Trust Administration - Principal Place of Administration

Santa Clara County Superior Court

When a trustee provides notice of a trust's existence to the beneficiaries, it must include where "the address of the physical location where the principal place of administration of the trust is located, pursuant to Section 17002." Prob C § 16061.7(g)(3). "The principal place of administration of the trust is the usual place where the day-to-day activity of the trust is carried on by the trustee or its representative who is primarily responsible for the administration of the trust." Prob C § 17002(a). While seemingly an irrelevant clause, the place of administration can be salient. Although, it should be mentioned why an address in California is even needed to be included in the first place. 

When a trustee designates a principal place of administration, this provides jurisdiction to the applicable county superior court in case judicial relief is needed. For example, if a trustee designates an address in Campbell, CA as the principal place of administration, then Santa Clara County Superior Court would be the appropriate venue for judicial relief. Each California county (there are 58 of them) has a county superior court located in it. Thus any address in CA will have a local county superior court. Just trust me on this.

From a legal perspective, county superior courts are not all the same. One county superior court may view probate matters differently than other county superior courts. For instance, Santa Clara County Superior Court is very receptive to Prob C § 850(a)(3)(B) petitions (commonly known as Heggstad petitions). In particular, Santa Clara County Superior Court allows for these petitions to be heard ex parte (which essentially means there is a minimal waiting period for the case to be heard by the judge) and does not hyper-scrutinize the evidence needed to have the petition be granted. The difference between having a Heggstad petition be granted or not is often enormously consequential. If granted, it typically avoids the necessity of probate for the petitioner. 

Conversely, other counties take a much more stringent approach in hearing Heggstad petitions, e.g. they require a noticed hearing (which means the case will be heard in 30-60 days) and certain evidence is needed to have the petition be granted.

In light of the foregoing, I designate my office as the principal place of administration for the client to ensure that they have access to Santa Clara County Superior Court, even if the client lives outside Santa Clara County (which has happened a few times).

Is Avoiding Probate Always Good?

One of the main reasons why a person writes a revocable trust is to avoid probate. The rationale is that once the person dies, the administration of their trust estate is typically a more expedient and economical method to administer than a probate estate. For example, probate takes 6-12 months to complete in California and the attorney fee is based off of the value of the estate. If the estate was worth $400,000, the statutory attorney fee is $11,000. This probate fee is higher than a trust administration fee in almost all cases because there are more steps to complete in probate than in trust administration. However, probate does have one mandatory aspect over trust administration that can be advantageous for beneficiaries, an avenue to address creditor claims.

When a person passes away, they will invariably have some outstanding debt. This might include a phone bill, a cable bill, a utility bill or a mortgage. These debts can range from the hundreds of dollars to millions of dollars, depending on the size of the estate. For instance, if a person purchased a multi-million dollar home, it would be easily conceivable that they had a $1M+ mortgage. 

The second step of probate is to satisfy the claims of creditors.  However, the manner in which these claims are addressed is not always the same for probate and trust administration.

In probate, the personal representative is required to provide notice to all creditors so they can submit their claim to the probate court. The personal representative can then either accept or reject the claim. Ultimately, before probate can be closed, the personal representative is required to state that all creditor claims have been satisfied. For example, in my petitions that I have I used to close probate, I say the following: "Petitioner has made all reasonable efforts to ascertain Decedent’s creditors. Notice of administration has been sent to all known and reasonably ascertainable creditors. More than 4 months have elapsed since the date letters first issued. The time for filing creditors' claims expired on January 18, 2014." 

Conversely, in trust administration cases, there is no requirement that the trustee have a creditor claim procedure, i.e. open probate. Instead, California law makes it optional for the trustee if they want to open probate. Probate Code § 19010. Thus, the trustee is free to satisfy creditor claims non-judicially. Alternatively stated, the trustee can pay debts without having to provide proof to a probate judge that they have done so. Occasionally this is not an issue if the decedent had few debts or their debts were easily verifiable. Issues arise though when the decedent had contingent or unknown debts, e.g. they were a defendant in a lawsuit. Hence, it cannot be said that opening probate is disadvantageous in every respect. By forcing the personal representative to address creditor claims before a distribution is made, the beneficiaries should feel confident that there is no lingering unaccounted for debt.

