Breach of Trust and the Statute of Limitations

Probate Code § 16460(a)(2) provides that if "an interim or final account in writing or other written report does not adequately disclose the existence of a claim against the trustee for breach of trust or if a beneficiary does not receive any written account or report, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after the beneficiary discovered, or reasonably should have discovered, the subject of the claim."

So you better file your petition on time.............

A recent unpublished appellate opinion touched upon this issue. Kathleen, a trust beneficiary, was a party to a trustee removal petition filed by another beneficiary, her sister Kelly Sue. The petition was filed in 1987. 

The 1987 petition stated that the trust was established for educational purposes to benefit the settlor's children, which included Kathleen and Kelly Sue.

The 1987 petition stated that "the entire trust is to be distributed in equal shares to all living beneficiaries on December 5, 1998, when the youngest beneficiary turned 25 years old." 

In 2015, Kathleen filed "an amended petition for redress for breach of trust, for fraud and punitive damages, conversion, constructive trust, injunctive relief, and declaratory relief." The petition alleged that Kathleen never received any distributions from the trust.

Kelly Sue was the respondent in the 2015 petition.

Kelly Sue's demurrer was sustained without leave to amend (a coup de grace in litigation) because Kathleen had failed to timely file suit, i.e. the statute of limitation had run. See Probate Code § 16460(a)(2). The reason being is that Kathleen's claim accrued on December 5, 1998. She did not file suit until 2015, more than 3  years after her claim had accrued. 

Kathleen argued that she lacked actual knowledge of wrongdoing by Kelly Sue. The California Court of Appeal was unmoved. "Kathleen cannot toll the statute of limitations by claiming she was unable to discover the claim by the distribution date. Her own allegations in the amended petition demonstrate she had actual knowledge of the existence of the trust; her status as a beneficiary of the trust; and the contents of the removal petition, which attached to it was the trust as an exhibit. In addition to her actual knowledge, Kathleen had constructive knowledge of the trust and its terms because she admits she was a trust beneficiary. As a beneficiary, she was entitled to request a copy of the trust and related information, through which she should have reasonably discovered the distribution date. Kathleen was also on inquiry notice as a trust beneficiary, and could have obtained information about the trust, as she eventually did in 2013 through public records. Unlike the situation in Quick, where the existence of the trust and the petitioner's status as a beneficiary were hidden from the plaintiff, thereby tolling the statute of limitations, here, Kathleen had actual and constructive knowledge of the trust and its terms."

Dunphy v. Wilken, Orange County Superior Court Case # 30-2015-00779480

Trustee Removal

When a beneficiary files a petition it concludes with requests for various forms of relief, e.g. compelling the trustee to submit an accounting, instructing the trustee, determining the validity of a trust provision, determining questions of construction of a trust instrument, approving the modification or termination of the trust, authorizing or directing transfer of a trust or trust property to or from another jurisdiction, etc. Prob C § 17200.

Generally speaking, a court can only grant what the moving party has requested in the petition. For instance, if the petition asks to instruct the trustee to rent a commercial property that has been kept intentionally vacant for years, the order would presumably relate to that subject matter as opposed to something else. In simplistic terminology, "you get what you asked for." 

Still, a probate court is one of general equity. Getty v. Getty (1988) 205 Cal.App.3d 134, 141-142. Thus it can fashion remedies that it sees fit in certain situations, i.e. order something in the interests of "fairness." One example where the probate court can acts on its own motion (known as sua sponte) is removal of the trustee. Prob C § 15642(a). Although  invariably the trustee's conduct will be the primary instigator of this. Hence, it is not as if the probate court would issue orders capriciously.

For example, assume a disgruntled beneficiary petitions for an accounting by the trustee, but not for the removal of the trustee. The trustee has never provided an accounting to the beneficiary and the settlor passed away years ago. The clear language of the trust directs the trustee to provide an annual accounting to the trustee. Furthermore, the beneficiary made repeated attempts to contact the trustee prior to filing the petition but to no avail. Thus, the beneficiary has a credible argument as to why an accounting should be provided.

