Professional Fiduciary - Trustee

A professional fiduciary is commonly used to serve as the trustee of a special needs trust. The rationale is that the professional fiduciary is equipped to navigate the myriad of rules and regulations regarding a special needs trust. This would include applicable federal law, state law (namely the probate code) and the California Rules of Court. In short, an expert is needed and a professional fiduciary fits that mold. However, not all professional fiduciaries follow the appropriate rules. In such a case, the consequences can be acute and expensive.

In a recently decided published appellate opinion, the California Court of Appeal upheld a $93,036.75 surcharge issued against a professional fiduciary.

Scott v. McDonald (2018) _______ CA4th _______

The opinion was not especially kind to the professional fiduciary in regards to her request for trustee compensation:

"The trust instrument provides, "The Trustee shall receive just and reasonable compensation, to be paid from the Trust, for [her] services in an amount to be determined by the Court on the occasion of the Trustee's court accountings or such other times as that issue may be brought before the Court with jurisdiction over the Trust. The Trustee may receive interim compensation on account, in accordance with the order of the Court with jurisdiction over the Trust."

Trustee did not file the required accountings with the court because she was unaware the trust was court supervised. Trustee did not look at the trust instrument to understand her authority under the trust. Trustee continued to serve as trustee of the trust when her professional fiduciary license was suspended from 2008 to 2010. Trustee did not keep accurate time records for her fees. Trustee breached her fiduciary duty by making disbursements for rent, clothing, vehicle expenses, and vacations. Trustee also breached her fiduciary duty by making a final distribution to Mother in the amount of $15,574.85, which was then commingled with Mother's personal funds and primarily spent on living expenses and household items.

Given Trustee's mismanagement of the trust estate, failure to make the required court filings, and continued service when she lacked a license, the probate court could reasonably conclude that Trustee was not entitled to compensation because any compensation for the service rendered would be inequitable due to Trustee's multiple failures in administering the trust (Cal. Rules of Court, rule 7.776(2))."

Professional Fiduciary Fees

A series of articles in the San Jose Mercury News chronicled the large fees professional fiduciaries charged their clients in conservatorship matters. Since a professional fiduciary often charges at least $125 per hour for their services, many conservatees were often aghast at the lofty cost. The series of articles prompted the Santa Clara County Superior Court to modify the local rules governing professional fiduciaries in such cases. The California legislature has also weighed in on the issue, AB 1339 (Maienschein).

According to the California legislative counsel "This bill would require that when a petition to appoint a conservator or a temporary conservator is filed, and the petitioner or proposed conservator is a professional fiduciary, as defined, the petition also include the petitioner’s or proposed conservator’s proposed hourly fee schedule or another statement of the petitioner’s or proposed conservator’s proposed compensation from the estate of the proposed conservatee for services performed. The bill would provide that provision of that schedule or statement shall not preclude a court from reducing the hourly fees or other compensation."

The thrust of this bill is to provide notice to all parties of the professional fiduciaries fee schedule whereby a large fee will not materialize out of the shadows. 

For example, a conservatorship is needed for a young man injured in an auto accident. The injured victim receives a large settlement  from the at-fault party's insurance company and a conservatorship is needed to safeguard the estate. His family is unable to handle the legal responsibilities of being a conservator. Instead a professional fiduciary is appointed conservator. The professional fiduciary then goes about doing the required tasks of being a conservator. When the annual accounting is required for the conservator, the professional fiduciary notes his hourly rate, $150 per hour, and the amount of hours worked, e.g. 100. The conservator's family is completely unaware of the fee schedule because in court filings such is not required prior to the professional fiduciary's appointment. The conservator's family is then floored upon seeing that the professional fiduciary is petitioning for a $15,000 fee.  This bill would require that the professional fiduciary provide notice of their fee schedule prior to appointment so as to avoid "sticker shock" for the conservatee and their family down the line.

This bill sailed through the California legislature, a 37-0 vote in the state senate and a 78-0 vote in the state assembly. The bill now sits on Gov. Brown's desk awaiting his signature. 

Trustee Compensation

6th Circuit Court of Appeal, San Jose, CA

A trustee is entitled to reasonable compensation under the circumstances unless the trust provides otherwise. Prob C § 15681. A recent 6th Circuit California Court of Appeal case emphasized the extent of specifying trustee compensation.

Thorpe v. Reed, No. H037330 (Cal. Ct. App. Dec. 13, 2012).

 
Danny Reed was the beneficiary of a special needs trust. Mr. Reed had unfortunately been injured in multiple accidents which resulted in the creation of a first-party special needs trusts to hold his recovery proceeds.  His mother, Jolaine Allen, was the original trustee. Then Thomas Thorpe of Dragomir Fiduciary Services Inc. became the successor trustee for approximately 4 1/2 months. Then Jenivee Reed, Mr. Reed's sister, became successor trustee. 

The issue in the case was whether or not Mr. Thorpe and his associated parties, lawyers Diane Brown and Michael Desmarais, were entitled to compensation for their services during Mr. Thorpe's time as trustee. The reason that this was an issue in the case was because the trust specified that a successor trustee was not entitled to compensation.      

In Mr. Thorpe's petition, he asked for $65,844.08, $31,047.85 for Ms. Brown and $11,879.14 for Mr. Desmarais as trustee and trustee attorney fees. The trial court judge reduced the fee for all 3 parties whereby Mr. Thorpe received $27,006, Ms. Brown $19,540.61 and Mr. Desmarais $4,739.02.

Ms. Reed appealed this decision and the appellate court reversed, holding that the trial court improperly re-wrote the trust to provide for Mr. Thorpe and his attorneys' compensation. The appellate court reasoned that since Mr. Thorpe accepted trusteeship without it being predicated upon modification to provide for compensation, he was entitled to no compensation as provided for in the trust. The opinion's final footnote summarizes it nicely "Before the appointment order, plaintiff (Mr. Thorpe) wrote the Supervising Court Investigator that he was willing to accept the trusteeship and conservatorship "subject to my attached fee schedule." But the probate court's order was unconditional, plaintiff began performing duties, and the trust was never amended to eliminate the no-compensation provision." The ultimate result was that Mr. Thorpe and his attorneys were entitled to $0.00 as compensation for their services.

Going forward, this case presents an interesting precedent. Presumably, a successor trustee of a special needs trust is entitled to $0.00 compensation if (1) the trust provides for such and (2) the successor trustee does not condition acceptance upon modification of the compensation clause.

California Professional Fiduciary

When selecting a successor trustee, many clients are often unsure whether or not their friends or family members have the requisite skills to be a competent trustee. The list of duties that are imposed on a trustee are lengthy and challenging. For example, a trustee owes a beneficiary a duty of loyalty, accounting, impartiality, etc. If the trustee, makes a mistake there are severe consequences, including removal. In light of this, many clients ask if there are professionals who handle being a trustee. The answer is yes.

In California, a professional fiduciary is a licensed individual who has been trained to execute the duties of a trustee. A professional fiduciary can also serve as a conservator, guardian or agent under durable power of attorney for healthcare or finances. In order to become licensed, a professional fiduciary basically needs to take an educational course, and then pass an exam and background check. http://www.fiduciary.ca.gov/licensees/faq.shtml.

A listing of professional fiduciaries can be found on the Professional Fiduciary Association of California’s (PFAC) website at http://www.pfac-pro.org.

The compensation rates for a professional fiduciary are much lower than a corporate trustee but higher than a family member trustee. A range from $100 - $150 per hour for the services of a professional fiduciary would be reasonable.