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. 

Apprasing an Estate

When somebody passes away, the decedent, they leave their possessions behind. For as the common refrain goes "you cannot take it with you."  In legal speak, these possessions are known as the decedent's "estate."

One of the first steps that an executor or trustee must do when administering a decedent's estate is to value the items in the estate. The principal reason why an executor or trustee needs to do this is for estate tax purposes. That is, it must be determined if the value of the decedent's estate eclipsed the estate tax exclusion amount. If the decedent's estate is under the threshold amount, no estate tax is due. Conversely, if the decedent's estate is above the threshold amount, an estate tax will be due albeit the amount will be dependent upon the amount over the threshold amount. 

Another primary reason to value the decedent's estate is because many estates are distributed in percentages. For instance, a trust might call for a 50% distribution to the daughter and a 50% distribution to the son. The trustee would be breaching their fiduciary duty to the beneficiaries if they just "guessed" as to the estate's value and distributed off of that valuation. Rather, the trustee must reasonably value each item in the estate and then distribute the estate. The following are items typically found in a decedent's estate and how to value them.

1. Home

A decedent's home is typically the most valuable asset in their estate. Hence, it is critical that the executor or trustee accurately value the home's value. The best method to value a home is to retain a licensed California real estate appraiser. While the temptation is their to use an online resource such as Zillow to save time and money, this temptation, much like almost all temptations, is best avoided. The crux is that Zillow's algorithm does not account for physical features inside and around the home. A real estate appraiser can spot a shoddy roof or the noise of rush-hour traffic, whereas Zillow's algorithm cannot. Though personally I use Zillow, I would never advise a client to use it as a basis for a home appraisal.

2. Bank Account

This is probably the easiest asset to value. If you are literate you can figure out how much money the decedent had in their bank account when they died. I trust you. 

3. Car

The bible for valuing a used car is Kelley's Blue Book. Though there are other resources, the KBB is the most popular guide for determining used car values. Personally I have used the KBB a few times when buying and selling a car. I have been very pleased with it.

4. Stocks

The advent of the Internet has made it much easier to gauge the price of a stock on the day the decedent died. Whereas in the past an executor or trustee might have to go to the library to locate an old newspaper to look up the stock price, the Internet has rendered this practice obsolete. Since stock prices can easily be found using Yahoo or Google Finance, an executor or trustee's job has been made much easier in this instance. A stock price is now just a proverbial click away.

However, if the decedent owned stock that was not publicly traded, a business appraiser will be needed.

Heggstad Petition - Is an Attorney Required?

A very common trust administration procedure is a Heggstad petition. See Probate Code § 850. Many unrepresented people who write a trust often forget to transfer the home they own to the trust. When the person passes away and the trustee seeks to sell the home, they encounter the fact that the home is still in the settlor's name and not in the trust's name. Herein the Heggstad petition comes into play.

A Heggstad petition seeks to obtain a court-order that finds that the home is a trust asset. The best piece of evidence to include in a Heggstad petition is a declaration of trust stating that the home is a trust asset. This is customarily found at the end of the trust document, i.e. Schedule A or Exhibit A. As mentioned, if the petition is granted, the home becomes part of the trust and the trustee may dispense of the property as the trust dictates. If the petition is not granted, the home will likely have to be probated which is a costly and lengthy legal process in California.

A person is free to act as his own lawyer. Famous court cases have involved litigants who acted as their attorney, e.g. Gideon v. Wainwright, 372 U.S. 335 (1963) involved an indigent prisoner successfully appealing his criminal conviction to the United States Supreme Court.  Although there is the old adage that goes "a self-represented attorney has a fool for a client."

However, a person is not free to act as a lawyer for somebody else. A California court held that a trustee, who was not an attorney, could not represent the trust in regards to a lawsuit involving the sale of a mobile home to the trust. Ziegler v. Nickel (1998) 64 CA4th 545. The court found that the trustee would be representing the interests of other parties, i.e. the beneficiaries.  Since representing others constituted the practice of law, he was required to have a law license. Bus & P C § 6125. Whereas the trustee did not have a law license, the lawsuit was dismissed.

