It may seem impossible to remove a Trustee, but not always.  Case in point, Los Angeles Superior Court Judge Mitchell L. Beckloff recently removed the three co-Trustees of Herbalife founder Mark R. Hughes’s Trust (as reported by Emily Green in the Los Angeles Daily Journal).  Mr. Hughes son Alexander, sole beneficiary of the $350 million Trust, brought numerous claims against the co-Trustees seeking their removal.  But Judge Beckloff based their removal on just one of the claims, relating to the sale of real property.

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Apparently, the co-Trustees sold a parcel of real property worth $23.7 million to a “poor” buyer—an entity that paid no money down and ultimately filed for bankruptcy protection.  The Court ruled that is seemed “self-evident that a ‘prudent person’ exercising ‘reasonable care, skill and caution,’ would not have approved the transaction proposed” by the buyer.  (See Emily Green’s Los Angeles Daily Journal article, page 7.)

There’s a lesson to be learned here.  Not all cases have property sales worth $23.7 million, but the duties and obligations of a Trustee apply regardless of the size of the estate—or at least they should.  Unfortunately, there are times when Courts decide that a breach of trust is too small to care about.  But the law doesn’t say that. 

The duty of a Trustee stems from the basic principal that they must act as a reasonable prudent person would, using reasonable care, skill, and caution.  In other words, nothing risky.  Trust funds are not supposed to be managed like a business.  Business assets can, and should be, put at risk in order to earn a profit.  Trust funds, by comparison, are meant to be cared for, protected, and preserved for the beneficiaries.  Selling $23.7 million worth of real property for no money down to a buyer who can’t afford it is not the example of protecting and preserving assets the law is looking for.

So why don’t more Trustees adhere to their duties and use reasonable care, skill, and caution?  Hard to say.  In my experience, it’s largely a matter of ignorance—a Trustee not knowing his or her duties and obligations.  You can’t adhere to rules you don’t know about.  Of course, ignorance is no excuse, but it explains the conduct of Trustee who go astray. 

But never forget, that Trustees are not held liable for every possible mistake.  The rules require them to be reasonable, but not perfect. 

The tangled web of litigation can cause some pretty funny alliances at times.  Emily Green of the Daily Journal reported on February 28, 2013 that the estate of Mark R. Hughes, founder of Hebalife, Ltd., who died in 2000, is still being litigated in the appellate court.  The latest turn of events comes from a claim for $3 million in attorneys’ fees made by the law firm of Mitchell Silberberg & Knupp LLP and attorney Hillel Chodos (Mitchell Silberberg & Knupp LLP and Hillel Chodos vs. Suzan Hughes, et. al., A130802).

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The $3 million fee is for services provided to the guardian (Suzan Hughes) of Mr. Hughes’ minor son, Alex.  At the time of the litigation, Alex was a minor and Suzan Hughes was fighting to remove the Trustees of Mr. Hughes’ Trust, which had an estimated value of $300 million.  The Guardian’s attorneys (Mr. Chodos and company) were allegedly paid $3 million for their services, but they had outstanding fees due of another $3 million.  Apparently, the lawsuit to remove the Trustees was unsuccessful.

Once the $3 million bill was asserted, both the guardian (Suzan Hughes) and the Trustees objected to payment of the fees—bringing these former enemies into alliance.  At the trial court level, the $3 million fee was denied because the Judge reasoned that the litigation was unsuccessful and was carried out primarily for the personal gratification of the guardian and NOT for the benefit of the minor.  Mr. Chodos and company disagreed, saying that during their representation they were following the instructions of the guardian and fighting a lawsuit that they honestly believed was in the best interests of the minor.

The First District Court of Appeal in San Francisco heard arguments and is expected to rule later this year.

Just goes to show that fee issues are a universal truth, the only difference being the amounts.  Most people don’t have to argue over $3 million in fees because not everyone has a Trust worth $300 million.  While the amounts may be large, the underlying arguments are no different.  Fiduciaries of all types, be they Trustees, guardians, executors, or agents under a power of attorney, owe a duty to act reasonably and only take action that is in the best interest of their beneficiaries and wards.  Violate that universal truth, and fees may be denied—not just attorney’s fees, but Trustees’ fees too (and executor fees, guardian fees, agent fees, etc).

