The United States is entering a new demographic era and as a result, a new era of estate planning. With the dramatic increase of the population entering their golden years, more and more households are using trusts and other estate planning tools. It is now a commonly used tool both in upper and middle-class families. As a result, more and more of the general population are being asked to serve as trustees. Emphasis on serve, because acting as a trustee really is service. It requires attention to detail and the ability to work with people, and the conflict which that sometimes entails.
As you may know, there are three parties to a trust. There is the trustor who places the assets in the trust (also known as the funder, settlor, donor, or grantor). There is the individual receiving the property (the trustee) and the individuals for whom the property is being held to benefit (the beneficiaries).
It is helpful if these parties maintain a good relationship and have open communication. While the settlor is still alive, the trustee should seek full, written disclosure and consent from the settlor to avoid possible disputes in the future.
What Are the Ramifications of Filing a Legal Action Against a Trust Fund?
Many individuals are concerned about litigation that dissipate assets in the trust or cause a nuisance. Trusts can contain what is called a no-contest clause. Quite simply put, if you commit the action that is listed in the clause, and contest the trust, your claim under the trust will be forfeited. This type of clause may have a standard, such as probable cause, which is the measure of the belief that you have to have in your case to contest the trust. In other words, if you have evidence of probable cause to support your claim, the no-contest clause may fall.
The most common direct contest to wills and trusts in California is undue influence or loss of capacity. If the beneficiary who challenges the trust loses the action or does not have probable cause of undue influence or loss of capacity, the no-contest clause could apply.
It is important to note that a no-contest clause does not prevent a party from bringing a cause of action, it just prevents the beneficiary from receiving a gift– if it applies. If a party is not set to receive much of a trust gift, this clause may not have much disincentive force.
Because of the severe consequences to a beneficiary who contests a trust with a no-contest clause, we strongly encourage you to seek legal advice from an experienced trust attorney. California law has changed over the years in this area and strict construction is applied. If the trust language is vague or ambiguous, the right to distributions under the trust should remain intact and the no-contest clause will not apply.
In a recent blog post, we answered the question, What Remedies Are Available When a Trustee Breaches a Fiduciary Duty? In cursory fashion, without going into detail on personal liability, we stated that “in litigation, the attorneys can seek the replacement of a trustee, civil damages, restitution, fines, and personal liability on the trustee’s part.” With regard to personal liability, the general rule in California is that trustees owe trust beneficiaries a fiduciary duty, the highest legal duty possible.
This means that they must prudently manage the trust for the sole benefit of the beneficiaries and always act in the best interests of those beneficiaries. Because trustees are fiduciaries, a beneficiary can sue them for breach of fiduciary duties if she believes the trustee has made a mistake or otherwise mishandled the trust. If trustees, for example, mismanage trust property, they may be forced to reimburse the estate. Similarly, if they fail to pay taxes on time, otherwise incur avoidable fees or penalties, or fail to make investments or make them poorly, trustees may be liable to the estate.
Once You Have Seen One Trust, You Have Seen One Trust…
Every trust can and often should be different. For example, where a trusted family member is a trustee, one could include a clause that immunizes him from honest mistakes and that waives the reasonable and prudent standard. The clause could state that trustees are not personally liable unless they act in bad faith, arbitrary behavior not being sufficient. Simple trusts will not often differ in how they are set up and what they do. The more complicated the estate, the larger the number of beneficiaries and the types of relationships and distribution schemes that are set up, the more complicated the trust language will become.
Stay On the Right Path
Many stories are appearing in the media about alleged or actual misappropriations by trustees. Our experienced lawyers and staff are well-versed in the laws and policies that apply to trustees. LRMMT has counseled many clients on these and other essential matters. We are happy to assist by answering your questions and providing legal advice. Getting involved to help protect you as a trustee or look into allegations of improper trustee actions is what we do.
Call the entrusted attorneys at Lowthorp, Richards, McMillan, Miller & Templeman at (805) 981-8555 or fill out our online contact form. We operate primarily in the Tri-Counties area – Ventura, Santa Barbara, and San Luis Obispo.