California Beneficiary Rights Overview
California trust law, like the law of most states, recognizes the right of beneficiaries to receive certain information and notice concerning the administration of the trust and its assets. What form that notice takes and when it is to be given varies with the type of rights involved and the needs of the particular beneficiary.
The term "beneficiary" is broadly defined under California probate code section 24 to mean a "person who has any present or future interest, vested or contingent, in an estate . " It includes the "heirs," "children," and "issue" of a person, all of which are defined under the probate code to include more than just biological relations. In short, anyone who could potentially claim an interest in an estate might be a "beneficiary." These beneficiaries may include people who are meant to receive nothing from the trust, but who nevertheless possess rights protecting them in case something goes wrong – rights the trustees and administrators must respect. It is important to know that, however broadly the law defines the term, beneficiaries are not limited to the individuals named as such in the trust.
The Legal Context of Trusts in California
As beneficiaries seek to enforce their rights in the California probate courts, it is important for them to understand the legal framework that governs California trusts. California Trust law is governed by the California Probate Code starting with section 15000 and running through section 19630.
Under California Probate Code section 16225, every trustee of a trust "shall keep the trust property separate from any other property held by the trustee" and "shall keep clear, distinct, and accurate records of the trust property." (Probate Code § 16225) If a trustee manages real property as part of his/her duties as trustee, the trustee must also maintain a listing of title to such property which identifies the trust as owner and which indicates that the trust was created under the laws of California. (Probate Code § 16225)
The general fiduciary duties of the trustee are found in California Probate Code sections 16009-16017. The duties of the trustee includes "acting with the care a prudent person would exercise if managing someone else’s property," "loyalty," and "impartiality" unless otherwise provided in the terms of the trust. (Probate Code §§ 16010-16016) Assuming that the terms of the trust do not provide otherwise, these duties apply regardless of whether the trust is revocable or irrevocable, and regardless of whether the beneficiary is a current beneficiary or a remainder beneficiary. (Probate Code § 16016)
In addition to the statutes found in the California Probate Code, certain administrative duties of the trustee are specifically set out in California Probate Code sections 16060-16069. Certain of the trustee’s record-keeping and reporting obligations are found in California Probate Code sections 16061-16063, including the duty to provide accountings and reports to beneficiaries. Section 16060 specifically refers to the disclosure that the trustee must provide to the beneficiary of the name and address of the trustee. California Probate Code section 16063 requires the trustee to give notice to beneficiaries of the accountings and the right to petition to compel a trustee to account or, alternatively, to waive the right to petition to compel an accounting.
Trustees may be penalized for their failure to comply with certain of these record-keeping requirements: the penalty under California Probate Code section 16420 may be imposed in the amount of 1/2% per month on the value of the trust assets, up to a maximum of 10%. This penalty may only be imposed by the Court. Beneficiaries may need to petition the probate court to seek a determination that the trustee failed to comply with his/her record-keeping requirements, including the failure to provide disclosures.
The Family Code includes requirements for disclosure of trust assets in a divorce context. For divorce proceedings started after January 1, 2003, a litigant is required to prepare and exchange with their spouse a Schedule of Assets and Debts, including all assets held inside a trust. The California Family Code requires the disclosure of trusts even though such trusts may not be subject to division in the divorce (e.g. a child support trust). The Schedule of Assets and Debts is a disclosure form and, if not completed, can be an incomplete disclosure to the court and to the other party. The failure to complete and exchange a Schedule of Assets and Debts may be grounds for sanctions against the non-compliant party under California Family Code section 2107(a). Executors and trustees are also generally required to prepare and exchange such disclosures.