First, the trustee asks for, and receives, numerous continuances to file the accounting. Second, the accounting the trustee ultimately files is replete with inaccuracies and misleading statements. Third, the accounting also fails to conform to court standards. Prob C § § 1060 - 1064. Cumulatively, the trustee has failed to fulfill their fiduciary duties.

At that point, a trial court is perfectly able to remove a trustee on its own motion. However, in practice, a trustee is typically suspended and then later permanently removed.   

In Re Conservatorship of Person and Estate of Moore

When an attorney becomes the trustee of a client's trust, trouble usually ensues. The following published decision is representative of this. 

In Re Conservatorship of Person and Estate of Moore, __ Cal.App.4th __ (2015) 

Attorney William Salzwedel was retained by Lester Moore to assist with amending his estate plan and filing an elder abuse action against his daughter. The elder abuse action stemmed from Mr. Moore's daughter, Poppy Helgren, questioning Mr. Moore about large monetary gifts Mr. Moore was providing his girlfriend. In fact, according to the appellate opinion, Ms. Helgren did nothing wrong. Ms. Helgren became concerned about this after being notified from Mr. Moore's doctors that he "suffered from dementia and lacked the capacity to handle his affairs."

In October 2010, Mr. Salzwedel had Mr. Moore "sign the following documents: (1) a partial revocation and modification of the Trust, naming appellant as temporary successor trustee of the Trust; (2) Moore's resignation as trustee; and (3) a Durable Power of Attorney appointing appellant as Moore's attorney-in-fact."

In December 2010, Ms. Helgren "filed a petition for conservatorship. A few months later, she filed a second petition to determine Moore's capacity to execute the estate planning documents."

Mr. Moore, through Mr. Salzwedel, to put it mildly, vigorously objected to the conservatorship petition. The resulting fees and charges was reflective of that. Later Mr. Salzwedel was removed as trustee in May 2012 by the probate court and it ordered him to account for his expenses. 

The details of the accounting were eye-opening.........

"The probate court noted that the accounting listed $474,348.01 in opening inventory and cash receipts and that appellant paid himself $148,105.11 in fees, or 31.22% of the conservatee's reported trust estate, . . . plus another $32,288.21, or another 6.81% of the conservatee's reported trust estate, in related professional and litigation fees."

"The expert witness expenses ($27,515.13) were also excessive. Appellant retained Edward Hyman, Ph.D., a psychologist, from Northern California who billed at the rate of $495 an hour. Doctor Hyman charged $6,000 for travel time and billed 23.25 hours ($11,508.75) on January 6, 2012 for "report writing" and a psychological assessment. The trial court found that appellant could have hired an medical expert from UCLA to make the psychological evaluation for $2,500. Appellant also paid a "celebrity psychiatrist," Dr. Carole Lieberman, $7,500 to evaluate Moore but the doctor never wrote a report or testified. In an e-mail, appellant admitted that Doctor Lieberman's fees were shocking and that Doctor Hyman's travel fees were an embarrassment. Appellant paid another attorney-doctor, Alan Abrams, $3,000 to review some medical records. The trial court found that $2,500 was a reasonable fee for Moore's psychological evaluation and that "everything else was wasted money and wasted time."

Predictably, the appellate court upheld the "$96,077.14 judgment surcharging him for excessive attorney's/trustee's fees ($70,044.99), medical expert fees ($25,015.13), and costs ($1,017.02)."

Beneficiary's Objections to a Probate Petition

When a trust beneficiary objects to a trustee's petition, the objection(s) must be limited to the scope of the petition. Otherwise, the objection will be disregarded.  "Evidence offered on an unpleaded claim, theory, or defense is irrelevant because it is outside the scope of the pleadings." California Bank & Trust v. Lawlor (2013) 222 Cal.App.4th 625, 637, fn. 3.

The following example illustrates this point.