Notice I said “may” be denied.  Why not “must” be denied?  Because so much is left to the discretion of the trial court.  If you can convince a Judge that your actions were reasonable, even if unsuccessful, then you have a chance of getting those fees approved.  Not so black and white after all. 

 

I have heard it a million times before: “I don’t need a Trust because ____________” you fill in the blank: I don’t have enough money, I won’t care when I’m dead, California probate is easy, my wife and I own everything in joint tenancy…there’s many, many excuses and misinformation regarding Trusts in California.

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In California, a probate must be opened for anyone dying with more than $150,000 in personal property (things like bank accounts, brokerage accounts, stocks, bonds, etc); or more than $50,000 in real property (which in California is almost all real property).  That means that if you own a home, regardless of whether the home has a mortgage or not, your estate will likely have to go through probate before it can transfer to your heirs. 

Probate is no easy task. See our prior posts on probate here and here.  It can take 12 to 18 months (or more) to complete, and it costs a lot.  For even a modest estate worth $500,000, the statutory attorneys’ fees alone are $13,000.  Add in another $13,000 for the executor and anywhere from $1,500 to $2,000 in hard costs (such as court fees, probate appraiser fees, publication of notice, etc.) and the total probate fees and costs can be around $28,000 for a $500,000 estate.  That’s far more than the typical fee for a lawyer to prepare an estate plan, which can run from $2,000 to $3,000 on average. 

How about estate taxes?  Luckily, California does not have an estate tax or inheritance tax.  But the Federal Government does have an estate tax, and the current estate tax limit is $5 million (plus a little more for inflation).  That means that anyone with an estate worth less than $5 million will pay no tax. 

There was a time when a Trust was necessary to save substantial money on estate taxes, back when the estate tax limit was only $600,000.  Now that the estate tax limit is $5 million, most people don’t need a Trust to save on estate taxes.  But a Trust still saves the trouble and expense of probate if you own real property or have more than $150,000 in personal property.  It also allows for someone to manage your financial affairs if you ever lose capacity, which is reason enough to have a Trust.

Still not convinced?  That’s okay because us lawyers make far more money on estates where proper planning is not done.  We would much rather earn a big, fat probate fee or spend years litigating your estate after you’re gone.  Not planning is a great way to make a lawyer a beneficiary, and maybe even the biggest beneficiary, of your estate. 

That may sound a bit jaded, but I have learned over the years that no matter how much sense planning makes, many people just won’t do it.  If you really want to save money, time, and trips to the Courthouse, it’s time to put your Trust in Trusts.

1. The Law of Prohibited Transferees

If you’re like me, you would think that lawyers who draft Wills shouldn’t add themselves as beneficiaries (“I leave my entire estate to my beloved son…lawyer”).  Unfortunately, a few bad apples ruin the bunch, and a few bad lawyers disagreed with my opening sentence.  Thanks to them, we now have sections of the California Probate Code designed to prohibit certain people from taking under a Will or Trust—referred to as “prohibited transferees.”[1]  The law is intended to lock the gates to an estate from people who are in a position to take advantage of the Will creator.

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Who are these “prohibited transferees”?  Some are obvious like the lawyer drafting the Will or Trust is a prohibited transferee.  So is anyone related by blood or marriage to the lawyer drafting the Will or Trust, and anyone in partnership with the lawyer drafting the Will or Trust.  We don’t want to benefit the lawyer, his or her family, or his or her business partners.  It also extends to others such as caregivers of a decedent and fiduciaries (people who may already be acting as trustee, agent, or conservator for the person who creates the Will or Trust).

But the law provides an exception to this rule where the prohibited transferee is related by blood or marriage to the Will or Trust creator.  So I can draft a Will for my mom and I am still allowed to take a gift under her Will because we are related.

