Estate Planning, Probate and Trust Administration
What is Trust Litigation?
Trustees have a lot of responsibility, and if they are uncooperative, fail to communicate or engage in theft, it can leave the beneficiaries in a difficult situation. Sometimes trustees refuse to provide an accounting of the money and property distributed through the trust. They may have made unwise investments with the money from the trust or may have had the trust re-written to favor them. Sometimes, trustees just don't give beneficiaries the inheritance to which they are entitled and won't even explain why. Trusts should be handled correctly under the law and when a trustee fails to appropriately administer the trust, steps should be taken by the beneficiaries to hold the trustee accountable.
Like personal representatives, executors, trust administrators, conservators and guardians, trustees are considered a fiduciary under California Probate law. A trustee must administer the trust using the terms of the trust and the governing California Probate Code. The instrument will likely direct the trustee to act or refrain from acting – a failure to do so may place the trustee in serious breach of his fiduciary duty. The following is a non-inclusive list of the fiduciary duties of the trustee: Standard of Care, Duty to Administer the Trust, Duty of Loyalty, Duty of Impartiality, Duty to Avoid Conflicts of Interest, Control and Preserve, Make Trust Productive.
How to Avoid Trust Litigation
There are ways for the Trust Drafters to discourage trust litigation:
5. Waivers of fiduciary duties of trustees - Most trustors name children, or one of them, as the trustee, and that can be a problem because of conflicts of interest, sibling rivalry, and lack of professionalism, to name just a few of the types of problems this leads to. I like to provide that in the event a trustee resigns, becomes incapacitated, dies or is removed, that the other beneficiaries (or a majority in interest of the adult beneficiaries) can name a successor trustee, which must be a professional trustee (i.e., a bank or trust company with assets of at least _________million dollars).
1. No Contest Clauses - is a clause in a legal document, such as a contract or a will, that is designed to threaten someone, usually with litigation or criminal prosecution, into acting, refraining from action, or ceasing to act. The phrase is typically used to refer to a clause in a will that threatens to disinherit a beneficiary of the will if that beneficiary challenges the terms of the will in court.
2. Trustee Exculpation Clauses - is an agreement that excuses the signatory from any blame, e.g. in an admission to hospital certificate. Legal opinion is that these have very little use as a defense against a suit for damages based on negligence.
3. Grants of very broad investment powers to trustees - An example might be where the trustee has a fiduciary duty to diversify investments, but the only asset of the trust at the trustors’ deaths is an apartment building that is producing great income. You could say the trustee may retain assets even if they are not diversified investments, and therefore that duty to diversify investments is “waived.” Another example I often put in trusts is that the trustors or either of them (usually husband and wife in family trusts) has no trustee fiduciary duties (re accountings, investments, duties of loyalty to all beneficiaries, etc.) while he or she is acting as trustee. “Fiduciary duties” are duties imposed on trustees for the benefit of the beneficiaries which are greater than one would have regarding one’s own property.
4. Ability of beneficiaries to change trust to a professional trustee - Trustees have much higher duties towards beneficiaries than a private person would have towards someone they are gifting to, say children.
For example, trustee’s have duties to provide periodic written accountings, deal impartially with beneficiaries, avoid conflicts of interest, not undertake any adverse trust, control and preserve trust property, make trust property productive, segregate and identify trust property (not commingle with trustee’s own funds or accounts), enforce claims, defend actions, avoid improper delegation, supervise performance of delegated matter, use their skills to full extent, etc. The duty to properly invest trust funds has been legislatively determined to require certain rigid formulas of diversification. This has led to many suits against trustees by beneficiaries. The big reason for making revocable living trusts is to avoid lawsuits and probate which is a costly court process. The duties may be waived or limited greatly by the trust language. For example, the trust may provide that “trustee shall have very broad investment powers, may retain investments made by the trustor(s), and are not limited by diversification principles of the law, etc.” Similarly the trust could provide for relaxation of other duties of the trustee in order to minimize the ability of beneficiaries to sue the trustee.
5. Waivers of fiduciary duties of trustees - Most trustors name children, or one of them, as the trustee, and that can be a problem because of conflicts of interest, sibling rivalry, and lack of professionalism, to name just a few of the types of problems this leads to. I like to provide that in the event a trustee resigns, becomes incapacitated, dies or is removed, that the other beneficiaries (or a majority in interest of the adult beneficiaries)
can name a successor trustee, which must be a professional trustee (i.e., a bank or trust company with assets of at least _________million dollars).