Trustee Bond

The default California trust law is that no bond is required of the trustee unless "(1) a bond is required by the trust instrument, (2) notwithstanding a waiver of a bond in the trust instrument, a bond is found by the court to be necessary to protect the interests of beneficiaries or other persons having an interest in the trust or (3) an individual who is not named as a trustee in the trust instrument is appointed as a trustee by the court." Probate Code § 15602. 

Typically most trusts do not require the acquisition of a bond, principally because bond procurement can be expensive. The bond premium is dependent upon the value of the trust estate and the creditworthiness of the trustee. Thus, many people opt to avoid the requirement of bond to spare the successor trustee the time and expense of obtaining it. However, occasionally the settlor will require the posting of bond for a non-familial trustee because of the lack of blood connection. I have seen this in a few trusts.

The purpose of the bond is to offer protection for the beneficiaries in case the trustee makes a mistake, i.e. a breach of trust. If the trustee does commit a breach of trust, the aggrieved beneficiary can seek recovery from the bond company. A breach of trust can entail a host of circumstances such as failure to abide by the California probate code or frivolous spending by the trustee. The bond company will then turn around and seek recovery from the trustee for the same amount that was paid to the beneficiary.

Many people erroneously assume that a bond is identical to insurance. Though a bond offers financial protection, it does not operate exactly like insurance. If the trustee commits a breach of trust and damages ensue, the trustee is personally liable for the amount the bond company pays the beneficiary for redress of injury. Whereas with insurance, the trustee would not be personally liable for payments made to cover their damages. Instead, the insurer generally covers the entire damages cost, provided all premiums have been paid, and does not seek reimbursement from the trustee.    

In the probate context, the requirement of a bond is more common. For example, many courts have local rules which essentially require the posting of a bond for an out-of-state personal representative. The local probate court rule of Santa Clara County Superior Court on the issue reads "the Court will ordinarily require a non-resident personal representative to post bond, even if the will waives bond, unless waivers of bond from all heirs or beneficiaries are filed, in which case the Court, in its sole discretion, may not require a bond."  

Holographic Will

A person should not expect the best results when they haphazardly do anything in life, estate planning is no different.

Estelle Elsa Manwell was a wealthy Californian. According to court documents, she owned real estate in Contra Costa and El Dorado County worth $1,238,848. On March 23, 2011, she executed a holographic will which bequeathed her estate to her 5 living children. For reasons unknown, her will was attested to by 9 witnesses (Author's comment: this is very peculiar, (a) a holographic will need not be witnessed and (b) even a type-written only requires 2 witnesses).  In terms of the real property, the will stated "I do not want any of my property sold outside of my family for a minimum of 20 years." Finally, the will did not nominate an executor nor mention bond. On March 25, 2011, Ms. Manwell passed away. 

There are notable problems with this situation. 

First, the most obvious defect is that there is no trust involved and there decedent owned real estate. Consequently, Manwell's estate must be probated and typically the only "winner" during probate is the attorney because they are handsomely paid. For an estate worth at least a $1M, the attorney can collect a statutory fee of $23,000. Meanwhile, the beneficiaries have to endure a costly and lengthy procedure, namely probate. 

Second, the will did not mention who would have priority to be administrator. Since the children all have equal priority, there existed the potential for conflict because the administrator can be compensated the same amount as the attorney. Consequently, court filings reveal that the children did in fact engage in adversarial proceedings to determine who would be administrator of their mother's estate.

Third, the will called for a lengthy restraint on the alienation of the estate's real property. In other words, the homes could not be sold for a long period of time after the decedent's death. I commonly advise clients to not insert such a clause in their trust because managing property is very expensive. The annual upkeep of a property, e.g. maintenance, property taxes, utilities, etc., is easily thousands of dollars. By essentially hand-cuffing the beneficiaries to the property, they deprive them of liquidity because they are not allowed to sell. I think clients like to keep "the farm in the family" because of the sentimental feelings attached to the property. This is an understandable feeling. Years of familial memories are deeply inter-twined with the property: birthdays, parties, holidays, family meals, etc. Still, the children do not automatically hold firm these same feelings. Hence, I like the notion of providing the children the option to keep or sell the residence. Thereby, the trust would omit a clause about keeping the real estate in the home.

Clearly Ms. Manwell knew that her demise was shortly coming, her will was written only 2 days prior to her death. It is logical to then assume that Ms. Manwell was trying to make the best of her situation. The problem is that sometimes it is too late to fully address all the issues. Despite her will, Ms. Manwell's estate is currently being litigated in probate court and her passing was over 2 years ago. Thus, it is doubtful that Ms. Manwell would be pleased with what that has ensued following her passing. The probate matter is replete with various motions, many of a bizarre nature, and does not appear to be resolved anytime in the foreseeable future.  