Different Types of Beneficiary Rights
Beneficiaries’ Rights in the Trust
Depending on the governing document, trust beneficiaries may be entitled to the following: The beneficiaries’ right to information should not be confused with a right to ask for more information than the beneficiary is entitled to. A beneficiary is entitled to learn about the Trust terms, including accountings, to see the Trust documents (including amendments), to receive a copy of the trustees’ bond, if any, and receive written notice of the trustee’s intention to sell, lease, or exchange much, if not all, of the trust property. The right of trust beneficiaries to inspect trust accounts and books may not be suspended even during litigation. The trustee has the right to agree to delay the inspection pending the outcome of the litigation, but the beneficiary has no obligation to agree to such provision. In some circumstances, trust beneficiaries’ rights may be delayed upon good faith request of the Trustee, such as where disclosure would be likely to impede the administration of the trust. However, the trustee has the burden to prove that the requested information is privileged. A trustee is required to keep the beneficiaries of the Trust account for an activity of a period of four (4) months and at the expiration of this period he shall have the account subject to the examination of any beneficiary, and he shall be able to fix a commission or a fee for those who examine the account at a reasonable rate that incorporates the size of the account as well as the degree of difficulty encountered. If a trustee wishes to be compensated for his/her work, then the trustee must either petition the court for approval of the compensation or do so in existence of a Trust provision specifying compensation. The trustee can be compensated for services he performed after the death of the settlor even if he did not serve as the estate executor or administrator. In other words, the trustee may be entitled to compensation for trust administration before and after the death of the settlor, unless a contrary intention is expressed in the trust instrument. There are certain safeguards and remedies available to Trust beneficiaries, including the statutory right to petition the court for orders requiring an accounting from the trustee, which must be filed within 90 days of the time when the beneficiary learned of the existence of the Trust. However, the right is however limited to those beneficiaries who have received a notice of the trust terms and the identity of the trustee. In addition, California Probate Code Section 16060 also entitles a beneficiary to bring action of removal and surcharge against the trustee who had committed such malfeasance and or nonfeasance that has resulted in loss to the Trust. This right cannot be waived through the trust instrument. Finally, the beneficiaries can petition the court for declarations of their rights under the Trust and mediation of any disputes.
The Functions of the Trustee to Protect Beneficiary Rights
Under California Trust Law, the Duties of a Trustee are defined by the Probate Code and the terms of the trust document itself. The terms of the trust will often designate the powers and the duties of the Trustee. While the Trustee has a number of implied duties, the code will also supplement the terms of the trust by implication. Many of these implied duties can have a direct impact on the rights of the beneficiaries.
The primary duty of a Trustee is the duty to administer the trust in good faith, for the benefit of the beneficiaries and in accordance with the trust document. To determine whether or not a Trustee has acted within the scope of trust law California courts have in the past looked to the Restatement of Trusts provided that the Restatement is not different from or inconsistent with the provisions of the California Probate Code or the trust terms as interpreted by the California Courts. The California Probate Code will usually govern any inconsistencies between the Restatement and the Code.
The Trustee has been given the power of fiduciary discretion to further and achieve the settlors’ unintended purposes in the trust. This means that the Trustee has the power to provide information, and must provide information to the beneficiaries upon request. California Probate Code Section 16060 provides that a trustee shall keep the beneficiaries of the trust reasonably informed of its administration. While California Probate Code Section 16061 requires that the trustee respond promptly to the beneficiaries’ requests for information related to the trust.
When the actions of a trustee directly contradict the intent of the trust settlor, the beneficiaries must take the necessary steps to correct the mistake of the trustee. Where the trustee goes beyond the powers and the terms of the trust, and pursues his or her own objectives beyond the settlor’s objectives, the courts have intervened. In Re Estate of Davis, states that "…[T]he Trustee and the beneficiaries may not exercise their rights deriving from the trust in a manner contrary to the trust’s directions." This means that once the settlor’s intent is clear, the Trustee may become liable for any improper actions. In California, the Trustee has the burden to bear the risk of loss in management and investments. The Trustee is prohibited from taking affirmative steps outside the terms of the trust to accomplish unrelated objectives.
In order to protect the rights of the beneficiaries, the Trustee is obligated to uphold the terms of the trust. A good rule of thumb is that the Trustee’s fiduciary responsibility to the beneficiaries should always be used for the beneficiaries’ benefit only, and never to further the Trustee’s own interests.
Common Conflicts Regarding Beneficiary Rights
A court action isn’t always necessary to get answers or results. Most beneficiaries who feel they aren’t getting transparent information or that the trust isn’t being administered according to its terms can simply make requests to the trustee to get clarification or information. Though such requests can be unwelcome and unwanted, they are an important first step to getting resolution through a court proceeding. It’s important to give the trustee a chance to respond and discuss the issues directly, especially in the context of the trustee traveling anywhere from several states to hundreds of miles away from the beneficiaries.
