October 15th, 2009
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Author: A. Trust Distribution Issues
Undoubtedly, one of the trustee’s most important duties is to make distributions to beneficiaries in accordance with the settlor’s wishes as expressed in the trust instrument. This will often require the prudent exercise of discretion to provide income and principal payments to one or more beneficiaries, in accordance with the trust instrument. The trustee must be loyal and fair to all beneficiaries, both current and remainder. In addition, the trustee may have to take into account (but not necessarily be controlled by) the income tax situation of each beneficiary to assure that the overall income tax liabilities for the trust and the various beneficiaries will be minimized to the extent consistent with the settlor’s objectives. If the trustee does not follow the terms of the trust instrument, or provisions of the law, then there is risk
1. Sanctions for Improper Distributions
If the trustee makes an improper payment, even if it was an honest mistake, there is liability. Therefore the beneficiary may successfully sue the trustee for the improper distribution, depending on the circumstances surrounding that distribution. Trustees are duty bound to treat beneficiaries fairly, make proper distributions, provide accountings, etc. If any of these duties are violated, the trustee is in violation of the law, and therefore liable for damages, which might include restoring the financial value of the trust. What this means is that the trustee has to be careful that any distributions proposed are consistent with the terms of the trust and also the law before being made.
2. Withholding or Postponing Distributions
The UTC and the Restatement prohibits a trustee from withholding distributions to which a creditor or other transferee of a beneficiary’s interest is entitled. Before withholding distributions from the trust, trustees should ensure that they have a legally defensible reason for doing so.
b. Preventing Distributions For Asset Protection Purposes.
When creditor protection is important, such as in cases where the trust instrument has a valid and enforceable spendthrift provision, the trust itself would provide the trustee with the legal basis for withholding otherwise mandatory distributions, if the trustee, in the exercise of the trustee’s sole and absolute discretion, should deem the distributions to be adverse to the beneficiary’s interest because there exists a creditor problem at the time that the distribution would otherwise be made. The beneficiary’s interest is reinstated after the disqualifying event has passed or has been resolved. This suspension protects against creditors’ claims, provided that the trustee’s power to suspend distributions is absolute and not just a condition limiting the time or manner of payment. The trustee should ensure that the spendthrift provision gives them the appropriate level of control over trust assets before making such an important decision.
C. Appropriate Screening by the Prospective Trustee
Each individual or corporate fiduciary that is considering an offer to be a trustee under a particular trust should fully assess the situation before agreeing to serve. Careful review of the trust documents might highlight potential pitfalls that should be discussed with the settlors prior to that agreement being made. Some of the things to look for can include: ambiguities, inconsistencies, potential tax problems, and potential conflicts of interest, as well as trustee fees. Further, the potential trustee should learn as much as possible about the beneficiaries of the trust, including their family history and familial relationships. Doing the appropriate level of due diligence might avoid potential future problems.
A potential future trustee and the settlor can and should seek the advice of their professional counselors in order to consider and address all these issues, prior to proceeding with legally enforceable trusts.
Do you want to create a trust? Are you considering being a trustee or successor trustee? If so, please contact the Law Offices of Daniela Lungu at (925) 558-2710 or email info@lungulaw.com for a complimentary assessment of your legal needs.
Do you want a specific topic discussed in this blog? If so, please contact us at info@lungulaw.com with your suggestions.
About Daniela Lungu, Attorney at Law
Daniela Lungu, founder of the Law Offices of Daniela Lungu, devotes her law practice to asset protection through estate and business planning. Ms. Lungu’s goal is to provide the people of the Bay Area and California with the highest quality, and most personalized legal services possible. Her attention to detail and a high level of communication with her clientele distinguish her from other attorneys in the field.
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I have repeatedly stated to my clients that one of the functions of estate planning is the avoidance of probate related matters. Not all probate actions are bad or ill advised, and in the absence of complete planning, might be the best option available. Certain matters handled by probate courts, such as admitting wills to probate and appointing executors, are routine and not contested. Routine probate matters can be handled very efficiently.
Here is a list of some of the factors (in no particular order) involved in probate litigation, grouped by categories:
“Contested matters” handled by probate courts (aka “probate court litigation”) is a broad term that includes a variety of situations, including, but not limited to,
• will contests (a challenge to the validity of a will);
• will and trust construction suits (a request that the court make a determination regarding the legal meaning or effect of particular wording used in a will or trust);
• guardianship contests (a fight over (1) whether a guardian should be appointed for a particular individual who allegedly has lost his mental capacity (and did not do any advance planning, such as executing powers of attorney), and (2) if so, who should be appointed as the guardian to make medical decisions and handle financial matters for that mentally incapacitated person);
• trust modification and trust reformation suits (a proceeding that requests the court to change (or “fix”) the terms of a trust because something is wrong with the way the trust is worded);
• trust termination suits (a legal action brought to terminate a trust because the purpose of the trust has been fulfilled or can no longer be fulfilled); and
• breach of fiduciary duty actions (suits by beneficiaries against an executor, trustee, guardian, or agent alleging that the fiduciary failed to act in accordance with the law and/ or the instrument appointing her and thereby caused damage to the beneficiaries).