Bobby is the lifetime beneficiary of a trust established by his late affluent uncle who lived in Monte Sereno, CA. To guard against trustee malfeasance, the trust required that an annual accounting be filed with the local probate court. The trust's main asset was a duplex in Santa Clara that produced a steady stream of income. Still, Bobby believed that the trustee, Tom, was not charging market-rate rent given the recent surge in rent. Bobby demanded that Tom increase rent for each unit but Tom objected, citing that tenant turnover was quite low over the years. Tom believed that if he charged at or near market-rate rent, he could cherry-pick the right tenants. These tenants would then stay at the property for years instead of leaving after a year. The transactions costs of finding new tenants, i.e. cleaning and repairing the unit, were quite high. Hence, Tom believed his strategy was prudent because ultimately it reaped a greater profit for the trust. The short-term cost of charging at or near market-rate rent was eclipsed by the long-term gain of avoiding costly tenant turnover.    

When Tom filed his accounting, it indicated that rent was $2,200 for each unit. Upon receiving the accounting petition, Bobby scoured Craigslist for duplex rentals in Santa Clara. He found that most duplex rentals in Santa Clara rented for $2,400 a month. In Bobby's objection to the Tom's accounting petition, he argued that Tom should be removed as trustee for breach of fiduciary duty. In particular, Bobby argued that Tom's refusal to charge more in rent was preventing the trust property from being productive and not in furtherance of the purposes of the trust. See Probate Code § 16007.

The problem with Bobby's objection is that the accounting petition was not the proper avenue to seek removal of Tom as trustee. While Bobby could object to the contents of the accounting petition, e.g. he could object if Tom could not substantiate expenses and costs. He was not in a position to seek removal of Tom as trustee because the pleadings were limited to the accounting. If Bobby wanted Tom removed as trustee he would have to file his own petition under  Probate Code § 17200(b)(10). Bobby could not piggyback on Tom's accounting petition for purposes of seeking his removal.

Standard Prudent Trustee Rule

When a person has been selected or appointed trustee, they are obligated to follow the prudent trustee rule, along with various other obligations. For purposes of this post, I will just focus on the prudent trustee rule.

California law codifies this rule as follows: "the trustee shall administer the trust with reasonable care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument." Probate Code § 16040(a). 

While this law is certainly written in legalese, it can still be translated into understandable language. Stated alternatively, the prudent trustee rule requires the trustee to act sensibly or reasonably given the situation and reflective of the terms of the trust. It should emphasized that the standard is flexible in that it accounts for various circumstances. What can be considered reasonable in one instance can be considered unreasonable in another.

For example, if the trust owns rental property and the tenants have responsibly occupied the property for years, e.g. timely payment of rent each month and proper upkeep of the house, it would be reasonable for the trustee to only have to periodically check the property. Frankly frequent visits to the property might engender a lack of trust with the tenants given their responsible tenancy. Conversely, if the rental property has frequent turnover and is located in a gritty neighborhood, the trustee would reasonably be expected to visit the property regularly to combat these issues. As the saying goes, "where there is smoke, there is fire." Hence, the reasonable trustee would comply with prudent trustee rule by being vigilant to the issues surrounding the rental property.  Sadly, the latter situation is much more common than the former situation. There are countless stories of absentee landlord-trustees who simply collect rent and are oblivious to the plight of their tenants.

It should also be noted that the prudent trustee rule is not violated simply because a loss has occurred. Even the most reasonable trustee can make the occasional mistake and California law does not impose on them the responsibility of infallibility. Pillsbury v. Karmgard (1994) 22 CA4th 743. This is particularly helpful because if infallibility is required, a trustee might become very hesitant to perform virtually any affirmative act out of fear of liability. Hence California law provides the trustee with some qualified wiggle room.

If the prudent trustee rule is violated, such is considered a breach of trust. Consequently, a trust beneficiary can then petition the competent probate court to have the trustee removed for breach of trust.

Attorney Disqualification

Generally, the attorney that the client wants to retain is the attorney that they are able to retain ultimately. Still, there are occasions when the desired attorney is unable to be retained because of a prior representation. 

For example, the attorney might have represented a past client who is now an adversary of the current client. Since representation of the prior client might yield confidential information that is not discoverable, this could give an unfair advantage to the current client. In particular, the attorney might know the past client's habits, vulnerabilities, personality, etc. This could prove very beneficial to the current client because the attorney would know how the past client could be exploited. Similarly if a professional football team spied on their opponent by taping their practices or their pre-game walk-through, this too would create an unfair competitive advantage because the spying team would know beforehand how that team will run its plays. 