In regards to a Heggstad petition, since the trustee would be representing the interests of others, rather than themselves, arguably they are required to have a law license to file the petition.

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. 

Attorney-Client Privilege in Trust Administration

Few areas of the law are as well-known to the public as the attorney-client privilege. The privilege allows for client communications with their lawyer to be held in strict confidence. Evid C §§952, 954. A lawyer may only disclose this information under very specific circumstances. The following two major cases addressed the applicability of the attorney-client privilege in trust administration cases.

Moeller v. Superior Court (1997) 16 C4th 1124

George Moeller and Grace Todd Moeller, husband and wife, created a trust in which George served as the initial trustee. George later resigned as trustee and Sanwa Bank assumed the office of trustee. The trust owned a parcel of land which was leased to a chrome plating business. 

During its operations, the business  severely contaminated the soil. This contamination appreciably depleted the trust estate whereby Sanwa Bank decided to resign as trustee because of presumably insufficient funds. Prior to its resignation, Sanwa Bank rendered a final accounting and deducted various fees from the trust. George's son Roger, Sanwa Bank's successor, objected to the accounting. 

Roger requested various documents from Sanwa Bank as support for the accounting it had rendered. Sanwa Bank responded that it had given Roger the appropriate documentation and the documents that were not provided was privileged information, i.e. communications from Sanwa Bank and its attorneys. Roger then petitioned to have this information disclosed nonetheless.

Roger's case weaved its way through the California court system before eventually ending up in the California Supreme Court. It held that "a successor trustee, unless the trust instrument otherwise provides, assumes the power to assert the attorney-client privilege as to confidential communications between an attorney and a predecessor trustee on the subject of trust administration, so long as the predecessor was acting in the official capacity of trustee rather than in a personal capacity."

In plain English, the Court held that Roger could request documents detailing the communications Sanwa Bank had with its attorneys because he was the successor trustee. 

Wells Fargo Bank v. Superior Court (2000) 22 C4th 201

William Couch established a trust in October 1991. He served as the sole trustee until his death in March 1992. Upon his death, Wells Fargo and Rosa Couch, William's surviving spouse, became the successor trustees. Years later, certain trust beneficiaries became agitated that the trustees were allegedly not making proper distributions. Consequently, the trust beneficiaries petitioned to have both trustees removed. During litigation, the trust beneficiaries asked for documents detailing the communications from Wells Fargo and its attorneys, O'Melveny & Myers, a prominent international law firm. Wells Fargo naturally balked at this request, citing the attorney-client privilege.

Like Moeller, Wells Fargo Bank meandered through the California court system before eventually landing in the California Supreme Court. However, the Court this time held that the petitioners were not entitled to discover client communications between Wells Fargo and its counsel because there is "no authority in California law for requiring a trustee to produce communications protected by the attorney-client privilege, regardless of their subject matter."

The distinguishing feature between these two cases is the person requesting the discovery of client communications. In Moeller, the successor trustee asked to discover the otherwise privileged communication. Conversely, in Wells Fargo, the beneficiaries requested to discover trustee communications with its lawyer.

Estate Planning Checklist

A checklist of questions can be a very useful tool in achieving almost any objective. Writing a trust is no different. The following are some key questions that apply to every situation. Though the questions may be valued differently by some, the end result is that the following questions must be answered eventually.

1. Who will be the trustee?

A trustee is a required element of a trust. Every trust must have a trustee or else it will not be considered a trust. The trustee is the legal owner of trust property. 

Although there is an old legal saying that goes “a trust will not fail for want of a trustee.” This means that if the office of trustee is vacant there are available legal channels to appoint a trustee. For example, California law allows a trust beneficiary the ability to petition the appropriate superior court to confirm the appointment of a trustee when the office of trustee is vacant. Prob C § 172009(b)(10).

The determination of who will be the trustee is a very important question. I always tell clients that trustee selection, along with selecting beneficiaries, comprise the two most important questions they will weigh during the process. The reason being is that trustee will have control over trust property and its administration. The trustee will ultimately be the person cashing checks, depositing money, filing trust tax returns, selling real estate, etc. Thus, whoever is selected is given an enormous amount of responsibility, and the legal liability that comes with it. The importance then of selecting a competent and attentive trustee cannot be understated. The norm is to pick a close family member or friend.

