Articles

I’m Trustee of an Irrevocable Trust – What are My Duties?

Posted by on 3:49 pm in Articles | 0 comments

As trustee, you occupy a position that comes with many responsibilities and important duties. In serving as a trustee, you stand in a special relationship of fiduciary responsibility to the beneficiaries. It is crucial that you understand the terms of the trust, to whom you owe these very important fiduciary and other duties, and that you adhere to your responsibilities. An irrevocable trust is one that generally cannot be modified. An irrevocable trust could be a trust that became irrevocable upon the death of the person who created the trust or could have been created as an irrevocable trust from its inception. Follow the Trust Terms One of the most fundamental duties is to administer (or manage) the trust according to its term. The terms of the trust include the trust document as well as any amendments. By following the terms of the trust, you carry out the settlor’s written wishes and the purpose of the trust. To comply with this duty, you need to read and understand the trust terms, including the duties and powers set forth in the trust document. Complying with this duty can be complicated. Your duty is to follow the terms as set forth in the trust. You are not to look at other documents or base your decisions on prior statements from the settlor where those contrast with the trust terms. Act in the Best Interest of the Trust Perhaps just as important is the duty to follow the trust terms is the duty to administer the trust solely in the best interest of the trust and the beneficiary. This means that you cannot put your interests above those of the trust or any of the beneficiaries (even if you are also a beneficiary). You must not deal with trust property for your own profit (ie self dealing) or for any purpose unconnected with the trust. You cannot take part in any transactions in which you have an interest adverse to any beneficiary. Adhering to these duties can be particularly difficult where the trustee is also a beneficiary. Such a conflict should not be ignored. Furnish Information and Communicate You have a general duty to keep the beneficiaries informed about the trust and its administration. This includes providing information about the trust and its assets informally as well as providing more formal reports, if requested by the settlor, as well as formal financial accountings if not waived by the trust document or by a beneficiary in writing. For further discussion of reporting and accounting duties see the separate article Does a Trustee Have to Provide an Accounting? Do Not Commingle Trust Assets with Other Assets You must avoid mixing or commingling trust assets with other non-trust assets, especially your personal assets. You should take steps to avoid commingling of assets. You should maintain separate bank accounts for trust cash and income that are distinct from your personal accounts and appropriately titled as trust property. You should also make sure that other trust assets are titled in your name as trustee of the trust and not held by you individually. Deal Impartially with Beneficiaries You must generally, unless the trust terms say otherwise, deal impartially with the trust beneficiaries. This means, for example, you must act impartially when making investment or distribution decisions pertaining...

read more

I’m Trustee of a Revocable Trust – What are My Duties?

Posted by on 3:16 pm in Articles | 0 comments

As trustee, you occupy a position that comes with many responsibilities and important duties. In serving as a trustee, you stand in a special relationship of fiduciary responsibility to the settlor (the person who created the trust) and the beneficiaries. It is crucial that you understand the nature of the trust (ie whether revocable or irrevocable), to whom you owe these very important fiduciary and other duties, and that you adhere to your responsibilities. A revocable trust is one that can be modified or completely cancelled by the settlor. This type of trust is commonly referred to as a living trust – meaning the settlor created the trust during their lifetime and the settlor is still alive. Typically, these trusts remain revocable until the settlor’s death. While the settlor is alive and able to manage his/her own financial affairs, the settlor and the trustee will typically be the same person. This Article is written for someone who is trustee of a revocable trust that is not the settlor of that trust. Duties are Owed to the Settlor One unique aspect of acting as trustee of a revocable trust is that you owe fiduciary and other duties only to the settlor or other person having power to revoke the trust. This can include someone to whom the settlor granted the power to revoke or someone appointed to act on behalf of the settlor (such as a conservator). You generally don’t owe any fiduciary or other duties to remainder beneficiaries named in the trust while the settlor is alive and the trust remains revocable. This is because they are only “contingent” beneficiaries since the trust can be modified or cancelled at any time. For this same reason, the remainder beneficiaries generally aren’t entitled to receive information regarding the trust while the trust remains revocable. Follow Settlor’s Directive Another unique aspect of acting as trustee of a revocable trust is that you have a duty to follow a written directive pertaining to the trust or its assets given to you by the settlor or other person delegated to give directives by the settlor. This duty is unique because once the trust becomes irrevocable, a trustee generally has no duty to follow any directives from a beneficiary. If, however, following the written directive would, in essence, be a modification of the trust, a trustee can only follow the directive if it complies with the requirements for modifying the trust. These requirements are discussed in a separate article Can a Trust be Amended? Follow the Trust Terms One of the most fundamental duties is to administer (or manage) the trust according to its term. The terms of the trust include the trust document as well as any amendments. By following the terms of the trust, you carry out the settlor’s written wishes and the purpose of the trust. To comply with this duty, you need to read and understand the trust terms, including the duties and powers set forth in the trust document. Act in the Best Interest of the Trust Perhaps just as important is the duty to follow the trust terms is the duty to administer the trust solely in the best interest of the trust and the beneficiary. This means that you cannot put your interests above those of the trust...