In light of this obvious conflict, the past client is given the ability to disqualify their past attorney even if it deprives the current client of their attorney of choice. This scenario played out in a recent probate case in Los Angeles County Superior Court, Case No GP016054.

Richard E. and Mary Holder, husband and wife, created a revocable trust on February 11, 2009. Richard passed away a few weeks later on February 26, 2009 and Mary passed away on July 19, 2010. The couple had two children, Shyla and Richard L. These two children were named as successor co-trustees of the trust. 

Shyla petitioned in June 2011 to have her brother Richard L. removed as trustee for breach of fiduciary duty. Allegedly, Richard L. had mismanaged trust assets and engaged in self-dealing. The interesting aspect of the case was that Shyla was represented by her husband, attorney David Cordier. Consequently, Richard L. filed a motion to disqualify 
Mr. Cordier from representing his wife. The trial court granted the motion and this decision was upheld on appeal in an unpublished decision by the 2nd district court of appeal. 

The court of appeal's decision can be summarized as follows: "we conclude there was sufficient evidence for the probate court to find that Cordier represented Richard regarding his business and received confidential financial information from him; Cordier represented and advised the settlors in creating the trust; Cordier represented both co-trustees in preparing the sales agreement and urging Richard to just sign the agreement; and Cordier assisted his son Brian and his wife Shyla in a manner adverse to Richard, as the co-beneficiary of the trust. Accordingly, the probate court did not abuse its discretion in granting Richard's motion to disqualify Cordier."

Thus, Mr. Cordier was barred from representing his wife Shyla with the proceeding to attempt to remove her brother as a trustee of the Holder trust. 

Fiduciary Duties of a Trustee

In need of some tender loving care........

When a person becomes trustee, one of their duties is to safeguard and make productive trust property under the circumstances at hand. Prob C §§16006-16007. A trustee cannot generally stand by idly and watch trust property rot, decay or deteriorate. Yes, the law unsurprisingly does not look too kindly on the lethargic. A common scenario where this arises is when a son or daughter inherits the family home from their parents. 

Many baby-boomers are resistant to re-locating to a retirement home. The comforts of living in the same residence they have called home for decades compels them to stay typically. This results in a home that can be in need of maintenance and repair given that many baby-boomers are not equipped to handle some the rigors of home ownership, e.g. gardening, household repairs, etc. This is not an indictment of baby-boomers but rather an honest assessment given that they naturally have physical limitations. Ultimately, the children will inherit a home that is habitable but may need renovation and/or improvement.

I was reading the probate file of a case in Alameda County recently. The decedent owned a home in Oakland, CA but had no close relatives living near by. When the decedent passed away, there was nobody available to immediately occupy the home. Sadly, vandals, squatters and drug-users trickled into the home as it was unoccupied. 

Assuming that the decedent had created an income-producting trust for their grandkids, the trustee would have been entrusted with safeguarding the home. Prob C §16006 This would entail ejecting or removing any occupants that would qualify as trespassers, i.e. squatters and drug-users Furthermore, the trustee would need to ensure that proper safety precautions were in place. Thus, they would probably need to check to see that all outdoor lights worked, the door locks were properly functioning, etc. Furthermore, the trustee would also be entrusted with making the property productive. Prob C §§16007. Thus it would be prudent for the trustee to inspect the property for maintenance issues, e.g. inspection of the roof, plumbing, heating, water and electrical. Since a productive home only results from a functional home.    

Failure to fulfill these fiduciary duties, i.e. safeguard trust property and make it productive under the circumstances, can result in severe consequences for the trustee. First, the trustee can be removed from the office of trustee. Prob C § 16420(a)(5). Second, a court can compel the trustee to redress a breach of trust by payment of money or otherwise. Prob C § 16420(a)(3). Third, a court can compel the trustee to act or not act in a certain way, i.e. an injunction. Prob C § 16420(a)(1)-(2).   