2. Who will be the beneficiary or beneficiaries?

Ah yes, who gets all your property when you pass on eventually. It should be noted that there is no right to inheritance, except for spouses in light of community property law. A child, niece, neighbor, family dog, etc. has no vested inheritance right in your estate. A person is free to leave their estate to anybody essentially, subject to spousal constraints, without any legal recourse. So you could leave your trust estate to a charity, your alma mater, the federal government or even your pet subject to certain qualifications.

Invariably the chosen beneficiary or beneficiaries are spouses and then remainder to children. For example, Harry and Wendy, a married couple, have two children Samuel and Donna. Harry and Wendy write a trust in which the surviving spouse will inherit the deceased spouse’s estate. Then when the surviving spouse passes away, Samuel and Donna will inherit such estate equally. For all but a few trusts I have written, this is the exact method of distribution that has been chosen by clients.

3. Should I even write a trust?

Writing a trust is not necessary, in my opinion, unless you own a home or have children or both. First, one of the key benefits of writing a trust is probate avoidance. Just about every asset can be disposed of through beneficiary designation. A person can list a bank account beneficiary, a stock beneficiary, an IRA beneficiary, a life insurance beneficiary, etc. The one glaring exception is that of real property. California law does not permit a person to name a beneficiary of their home. Thus the default rule for transfer of real property, generally speaking, is probate. However, real property owned in trust is exempt from probate. Yet if a person does not own real property, then this benefit is inapplicable. Second, if a child inherits a large sum of money, namely over $5,000, then a court-supervised guardianship is needed to oversee their estate. I would like to believe, regardless of contemporary economic constraints, that most parents have more than $5,000 to leave to their children. If the inheritance if distributed outside of a trust, a guardianship is likely needed. Still, if a person does not have a child, this benefit is irrelevant.     

Obviously attorneys have a direct financial interest in wanting clients to write a trust. However, I never encourage clients to write a trust if it is unnecessary, namely the client(s) lack a home and children.

4. How much should we spend for a trust?

One of the great trust myths is the fallacy that writing a trust eliminates the need for post-death administration. In reality, the same steps for trust administration are patterned after the probate process essentially. The result is that there will be significant time and expense for both situations. However, trust administration is a non-judicial process whereas probate is a judicial process, which generally shortens the amount of time involved and likewise reduces the amount of cost involved. Whenever I talk about fees with a client, I always bring up that trust administration will almost always be more expensive than writing a trust. So when I quote them a fee of $1,500 hypothetically, I also include that trust administration may easily cost $5,000. The takeaway is that a person should not look at just the initial step, writing a trust, but the entire process, writing a trust and its administration, when gauging how much they are willing to spend.

Living Trust Seminar

While reading through my town’s newspaper recently, I came across an advertisement for a free living (revocable) trust seminar offered by a legal services company. 

Since two local libraries, namely Newark and Union City, were gracious enough to let me host an estate planning seminar at their branches through the years, I was curious to see what topics the company included in their advertising materials. The following is one reason the advertisement lists that encourage people to write trusts. 

Avoid court involvement by keeping the affairs of your estate private

This is a legitimate reason to write a revocable trust. The reason for this is because if your estate is over a certain amount, generally speaking $100,000, then your estate may be subject to probate. 

In short, probate is the court-supervised process in which your assets are transferred from you to somebody else upon your death. Probate is not the ideal process for distributing your estate to your beneficiaries in California because of the time involved, 9-12 months to start and complete, and the fees involved, a few thousand dollars at a minimum. 

In light of this, people write revocable trusts to avoid probate, as the California Probate Code specifically says that assets held in a revocable trust are not subject to probate administration. Thus, if somebody writes a revocable trust and funds their estate into it, their estate can be transferred outside of the probate process. However, the same steps involved in the probate process will be utilized in the trust administration process as well. For instance, just as in the probate process, the trust administration process will require an inventory of the person’s assets, the payment of the person’s debts and finally the distribution of said assets after the debts have been satisfied.

Much is made of the fact that the probate process is public whereas the trust administration process is private. Hence, any person can go to the local superior court and look up the probate record of a person who passed away (“decedent”). The probate file will detail the inventory of every item they own, the value of each item and the beneficiary of each item. 

