As a trustee, you are the captain of the ship and responsible for following the trust terms like a map, navigating the sometimes choppy waters of California trust law, and delivering the trust safely to the shores of legal compliance and happy beneficiaries. With seemingly endless potential pitfalls, understanding what to avoid is essential to minimizing risks.
At Gokal Law Group, we have successfully helped trustees navigate complex probate law while fulfilling trust terms for years. And, when required, we offer premier representation in court. Read our blog to learn common risks and pitfalls you face as a trustee.
California Trust Law: What Are Potential Risks & Pitfalls for Trustees?
As a trustee, several hazards pave the way for successful administration. From insufficient funding to having the right team, here is what to be aware of when you are a trustee to ensure smooth sailing during administration.
“There are many nuances within the trust document you must evaluate at the beginning, during, and at the close of administration. These are broad brush strokes, and the world of Trusts can feel like a situation described perfectly by the adage, ‘We plan, the universe laughs.’ Tax laws, investment strategies, and government policies all shift, requiring a trustee to navigate minefields. The road map and California trust law are created by the trust instrument, but there are times when logic and fiduciary obligations conflict with those rules, despite its best intentions. It’s important to approach the situation with a 30,000-foot view.” – Alison Gokal, Orange County Trust Litigation Lawyer, Gokal Law Group
Is a trust sufficiently funded to allow for proper administration? Are there enough funds within the trust to enable proper and complete administration in your role as trustee?
Per California trust law, administering a trust requires paying off all taxes and debts with assets and funds held in the trust. A grantor failing to fund the trust and re-title assets into the name of the trust is a common reason for trusts and trustees to fail.
Several Waterfalling Trusts
Another common risk for trustees occurs when several trusts serve as a waterfall into each other. People use this estate planning strategy to transfer wealth between generations.
When the trust you serve as the trustee for is dependent upon the trust above, this can put a considerable onus on the trustee because each trust must be administered closely following trust terms and for the benefit of each beneficiary.
One potential pitfall relates to funding. Did the creator fund the different trusts sufficiently to operate? If not, the trustee will need to petition the court for instruction on managing the inability to fund all trusts.
“It is essential to analyze funding and trust terms closely for each trust. As trustee, you must follow the rules laid out in the trust, analyze the best interest of the beneficiary, and ensure the legal standards for the newly created sub-trust jurisdiction are met, which is complicated, to say the least.” – Alison Gokal, Orange County Trust Litigation Lawyer, Gokal Law Group
Conflicts With Beneficiaries
As a trustee, you are afforded considerable discretion over the trust by California trust law. However, this often creates pushback when a beneficiary seeks additional funds.
If there is a conflict, the first battle is typically the beneficiary attacking a trustee’s discretionary rights and whether or not they are in the best interests of the beneficiary and trust. This can result in costly litigation and legal repercussions.
For example, imagine a beneficiary wants more money for a bigger house which the trustee does not believe is needed or warranted. Will the beneficiary be frustrated enough to claim that the trustee is in breach of their fiduciary obligations to act in the best interest of the beneficiary and under the terms outlined in the agreement? This breach is a severe offense.
The more power you receive, the greater your ability and trust the court puts into your hands. But at the same time, it also creates room for frustration and conflict, even if the trustee is doing everything perfectly.
Also, consider that as a trustee, there is a tremendous amount of administration involved. Carefully analyze the trust to determine if there are enough funds in place to retain trusted advisors in the locations of the beneficiaries to ensure you distribute funds as needed.
The discretion you receive means you must also account for the health, education, support, and maintenance of the beneficiary, and this requires taking the beneficiary’s financial resources outside of the trust into consideration.
These conditions create a world of possibilities in which the trustee and beneficiary don’t see eye to eye and, unfortunately, the potential for litigation.
Jurisdiction is also key to consider. There are requirements under the trust to comply with the statutes of the state it was created, but where are the trust assets? And where is the trust being administered?
A trust is an entity like a corporation, where the physical location determines legal and tax requirements. The location of administration only occurs after administration starts, so you must consider this.
The beneficiary age can also pose additional hurdles for trustees. If the beneficiary is under 25 years old, as the trustee, you may need to seek to obtain an appropriate party to hold the funds if a parent is not available or a legal guardian is not in existence yet.
While this may not necessarily be an issue presently, it could very well be one in the future, and you should always give it careful consideration.
Having the Right Team
Assembling the right team can pose additional pitfalls and risks for trustees. Trustees should retain a team that includes:
- A trust administration attorney for each jurisdiction at issue, place of administration, and location of beneficiaries.
- A CPA for each jurisdiction.
- An international tax lawyer if beneficiaries have residency outside of the location of administration.
- A financial planner or investment advisor since fiduciary duty includes making prudent investments to make assets profitable to the best of the trustee’s ability, but always putting the beneficiary first.
As a trustee, you can pay for these professionals using trust funds. Risks and pitfalls arise if you fail to hire a qualified professional or if you hire a professional that charges above market rates, which is a breach of fiduciary duty.
Do You Need Help Navigating the Constantly Changing California Trust Law? We Can Help!
If you are a trustee, there is a slim margin for error when balancing probate law, trust terms and beneficiary needs. Fortunately, a premier attorney can help you perform this balancing act and avoid costly litigation and legal consequences.
Visit our Contact Us page to schedule a free consultation for expert guidance from trust administration attorneys and, if needed, a fierce advocate in the courtroom.