California trust litigation often stems from disagreements and hostility among family member co-trustees. Rather than picking one of their kids to serve as sole successor trustee when they die or become incapacitated, Mom and Dad often appoint two or more of their children to act together as successor co-trustees.
Having more than one child serve as co-trustee can work out well or turn into a nightmare. In this post we’ll discuss the challenges associated with sibling co-trustees and how controversy might be avoided.
The default rule in California is that co-trustees must act unanimously.
In California, unlike most states, co-trustees must make administration decisions by unanimous consent. If there are three co-trustees, all must consent with respect to the various details of trust administration, such as hiring a real estate agent to list/sell trust property or engaging an accountant to produce accountings and tax returns.
Under California Probate Code section 15620, unanimity applies to co-trustees “unless otherwise provided in the trust instrument.” Estate planning attorneys often will insert special language specifically allowing for action by a majority of co-trustees. If such wording is not included in the original trust instrument or an amendment, section 15620 requires “unanimous action.”
Experienced estate planners typically counsel clients about the pitfalls of appointing co-trustees without adding a majority-rules clause.
What if the co-trustees can’t agree?
If co-trustees who are subject to the default rule can’t reach a consensus, any of them can file a petition for instructions under California Probate Code section 17200, asking a judge of the Superior Court to provide directions to the co-trustees.
A co-trustee who petitions for instructions must provide notice of hearing to all co-trustees and all beneficiaries, using Judicial Council Form DE-120. While a minimum of 30 days’ notice is required under California Probate Code section 17203, the notice period will depend on the availability of hearing dates.
In the probate unit of Sacramento County Superior Court (Department 129), the clerk is setting hearings in trust matters about 90 days out from the date of filing. If there is genuine urgency with respect to a petition, however, the court may take it up on an ex parte (shortened time) basis, with notice given by 10:00 a.m. on the court day prior to the hearing. (See our prior post for a discussion of ex parte procedures in California probate courts.)
A petition for instructions by one co-trustee may spark objections and cross-petitions by other co-trustees, and beneficiaries who are not co-trustees may join in the fray. If there is an objection, the court typically will set the matter over for further hearings. The parties will have time to engage in discovery, including interrogatories, document requests and depositions. Ultimately, under California Probate Code section 1022, if a compromise cannot be reached, the court may hold an evidentiary hearing (bench trial) on the petition(s) and objection(s).
Can each co-trustee engage his or her own attorney?
A trust is not a legal entity, but rather a fiduciary relationship where one or more trustees holds property for the benefit of certain beneficiaries. Hence, a lawyer does not represent “the trust” but instead represents one or more co-trustees to guide them with respect to trust administration. Many California lawyers are unfamiliar with this distinction as are most family member trustees.
While co-trustees often share legal counsel, each co-trustee has the option of engaging his or her own attorney to represent him or her in a co-trustee capacity. In fact, where co-trustees are in substantial disagreement, an attorney or law firm may be unable to represent (or continue to represent) them all given the ethical rules that require attorneys to avoid conflicts of interest in the absence of informed consent by the affected clients.
The separate legal representation of co-trustees can raise complications over and above an increase in administration costs. Co-trustees may decline to provide funding for one another’s legal counsel, forcing each co-trustee to either (1) advance legal expenses and seek reimbursement, or (2) ask the court on the front end to approve the engagement and payment of counsel.
Co-trustees may condition payment or reimbursement of legal expenses on the production of detailed billing invoices, but counsel may be reluctant to reveal information regarding their work product such as the issues they have researched or the witnesses they have interviewed.
In a strained environment, co-trustees are likely to accuse each other of spending too much on lawyers or having lawyers advance their personal interests as opposed to representing them in their fiduciary capacities.
By the time co-trustees get separate counsel, communications often will have broken down to the extent that the co-trustees are no longer able or willing to collaborate informally in trust administration. The lawyers then play an increasing role in attempting to move forward, at substantial expense to the trust.
Can a co-trustee simply tune out and let the others handle things?
A co-trustee may lack interest or time to participate in trust administration, or may seek to avoid conflict by taking a passive approach and letting the others do all the work.
Such a passive approach, however, is perilous to the co-trustee. Under California Probate Code section 16013, each co-trustee has an independent duty to participate in administration of the trust. Each co-trustee must take reasonable steps to prevent a co-trustee from committing a breach of trust or to compel a co-trustee to redress a breach of trust.
So, for example, if Co-Trustee Albert sells a ranch property held in trust to a friend for less than fair market value, and Co-Trustee Betty goes along with the sale without asking any questions, Betty can be held liable for breach of trust.
Accordingly, a co-trustee who wants nothing to do with trust administration generally should decline to serve or resign, as opposed to dozing in the wheelhouse.
What will a California judge do when faced with acrimony among co-trustees?
Under California Probate Code section 15642, if hostility or lack of cooperation among family member co-trustees impairs trust administration to the detriment of the beneficiaries, the court can end the gridlock by removing all of the co-trustees and appointing a third party to serve as sole successor trustee. The third party may be a bank trust department or a private professional fiduciary licensed by the California Department of Consumer Affairs.
Often one co-trustee will petition the court to remove the “problem” co-trustee. The court, if persuaded that one sibling indeed is having a damaging effect on trust administration, may grant such a petition. But judges will approach such requests with skepticism. For one thing, it may not be easy to sort the good trustee from the bad one. Also, judges generally give deference to Mom and Dad’s selection of the siblings as co-trustees and will be reluctant to remove one sibling while leaving the others to rule the roost.
What’s the takeaway?
Parents should think long and hard before appointing their siblings to serve together as successor co-trustees. While majority rules provisions can help resolve disagreements without a trip to the courthouse, they also can result in the marginalization of a co-trustee with valid concerns. Parents who anticipate conflict should consider naming a third party to serve as successor trustee. The fees charged by such a third party may be much less than the expenses incurred by sibling co-trustees who squabble over trust administration, and the third party may be able to complete administration much faster than siblings who don’t see eye to eye.