read more

I’m a Trustee – Can I Protect Myself From Liability?

Posted by on 4:54 pm in Articles | 0 comments

As a trustee, it’s natural that you want to take steps to protect yourself from challenges to actions you take or don’t take or other decisions you make. In fact, taking these steps is a good idea. But what can you do? Get the Beneficiary’s Consent One of the simplest things you can do is to get the beneficiaries to consent (ie agree) to an act you want to take or a decision you want to make. Consent is something that is obtained before or at the time of your act or decision. It is best to get the consent in writing. In order for the consent to be effective, a number of rules must be followed. As trustee, you must give a full disclosure of all the “material” facts and circumstances surrounding a particular transaction or act, including your interest (if any) in the particular transaction or act. The consent cannot be induced by improper conduct. An example of improper conduct would be threatening to withhold distributions unless a beneficiary gives his/her consent. The transaction or act has to be fair and reasonable. It is a good idea to suggest the beneficiaries consult with their own legal counsel. A beneficiary who consents to an act or omission cannot hold you liable for breach of fiduciary duty. It is important to understand, however, the consent is only effective as to that beneficiary. It may be difficult to get the consent of all beneficiaries, especially where there are minor, unborn, unascertainable, or incapacitated beneficiaries. Get the Beneficiary’s Release or Affirmance Another option is to get the beneficiaries to provide a release or to affirm your act or decision. Both of these are obtained after the act or decision and, if effective, preclude the beneficiary from holding you liable for that act or decision. Again, it is best to get this in writing. With a release, the beneficiary essentially gives up any claim for breach of trust based on the act or decision released. To be effective, the beneficiary must be aware of his/her rights and the material facts pertaining to the act or decision as known to you. As with consent, the release cannot be induced by improper conduct, and it is a good idea to suggest the beneficiaries consult with their own legal counsel. By affirming an act or omission, the beneficiary ratifies your act or decision. Like a release, to be effective, the beneficiary must be aware of his/her rights and the material facts known to the trustee. Again, the affirmance cannot be induced by improper conduct of the trustee, and it is a good idea to suggest the beneficiaries consult with their own legal counsel. Notice of Proposed Action You can alternatively provide the beneficiaries with a Notice of Proposed Action. This can be used to alert beneficiaries to an act you are contemplating and provides the beneficiaries an opportunity to object before you take, or don’t take, the action. The minimum time for beneficiaries to respond is 45 days. The Notice must describe the action proposed to be taken and give an explanation of the reasons for the action. The Notice must be sent to all beneficiaries entitled to receive income. This includes beneficiaries entitled to receive income at your discretion or who would receive a...

read more

Does a Trustee Have to Provide an Accounting?

