Law Office of Adams & Rafferty, P.C.

California is one of several states where the revocable living trust has become de rigueur for individuals and couples with anything more than a modest estate. The generally stated reasons for the rising popularity of trusts are to avoid the expense and delay of probate, including legal and executor’s fees; make monies available immediately to pay decedent’s debts; promptly distribute the assets to beneficiaries; and maximize estate tax savings.

In this rush to avoid court intervention and paying probate attorney’s fees, creators of trusts are missing the Achilles’ heel of trusts: Trust documents are by law private, and trusts are not generally subject to court oversight. The ensuing lack of court supervision greatly increases the chances of theft, improper investment, and other fiduciary abuse by the nonprofessional trustee.

A look into the probate process and its goals will highlight the potential problems with trust administration.

Lessons from Probate

Probate is the process by which the court ensures that a deceased person’s debts are paid, assets are sold at market value, monies are invested in a safe manner, and all monies paid out by the executor are spent on appropriate estate expenses. Generally speaking, the court process protects the beneficiaries by ensuring that assets are protected and requiring a court-approved accounting of all expenditures.

In a revocable living trust situation, there is no such court oversight. This lack of oversight tends to increase the opportunity for a trustee to steal or otherwise self-deal. Many trusts drafted by attorneys further assist the dishonest trustee by containing clauses that waive accountings, release the trustee from liability, leave certain matters to the unfettered discretion of the trustee, and otherwise protect the trustee.

Additionally, although a trustee has a legal duty to account to the beneficiaries (unless waived), if a trustee fails to account, the beneficiaries must hire their own lawyer to have a court compel the trustee to account. The trustee can then hire his own attorney ¬– using trust funds! – and can often delay the accounting for a year or more. During this time, the beneficiaries may have no information concerning the assets of the trust and cannot stop the trustee from spending the assets.

How to Protect Yourself

If you and your attorney have determined that a trust is appropriate for your situation, there are ways to protect your family from a dishonest trustee.

1. Choose your trustee carefully. If you’re concerned that family members may lack the skill or prudence to carry out the job, choose a bank or independent professional trustee.
2. Make sure the trust has safeguards in place. These safeguards should ensure that the trustee provides regular accountings to beneficiaries, must provide full disclosure to the beneficiaries upon demand, and can be removed on the occurrence of specified acts.
3. Keep your beneficiaries informed. Inform your beneficiaries as to where you keep your important papers, and ensure that there is more than one copy of your trust and associated documents to ensure oversight of the trustee and the assets of the trust.
4. Put limits on trustee compensation in the trust instrument.

Signs of an Unworthy Trustee

If you are involved in a trust situation, you should be aware of the following signs that a trustee may be dishonest or incompetent:

• Failure to provide requested information in a timely manner, including accountings and lists of assets.
• An attitude indicating the trustee has a sense of entitlement to the trust assets, i.e. “Mom and dad put me in charge of this trust, and you’ll have to do it my way.”
• Lack of communication between the trustee and the beneficiaries.
• A significant delay between the death of the trustors and distribution of trust assets to the beneficiaries.
• Unequal or unexplained distribution amounts.
• Unusual and risky investments by the trustee, such as antique cars, commodities futures, gold, or jewelry.
• A change in story by the trustee as to appropriate distribution to beneficiaries or amount of assets on hand.
• Below market value sales to family or friends.
• Failure by the trustee to sell assets that may require liquidation, such as real estate or a business, in a timely manner.

Choosing a Trustee

Carefully consider your options when you choose a trustee for your trust, because if assets are spent or stolen, there often will be no recourse for the beneficiaries. In making a choice, consider such factors as integrity, judgment, experience, and time available to make a selection.

Consider having co-trustees if you are not certain of the person you are choosing. Be mindful of potential conflicts of interest. If you are a business owner and only one of your children is involved in the business, consider the potential for distrust and conflict of interest if that person is the sole trustee. He or she may have a strong interest not to liquidate the business or share the business profits with siblings.

Family members can make suitable trustees. The type of assets you hold, the business acumen of the person, and intrafamily relationships must be considered in selecting an executor or trustee. If family members are not available or acceptable for the position, a bank or independent professional fiduciary should be utilized.

Remember, once the patriarch or matriarch of a family is gone, the family dynamic changes. The glue that once held the family together may no longer exist. Consider the potential for acrimony and the lack of a peacekeeper when you choose a trustee. Use an objective person as a sounding board in making your decision.

Revocable living trusts are an efficient, cost-effective way to transfer assets on your death. However, be sure that your trust has appropriate safeguards to avoid family fights, wasting of the assets, or the transfer of assets to the wrong persons.
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Exec Legal Guide
Trust/Adams & Rafferty
© 2001 North Bay Business Journal