Beneficiary Notification - Prob C § 16061.7

An issue when litigating a matter is timeliness. Sometimes a litigant can be premature while other times the litigant can be tardy. It is rarity though for a person to be both too early and too late in the same matter. Amazingly, such was the case of a litigant named Edward Bridgeman who wanted to challenge the validity of amendments to his father's trust.  Bridgeman v. Allen, CA Court of Appeal, 2013    

Henry and Kathleen Bridgeman created a revocable trust, naming themselves as co-trustees and their son Edward Bridgeman as beneficiary. Following Kathleen's death, Henry became sole trustee. "In 2004, Henry was diagnosed with dementia and possible Alzheimer's disease. In February or March of 2005, Donna Allen began taking care of Henry. In March 2005, Henry signed an amendment to the Trust, naming Allen as the sole beneficiary and successor trustee. Henry also appointed Allen as his attorney in fact on a durable power of attorney and advanced health care directive."

Edward filed a petition to invalidate this amendment. However, his petition was dismissed because he lacked standing as the trust was still revocable. The trial court's ruling noted that the dismissal did not prohibit a future filing by Edward.

In July 2011, Henry passed away and Beverly Brito, having replaced Ms. Allen who had been removed as trustee, served notice to Edward per Prob C § 16061.7. This notice contained the phrase, as required by California law, "you may not bring an action to contest the trust more than 120 days from the date this notification by the trustee is served upon you." Prob C § 16061.7. Edward, who was living out of state, receive this notice in July 2011.

On November 17, 2011, more than 120 days after notice was given, Edward sought relief to have his claim not be barred by the statute of limitations. Edward's attorney made a clerical error so the filing was actually not filed until until November 21, 2011. The trial court denied his claim as it was not within the 120-day window. On appeal, Edward argued that since he was an out-of-state resident, an extra 10 days should apply to the statute of limitations. CCP § 1013.

The Court of Appeal rejected this argument because it found that CCP § 1013 is the default rule and the probate code had a specific rule for providing notice. Thus, in terms of the statute of limitations, Prob C § 16061.7 was controlling, CCP § 1013 was not. In the words of opinion "Read together, the plain language of these statutes provide that an action to contest the trust must be filed within 120 days from the date the notification by the trustee is served (§ 16061.8), service may be by mail (§ 1215, subd. (a)), and mailing is complete and may not be extended when the notice is "deposited in the mail." (§ 1215, subd. (e).)"

Ultimately, Edward's claim was rejected as he had not timely filed within the applicable statute of limitations. His deadline to file was November 8, 2011 and he had filed on November 21, 2011. Thus Edward was surprisingly too early and too late with his filings in the same case.

Self-Dealing - Breach of Fiduciary Duty

Avarice - Jacob Matham

When a person acts in a fiduciary capacity, the interests of others are given priority. In terms of a trust, the trustee acts as a fiduciary for the beneficiary. Therefore, the trustee needs to elevate the interests of the beneficiary above theirs. The California probate code delineates the duties the trustee needs to perform in order to fulfill this fiduciary responsibility. Unfortunately, some trustees have issues when complying with all of their fiduciary duties.

One common way in which a fiduciary runs afoul of their duties is by engaging in self-dealing. This conduct violates both the fiduciary duty of loyalty and the fiduciary duty to avoid a conflict of interest. Prob C §§16002; 16004. In short, self-dealing involves the trustee behaving in a fashion that benefits themselves, without regard to the needs of the beneficiary. Intuitively, this is a breach of a trustee's fiduciary duty because they have elevated their concerns over the concerns of the beneficiary.

An example of self-dealing is as follows.

Thomas was the trustee of his neighbor Theo's trust. Theo had created the trust for the benefit of his nephew Bob. Theo's nephew was a profligate individual who failed to appreciate how to purchase prudently. Bob routinely purchased frivolous items such as lotto tickets, chia pets, body bands, tickets to Nickelback concerts, snuggies, movie tickets for John Carter, etc. Alarmed by Bob's antics, Theo decided to create a trust for Bob's benefit but to only make him a lifetime beneficiary. Furthermore, any distribution to Bob would be subject to an ascertainable standard, i.e. distributions could only be made for Bob's health, education, maintenance and support. Therefore, that 50th chia pet would not be purchased from Theo's trust. 

