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Opportunities For A Trustee To Reduce Liability

Advantages: Provide better service and proactively document decisions made so that trustee has all available defenses.

Current Law
  • Current law requires Trustee to monitor acts of any agent and imposes liability for failure to do so
  • Have written retainer agreements for any Trustees, Attorneys, Accountants, and other professionals employed by the Trustee, designate responsibilities and monitor all agents and use attorney and their staff so that attorney client privilege is available (See Pham v. Cheadle 246 Cal. App. 4th (2016 provides as follows).
    • Disqualify opposing Counsel based on use of privileged document
    • Extends Attorney Client privilege to any communication with a lawyer and makes it an absolute privilege even if the content may not be privileged
    • Provides a complete copy of estate planning files to any Beneficiary
Note: Attorney Client privilege is held by Trustee and a change in Trustee allows new Trustee to obtain privileged communications for earlier Trustee

Claims Frequently Made Against Trustees:
  • No reports or accountings or even maintenance of records from which reports and accountings can be made for a Trust (Records should be maintained to support an accounting through at least final termination of trust) and interim or final court order or waiver of accounting and release
  • No waivers of accounting with releases or court orders obtained
  • Reports and accountings that were provided are alleged not to be accurate and create claims for equitable indemnity against attorneys and accountants preparing accountings and those claims can be simultaneously tried if, and when, objections to the accounting are tried in probate court. This complicates a trial and creates potential liability for the preparer of the accounting.
  • Not equalizing income and principal distributions among the Beneficiaries on a pro rata basis of distributions
  • Mistakes on Form 706 federal estate tax return particularly not including Form 706 PC to allow claims for refunds if the estate is taxable and the administration takes more than the time to file Form 706
  • Not following the Trust or the intent of the Trustor
  • Claims arising from not having good relations with Beneficiaries regardless of their personalities
  • Interpreting without court assistance inconsistent estate plans of both Trustors(s)
  • Conditioning a distribution with a release
    • Probate Code 16004.5. (a) A trustee may not require a beneficiary to relieve the trustee of liability as a condition for making a distribution or payment to, or for the benefit of, the beneficiary, if the distribution or payment is required by the trust instrument. (b) This section may not be construed as affecting the trustee’s right to: (1) Maintain a reserve for reasonably anticipated expenses, including, but not limited to, taxes, debts, trustee and accounting fees, and costs and expenses of administration. (2) Seek a voluntary release or discharge of a trustee’s liability from the beneficiary. (3) Require indemnification against a claim by a person or entity, other than a beneficiary referred to in subdivision (a), which may reasonably arise as a result of the distribution. (4) Withhold any portion of an otherwise required distribution that is reasonably in dispute. (5) Seek court or beneficiary approval of an accounting of trust activities.
Trust Director Statute
(adopted by nearly unanimous vote in assembly and senate and immediately signed by Governor Newsom)
  • 2024 alternative to current agency law is the Trust Director Statute which can allocate liability from trustee to the trust director for actions by trust director only if statute is specifically included in a revocable trust or included in a modification to an irrevocable trust (see Probate Code Sections 16600 to 16609)
  • Trustee Becomes a Directed Trustee for those tasks the Trustor(s) want to retain or delegate to others in which case the trust director is liable for decisions and the Trustee is not liable and not required to review or “second guess” the trust director
  • What can be directed? Legislative history implies that is limited by the imagination of the attorney. In short there are apparently no limits.
Delegate The Following Tasks To The Trustors:
  1. All investments decisions particularly closely held and concentrated investments such as family businesses and real estate ( trustors will want to do that anyway)
  2. All tax planning and tax preparation (their tax preparer and estate planner has more experience with the situation and prepares their individual returns, estate planning, and transaction documents while maintaining the compliance of any entities with applicable law)
  3. Provide that all in-kind distributions made by a trust director or the Court
  4. Provide better service and more transparent negotiations over fees allowing trust to consider modified fees with hourly and percentage fees, say $250-$450 hourly plus a percentage of assets, say up to .4% on larger trusts
Retain The Following Tasks:
  • Prepare quarterly accountings or waivers of accounting and releases or court orders and discuss them with the trustors, trust directors, and beneficiaries
  • Suggest more complex accountings and reports have peer review or legal review before submission to beneficiary:
