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Woman in backseatActing as a trustee can be a thankless and time consuming job, especially when the reward at the end is nothing more than second-guessing from trust beneficiaries.  In our Sacramento-based trust and estate practice, we represent trustees who have strained relationships with beneficiaries, whether their siblings, step-relatives, or otherwise.  One useful tool to help trustees manage those relationships is the Notice of Proposed Action.

The notice procedure allows a trustee to obtain immunity from breach of trust claims without (1) obtaining an order from a California probate court, or (2) waiting three years for the statute of limitations on breach of trust claims to run.

Thus, it is not surprising that the California Legislature recently expanded the use of this handy trust administration tool.  Assembly Bill 1700, which goes in to effect on January 1, 2017, will permit a trustee to give a Notice of Proposed Action for preliminary or final trust distributions.

As an example, a trustee could use this expansion of the Notice of Proposed Action scheme to inform all of the sibling-beneficiaries that the trustee intends to make a preliminary distribution of the long-time family home to one of the beneficiaries, Bobby, at a certain value.  Perhaps Bobby is living in the residence already and instead of continuing to carry the home as a trust asset, it may make good sense to distribute the home and associated expenses and liabilities directly to Bobby before the rest of the trust assets are ready for distribution.  After sending a Notice of Proposed Action and waiting out the compulsory time period, the trustee can feel protected in distributing the home to Bobby – even if other beneficiaries try to balk later and claim that they wanted the home or that value allocated to Bobby was too low.

What is a Notice of Proposed Action?

California Probate Code sections 16500-16504 permit a trustee to give notice to the beneficiaries of a trust that the trustee intends to take (or not to take) some specified action.  After waiting at least 45 days, the trustee may proceed with the proposed action (or inaction) and will be free from any liability for proceeding in that fashion.

For example, the trustee of the family trust may mail a Notice of Proposed Action to his siblings that he intends to diversify the trust’s holdings by listing the trust’s almond orchard in Woodland for sale and that he intends to accept any offer above $20,000/acre.  After waiting the required 45 days, the trustee can move forward and list and then sell the property for at least $20,000/acre without fear of later being held liable to the trust or beneficiaries for selling the land below market price.

This tool can be very helpful in trust administrations when dealing with passive, noncommittal, and/or whiney beneficiaries.  A Notice of Proposed Action requires a beneficiary to “speak now or forever hold your peace.”  At the same time, if an objection is all but certain, the notice procedure has relatively little value and the trustee may decide that it is more efficient and cost-effective to simply petition the court for instructions under California Probate Code section 17200 rather than wasting time with a Notice of Proposed Action.

How are Notices issued?

To effectuate a notice of proposed action, a trustee must mail a written notice to the beneficiaries of the trust that includes: (a) the name and address of the trustee; (b) a telephone number where the beneficiary can receive more information concerning the proposed action; (c) a description and explanation of the proposed action; (d) the time period for objections; and (e) the date on or after which the trustee intends to take the proposed action.

A beneficiary who objects to the proposed action must mail a written objection to the trustee within the specified time frame.  If no objections are received, then the trustee is not liable to the noticed beneficiaries for proceeding with the proposed action.

I objected, what happens next?

Once an objection has been lodged, there are a few ways that the trustee and the beneficiary can proceed:

  • The trustee may abandon his or her plan in the wake of the objection and decide not to proceed with the objected-to course of action.
  • The trustee may ignore the beneficiary’s objection and proceed with the proposed action, although such a decision would place a bullseye on the trustee’s back if the action ended up causing any harm to the trust property or the beneficiaries.
  • The trustee or an objecting beneficiary may file a petition in the probate court to present the proposed action to a judge for a final determination. In such a proceeding, the objecting beneficiary bears the burden of proving that trustee’s proposed action should not be taken.  And, it is hard to blame a trustee for incurring the expense associated with seeking court approval of a proposed action in the fact of a written objection.

When can a trustee use a Notice of Proposed Action?

First of all, it is important to remember that Notices of Proposed Action are optional for trustees.  Trustees are not obligated to double-check with the beneficiaries before they make each and every little decision as a trustee.  In fact, trustees are generally never required to confer with beneficiaries before making decisions in conformance with their duties under the trust agreement and the Probate Code.

A trustee may use a Notice of Proposed Action in most situations.  There is only a narrow list of matters contained within California Probate Code section 16501 where Notices of Proposed Actions are not available.  These include:

  • Matters related to the trustee’s compensation or the compensation of the trustee’s attorney;
  • Settlement of accounts;
  • Discharge of the trustee;
  • Preliminary and final distributions (allowed as of Jan. 1, 2017); and
  • Transactions where the trustee or the trustee’s attorney receives some right or property interest from the trust.

It is important to note that if a trust beneficiary is disabled or is a minor, then a Notice of Proposed Action would likely not be effective for that beneficiary without the appointment of a representative.  The process of involving a guardian ad litem or having a conservator appointed may make Notice of Proposed Action cost-prohibitive in those situations.

Take Away Points

The Notice of Proposed Action scheme has existed in California for more than a decade since the statutes were enacted on January 1, 2005.  Nevertheless, none of the five statutes that make up the scheme has ever been cited in a published appellate decision, perhaps because the statute is relatively clear cut.

Meanwhile, more and more trust matters are being filed each year in Department 129 of Sacramento County Superior Court.  As such, the wait time between an initial trust filing and when the matter is heard by the court continues to lengthen.  We have heard from colleagues in Southern California that a trust petition can take more than six months to be set for an initial hearing.  If this trend continues, Notices of Proposed Action may become an even more important device to alleviate stress on an over-burdened court system.