2. The Court clarifies family relationships relating to Prohibited Transferee law

The California Court of Appeal for the Second District recently clarified what it means to be related to the person creating a Trust or Will, in Estate of Oligario Lira (decided December 26, 2012, published January 22 2013).  Oligario Lira married his wife, Mary Terrones, in 1968.  Oligario had three children from a prior marriage and Mary had six children from a prior marriage.  On February 21, 2008, Mary filed for divorce from Oligario, but the marriage was not legally terminated by the Court under February 21, 2010.  After the divorce filing, but before the legal termination, Oligario created a new Will (on January 6, 2009) naming his three natural children, and three of his stepchildren as beneficiaries.  The Will was created by his step-grandchild who was an attorney.

Oligario died on July 20, 2010, and a dispute arose between his natural child, Mary Ratcliff, and his stepson, Robert Terrones.  Mary’s main claim was that Robert was a prohibited transferee because Robert was related to the attorney who drafted the Will and Trust.  Under PC Section 21350(a)(2), such a relationship precludes Robert from inheriting under the Will.

Robert argued that he was exempt from the rule of prohibited transferee because he was related by marriage to the decedent (Oligario).  Just as I can create a Will for my mom and receive a gift, so too can Robert receive a gift from a Will created by his lawyer-son if Robert was related to Oligario.

The question turned on whether or not Oligario and Robert were related for purposes of this issue.  Robert argued that at the time the Will was signed, he was still related to Oligario by marriage.  Only after the marriage was legally terminated would that relationship end.  Mary argued that at the time of Oligario’s death Robert was not related and that should be the time for measuring family relations, not the time of signing the Will.

The trial court sided with Robert and the Appellate Court agreed.  Writing for the Court, Justice Perren held that the statute is properly interpreted to measure family relationships at the time the Will is signed.  Here, since the Will was signed before the court had legally terminated the marriage, Robert and Oligario were still related by marriage.  The fact that they were no longer related by marriage at the time of Oligario’s death is irrelevant (according to the Court). 

A rather shocking result for Mary, who did not consider Robert as a family relation after the divorce.  But one wonders if the Court was swayed by the longevity of this marriage.  It lasted from 1968 to 2010 (42 years), and there could have been some relationship between Oligario and Robert that had nothing to do with their legal status as “family” members. 

Sometimes the law and feelings about family members don’t mix well.  A great result for Robert, who unlocks the gates to his share of this estate. 

 

[1] The Prohibited Transferee Sections of the Probate Code starting as 21350, were replaced effective January 1, 2011 with Probate Codes section 21380.  The new code section continues the old law, with the only real difference being that prohibited transferees can try to overcome the prohibition if they can prove by clear and convincing evidence that the decedent wanted them to have the stated gift.

Joint accounts—the most confusing asset in the estate planning word.  Especially joint bank accounts.  They start off relatively harmless with a parent naming one of their children as a joint account holder to help pay bills and manage finances.  But rather than add a child only as an agent over the account (which would expire at death), people invariably add a child as a joint account owner with the right of survivorship—meaning that one child gets all the assets left in that account after the parent dies.

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The confusion about joint accounts comes from misinformation on how a Will or Trust controls joint accounts.  That is to say, they don’t.  Nothing contained in a Will or a Trust affects the distribution of a joint account.  That’s because joint accounts answer to a higher authority—the joint account agreement.  The same is true for life insurance benefits, which pass according to the beneficiary designation regardless of what the Will or Trust says.  Same is true of joint accounts, which pass to the surviving account holder regardless of the Will or Trust.

There are times when a parent wants to leave a joint account to only one child.  And there are times when they do not intend to do that.  The problem is that those intentions are very rarely voiced or written down.  Just what did mom and dad intend by naming only one child on a joint account?  Opinions differ.  The child with the money claims it was meant to pass to him only, and the other children disagree. 

But the law assumes that a parent knows precisely what they are doing when they name a child as a joint account holder—not always true.  The presumption is that the account was titled intentionally to include only one child to the exclusion of any other provisions in a Will or Trust.  And it is up to the excluded children to prove otherwise.

What’s more, to prove a contrary intent (i.e., that mom and dad did NOT intend to leave the account to only one child), the law requires “clear and convincing evidence.”  See Probate Code Section 5302(a).  This is a higher evidentiary standard than we typically use in civil cases.  Usually we employ a “preponderance of the evidence” test in civil cases, which means a certainty of 50% plus a little bit more.  In criminal cases we use the well known “beyond a reasonable doubt” standard.  Clear and convincing evidence requires more certainty than preponderence of the evidence, but less than beyond a reasonable doubt. 