Beneficiaries have common concerns that usually need to be addressed timely with the trustee:
Benefits awarded to beneficiaries
If a beneficiary is entitled to distributions, they should discuss their concerns with the trustee about the amounts being paid with the goal of getting on track with distribution amounts.
Two commonly disputed subjects
The two most commonly disputed subjects involve the distribution of income and principal . Beneficiaries can fight over whether or not the trustee has discretion to pay principal or only income when it comes to distributions. Some trusts grant absolute discretion, while others dictate certain payments of income and principal, or only income. Whichever the case, the trustee has an obligation to follow the terms of the trust, and to provide documentation to the beneficiaries once the terms are satisfied.
Other common disputes
Other common disputes involving beneficiaries are: When the estate relating to the trust is protracted, such as in a protracted probate or litigation lasting more than a few years, beneficiaries may lose sight of the size of the estate and its value. Perhaps the most common dispute with beneficiaries involves the lack of full disclosure by the trustee of the trust accounting and the relevant supporting documents. In addition, if a trustee is not communicating with the beneficiaries about the progress of the trust distributions, they may have to resort to litigation.
How Beneficiaries Can Enforce Their Rights
Beneficiaries have a range of options when it comes to asserting their rights under California trust law. First and foremost, it is usually advisable for a beneficiary to seek legal advice from a qualified attorney as soon as possible. Trust disputes can be complicated, and the help of an experienced attorney can make all the difference in resolving the dispute or proceeding with litigation.
Once a beneficiary has obtained counsel, the first step is often to request a copy of the trust instrument itself from either the trustee or the attorney who created the trust. Under California law, a trustee is required to provide a beneficiary with a copy of the trust within 60 days of the request and may be liable for damages if he or she does not comply.
A beneficiary should also consider sending a formal notice to the trustee of any problems or disputes about the administration of the trust (if the trustee is still acting) or of the creation of the trust (if the trustee has already passed away). This notice will provide the basis for the beneficiary’s claims in the event that trust litigation becomes necessary.
If the trustee refuses to acknowledge the beneficiary’s demands, litigation may be the next step. Before a beneficiary can even file a lawsuit with the court, however, he or she must formally "notify" the trustee of the dispute. This means that the beneficiary will have to send what is commonly referred to as a "Notice of Proposed Action" to the trustee at least 15 days before commencing the lawsuit in court.
Recent Developments and Trends in California Trust Law
Beneficiary litigation over California Trusts has increased significantly in recent years as California Courts have allowed the parties to resolve their disputes by way of "binding" arbitration. This new trend has been met with mixed reactions by beneficiaries and Trustees because there is a perception that the process favors Trustees and also because usually it is a high stakes game at the expense of either Trustee or beneficiary. In addition, as a result of the Court’s interpretation of the term "agreement" as contained in the Trust, many fee agreements between Trustees and trust counsel are being framed as Agency Agreements and as a result, they will have to be disclosed to beneficiaries regardless whether the Agreements are reasonable.
Another recent trend in California Trust cases is the inclusion of an in terrorem clause. In a California Trust, a no contest clause makes a beneficiary’s exercise of a right, condition, or power void if the beneficiary engages in court litigation to challenge the Trust. Courts generally enforce no-contest clauses unless the beneficiary shows that the clause is (1) overbroad, (2) illegal, (3) against public policy, (4) not reasonably necessary to protect the testator’s intent, or (5) ambiguous, uncertain, or vulnerable to construction in a manner that contravenes the testator’s intent. Courts used to be somewhat reluctant to enforce trusted in terrorem clauses, whereas in the past several years they have become more reluctant to set them aside.