Whereas most people would like to keep their financial affairs private, it is natural to use the lure of a revocable trust’ privacy to encourage people to write one. 

The privacy factor of a revocable trust is an unpersuasive argument in my opinion for at least two reasons. 

First, most people are not so consumed by the financial affairs of a dead person so as to compel them to go to the local probate court and look up their file. I understand some readers are thinking right now, “what about rich people, I am curious to know what that rich person owned.” Granted, you may be curious about that recently-deceased affluent individual who lived on your street, but it is doubtful that your curiosity would propel you to drive to a courthouse to sift through court records. 

Second, the largest asset for the vast majority of Californians is their home. Ownership records for homes are public records. Consequently, if you leave your home to your child through the medium of a revocable trust, the general public will have access to this record. Whereas the transcripts of court records in California are not currently online, real property records are readily available. I can ask my real estate agent for a property address or a name, and he can tell me, usually within a few hours, the owner of the property or which properties are owned by the particular person.

In short, if you think a revocable trust is great because it eliminates the necessity of probate, then that is a prudent thought. Conversely, if you think a revocable trust is great because it is a private document, you are not fully cognizant of the realities of trust administration.

Anti-deficiency Real Estate Laws in California

In response to the Great Depression of the 1930s, the California legislature passed a series of borrower-friendly laws that severely restricted the remedies available to lenders in case of foreclosure. 

These laws bar deficiency judgments in the case of non-judicial foreclosure, Civil Code Section 580d, and purchase money mortgages, Civil Code Section 580b. The focus of this post is to show the relationship between the anti-deficiency laws and estate planning. Yes, there is a connection.   

In short, Civil Code Section 580d and Civil Code Section 580b say that in the case of a (1) non-judicial foreclosure sale of real property or (2) a property secured by  purchase money mortgage, a deficiency judgment will be prohibited in both instances. Now that I have given the lawyer's definition of the anti-deficiency law I can proceed with the everyday language explanation.

1. Non-judicial Foreclosure

A non-judicial foreclosure is a transaction done outside of court supervision. The sale usually occurs on the courthouse steps. For example, in Santa Clara County, non-judicial foreclosure sales happen routinely at 10:00 am on the backside of the Superior Court located at 191 N First Street San Jose, CA 95113.

2. Purchase money mortgage

A purchase money mortgage is a mortgage in which the loan proceeds are applied to the purchase of home itself. For example, borrower obtains a loan from lender to purchase his residential home. This would qualify as a purchase money mortgage.

3. Deficiency judgment

A deficiency judgment occurs in a foreclosure sale when the asset securing the loan is sold for less than the value of the loan. For example, borrower obtains a $400k loan on a $500k home in 2005. In 2010, the loan has been paid down to $375k but the home is now $200k. Borrower, unable to make the payments due to financial hardship, losses the home to a foreclosure sale in 2010. At this foreclosure sale, the house is sold for $200k. Since the lender cannot recoup its money from the foreclosure sale, the bank would like to pursue a deficiency judgment against the borrower for $175k.

Civil Code Section 580(b), (d) and Estate Planning

Now that you have a decent understanding of the nuances of the anti-deficiency laws, you should be able to apply these laws to estate planning.

Assume that you are either the successor trustee of your parents' living trust or you are the executor of your parents' probate estate. Your parents purchased their family home a few years during the boom years of the 2000s. Now in 2010 however, the house is under water in that the value of the home is eclipsed by the value of the loan. The loan is $500k and the home is worth $350k for instance. Furthermore, your parents' estate lacks the necessary liquidity to pay off the mortgage, namely your parents' estate is cash poor. You are concerned that the bank will foreclose on the property and seek a deficiency judgment against the other assets of your parents' estate, presumably your inheritance. However, Civil Code Section 580b explicitly bars such an action by the bank because the mortgage was a purchase money mortgage. Thus, the deficiency incurred as a result of the foreclosure sale of your parents' home will not affect the other assets of the estate.

Breach of Fiduciary Duty

If you are the trustee of a trust in California, the California Probate Code spells out various duties which you must follow. Here are some examples in which the trustee failed to comply with their fiduciary duties.

