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Can a California trustee require a beneficiary to sign a release in order to get a distribution from a trust?  A question like this appeared recently on the AVVO “Free Q&A” page and makes for a perfect blog topic.

Trustees understandably want to wrap up trust administration without having to worry about being sued by beneficiaries.  When a beneficiary appears to be litigious, the trustee may want to dangle a preliminary or final asset distribution as a carrot to get the beneficiary to sign a release.  Yet, since the trustee is a fiduciary, California law does not give a trustee unfettered discretion to insist on releases.  An effort to prevent trust litigation could end up sparking such litigation.

An Avoidable Prohibition

A California trustee owes duties of loyalty to the beneficiary.  Notably, California Probate Code section 16002 requires the trustee “to administer the trust solely in the interest of the beneficiaries” and section 16003 requires the trustee to “deal impartially” with beneficiaries.

When a beneficiary sues a trustee for breach of duty, the statute of limitations (per Probate Code section 16460) generally runs for three years from when the beneficiary knew or should have known of the breach.  That’s a long time for a trustee to have to look in the rear-view mirror for beneficiary claims.

Probate Code section 16004.5(a) states that a “trustee may not require a beneficiary to relieve the trustee of liability as a condition for making a distribution or payment to, or for the benefit of, the beneficiary, if the distribution or payment is required by the trust instrument.”

Let’s say that Mom and Dad have passed and daughter Tanya is administering the trust.  The trust instrument provides that Happy Family Ranch and the tractors and other equipment there are to be distributed out to Bob, Tanya’s brother.  Tanya and Bob are estranged.  Can Tanya as trustee refuse to deed the Ranch to Bob until he releases her of any and all claims associated with it, such as how she kept up the barn and tractors over the past few years?

The answer may be “no” under section 16004.5(a), but the law permits Tanya to take a more nuanced approach to defuse Bob’s possible hailstorm of claims against her.

Indeed, there’s a roadmap right there in Probate Code section 16004.5(b).  The statute allows a trustee to seek a voluntary release or discharge from the beneficiary.  The trustee may maintain a reserve fund for reasonably anticipated expenses, including accounting and legal fees.  The trustee may withhold a distribution if it is “reasonably in dispute.”  And the trustee may seek court approval of an accounting.

Tanya should consult with an attorney about how to navigate her situation.  The advice may be to invite Bob to tour the Ranch with the understanding that if he is satisfied with its condition and willing to sign a release Tanya will deed the property out to him immediately.  Note that, for the release to be effective under Probate Code 16464, Tanya should disclose to Bob, preferably in writing, any material deficiencies at the property of which she is aware, such as a structural engineer’s report she obtained showing that the barn is at risk of collapse.

Even if Bob is uncooperative, a California Superior Court judge can review and approve Tanya’s management of the Ranch.  Her lawyer may advise her to complete a trust accounting that includes the financial activity related to the Ranch.  If Bob declines to sign off, Tanya can file a petition with the Court under Probate Code section 17200(b)(5) seeking to settle the account and have all of her acts during the accounting period approved.  If the petition meets the statutory criteria and Bob does not come forward to object, the judge is likely to approve the petition.

It is generally preferable for a trustee in a position like Tanya to be proactive in seeking the distribution of assets and the completion of administration.  If Tanya simply demands a release and refuses to give the Ranch to Bob, he is likely to initiate trust litigation and the judge may look disfavorably on her.

As Mama Said, Watch Your Tone

As the tale of Tanya and Bob shows, the propriety of seeking a release is largely a matter of tone.  The trustee can dangle a sweet carrot by politely asking for a release with the understanding that the beneficiary will enjoy the carrot all the sooner.  On the other hand, if the trustee seeks to coerce a release by way of an unyielding ultimatum, the trustee may run afoul of her fiduciary duties and face adverse consequences.