In California trust administrations, the trustee is in the driver’s seat. The trustee marshals the assets, deals with creditors, and (except in the case of ongoing trusts) gets them distributed out to the beneficiaries in fractional shares per the terms of the trust. But what happens when the trustee favors himself as a beneficiary, disfavors a family member he/she dislikes, or simply falls asleep at the wheel?
As illustrated by the Donald Sterling case recently discussed here, petitions to remove trustees are common in California trust litigation. Courts will suspend or remove trustees if the petitioner provides sufficient evidence that removal is necessary to protect the beneficiaries. This post will discuss trustee removal under California law from the beneficiary’s perspective. With apologies to The Sound of Music, “how do you solve a problem like trustee-a?”
The beneficiary first should consider whether there is mechanism written into the trust document that allows the beneficiary to remove and replace the trustee without a court order. Such language, though unusual, provides a path that is quicker, cheaper and more certain than asking a judge to remove the trustee.
In the absence of a provision that permits a change of trustee without court involvement, an interested party may petition the probate court, in the Superior Court of the county where the trust is being administered, to remove the trustee. While the petition is typically filed by one or more of the beneficiaries, a co-trustee or the person who created the trust (i.e., the “settlor”) also may file the petition. Under California Probate Code section 15642, a trustee may be removed for any “good cause,” including: (1) where the trustee has committed a breach of trust, (2) where the trustee is insolvent or otherwise unfit to administer the trust, (3) where hostility or lack of cooperation among co-trustees impairs trust administration, (4) where the trustee fails or declines to act, (5) where the trustee’s compensation is excessive, (6) where the trustee has serious mental capacity issues, or (7) where the trustee is substantially unable to resist fraud or undue influence.
Importantly, the court will be focused on whether trustee removal is needed to safeguard the beneficiaries going forward. “The purpose of removal is not the infliction of a penalty for past behavior, but is the preservation of the trust property.” Moore v. Bowes (1937) 8 Cal.2d 162, 165. Hence, an error in judgment, if one occurs, does not justify removal of an administrator where the court’s direction can adequately protect the interests of the estate. Estate of Feeney (1983) 139 Cal.App.3d 812, 821. So the beneficiary seeking removal should discuss the trustee’s past conduct as it pertains to his/her ability act properly going forward.
The California Probate Code gives the court broad latitude to manage trustee removal petitions. While it may take many months for a trustee removal petition to come to trial, in the interim the probate judge under section 15642(e) may suspend the trustee and appoint a temporary trustee.
In trustee removal litigation, the trustee typically has a funding advantage in that he/she (unlike the party seeking to remove him) can use trust assets to pay legal counsel for the defense. However, this also creates downside risk for the trustee because the court may require the trustee to reimburse the trust for legal expenses to the extent she/she is unsuccessful in the defense or the court deems the defense costs excessive. For example, if the trustee engaged in self-dealing that warrants removal, he/she may have to repay all funds expended in defending the removal petition.
The beneficiary who seeks to eject the trustee generally must bear his or her own legal expenses. These may run into the many tens of thousands of dollars, depending on the complexity of the litigation and the vigorousness of the defense. In addition, if the judge deems that the removal petition was filed in bad faith (i.e., frivolous), the judge may require the beneficiary to pay the trustee’s reasonable legal fees and costs under Probate Code section 15642(d).
Many trustee removal petitions are resolved by compromise. The trustee may address the beneficiary’s concerns or agree to step down from the post of trustee. However, if settlement can’t be reached, the probate judge eventually will conduct a bench trial on the removal petition, and the outcome will lie in the judge’s discretion.
In sum, an unhappy beneficiary can ask a probate judge to give the trustee the hook, but will need to present compelling evidence that the trustee is unfit to continue with trust administration.