1. The trust drafter instructed the trustee, Bank of America, to not allow the trust bank account to exceed the maximum Federal Deposit Insurance Corporation amount. For whatever reason, Bank of America permitted the account to exceed the threshold amount. In particular, the FDIC amount was $10,000 (think 1960s) but the account balance at one time was $49,000. Consequently, Bank of America was held to have breached its fiduciary duty to follow the terms of the trust. Prob C §16000; Estate of Gilmaker (1962) 57 C2d 627.

2. The beneficiaries of a large trust objected to the accounting done by the trustee, Wells Fargo bank. In response, the trustee threatened to deduct the cost of the audit from the objecting beneficiaries share of the trust in order to deter them. Consequently, the trustee was held to have breached the fiduciary duty of loyalty it owed to the beneficiaries because such action benefited the trustee at the beneficiaries' expense. Prob C § 16002; Estate of Gump (1991) 1 CA4th 582.     

3. The owner of a San Francisco restaurant left half of the family restaurant to be held in trust for his wife. The husband decided to appoint his attorney as trustee. Hence the attorney as trustee was responsible for the restaurant's operations. However, the attorney failed to perform his required trustee duties, as he did not keep a separate bank account, books or records for the trust, even though he had been the trustee for a number of years. Thus, the attorney breached his duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration. Prob C § 16060; Di Grazia v. Anderlini (1994) 22 CA4th 1337.    

4. The trustee was engaged in a real estate dispute with one of the beneficiaries. Since the beneficiary had a combative litigation style, the costs were substantial. In order to cushion the blow of litigation, the trustee decided to sue the beneficiary for elder abuse (the trustee represented an elderly couple), which permitted the recovery of attorney fees. Ultimately, the trustee obtained a judgment against the beneficiary for roughly $700,000 in civil court. The problem was that the trustee incurred trustee fees totaling roughly $1.3 million in the process of obtaining that judgment. Furthermore, the beneficiary filed for bankruptcy subsequent to the judgment. Whoops. The court held that the trustee breached his duty to prudently enforce claims against the trust, since no prudent person would spend $1.3 million to try to collect $700,000. Prob C § 16010; Schwartz v. Labow (2008) 164 CA4th 417.     

5. The trustee decided to invest trust money in junior deeds of trusts, namely a second or junior mortgage. Instead of ascertaining the property's value through reasonable steps to make sure the property was worth the combined amount of both the first and second mortgage, the trustee solely relied on a real estate broker's guess as to the property's value. Naturally, the borrowers on the first loan defaulted, the property was foreclosed on and the trust lost $60,000 ($400,000 today) because the property was worth far less than what the real estate broker had guessed. Prob C §16047(d); Estate of Collins (1977) 72 CA3d 663. 

Trust Funding

In order for a trust to be valid in California, the trust must own property.

The legal term for trust property is "res" if you want to impress your dinner party guests with Latin. The trust must identify some piece of property that is owned by the trust whether it is intangible personal property, a patent, personal property, a piece of jewelry, or real property, a house. 

The way in which you transfer ownership of property to a trust is to name the trustee of the trust as the owner of the property. The reason for this is because the trustee of a trust is considered the legal owner of the property. For example, if I transferred a condo I own into a trust but named Thomas Thucydides as the trustee of the trust, then if somebody was checking ownership records of that condo they would discover that Thomas Thucydides, not Shahram Miri, was the legal owner of the property.

It is relatively easy for a client to transfer many types of property to their trust. If a client has a bank account they would go to the bank and ask the bank that the account holder's name be changed from, for example, John Smith to John Smith, trustee of the Smith 2010 revocable trust. If a client owns stock, the stock transfer agent will have forms available in order to effect a transfer of ownership. 

However, the one piece of property that is most likely too difficult for the lay person to transfer into their trust is their home.

Transferring one's home into a trust is especially important because a home will generally wind up in probate if it is not held in trust. The reason why transferring a home into a trust is cumbersome for clients is because deeds require that certain information be included on it such as names of seller/transferor, buyer/transferee, the cost of documentary transfer tax, the legal description of the property, etc. Since lay people infrequently write their own legal documents, often times people will pass along the burden of writing and recording a deed to an attorney.  Otherwise, the consequences of not  transferring one's home into a trust are steep due to the likelihood of probate with its associated cost and time.