Posted by on 12:22 pm in Articles | 0 comments

It is important to understand that there are three distinct duties with respect to providing information to beneficiaries pertaining to the affairs (administration) of a trust. 1. Duty to Keep Beneficiaries Reasonably Informed A trustee must generally keep the beneficiaries reasonably informed of the trust and its administration. Complying with this duty means providing information reasonably necessary to enable a beneficiary to enforce his/her rights under the trust or to prevent or remedy a breach of trust. The duty to keep beneficiaries reasonably informed cannot be waived (either by the trust instrument or by a beneficiary). During the time the trust is revocable (meaning that it can be modified or even cancelled), the trustee owes this duty only to the settlor (the person who created the trust) or other person having power to revoke the trust. This can include a person to whom the settlor granted the power to revoke or to someone who has been appointed to take care of the affairs of the settlor (such as a conservator). Once the trust becomes irrevocable, the trustee owes this general duty to all beneficiaries, including current, contingent, and remainder beneficiaries. 2. Duty to Provide a Report of Information A trustee must provide a report to beneficiaries, upon reasonable request, relating to the administration of the trust relevant to the beneficiary’s interest. Complying with this duty means providing requested information to a beneficiary entitled to receive the information requested. The report typically includes information pertaining to the assets, liabilities, receipts, and disbursements of the trust as well as the acts of the trustee. This type of report can be much more helpful than a formal accounting because it generally contains more detailed and more easily understandable information than a formal accounting. During the time the trust is revocable, only the settlor (or other person having power to revoke the trust) has the right to request a report of information. Once the trust becomes irrevocable, the trustee owes this general duty to all beneficiaries, and any beneficiary – whether current, contingent, or remainder – has the right to request and receive a report. The duty to provide requested information to beneficiaries cannot be waived by a provision in the trust. However, a beneficiary can waive his/her right to a report. The waiver must be in writing and is only effective as to that beneficiary. In other words, if there are multiple beneficiaries and only one waives the duty, the duty is still owed to the other non-waiving beneficiaries. Such a waiver can be withdrawn, requiring the trustee to provide a current report and reports going forward. 3. Duty to Formally Account A trustee must generally provide a formal accounting at least annually, at termination of the trust, and when there is a change of trustee. A formal accounting is one that complies with the requirements set forth in the Probate Code. It includes statements detailing receipts and disbursements, assets and liabilities, the trustee’s compensation, agents hired and their compensation, and certain disclosures regarding the right to object to the accounting and the three year statute of limitations. During the time the trust is revocable, this duty is only owed to the settlor (or other person having power to revoke the trust), unless the trustee and the settlor are the same person,...

read more

Does a Demand For Information Trigger a Trust’s No Contest Clause?

Posted by on 2:41 pm in Articles | 0 comments

  One of the biggest confusions among trustees and beneficiaries is the true scope of a no contest clause. Regardless of the wording of a no contest clause, it cannot be triggered by a beneficiary taking actions such as asking for information, demanding an accounting, objecting to an accounting, or challenging an action taken by a trustee. Put another way, even if the no contest clause says it can be triggered by such actions, that aspect of the no contest clause is void (per law) as against public policy. If you are a trustee, you need to understand that you cannot use the existence of a no contest clause to deny information to beneficiaries to whom you owe duties or as a “defense” when a beneficiary seeks to challenge an action you have taken. You should be transparent in your actions as trustee, provide information to your beneficiaries, and keep detailed trust records. Beneficiaries have the right to review and challenge your actions. If you are a beneficiary, you should understand that you have the right to receive certain trust information and to question the actions of the trustee about how they are managing the trust. A no contest clause cannot be triggered by you asking about things such as the management, investment, distributions, income, and agents of the trust. A no contest clause is also not triggered by the filing of actions in court to compel the trustee to provide a beneficiary with information or an accounting or challenging actions taken by the trustee. The above discussion is not meant to convey the message that no contest clauses should be ignored. To the contrary, no contest clauses can have a sting to them, the breadth of which depends greatly on the year in which the trust instrument became irrevocable and the wording of the clause. (See the Article entitled How Does a No Contest Clause...

read more

Can a Trust be Amended?