Although the participants in the courtroom continue to be mostly the same, the past decade has seen a few shifts in the issues and positions of the parties. It is hard to create a generalization as to who is winning, or how many cases are even resolved by a jury. In particular, the traditional issue of whether someone drafted a new Trust or replaced an existing Trust has expanded into the new and uncharted challenges of whether a legitimate mistake can be made in executing an amendment. Do you need witnesses for a Trust amendment? Do you need notarization? Of course a great deal depends on what type of Trust is involved. For example, with an inter-vivos Trust, execution formalities are necessary whereas with a testamentary Trust, execution formalities are not strictly required.
For years, fraud was a common issue because people were trying to amend or set aside a Trust based on illusory claims of undue influence, duress, and lack of capacity. Now the issues center around ambiguities in trust instruments, equitable estoppel as a remedy, and claims that a Trust amendment is defective due to lack of witnessing, notarization, or failure to include the exact statutory verbage. As mentioned before, in the last decade or so, litigation of Trust disputes has focused less on the intentions of the settlor and more on the overly technical requirements for Trust amendments under Probate Code § 15401. Many Courts find it easier to avoid finding likely intent by declaring the amendment is invalid for some technicality. Those cases that have directly addressed these highly technical issues have generated mixed results.
In Taylor v. McGloughlin, 195 Cal.App.4th 120 (Cal.App. 6 Dist. 2011), the court held that the lack of proof that prescribed statutory language had been used was fatal to a beneficiary’s effort to prove an inter vivos trust amendment. By contrast, In re The Robert Kroch Trust, 132 Cal.App.4th 1200 (Cal.App. 4 Dist. 2005), the court held that a trust amendment was valid even though the trust amendment did not contain precisely the statutory language used to amend the Trust, but used other words conveying the same intent. On December 8, 2008, the California Supreme Court made its widely anticipated ruling in Coca-Cola Bottling Co. of Fresno, Inc. v. McClain, 7 Cal. 4th 202 (Cal. 1997). The Court issued its published opinion and affirmed the lower Court’s ruling that trust amendment language substantially similar to the statutory language was sufficient to validate a Trust amendment.
If the focus becomes almost solely on minor issues related to execution formalities within the Trust, without regard for what the Trustmaker intended, it will discourage trustees from subjecting Trusts that have been amended to a second guessing by "money grubbing" beneficiaries seeking to set aside amendments that actually may have been the Trustmaker’s true intentions. Some people calling themselves probate attorneys are not probate attorneys unless they practice often and learn the nuances of California Trust law. It is also apparent that persons coming from outside California to administer California Trusts must be extremely careful to appreciate the differences in California Trust law.
Conclusion: Safeguarding Beneficiary Interests
A common theme, throughout this article, has been the need to recognize the rights of Beneficiaries and their often-modest ability to protect those rights. By understanding your rights as a Beneficiary that are protected by California law, you can better protect your interests.
Among the rights discussed in this article, the right to a copy of the trust is probably the most important, because it is not sufficient for a Trustee to simply give the Beneficiary access to the trust document (i.e., by making it available for review at the Trustee’s office, or even by providing the Beneficiary with a copy of the schedule of assets).
The other rights—because they run with the locus standi of the Beneficiary—are less critical, because, it may be expected, the Trustee will voluntarily honor the Beneficiary’s request (despite the Trustee’s higher duty to the current beneficiaries of the trust, to the detriment of his interest). Nevertheless, if a Beneficiary requests an accounting, it should be provided, despite the Trustee’s reluctance to furnish the accounting or his insistence that one is not necessary, for whatever reason .
Although mediation may not be very effective in court-supervised trust litigation (which is governed by statutory time schedules for pleadings, certain presumptions and burdens of proof, and evidentiary rules), a Beneficiary may insist on mediation as a condition of making her demands known to the Trustee.
In addition, the demand letter, along with the Trustee’s response, can be very effective in managing the Trustee’s reaction to a Beneficiary’s claims, by making a record of the Beneficiary’s claims, if, and when, litigation becomes necessary.
With knowledge of what the California Probate Code obligates a Trustee to do, a Beneficiary will be able to insist that a Trustee provide him a copy of the trust and, where applicable, an accounting. If a Trustee fails to comply with a Beneficiary’s request for information, or places unreasonable conditions on the troubling of a trust asset, it is reasonable (and expected) for the Beneficiary to resort to litigation to enforce her rights under the Probate Code.