Obtain a Copy of a Trust

If you are the beneficiary of a living trust, you are entitled to receive a full and complete copy of the trust upon request to the trustee in certain situations. The following is one example of such.

The applicable law states:

"the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust to each of the following, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it, when a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust." Prob C § 16061.5(a)(1).

The follow-up question to this is, "when does a trust become irrevocable?" In almost all cases, a trust becomes irrevocable when the settlor (the person who drafted the trust) passes away. For example, Samuel  drafts a revocable trust and names himself trustee and beneficiary while he is alive. Upon Samuel's passing, the remainder beneficiary is his nephew Bobby while his brother Thaddeus is the successor trustee. Bobby may request a copy of the trust document from Thaddeus after Samuel passes away. Prob C § 16061.7(g)(5).

The ability to request a full and complete copy of the trust stems from the trustee's duty to keep the beneficiaries of a trust reasonably informed of the trust and its administration. Prob C § 16060. Of note, the duty imposed under Prob C § 16060 cannot be waived. Salter v. Lerner (2009) 176 Cal.App.4th 118.

Furthermore, failure to provide a full and complete copy of the trust to the requesting beneficiary by the trustee is a breach of trust and hence grounds for removal. Prob C §15642(b).

The moral of this story (or blog post) is if you are a trustee, you should comply with the beneficiary's request to provide them with a copy of the trust document if the trust has become irrevocable.  

Reasonable Compensation for a Trustee

In a previous post I discussed the compensation rate for a trustee in which the trust did not specify how much the trustee would be compensated. In such a situation, the trustee would be entitled to "reasonable compensation under the circumstances." Prob C § 15681. As mentioned, a rule of thumb used by some estate planning attorneys is to annually compensate the trustee 1% based off of the trust's total value. For example, if the trust estate was worth $500,000, the trustee would be entitled to $5,000 as compensation.

Alternatively, if the compensation rate might be a bit higher than the trust beneficiaries like, 4 or 5% for instance. The trustee can petition the competent probate court for approval of their trustee fee. Prob C § 17200(b)(9). This ensures that the trustee's compensation is not grounds for the trustee's removal and surcharge (see monetary penalty) for breach of trust.

If the trustee decides to file a petition to approve their compensation rate, the probate court may consider the following factors in determining reasonable compensation (see Cal Rules of Ct 7.776): 

1. The gross income of the trust. 

Gross income is the total amount of revenue that the trust generates before taxes are imposed. For example, if the trust's only asset was a piece of rental property and collected $5,000 in rent a month. The gross income of the trust would be $60,000. The fact that gross income is the measure, and not net income, is worth mentioning. Net income is the amount of revenue generated after expenses have been accounted for, namely taxes, fees, permits, licenses, etc. In the example here, if net income was the measure, the revenue figure would be much lower because property taxes, maintenance costs and other expenses would be incorporated into the accounting equation. Consequently, this revenue reduction would in turn lessen the amount of compensation the trustee could claim since the trust estate was less profitable.   

2. The success or failure of the trustee's administration. 

For example, the trustee decided to invest in Google during its initial public offering. Good decision. Conversely, the trustee decided to invest entirely in Enron stock. Bad decision. 

3. Any unusual skill, expertise, or experience that the trustee has brought to the position. 

For example, the trust owns a large collection of Persian rugs. The trustee is a collector of Persian rugs and is keenly aware of the different types of Persian rugs. Hence, the trustee can accurately appraise the value of a Persian rug in case one is ever sold. 

4. The "fidelity" or "disloyalty" shown by the trustee. 

For example, the trust owns a beautiful beach home along an exclusive part of the coastline. The only other nearby tenant is a dining hall. Instead of renting the dining hall for dinner parties for his family and friends, the trustee hosts all the dinner parties at the beach home. This would be an example of "self-dealing", an act of infidelity. 

5. The amount of risk and responsibility assumed by the trustee. 

For example, the trust owns a large office building. The trustee is entrusted with leasing office space to hundreds of individual tenants who each have particular demands and concerns. 