Posted by on 4:19 pm in Articles | 0 comments

The answer to this question depends on the type of trust at issue and the reason for the amendment. A Revocable Trust A revocable trust (sometimes referred to as a living trust) can generally be amended or cancelled by the settlor. It’s the nature of that kind of trust – it can be revoked. To amend or revoke a revocable trust, the best course of action is to follow the procedure set forth in the trust document. To amend (ie change) the trust, the typical procedure is for the settlor to sign an “Amendment to X Trust” stating the change to the trust and delivering that signed writing to the trustee. To revoke (ie cancel) the trust, the typical procedure is for the settlor to deliver a signed document to the trustee, expressly revoking the trust. If the trust is silent on the procedure to follow, then the Probate Code provides that amendments and revocations can be done by delivering a writing, signed by the settlor, to the trustee during the settlor’s life. An Irrevocable Trust An irrevocable trust is just that: absent certain circumstances, it cannot be changed. As mentioned, however, there are certain circumstances under which an irrevocable trust may be modified or terminated, some of which require court permission. An irrevocable trust may be modified or terminated if the settlor and all beneficiaries consent. The biggest hurdle with this method is that all beneficiaries must consent. That includes current beneficiaries and remainder beneficiaries, including minors, unborn, and unascertained beneficiaries. Typically, the consent of minor, unborn, or unascertained beneficiaries can be given by a guardian ad litem who represents those beneficiaries. When the settlor cannot give consent, an irrevocable trust may be modified or terminated by petition to the court with the consent of all beneficiaries. The same complexities with respect to obtaining the consent of all beneficiaries remain. Also, the beneficiaries must give a good reason for the modification or termination, beyond the mere convenience of the beneficiaries. If the trust has a spendthrift clause or similar restraint on a beneficiary’s interest, it generally cannot be terminated. Additionally, the court must determine if continuance of the trust is necessary to carry out a material purpose of the trust. If so, it won’t be modified or terminated unless the court determines that the reason for doing so outweighs the interest in accomplishing a material purpose of the trust. A trustee can terminate a trust if the principal of the trust is $40,000 or less. If the principal of the trust is greater than $40,000, then a trustee or beneficiary may petition the court to modify or terminate the trust by showing that the fair market value of the assets of the trust are so low in relation to the cost of administration that it is impractical to continue the trust. Finally, a trustee or beneficiary may petition the court to modify or terminate the trust where there are changed circumstances not known or anticipated by the settlor. The change in circumstances must result in a situation where continuation of the trust under its terms would defeat or substantially impair the ability to accomplish a purpose of the trust. Examples include changes in tax laws, where the terms of the trust are outdated or too restrictive, or, for...

read more

Can Mediation Help to Resolve Trust and Estate Disputes?

Posted by on 5:15 pm in Articles | 0 comments

Litigation over a trust or will is sometimes unavoidable. But where disagreements exist, if the parties can focus on settling the dispute, they may be able to avoid a long, drawn-out and costly litigation. Mediation is an alternative to litigation that has several advantages, including: Cost-effective alternative to a lengthy and expensive courtroom battle Provides a confidential forum for discussions that cannot be used in the litigation Avoids public disclosure of personal issues, private matters, and sensitive topics Facilitates open conversation to address the dispute or underlying issues Gives the participants the opportunity to heal broken relationships What is mediation? In mediation, a neutral person (a mediator) tries to help the parties resolve their dispute. The parties select the mediator, often a retired judge or an experienced trust and estate attorney. The mediator’s role is to facilitate open communication about the dispute and options for resolving the dispute in an effort to bring about a settlement that is agreed to by all involved. A mediator does not decide who “wins” and does not make any decisions. Nothing can be imposed on anyone unless it is agreed upon. The mediator’s role is simply to try and help the parties resolve their dispute by candidly discussing the issues and settlement options.   What happens in mediation? Once selected, the mediator will communicate with counsel regarding his/her procedures. Most mediators encourage the parties to sign a mediation agreement. Depending on the complexity of the case, some mediators will request a written statement providing the mediator with information about the dispute, the party’s perspectives, and various settlement ideas. The mediator will schedule a confidential settlement meeting or several meetings, which are typically held in the mediator’s office. In these confidential settlement meetings, everything is “off the record” and cannot be used in litigation. Typically, the mediator starts by meeting with all the parties and their counsel together. This provides a forum for the parties to express their thoughts to each other. This sort of open communication can be particularly helpful in resolving trust and estate disputes because such disputes often center on communication issues, feelings of mis-trust, and/or feelings of being treated unfairly. After the parties have had their open discussion, the mediator will then split the parties into separate rooms. The mediator will meet privately with each party for further discussion of that party’s perspective and thoughts on settlement. These private discussions with the mediator are confidential as well. The mediator will go back and forth between the separate rooms, trying to bring the parties to a settlement by finding common ground on which the parties agree.   What happens at the end of mediation? If a resolution is reached, the parties will typically sign a binding agreement at the end of the mediation. If the terms of the agreement are particularly complex, at least the key terms should be agreed upon and put into writing at the end of the mediation. Documentation of finer details or complex aspects of the settlement can be documented at a later date. If the parties could not reach an agreement, the mediation ends and the litigation continues towards...

