People select Trustees to handle the trust’s affairs after they pass on, but sometimes they die without knowing that the Trustee was a bad choice. How does a beneficiary of the Trust fix this problem under California Law?
What is a Trustee?
Any person can be a trustee. The trustee is like a manager of the trust estate. A person who sets up a trust must name someone who will manage the trust’s affairs and carry out the trust’s business. Typically, the person who sets up the trust acts as the trustee until their own death; then, a new person automatically takes over. (If you need help removing a trustee in Kern County, call Coleman & Horowitt, LLP at 661-325-1300 to schedule a consultation with Jared R. Clemence.)
What Power Does a Trustee Possess?
The trust declaration defines the power of the trustee. Typically, the trustee’s power is broad, and the declaration permits the trustee to do almost anything legal to sell, grow, expand, distribute, or not distribute the trust assets.
Because the trustor (the person who sets up the trust) typically wants to reduce headaches and worry for the trustee, they will waive liability for most discretionary decisions. Giving the trustee unquestionable power makes it easy for a trustee to do bad things with that power.
How Can a Beneficiary Remove a Trustee?
When the trustee starts doing bad things, it may be necessary to remove him or her. It is difficult because the beneficiary must convince the court that it should challenge the trustee’s choices despite the trust declaration’s statement that the trustee’s decision shall not be challenged or questioned.
Probate Code section 15642 provides rules for removing a trustee. Subdivision (b) lists nine causes of action. The last cause of action is the broadest: “for [any] other good cause.”
The list includes reasons to remove a trustee that doesn’t require the trustee to be a “bad person.” For example, reason number eight permits a beneficiary to remove a trustee who cannot resist undue influence. This reason would be used if the trustee were particularly gullible and frequently spent trust money with good intentions but where a reasonable person would have resisted the temptation. Think about the grandmother who tells you that she just inherited a fortune from a Polish prince, which she learned from an email that she received from a stranger. As long as she pays $100,000 by Friday, the Polish attorney can have her million deposited in her bank by the end of the month. (This is a scam that I frequently see.) The reasonable person might recognize that this is most likely a fraudulent email attempting to extort $100,000 from an unsuspecting victim. If the trustee can jump at this offer and write the check on the spot, then reason eight permits their removal.
The big ones that I like to look for are the following:
- Reason One: The trustee has committed a breach of trust.
- Reason Four: Where the trustee fails or declines to act.
- Reason Five: Where the trustee’s compensation is excessive under the circumstances.
Breach of Trust
The standard for removing a trustee is lower than for compelling an accounting. (See “Compelling a Trust Accounting When the Trust Waives Accountings.”) To compel an accounting, the petitioner must prove a “material breach of trust” is “reasonably likely.” Here, there is no need to prove likelihood, and there is no need to show that the breach was “material.” Any violation of the trustee’s fiduciary duty may qualify for his removal.
Failing or Declining to Act
The trustee must take action, especially when there is a good cause. If the stock market is sinking, liquidating stocks may be appropriate. If the trustee fails to protect the trust estate by holding when they should have sold, there may be grounds for their removal. If the trust owns a business and the business has no manager, failing to hire a replacement manager within a reasonable time may be grounds to remove the trustee.
Be careful! Many beneficiaries hope to claim that the trustee should be removed because they failed to distribute trust assets to the beneficiaries. However, the trust declaration often does not include time limits, so the court must evaluate whether distributing the assets in a timely fashion was the trustor’s intent. I have a trust that I’m currently working on, where the language is vague. Still, the inclusion of some clauses strongly suggests that the trustor preferred holding assets for as long as possible to grow the trust’s value for future generations over distributing assets to his living children. In other words, the trustee may not have a duty to make timely distributions and might be able to defer distributions after the beneficiary’s death to the beneficiary’s heirs or other people.
A Breach of Trust and a Breach of Fiduciary duty are often treated as interchangeable claims. Fiduciary duty is often easier to understand because a fiduciary must put the beneficiary’s interest in front of their own. It is a duty that is easily violated. Taking excessive compensation is a breach of the fiduciary duty because the trustee is profiting at the expense of the beneficiaries.
When trustees breach the trust, beneficiaries often claim they are using it as a personal piggy bank. If true, then the trustee is likely making large withdraws from the trust estate to reap the benefit of their transactions.
What Are the Risks?
Removing a trustee is not risk-free. On June 13, 2022, the Court of Appeal of California, in the Sixth Appellate District, held that the beneficiary can be charged with the cost of the trustee’s defense, and the size of the judgment can exceed the value of the beneficiary’s interest in the trust. (Bruno v. Hopkins (June 13, 2022) 79 Cal.App.5th 801.)
In Bruno v. Hopkins, the beneficiary was entitled to $200,000 under the trust document’s terms. However, the court awarded a judgment against her for $829,000 in attorney fees and $96,000 in costs. The court found that her testimony was not believable and that she brought the lawsuit in bad faith.
If a beneficiary loses a case to remove a beneficiary, the court will evaluate whether the action was filed in “good faith.” If it was not, the beneficiary can be charged with the costs of the lawsuit, which can be exorbitant!
So, word to the wise, be cautious in planning a lawsuit to remove a trustee! Make sure you have your facts straight and that your arguments are based on good faith belief that the trustee has breached the estate’s trust.