A trust declaration may waive periodic accountings.1Prob. Code, §§ 16062 & 16064. But how does a beneficiary prevent the trustee from stealing the trust’s assets and using it as a personal bank when the beneficiary has “no right” to an accounting?
What is an Accounting?
The accounting provides information necessary to verify that the trust estate is well managed. It includes income, expenses, assets, liabilities, and other information that usually determines any entity’s financial health.2Prob. Code, § 16063.
The trust may lawfully waive periodic accountings.3Prob. Code, §§ 16062 & 16064. A beneficiary may not compel a trustee to perform an accounting unless an exception applies.4Prob. Code, § 16064, subd. (a).
Exceptions that Make the Waiver Void
In some circumstances, the language that waives the accounting can be stricken from the trust declaration or treated as if it did not exist.
It is unusual, but the Probate Code includes a current reference to repealed code language. The trust’s waiver language is void when the previously revoked language of Probate Code section 21350.5 (repealed January 1, 2014) applies.5Prob. Code, § 16062, subd. (e)(1). For practical purposes, one can generally ignore this situation because the updated language in the nonrepealed code referenced by Probate Code section 16062, subdivision (e)(2), is the same general legal framework. In other words, skip the repealed law unless there is no recourse from the current law. However, remember that this code revitalizes dead legal language and makes it current by referring to “a disqualified person as defined in former Section 21350.5.
The second situation that renders the text void is where a person is presumed to have caused undue influence under Probate Code sections 21380, subdivision (a), and Probate Code section 21382.
Use the links above to see the list of people who are presumed to have used fraud or undue influence.
Side Note: A “presumption” is a legal conclusion that the court will use unless the parties provide evidence that it is untrue. Some presumptions are “conclusive,” which means the court will ignore contrary evidence. Most presumptions are “rebuttable,” meaning the court welcomes evidence to the contrary.
Exceptions Based on Trustee Conduct
The same Probate Code that gives permission to waive the trust accounting also gives a situation where trustee conduct renders the waiver invalid. “Regardless of a waiver of accounting in the trust instrument, upon a showing that it is reasonably likely that a material breach of trust has occurred, the court may compel the trustee to account.”6Prob. Code, § 16064, subd. (a).
To have the court compel an accounting, one must show two key elements: (1) The beneficiary believes there has been a “material breach of trust.” And (2) the belief is “reasonably likely” to be true.
This exception requires a court order and is not resolved by a simple demand letter. It also requires that the court agrees with the petitioner that there exists a likely breach to trust within reasonable likelihood as the court chooses to define “reasonable” on that day.
What is a Breach of Trust?
A “breach of trust” is “[a] violation by the trustee of any duty that the trustee owes the beneficiary . . . .”7Prob. Code, § 16400. Cortese v. Sherwood (July 31, 2018) 26 Cal.App.5th 445 at 456 defines a “breach of trust” in terms of an attorney when an attorney actively participated in receiving a personal financial gain at the disadvantage of the beneficiaries. In this way, a “breach of trust” is viewed similarly to a “breach of fiduciary duty.” Estate of Gump (Dec 5, 1991) 1 Cal.App.4th 582 at 603 tells us that a “breach of trust may be negligent, wilful, and/or [sic] fraudulent . . .”
Material Breach of Trust
Is there a difference between a “breach of trust” and a “material breach of trust?”
California cases and statutes never define “material breach of trust.” Courts will turn to the ordinary meaning when there is no statutory definition. One reasonably can argue that by using the term “material,” the legislature intended that the trustee be permitted leeway. Not all breaches of trust will warrant court-ordered accounting. Only those breaches that are “material” qualify.
This leeway is broad because to argue that a breach has been “material,” one likely must assert that the breach somehow violated the core purpose or intent of the trust. The court may even expect a showing that the trustee has intentionally subverted the trust’s intent through their breach.
Showing a Material Breach of Trust to Compel an Accounting
When it comes to compelling an accounting, it is impossible to have personal knowledge of a breach of trust when the trustee keeps all their actions secret from the beneficiaries. If the trustee has successfully avoided reports to beneficiaries, then beneficiaries do not know the state of affairs. To make a pleading or complaint, the petitioner must have personal knowledge or base that personal knowledge on available information that gives the petitioner a reasonable belief that the pleadings are true. So, what is a beneficiary to do?
One can turn to private investigators to hopefully turn up information that gives enough for the pleading. One can also personally investigate by talking to other people involved if they will speak on the matter. One might even consider lodging the complaint making the allegations, and using the power of a court order to access information to prove that the allegations are true. However, this last method is frowned upon. (It’s a bit like fishing with a hand grenade, you don’t know what and if you will get anything, but you are willing to cause a lot of damage to see what turns up.) The last method may lead to sanctions and fines by the court if the court discovers that you made your allegations in bad faith.
Coleman & Horowitt handles these matters and can consult on specific case scenarios for a small consultation fee. Call 661-325-1300 to ask about pricing and schedule a consultation.