The best “clear and convincing” evidence would be writing from the parent who created the account saying “I am doing this only for convenience, not because I intend to leave everything to one child.”  That type of writing rarely occurs.  Instead, there is usually a mix of claims, allegations, and supposed statements from the parent.  That leaves the stiffed children scrambling to find the evidence necessary to overturn the joint account.  And that evidence isn’t searched out until the one person who can clarify the situation is deceased—the parent. 

If you are going to undo a joint account after death, be prepared to find evidence that is both clear and convincing.  It’s not impossible, but it takes a bit more digging than normal.

Lawyers have rules that we must follow (no, seriously we do), and one of them is that any engagement where we estimate the fees to the client will exceed $1,000 must be documented by a written fee agreement—sometimes called retainer agreement or engagement agreement.  See Bus. & Prof. Code Section 6148.   The California Court of Appeals clarified last year that written fee agreement are not required, however, where an attorney is representing the executor of a probate estate.

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First, let’s sort out who the attorney is, and is not, representing in a probate estate.  Any probate has three potential groups of interested people: (1) the executor (or administrator, both are referred to as the Personal Representative); (2) the beneficiaries; and (3) the creditors of the decedent.

When a client enters my office to discuss a possible probate, they are usually the person named as the executor under a decedent’s Will.  They are asking me to represent them and handle the probate estate; who do I represent?  The answer is I represent the client in his or her capacity as executor.  Technically they are not an executor of the estate yet—not until the Court orders their appointment—but they are the proposed or named executor and that is the capacity in which I would represent them.

More important question: who am I NOT representing?  I do not represent the “estate”—which only exists through an executor—the beneficiaries or the creditors of the decedent.  This is a common misconception, many beneficiaries believe that an attorney for the executor represents the estate and, therefore, also represents the beneficiaries—not true.  The attorney represents the executor, and only the executor.

So why does a lawyer not need a written fee agreement for representing an executor?  According to the California Court of Appeals (in Estate of Dennis Wong) it’s because the client (i.e., the person acting as executor) will not incur any fees whatsoever in the representation.  Therefore, the requirements of Section 6148 are not triggered. 

Let me explain.  Section 6148 states that a written agreement is required whenever the “client” will incur fees in excess of $1,000.  In a probate estate, the executor does not pay the attorneys’ fees, the estate does.  In other words, the executor, as an individual, is never liable for payment of fees—but the estate assets are. 

You can think of the estate as a pool of assets guarded by the Court.  Before the estate is closed, the Court decides who gets paid and by how much.  For attorneys, the fee is set by statute, which is calculated by a percentage of the estate.  And the statute also sets the procedure by which the attorney asks for those fees.  Once granted by the Court, the fees are paid from the pool of assets and the rest is distributed to the estate beneficiaries.

I know what you’re thinking, if the executor is one of the estate beneficiaries, then isn’t the executor paying some portion of the attorneys’ fee?  Well yes, but not directly.  Remember the estate assets are not really assets of the beneficiaries until the very end of the probate process when the assets are distributed out to them.  Before that, the assets belong to the decedent’s estate and the Court has say on who gets paid and how much.  That’s true for creditors too.  But the executor pays nothing from his or her own individual wallet, so Section 6148 is never implicated, so a written fee agreement is not required.

Now that we know that it is perfectly legal NOT to obtain a written fee agreement, should we throw out our engagement agreements?  No.  I have always used written fee agreements even in probate matters, and why not use them?  In my experience, surprising clients about fees is a bad idea (“You owe me $20,000…SURPRISE”).    Better to put it all down in writing up front so there are no surprises down the road.  Each side knows what to expect and knows that the fees will not be paid until ordered by the Court.

For those of you (attorneys and clients alike) not using fee agreements in probate, however, you can no longer be surprised that fees will be paid…it’s just the amount that might catch you off guard.  You’ve been warned.