6. The time that the trustee spent performing trust duties. 

For example, the sole trust asset is a block of Southern Company stock, a blue chip energy company whose stock has been historically stable. Clearly, the trustee would not be overly-worked in managing this trust.

Disclaimer: I own 1200 shares of its stock and am acutely aware of its molasses-like stock movements over the years. 

7. The custom in the community, including the compensation allowed to trustees by settlors or courts and the fees charged by corporate trustees. 

8. Whether the work was routine or required more than ordinary skill and judgment. 

For example, the trust owned numerous pieces of antique jewelry, furniture and paintings. Since a common person is ill-equipped to distinguish between authentic and fake in those fields, the trustee would either need to self-educate themselves on the topic or enlist the services of antiques expert in making a decision to sell the items. 

Trust Administration - Taxes, Uniform Prudent Investor Act & Accounting

It is not uncommon for a trust to endure for many years after the original drafter(s), the settlor(s), have passed away. This can be classified as long-term trust administration. 

For example, husband and wife draft a trust with the survivor inheriting everything. Then upon the surviving spouse’s death, the remainder of the trust estate distributes to the children in equal shares outright and free of trust, provided the children are at least 25 years old. Even though at first glance it does not appear that long-term trust administration is likely, there is the distinct possibility that it may arise. For the sake of argument, let us assume that husband and wife pass away in an auto accident, leaving Son, age 18 and Daughter, age 20. Son’s trust would require 7 years of administration while Daughter’s trust would require 5 years of administration. The following are common hurdles that would be encountered in the long-term trust administration of Son and Daughter’s trust.

1. Tax Returns

First, the trustee should file Form 56 with the IRS to notify it that a fiduciary relationship exists between the trustee and the trust. IRC §§6903, 7701(a)(6); Treas Reg §301.6903-1. Second, the trustee would need to acquire a federal identification number for the trust in order to properly file tax returns. Third, the trustee would need to annually file federal and state tax returns depending on the trust’s circumstances. In particular, a trust must file a tax return in California if either the net taxable income is over $100 or the gross income exceeds $10,000, regardless of the net taxable income. Rev & T C §18505(e)-(f); FTB Form 541. A federal return must be filed if the trust has any taxable income or gross income of $600 or more, regardless of the amount of taxable income. IRC §6012(a)(4); IRS Form 1041.

2. Investments of Trust Assets - Uniform Prudent Investor Act (UPIA)

The trustee needs to be mindful of the Uniform Prudent Investor Act (UPIA) which governs investment and management of trust assets. Probate Code §§16045-16054. The UPIA is the default rule as the trust can specify a different method in evaluating a trustee’s investment decisions. Prob C §16046(b). However, most trusts do not expand or restrict the UPIA standards. Here are some important sections from the UPIA.

First and foremost, the duty of care requires that “a trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. Prob C §16047(a). Although, “a trustee's investment and management decisions respecting individual assets and courses of action must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust." Prob C §16047(b). Therefore, the fact that the trustee made 10 good and 1 bad investment choices that resulted in a positive outcome for the trust does not violate UPIA.

Furthermore, “the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.” Prob C §16048. Hence, the trustee could probably not invest all trust assets in volatile stocks like British Petroleum or Goldman Sachs.

Additionally, a trustee may delegate investment and management functions, if prudent under the circumstances, to an agent of the trustee. Prob C §16052(a). Thus, a trustee could appoint a certified financial planner to assist the trustee in making investment decisions.

Moreover, “the trustee must, within a reasonable time of accepting the trusteeship or receiving the assets, review the assets and make and implement decisions concerning the retention and disposition of assets so as to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust.” Consequently, the trustee would need to perform an inventory of the trust and determine the future goals and needs of the trust in order to achieve the trust’s stated goals.

3. Accounting

The trustee is generally required to provide at least an annual accounting to beneficiaries for trusts created on or after June 30, 1987. See Prob C §16062. An accounting is also required when there is a change of trustee and when the trust terminates. Prob C §16062(a). The accounting must contain the information specified in Prob C §16063, which is too long to cite here (trust me). However, a beneficiary may waive in writing the right to an accounting from the trustee. See Prob C §16064(c).