The sole asset of Theo's trust was a rental property located in Los Gatos, CA, namely a fourplex. Theo was a real estate guru and shrewdly purchased, all-cash, a very lucrative rental property at just the right time. Rents from the fourplex provided a healthy cash-flow for the trust.

Unknown to Theo, Thomas was a compulsive gambler. Nearly every weekend would see Thomas scurry to a local casino to fritter away his money on craps, blackjack and Texas hold'em. Theo had just assumed that Thomas lived by the mantra "work hard play hard" and liked to get away for the weekend. Don't we all sometimes.

Thomas' gambling addiction eventually manifested into massive debt. Unable to pay this debt, Thomas deeded the property to himself. Then he obtained a home equity line of credit to satisfy his gambling debt.

This act constituted self-dealing because Thomas acted in his best interests rather than Bob's. In particular,  Thomas, blinded by his gambling debt, had used trust property to benefit himself personally as opposed to benefiting Bob. Thus, Bob could pursue various legal remedies to rectify the error such as seeking a court order to void the transaction. Estate of Martin (1999) 72 CA4th 1438.

Self-dealing can be a very expensive proposition for the imprudent trustee. For instance, one trustee was adjudged to have engaged in self-dealing and the beneficiaries were awarded millions of dollars in damages. Uzyel v. Kadisha (2010) 188 CA4th 866.

Removal of a Trustee - Breach of Fiduciary Duty

100% financing for realty can cause problems/image: Bob Ionescu

When a trustee fails to execute their fiduciary duties, a trustee may request the trustee's removal via petition. The California law which provides for this is Prob C § 17200(b)(10). The following involves a case that has been litigated for years in the California court.  This is almost expected given the amount of money involved. A reality of law is that cases which involve small sums of money, arguably less than $5,000, do not get litigated given the time and expense of litigation. This case however involves a pretty penny.

The founder of Herbalife, Mark Hughes, passed away in 2000 as the result of an accidental overdose of alcohol combined with antidepressants. During his career, Mr. Hughes amassed a huge fortune thanks to the success of Herbalife. Prior to his passing, Mr. Hughes drafted a trust which provided for a rather large inheritance to be distributed to his only son, Alexander, once he turned 35. The trust estate's current value is pegged at $350M. Yeah not too shabby of an inheritance.

This past Monday, a Los Angeles Superior Court Judge ordered the removal of the trust's 3 trustees, John Reynolds, Christopher Pair and Conrad Klein, an attorney. The 3 trustees all had a close connection to Mr. Hughes either through familial, business or professional relationships. Judge Mitchell Beckloff ruled that the 3 had breached their fiduciary duty owed to Alexander because they had failed to manage the trust estate with "prudence, skill and diligence." In particular, the ruling was based on the sale of real property the trust formerly owned in the Santa Monica mountains. The trust sold the realty to a business entity for $23.7M, yet did not require that the buyer tender any down payment. In other words, the trust sold the realty to the business entity with financing constituting 100% of the transaction. Following the purchase, the business entity sought bankruptcy protection.   

For reference, many of the real estate purchases that occurred during the great sale recession involved 100% financing. That is, the buyer did not have to tender a down payment. This is a very risky endeavor because the buyer lacks much equity in the home. Therefore, the buyer would be more willing to walk away from the home, i.e. strategic default, if issues go awry, e.g. loss of income, severe illness, since the buyer lacks money in the property so to speak. Lenders prefer to use a conventional 20/80 financing model, 20% down and 80% financed, because then the buyer has "skin in the game" (their own money). 

Personally, I can definitely understand the judge's ruling given the buyer's financing arrangement. In light of the great recession, it would have been prudent for the trustees to at least require some down payment given recent history.

Obviously, the decision may be appealed and given that the trustees' have ample resources, this is a distinct possibility. 

Breach of Trust

In order to practice law in California, one needs to acquire a license. More particularly, a person needs to acquire a law license. Like any other license granted by the state of California, the license can be stripped from the licensee by the issuing body. Lawyers who lose their license are said to have been "disbarred." Yes lawyers are so special that they get their own word to describe loss of professional status.