read more

Can A Trustee Be Replaced (Removed)?

Posted by on 4:19 pm in Articles | 0 comments

In short, yes. A trustee can be replaced (the technical term is removed). Grounds for removal are found in multiple places. Removal Per the Trust Instrument Often, the trust instrument grants the power to remove the trustee to a particular person or persons. The trust will state whether the power to remove the trustee can be exercised with or without “cause”. If removal requires cause, what constitutes cause may be stated in the trust instrument. If the trust is silent on this issue, then cause may be found, for example, where there is hostility from the trustee that impairs the administration of the trust, where the trustee fails to comply with the terms of the trust, where the trustee fails to comply with fiduciary duties to provide information, and where there are conflicts of interest. To remove the trustee pursuant to a power granted in the trust instrument, the person with the power must follow the procedure for removal set forth in the trust instrument. The removal act should be done in writing and that writing should be kept as part of the trust records. Removal by Court Action A trustee can be removed by court action. A petition can be brought by a settlor, co-trustee, or beneficiary with standing to remove the trustee. The grounds for removal of a trustee by the court include the following: where the trustee has committed a breach of trust where the trustee is insolvent or otherwise unfit to administer the trust where hostility or lack of cooperation among co-trustees or with a beneficiary impairs the administration of the trust where the trustee declines or fails to act where the trustee’s compensation is excessive under the circumstances where there are irreconcilable conflicts between the trustee’s personal interests and those of the trust where there are conflicting duties (e.g. a trustee’s duty to the trust might conflict with the trustee’s duty as board member of corporation in which the trust owns an interest) where the trustee is substantially unable to properly execute his/her duties where the trustee cannot resist fraud or undue influence for other “good cause” But Beware! The decision to bring an action to remove a trustee should not be made lightly. A removal action can be very expensive. To bring a successful petition, you must provide proof to the court that grounds exist for removing the trustee. This involves informal and formal discovery, which can be costly. Discovery is the process where you try to obtain as much evidence as you can to prove the trustee should be removed and where the trustee tries to gather evidence that he/she should not be removed. It can involve obtaining documents, taking depositions, and even retaining experts. Additionally, the removal action is subject to the other normal court procedures, such as pre-trial motions, which can be costly to bring or defend depending on their complexity. In short, the process is expensive and can take years to wind through the court system. If at all possible, start by asking the trustee to resign and avoid a long court battle. If that’s not possible, make sure the decision to seek a court order removing the trustee is not grounded in emotion but rather in provable...

read more

How Does A No Contest Clause Work?