Every party to a lawsuit would like to have their attorneys’ fees paid by the other side, especially if the other side loses.  That rarely happens in the U.S. because we have the “American System” of attorneys’ fees—that is each party pays their own.

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There are a few exceptions, such as when parties enter into a contract that says the prevailing party is to be paid their attorneys fees.  There are a few other statutory exceptions, but overall Court’s are very reluctant to shift attorneys’ fees from one side to the other even where it is authorized by statute.

In cases that operate under the Probate Code (Trust cases, Will matters, and Conservatorships/Guardianships) there are a few areas where attorneys’ fees can be awarded, but rarely are.

Consider this: Trustees have a duty to render accountings at least annually.  Let’s say you’re a Trust beneficiary and after a year goes by the Trustee refuses to provide an accounting.  You send a written request to account and the Trustee either ignores you, or refuses to provide an accounting.  As a beneficiary, you have rights and you can assert those rights in Court, so you bring a petition in Probate Court asking the Court to order the Trustee to account.  The Trustee finally complies and provides you with a Trust accounting.  Can the Trustee be forced to pay your attorneys’ fees for the petition to compel an accounting?  No.  There is no provision that allows the Court to shift your fees to the Trustee. 

It would seem like this type of action should carry with it an AUTOMATIC requirement that the Trustee pay your fees—especially if the Trustee refused to account.  But it does not.

There are some instances when Courts are given the discretion to award attorneys’ fees, but they rarely do.  One of those instances is when either a Trustee fights an objection to his or her accounting “in bad faith” or a beneficiary brings objections to an accounting “in bad faith.”  The problem is that fighting an accounting is not enough, by itself, to trigger the shifting of attorneys’ fees from one party to another.  The fight must be done “in bad faith”—a higher standard and one that is difficult to meet in most cases. 

Plus, since Courts most often apply the American System of fee payment (each party pays its own way), Judges seem reluctant to shift attorneys’ fees even when they are authorized to do so.

What does this mean for you and your case?  Don’t count on getting your attorneys’ fees reimbursed.  I usually advise every client to go into litigation on the assumption you will NOT receive reimbursement for your attorneys’ fees and costs.  If you are one of the lucky ones who are awarded attorneys’ fees, then take it as an unexpected bonus.

Not fair you say?  I agree.  But it’s just the American way of pay to play in our Court system.

It’s an exciting time to be a Trust and Will litigation lawyer.  Our California Supreme Court recently handed down an opinion on a very pivotal area of Trust litigation—Trustee liability.  Last October we wrote about the case entitled Estate of William Giraldin, where the Fourth District Court of Appeal held that beneficiaries of a revocable trust did NOT have standing to sue a Trustee for acts that occurred while the Trust settlor (the Trust creator) was still alive.

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Generally speaking, so long as the settlor is living, the Trustee owes duties ONLY to the settlor and not to any other beneficiaries.  Once the settlor dies, the revocable trust then becomes irrevocable and the beneficiaries’ interest in the Trust vest—making them actual beneficiaries with actual rights as against the Trustee. 

The question raised by the Giraldin case was whether beneficiaries could sue a Trustee for acts that the Trustee undertook while the settlor was still living.  The Appellate Court concluded that beneficiaries can NOT sue a Trustee for pre-death acts because the beneficiaries interests in the trust were not vested at that time.  But the Trustee’s wrong acts that take place before the settlor dies can have serious ramifications and damages to the beneficiaries’ interests after the Settlor dies.  For example, if the Trustee loses $1 million while the settlor is alive (and the settlor does nothing about it), that’s $1 million less for the beneficiaries after the settlor’s death. 

The California Supreme Court has overturned the Appealate Court’s ruling in Giraldin, and instead held that beneficiaries do have the right to sue a Trustee for acts that occurred before the settlor died.  But there’s a catch, the suit must be brought to correct any breaches as against the settlor only.  In other words, the beneficiaries have no vested rights while the settlor is alive, so the Trustee, by definition, cannot breach any duty to the beneficiaries during the settlor’s lifetime.  But the Trustee could potentially breach his or her duties as against the settlor, and for that, the Trustee can be sued by the beneficiaries.