Estate Planning Questionnaire

When clients come in to have a will and/or trust written, I provide them with a questionnaire to complete. The following assets need to be identified by the client to allow me to appropriately tailor their estate plan.

The following are assets that are commonly owned by a client.

Real Property

This includes any piece of land the client owns. This might include single-family homes, vacation homes, condos, town homes, farmland, commercial lots, raw land and multi-unit buildings.

Personal Property

This includes assets such as jewelry, watches, furniture and other items of value. 

I do not ask clients to document an old monopoly board game or their prized yarn collection.

Bank Account

This is rather self-explanatory.

I recommend Star One Credit Union for banking in case anybody is curious.

Stocks

This would refer to individually owned stocks, e.g. Apple or Exxon Mobil.

Mutual Funds

This is rather self-explanatory. If a person is investing in the stock market, they should know the difference between a mutual fund and individual stocks. Or at least I hope so.

Bonds

Bonds are not the trendy type of investment but occasionally a person will own a bond. It is commonly assumed that U.S. treasury bonds are the safest investment because they are backed by the full faith and credit of the federal government. Whenever credit is extended, which is what you are doing when you buy a bond, the central question is the credit-worthiness of the borrower. I know of few borrowers who can match the financial strength of the U.S. government. Actually I know of no borrowers, other than Monty Burns or Scrooge McDuck, who can match the U.S.' credit.

Life Insurance

The two common types are whole and term. Most people usually have a term policy, which means that if the insured dies within the term’s period, the insurer pays the policy’s beneficiary the proceeds.

Annuity

For reference, an annuity is a right to receive fixed payments periodically for a specified duration. Black's Law Dictionary (9th ed 2009). 

Retirement Account 

This would include 401(k)s and Roth IRAs

Automobile

Yes I want to know about your 2001 Pontiac Aztek or your 1970 AMC Gremlin

Business Interests

This would include any interest the client may have in a corporation, limited liability company (LLC), general partnership, limited partnership, limited liability partnership (LLP) or sole proprietorship.

Once the client has supplied me with this information, I can start the drafting process……………. 

Probate Bond

When a person dies, called the decedent, and leaves behind a will, the will's executor will need to probate the will. Consequently, a probate bond is commonly required for this process. The following 6 questions address some key aspects of a probate bond.

1. What is a probate bond?

A probate bond is an insurance policy for associated parties of the decedent should the executor breach a fiduciary duty while administering the decedent's estate during probate.

2. How does a probate bond work?

If an executor breaches a fiduciary duty, affiliated parties of the decedent may seek payment from the bond company to redress the injury caused by the executor's misdeed(s). Thereafter, the bond company is entitled to reimbursement from the executor for up to the amount expended by the bond company. The bond company's liability is generally limited to the amount of the bond.

For example, assume Earl was the executor of Wilfred's will. Wilfred's estate consisted of a home and a small bank account. The will's sole beneficiary was Wilfred's neighbor Beatriz. Earl obtained a probate bond from a bond company during the early stages of probate. During the probate's administration, Earl failed to timely pay the mortgage payments and the home was foreclosed. This constituted a breach of Earl's fiduciary duty as he failed to exercise ordinary care and diligence when managing the home. Prob C § 9600(a). Beatriz then filed a motion in Wilfred's probate case to have the bond company award her damages for Earl's breach. The bond company would then award damages to Beatriz and seek reimbursement from Earl for the amount expended to Beatriz.    

3. Is bond required?

No, bond is not required in the following situations

• The will waives bond.  Prob C §8481(a)(1).                                                                              Although the court may require bond even though the will waives the requirement of bond if: 
• for good cause, on its own motion or on petition of an interested person Prob C §8481(b) and 
• if the proposed representative resides outside California or for other good cause. Cal Rules of Ct 7.201(b).
• All beneficiaries in writing waive bond and the will did not require bond or there is no will. Prob C §8481(a)(2).
• A trust company is appointed executor. Prob C §§83, 301(a).

4. How do you obtain a bond?

The executor will need to file an application with a bond company which will then conduct a credit check of the executor. The cost of the bond is directly proportional to the executor's credit worthiness. The better the credit, the less expensive the bond will be and vice versa.

5. How much will be the bond?

The bond's size generally correlates with the estate's size. 

For example, per Prob C § 8482(a)(1)-(3), "the court in its discretion may fix the amount of the bond, but the amount of the bond shall be not more than the sum of:

1. The estimated value of the personal property.
2. The probable annual gross income of the estate.
3. If independent administration is granted as to real property, the estimated value of the decedent’s interest in the real property."

 6. Can bond be changed?

Yes bond can both be increased and decreased during probate. For example, the bond might be increased if the executor uncovers previously undiscovered assets of the decedent. Conversely, the bond might be decreased if the appraised value of the decedent's assets are less than estimated.