Posted by on 4:05 pm in Articles | 0 comments

The answer to this question depends, primarily, on when the instrument (the trust or will) became irrevocable. General Discussion In general, a no contest clause is a provision in a trust or will that, if enforced, would penalize a beneficiary for filing an action in court pertaining to the trust or will. No contest clauses are supposed to act as deterrents and discourage litigation. With the typical no contest clause, a named beneficiary will forfeit his/her specific gift or share of the estate by bringing litigation contesting a trust or will or a part of a trust or will. A no contest clause is only enforceable against named beneficiaries. In other words, if the person bringing the contest is not given anything in the trust or will, the no contest clause has no effect as to that person. Put another way, that person has nothing to lose in bringing a contest. Also, as to named beneficiaries, a no contest clause is only effective if it has enough “teeth” to it. The point of including such a clause in a trust or will is to make the beneficiary really think about if he/she is willing to take the risk of losing the specific gift or share of the estate that would be forfeited with an unsuccessful contest. In other words, if the beneficiary is to receive $10,000 per the trust terms but stands to split a $500,000 estate 50/50 if the contest is successful, the beneficiary may very well take that risk. Instruments That Became Irrevocable Before January 1, 2001 Because of changes in the law as of January 1, 2010, we now have one set of rules governing no contest clauses in instruments that became irrevocable before January 1, 2001 and another set of rules for instruments that became irrevocable after January 1, 2001. The “old” law governs instruments that became irrevocable before January 1, 2001. Under the old law, no contest clauses are generally enforceable in California. Such no contest clauses can take many forms, ranging from simple clauses to prevent challenges based on lack of capacity or undue influence to more broadly worded clauses to prevent almost any type of challenge. Also, the no contest clause can be triggered by either a direct or indirect contest or challenge to the instrument or one of its provisions. Additionally, under the old laws, a beneficiary can obtain a ruling from the court to determine if the proposed contest or challenge would or would not trigger the no contest clause. This is commonly known as filing a safe harbor petition and is done before filing the actual contest petition (which is a separate filing). Instruments That Became Irrevocable After January 1, 2001 In 2008, legislation was enacted to significantly restrict the effectiveness and breadth of no contest clauses. These new laws came into effect January 1, 2010 and apply to instruments that became irrevocable after January 1, 2001. Under the new laws, a no contest clause is only enforceable if the contest falls within one of three types of categories: a direct contest brought against the instrument and without probable cause challenging certain property transfers but only if expressly barred by the no contest clause filing or prosecution of creditor’s claims but only if expressly barred by the no contest...

read more

Can I Prevent Litigation Over My Assets? (Part 2)

Posted by on 3:47 pm in Articles | 0 comments

Unfortunately, you can’t absolutely prevent fighting over or a lawsuit about your will, the trust you create, or your assets (your estate). It is the nature of our legal system. A lawsuit can be filed by anyone. However, here are 12 tips to reduce the likelihood of litigation over your assets. Understand what heirs and beneficiaries typically fight about Don’t assume your family won’t fight Work with a well-qualified, experienced attorney Be clear about how assets are to be divided (especially sentimental items) Don’t bring your children or other beneficiaries to meet with your attorney Be open about your intentions Include a No Contest Clause Allow litigation expenses to be charged to the share of the beneficiaries involved Don’t add someone to an account unless you intend for that person to be a true owner Keep your estate plan (documents) up to date Pick the right trustee (trust) or executor (will) Make a succession plan for running the family business Part 2 of this Article discusses Tips 7-12. See Part I of this Article for a discussion of Tips 1-6.   Tip 7: Include a No Contest Clause If you either don’t want to disclose your plan to your family or believe that even with disclosure there will still be fighting, you may want to include a no-contest clause. It can be a useful tool to keep litigious-minded beneficiaries in line. A no-contest clause can take different forms, ranging from the loss of a contesting beneficiary’s significant share of the estate to the loss of a specific gift. It should have enough “teeth” to it so that the potential loss (whether a specific gift or a share of the estate) makes the beneficiary really think about if he/she is willing to take the risk.   Tip 8: Allow Litigation Expenses To Be Charged to the Share of Beneficiaries Involved Another way to discourage litigation is to specifically provide in the documents that funds can be used to aggressively defend challenges to your estate plan and that the expenses can be charged to the share or shares of beneficiaries involved (whether directly or indirectly). Without such language, a court will generally not permit such an allocation unless there is a finding that the contesting beneficiary acted in bad faith in bringing the challenge.   Tip 9: Don’t Add Someone to an Account Unless You Intend For That Person to be a True Owner Many people add a son or daughter to their checking account as a co-owner (aka a joint owner). Often, people decide to do so to enable that son or daughter to write checks and help out with managing money. But what people may not realize is that in most cases, adding someone to the account makes that person a full co-owner. And as a full co-owner, they have right to keep the money after the original account holder’s (the parent’s) death. That co-owner becomes the sole owner of the account. This can be a disaster. If there is more than one child, but only one was added as a co-owner, siblings can fight about whether the one child added as co-owner should keep the funds in the account or if all the children should share the money in the account.   Tip 10: Keep Your Estate Plan...

read more