For example (these examples are taken from the Supreme Court’s opinion), let’s say a settlor tells the Trustee during the settlor’s lifetime that he wants to withdraw a substantial sum of money to take a final trip around the world.  The Trustee follows the settlor’s direction and the Trust is reduced by the withdrawal.  This act may not be in the best interests of the beneficiaries because it lessens their interest in the Trust, but because the settlor is alive they have no standing to sue.  And since the Trustee would NOT have breached his or her duty to the settlor by following the settlor’s direction to make the withdrawal, there would be no liability as against the Trustee.

In contrast, if the Trustee were to withdraw a large sum of money from the Trust during the settlor’s lifetime and then spend the money on a world trip for the Trustee—not the settlor—that would be a breach of Trust as against the settlor.  And the beneficiaries could sue the Trustsee for that breach even after the settlor dies.

In the end, this is a good result for future cases because under the Appellate Court’s view of the world, a Trustee could have breached his duties and looted a Trust once the settlor was incompetent or just before the settlor’s death and there would be nothing the beneficiaries could do about it.  Now, under the Supreme Court’s ruling, the beneficiaries could assert an action for the breaches the Trustee incurred as against the settlor.  It will help to ensure that last minute breaches that occur when the settlor cannot defend himself or herself will not go uncorrected.

Another year is in the books, and on the web for us thanks to our blog.  We wrote quite a few articles again this year, but there are a few stand-outs among them. The following list represents our twelve most popular articles (and our personal favorites too):

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1. Form Interrogatory 15.1: Show Me your Facts.  Decsribed as a “procedural 2 x 4”, form interrogatory 15.1 gets broken down into an understandable form by partner Stewart R. Albertson.  A very popular video on an underappreciated interrogatory.

2.  The Best (Private) Trustee in the World!  We spend a good deal of time discussing what Trustees do wrong in administering a Trust estate.  But it’s nice to stop and pay tribute to those Trustees who do right.  I have the pleasure of represnting one very good private Trustee–in fact he’s the best private Trustee in the world–I guarantee it!

3. The Empty Will: Why a California Will or Trust May Not Control Your Assets After Death.   Not much passes under a California Will these days, yet we spend so much time talking about Wills.  This article helps decipher what passes under a California Will and what does not.

4. 5 Tips for Aspiring and Accomplished Lawyers.  This is one of my personal favorites, a guest post from our friend and colleague, Mike Hackard, with Hackard Law in Sacramento, CA.  Mike is an experienced attorney with over 35 years of experience and he shared some great tips with us for aspiring and accomplished lawyers.  Thank you Mike!

5. Video Series.  We did more videos this year, and we have more in the works for 2013.  All of our videos seem to be very popular.  Stewart and I assume it’s becuase of our good looks, but our staff seems to think it’s the good information we provide in the videos.  Well whatever the reason, our videos made the top 12 list for 2012.

6. AeroFlow Windscreen for my BMW R1200GS.  What do BMW motocycles and the law have in common?  Nothing at all.  But Stewart’s post on his BMW motorcycle was interesting and a popular source of conversation. 

7. When to Fight for your Right to Privacy: A Three Part Series.  It should be no secret that you have a right to privacy–even in our digital world.  California’s Constitutional Right to Privacy gets some discussion in our three-part series on the subject.  You have to know your rights, know when to fight for them, and know when not to fight for them.

8. When a Beneficiary “Can’t Get No Satisfaction”: How to Remove a California Trustee in 3 “Easy” Steps…  “Easy” is a relative term, of course.  But it never hurts to think positively and discuss how to go about removing a Trustee, if that needs to occur, as if it were easy.  

9. 5 Essential Elements for a Slam Dunk Case.  A personal favorite of mine, the notion of a “slam dunk” case.  Everyone has a slam dunk case, or so they think.  But until the stars align, and you have the 5 essential elements on your side, your case may not be such a sure thing after all.

10. What You Need to Know When an Estate Plan Goes Awry.  Attorneys never make mistakes, right?  Wrong.  Sometimes even attorneys can make mistakes, and when those mistakes damage an otherwise well intentioned estate plan there may be some legal recourse to pursue.  This post discusses some of the strategies to successfully navigate an attorney malpactice case.