Probably the fastest way for a lawyer to lose their license, disbarment, is to steal money from a client. This initially might seem like a difficult task at first blush but often times clients entrust their lawyer with a large some of money. For example, a few years ago, a client asked me to hold $60,000 in an escrow account. Since I was the sole signatory on the account, I could (if I wanted to destroy my professional and personal life) withdraw all the money from said account and expend it for my personal benefit. Since I am writing this post as an active member of the state bar of California, let us just say that the client's money was handled ethically.

Unfortunately some lawyers do not exhibit ethical behavior, commit egregious breaches of trust and suffer disbarment for stealing client money. An example of such is the sordid story of an attorney by the name of Sydney Kirkland, a soon to be former member of the state bar of California.

Jeanette Letman created a revocable trust which named Grover Gordon, a close elderly friend and companion, as sole beneficiary of her trust estate. Ms. Letman amended her trust numerous times and eventually settled on Mr. Gordon and Ms. Kirkland as successor co-trustees. This last amendment occurred on April 14, 2010. It should be noted that an attorney should rarely, if ever, name themselves as trustee because of ethical and legal
constraints. 

Ms. Letman passed away on January 15, 2011 and thereby Mr. Gordon and Ms. Kirkland became co-trustees. According to state bar, the trust bank account when Ms. Letman passed away was $285,730. During her time as trustee, Ms. Kirkland's trusteeship was marked by serious problems. According to a ruling by a San Diego Superior Court judge: "Ms. Kirkland violated numerous fiduciary duties. Ms. Kirkland exercised undue influence. Ms. Kirkland forged a bank statement. Ms. Kirkland forged the signature of Mr. Gordon. Ms. Kirkland prepared a false accounting. Ms. Kirkland misappropriated substantial money and also jewelry and personal property without knowledge or consent of Mr. Gordon."

Ultimately it was found that Ms. Kirkland had misappropriated $275,742.5 of Mr. Gordon's inheritance. Consequently, Ms. Kirkland stipulated to disbarment in light of her wrongful conduct in a January 16, 2013 filing with the state bar court of California. Additionally, Ms. Kirkland faces criminal and possibly civil charges for her actions.

It is obviously difficult to rationalize why an attorney with no discipline record up to that point would act in such a heinous fashion. Lawyers are often entrusted with great sums of money and sometimes attorneys do not follow through on their ethical requirements. Ms. Kirkland is an unfortunate example of that.

Trustee Vacancy

 
Simply stated, a trust will not want fail for want of a trustee. Prob C § 15660. In regular English this means that even if there is no acting trustee, the trust will continue nonetheless. 
The following are instances in which there is a vacancy in the office of trustee (Prob C § 15643):

1. The person named as trustee rejects the trust.
2. The person named as trustee cannot be identified or does not exist.
3. The trustee resigns or is removed.
4. The trustee dies.
5. A conservator or guardian of the person or estate of an individual trustee is appointed.
6. The trustee files a petition for adjudication of bankruptcy or for approval of an arrangement, composition, or other extension under the federal Bankruptcy Code, or a petition filed against the trustee for any of these purposes is approved.
7. A trust company's charter is revoked or powers are suspended, if the revocation or suspension is to be in effect for a period of 30 days or more.
8. A receiver is appointed for a trust company if the appointment is not vacated within a period of 30 days.

When a vacancy occurs, appointment of a new trustee can be achieved through various ways. 

First, if the trust instrument provides a practical method of appointing a trustee or names the person to fill the vacancy, the vacancy shall be filled as provided in the trust instrument. Prob C § 15660(b). For example, many trusts allow the last named trustee to appoint a successor if that person declines to act.

Second, when the trust does not specify a successor or the manner of selection, a trust company can be appointed trustee if approved by the adult beneficiaries. Prob C § 15660(b). However, most trust companies will not accept appointment unless the trust is rather large, i.e. the trust is comprised of millions of dollars of assets. Hence, this option is not available to the vast majority of trusts. 

Third, if the first two options are unavailable, the trust beneficiaries may petition the appropriate court to select a successor trustee. Prob C § 15660(d). The court shall give consideration to any nomination by the beneficiaries who are 14 years of age or older. Prob C § 15660(d).  