There are several high risk factors for probate litigation such as sibling rivalry and multiple marriage situations, the so-called “second marriage” situation. Many people marry for a second (or even third or fourth) time without signing a premarital agreement (“Pre-Nup”) before the wedding. The Pre-Nup is one of the best ways to avoid probate litigation on death. It can also avoid a very expensive “forensic accounting” on the death of the first spouse. Many people mistakenly believe they own certain assets as their separate property (perhaps simply because the asset was in existence before the marriage and/ or is titled solely in their name) when, in fact, their property may have become community or marital property, in whole or in part, during the marriage. The classic probate court litigation case: children of the first marriage versus the spouse of the second marriage.
Some Factors That Could Lead to Probate Litigation
Creating a “Nonstandard” Estate Plan
Some examples included estate plans that (1) “cut out” a child, (2) treat children differently, (3) create overly detailed trusts attempting to “control from the grave,” and (4) make gifts to mistresses.
The Second Marriage Situation
As previously noted, if the Pre-Nup or Post-Nup does not clearly define the ownership of assets by couples who were married previously, the potential for litigation on the death of a spouse is much greater (especially if there are children from the prior marriage). If assets are not cleanly divided between the surviving spouse and the children from the prior marriage, problems can arise.
Not Appointing the Right Fiduciary
Serving as the executor of an estate, the trustee of a trust, or an agent under a financial power of attorney requires a huge commitment of time and effort and absolute honesty. When making your choice consider all factors, including: 1) their communication skills, 2) ability to follow legal instructions from adviser, 2) timeliness in getting work done, 3) trustworthiness, 4) financial skill set, 5) susceptibility to bad influence, 6) general attitude, 7) level of common sense, and 
ability to be organized.
Ill-conceived or “Faulty” Planning
There are so many examples of “bad estate planning” that it is impossible to list all of them here. Some are the result of incompetence and/ or lack of experience on the part of the attorney who prepared the plan. Others are the result of individuals trying to do things themselves that are not well thought-out. Some examples include (1) a person writing his or her own will or codicil (unless the instrument is a handwritten codicil that disposes only of personal effects); (2) having a customized estate plan not drafted by an attorney with sufficient expertise to draft non standard provisions, or 3) appointing one child as the trustee over another child’s trust.
Other Difficult Situations
Other situations that are always more difficult to plan for and that increase the need for solid planning to avoid probate litigation (and other problems) include (1) heterosexuals living together who have not executed a “non-marital cohabitation agreement” to avoid a “common law spouse” lawsuit on death; (2) gay and lesbian couples who do not do “special additional planning to place their partners in a secure position of control (to override state law priority statutes) and to arrange for the unassailable transfer of assets to their partners on death (tax planning also can be harder because the estate tax marital deduction is not available to gay and lesbian couples); (3) making unreported “taxable gifts during life (a taxable gift is a gift that is more than $13,000 per person per year (the current annual exclusion amount)); (4) making gifts during life to just one child and not to all children in equal amounts; (5) failing to tell the estate planning attorney about an illegitimate child or child from a prior marriage; and (6) failing to organize the client’s financial and other important information to enable the executor of the estate to do a good job.
Failure to Follow Up
This category includes the client (1) failing to review the estate plan on a periodic basis (estate plans become outdated very quickly); (2) failing to do the necessary “homework incident to the estate plan (such as re-titling accounts and completing beneficiary designation forms as instructed so that non-probate assets are coordinated with the client’s estate plan in his will or trust); (3) failing to change the will, account titles, and beneficiary designations after marriage or divorce; and (4) failing to re-title all the assets in the name of the living trust before death if the intention is to avoid probate completely.
How to Avoid Probate Litigation
Do not do anything that could cause serious legal consequences without first discussing them with legal or other advisors. Check with your advisors regularly to ensure you are on the correct path and be prepared to discuss every issue and concern. Follow through on necessary “homework” such as account titling and beneficiary designation matters (see above). Plan ahead whenever possible. Make sure you make the correct choice of fiduciaries.
In discussions with family members, you should explain the reasons for the plan being implemented, although you will need to be careful how you state your reasons.
Not all probate litigation can be prevented, of course, but a large portion of probate litigation can be prevented by good planning.
For a complimentary consultation of your particular legal needs and how to avoid probate in your estate, please contact the Law Offices of Daniela Lungu at (925) 558-2710 or email info@lungulaw.com.
Do you want a specific topic discussed in this blog? If so, please contact us at info@lungulaw.com with your suggestions.
About Daniela Lungu, Attorney at Law
Daniela Lungu, founder of the Law Offices of Daniela Lungu, devotes her law practice to asset protection through estate and business planning. Ms. Lungu’s goal is to provide the people of the Bay Area and California with the highest quality, and most personalized legal services possible. Her attention to detail and a high level of communication with her clientele distinguish her from other attorneys in the field.