    • Reports and quarterly probate accountings must be done very carefully as there is potential liability for errors in reporting transactions correctly and generally encourage retainer of an attorney who retains an accountant to go through the records and object especially if the accounting is filed with the court for confirmation Reports and quarterly waivers of accounting encourages the parties to review the documents and if it is done at the outset and at quarterly intervals it is often readily obtainable and then the question becomes should there be a confirming court order
  • Invest a cash reserve in a diversified portfolio which you as a resigning Trustee can use as a reserve against claims until a waiver of accounting with a release or a court order is obtained
  • Retention of separate counsel when resigning as trustee
  • Exercise of the power to distribute income and principal and use the standard of health, support, maintenance, and education which helps reduce problems of interpretation and IRC 2036 relating to estate tax inclusion of gifts which occurs whenever there is a transfer to a trust or entity which was not for fair market value consideration and the transferor retains the right to income (or use of the property) or the right to designate who and when the income can be paid to (which also includes related parties such as parents, siblings and children who make those decisions). See also Estate of Bigelow 503 f.3d 955 (CA-9 2007) where there was an implied right to use a property transferred to a family entity ostensibly for fair market value consideration resulting in inclusion in the estate; compare to Estate of Magnin 184 f.3d 1074 (CA-9 1999) Allowing a sale of a remainder interest to terminate 2036 arguments of the commissioner. Also, Estate of Jorgensen 431 f. App 431 (CA-9 2011) decedent retained the economic benefits of the property and control of the partnership such that the partnership was included in his estate.
Affirmative Defenses Available If Claims Are Made
  • Following the intent of Trustors and the directions of Trustor: Probate Code 15800 and Estate of Giraldin 55 cal.4th 1058 (2012), and Ammerman v. Callender, 245 Cal.App 4th 1058 (2016) allowing beneficiary or attorney to testify as to intent
  • Following the terms in the Trust: Probate Code 16000
  • Following advice of Counsel: Wolf v. Mitchell, Silberberg & Knupp 76 cal.App.4th 1030 (1999)
  • Consent by Beneficiary: Probate Code 16463, 16464, 13106, 19508
  • Ratification by Beneficiary: Probate Code 16463, 16464, 14106
  • Waiver by Beneficiary (Generally a waiver is the voluntary relinquishment of a right based on acts such as receipt of funds on an ongoing basis without any objection)
  • Estoppel by Beneficiary: (Based on acceptance of benefits and then taking an inconsistent position): Probate Code 16463, 16464, 13106
  • Assumption of risk by beneficiary (based on assuming the risk of all harms which are now the basis of objections): Probate Code 16040, 16046, 16461,16462
  • Actions were taken with trust advisors who are treated as co-trustees (see Crocker-Citizens National Bank v. Younger 4 cal.3rd 202 (1971); Or actions taken by others who became de facto trustees took actions not known to or approved by trustee and are solely liable for claims of the beneficiaries. (See Gaynor v. Bullen 19 cal.App.5th 864 (2018) and King v. Johnston 178 cal.App.4th 1488 (2009))
  • Possible Preamble to An Agreement With Beneficiaries
    • All Beneficiaries agree that the (1) intent and directions of Trustor(s) were followed, (2) the terms of the trust were followed, and (3) Beneficiaries ratified and consented in advance to all actions taken by Trustee with the result that no Beneficiary has any claim against Trustee or any other Beneficiary
In all cases provide written notice to Beneficiaries of important decisions they need to make, their right to counsel and allow time for any beneficiary to exercise that right. Do not become involved in disputes with beneficiaries regarding distribution of assets particularly in-kind distributions as it is questionable that Trust administration extends to distribution decisions among Beneficiaries. Also watch defense costs for an accounting and see Donahue v. Donahue 182 Cal.App 4th 259 (2010) regarding unnecessary and duplicate fees for a defense of Trustee resulting in surcharge to Trustee of the fees.

C. Tucker Cheadle Law works throughout California, specifically in Orange, Los Angeles, San Bernardino, San Diego, Marin, Santa Clara, Santa Maria, Stanislas, Redding, and Napa counties. Contact us today at 949.553.1066 to discuss opportunities for you as a trustee to reduce liabilities.

This article is designed only to provide a general background and is not legal advice. If you need legal advice please contact C. Tucker Cheadle and after providing all the important facts and information, a legal opinion can be made. A review of any materials on this web page, any preliminary comments or an introductory meeting does not constitute legal, income tax or accounting advice upon which reliance can be placed. The attorney client relationship can only be created by a written retainer agreement following a check of potential and actual conflicts of interest with other clients.
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