By far the optimal method to replace a trustee is by abiding by the terms of the trust. It is the fastest and most economical way to fill the vacancy. In contrast, a trust will typically not have enough assets to merit a trust company assuming trusteeship. Furthermore, a petition to appoint a trustee will cost thousands of dollars in attorney fees. Also, the appointment of a successor trustee by a court will only result in the appointment of one trustee. If that one trustee vacates the office of trustee, the beneficiaries will have to petition the court again to select another trustee. 

Exculpatory Clause For a Trustee

Shield = protection (I try to be creative)

When a person has been told that they have been nominated as the successor trustee of a living trust, they often ask "what are my responsibilities" and "how much risk or liability is involved?" The former question was addressed in a previous blog post. As for the latter question, many prospective trustees would like to insulate themselves from liability because humans are fallible and thus mistakes will occur. One method that a prospective trustee can be shielded from liability is through an exculpatory clause found in the trust. The term "exculpatory" is legal speak for clearing somebody of liability.

The consequence of an exculpatory clause is that the trustee will generally not be held liable for the misdeeds or errors they commit while trustee. However, there are limitations as to what mistakes a trustee will be held accountable.  California law prohibits clauses "relieve the trustee of liability (1) for breach of trust committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary, or (2) for any profit that the trustee derives from a breach of trust." Prob C § 16461. The following examples distinguish between what an exculpatory clause would apply to and what it would not.

Samuel, a widower, drafted a trust for the benefit of his son and daughter, Sven and Donna. Samuel is unsure about Sven and Donna's temperament and decides to name his long-time neighbor Theo as the successor trustee. To assure Theo that he will not be undertaking a perilous position, Samuel has his attorney write into the trust a sweeping exculpatory clause that reflects Prob C § 16461. When Samuel passes away years later, Theo steps into the shoes of the trustee. The sole trust asset is the family home that Theo is to hold in trust for Samuel's kids until they reach age 35

Years go by and the pool falls into disrepair. Theo decides to fill-in the pool by using a licensed contractor instead of renovating it. Sven and Donna become very agitated over this because they have fond memories of their youth swimming in that pool. They tell Theo that they intend to sue him for breach of trust because removal of the pool will adversely affect the amount of rent the house can reap. Theo counters by saying that a pool is a difficult amenity to manage and that the cost to renovate the pool will not be off-set by the increase in rent of a house with a pool, as opposed to without a pool, will garner. Unfazed by Theo's sensible arguments, Sven and Donna sue Theo for breach of trust. Ultimately Theo prevails because he cites the exculpatory clause in the trust and the judge agrees. That is, the judge concurs that this was a reasonable decision by Theo because pools are expensive to maintain, renovation costs would be appreciable and he used a licensed professional to complete the job.

Now assume the same facts as above but now Theo follows a different path for removing the pool. Instead of using a licensed contractor, Theo retains the help of his handyman friend, Al. Al lost his contractor's license years ago and Theo is unaware of this. Al tells Theo that if he hires a licensed contractor, removal will require a permitting process and city ordinances require removal of the pool debris, a cost of roughly $15,000 in Al's mind. However, Al tells Theo that he can "remove" the pool through other means. Instead of removing the pool, Al will fill-in the pool with concrete and spread dirt over the top to conceal it. Theo is concerned by this unlawful procedure but thinks that the planning department will never find out about it. Theo hires Al to complete the job for $3,000 and Al kick back $500 to Theo for hiring him in tough economic times. Eventually, Sven and Donna become aware that Theo used an unlicensed contractor to perform the job and sue Theo for breach of trust. Again, Theo introduces the exculpatory clause into evidence to prove his innocence. However, the judge is not so forgiving this time around. Here, the judge holds that a prudent person would not hire an unlicensed contractor and would not to remove a pool without permits after being told it would be required, and to cap it off, the trustee received a profit from his misdeed. Thus, the judge would find, despite the exculpatory clause, that Theo committed a breach of trust for intentionally hiring an unlicensed contractor, not obtaining required permits and profiting from this collusion.