11. When is a Trust like a Will?  Appellate Court Confuses Capacity Rules for California Trust Amendments.  The California Courts of Appeal don’t often make new law in the area of Trusts and Wills.  But when they do, we often wished they hadn’t.  Case in point, Anderson vs. Hunt where the Appeallate Court took an already confusing area of the law and made it more confusinger (yes “confusinger” a new term coined for the first time right here).  

12. Trustee: Do Not Pass Go, Do Not Collect $200.  Another appellate court case, Thorne vs. Reed, where a Trustee is told his pay is zero–one of few areas where you can have legal servitude.  If a Trust says Trustee compensation is zero, then that’s what it is.  Seems fair enough, unless you’re the Trustee!   

There you have it, the top 12 post for 2012.  We hope you enjoy these posts along with all our other articles.  We look forward to bringing you more useful and interesting Trust and Estate information for 2013.

Happy New Year!    

The California Court of Appeal (Sixth District) has clarified when a Trustee’s compensation can be limited in Thorpe vs. Reed, decided this month.  Thorpe involved a special needs trust that had be created for Danny Reed, who had been the victim of two separate auto accidents.  Danny’s mother, Jolaine Allen, was initially appointed the Trustee of the special needs Trust and everything went along fine for a few years.

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Then the financial crisis hit in 2008 and Jolaine was concerned that all of the Trust’s cash (about $650,000) held in Washington Mutual would be depleted if Washington Mutual became insolvent, which did in fact happen.  Jolaine went to Court and obtained an order withdrawing the money so that it could be re-deposited at other banks at $100,000 per deposit.  Unfortunately, Jolaine did not have a photo identification and, therefore, could not open any new bank accounts.  A mess ensued, but nothing damaging.

In the meantime, the Court stepped in, removed Jolaine as Trustee and appointed a new temporary Trustee, Thomas Thorpe, to act until things could be sorted out.  The problem is that the Trust document specifically stated that no successor trustee was entitled to compensation.  Since Mr. Thorpe was a professional fiduciary (someone who regularly acts as a trustee for a fee) the no-fee provision in the Trust was a bit of a problem.

Mr. Thorpe filed a petition with the Court asking that the Trust be modified to, among other things, increase the Trustee’s compensation.  But Mr. Thorpe’s appointment as Trustee was not made without a fight, and Danny’s family was prepared to fight to get the Trustee removed and appoint Danny’s sister, Audelith Reed, as successor Trustee—Audelith was willing to serve without compensation.

After a series of hearings, Mr. Thorpe was removed and Audelith was appointed successor Trustee.  Mr. Thorpe then filed a petition asking the Court to pay him and his attorneys the following fees: $65,844.08 for Mr. Thorpe, $31,047.85 for one attorney for Mr. Thorpe, and $11,879.44 for another attorney.  These fees were for four and a half months of services by Mr. Thorpe and his attorneys (it’s good to be a Trustee). 

Audelith objected to the fees on the basis that the Trust specifically restricted Trustee compensation.  The Trial Court disagreed.  The Court cut Mr. Thorpe’s fees, but not to zero.  Mr. Thorpe was awarded $27,006; $19,540.61 to one attorney; and $4,739.02 for the other.

Justice Premo, writing on behalf of the Sixth District Court of Appeals, disagreed with the Trial court.  Citing Probate Code Section 15680, the Appellate Court stated that compensation for a Trustee is set by the Trust document.  If a Trust document states that a Trustee is to receive no compensation, then so be it.  A court can issue an order increasing compensation where appropriate, but such an order only applies prospectively—not to past services that occurred before the order is issued.  If a Trustee does not like the compensation provisions, then they can either (1) not agree to act as Trustee, or (2) have an interested party petition the Court and ask for additional compensation before acting.

Of course, any Trust that prohibits Trustee compensation is not going to attract many Trustees who want to act.  But in Danny’s case, it may have helped to ensure that his family would act as Trustee rather than a professional—which is what Danny wanted. 

The point is, be sure to read the Trustee compensation provisions before agreeing to act as a Trustee.  If you don’t, you may find yourself working for free.