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COMMON QUESTIONS AND ANSWERS REGARDING TRUSTS
- Contributed by MontereyTrust.com

Q.  I am a beneficiary of a trust and don’t understand my rights. The Trustee never returns my calls and I don’t know what is going on with the Trust.
A. One of the most important duties of a trustee is to keep the beneficiaries of the trust informed of the trust and its administration. Assuming we are discussing a trust that has become irrevocable and the trust does not contain anything to the contrary and, given some exceptions, the Probate Code at Section 16061 states that “on reasonable request by a beneficiary, the trustee shall provide the beneficiary with a report of information about the assets, liabilities, receipts, and disbursements of the trust, the acts of the trustee, and the particulars relating to the administration of the trust relevant to the beneficiary’s interest, including the terms of the trust”. At the onset of the trust administration (meaning after the Grantor passes away and the Trustee steps in), a beneficiary is be entitled to receive a copy of the trust. If you do not understand your rights after you have read the trust, it may be in your best interests to see an attorney and have them read the document and explain your rights. Thereafter, you are entitled to an accounting of trust activity at least once a year. The accounting must outline receipts of the trust, distributions, the trustee’s compensation, any agents hired by the trustee and the accounting must contain the statement that “claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim”.

The trustee must also notify you if there is a change in trustee.
Q. I stand to inherit the assets of the estate after my stepmother passes away. She receives income. How should the trust be invested so that I will in fact receive assets that are still worth something when she passes away?
A. If one beneficiary is entitled to income for their lifetime and another beneficiary stands to inherit the remainder of the estate, the trustee is obligated to invest in both income-producing assets and in assets that are expected to grow over time. Even if the income beneficiary needs more income, having an investment strategy that only produces income and does not produce any growth of principal is favoring the income beneficiary over the remainder beneficiary. This is a violation of the duty to treat beneficiaries with impartiality. Also, it may be a violation of the duty of the trustee to invest the portfolio prudently and can constitute a breach if not adhered to.
Q. The Trustee of my father’s estate bought a piece of art from the estate for what he called “fair market value”. I don’t think he paid enough. Was this right?
A. A Trustee may not deal with trust property for their own profit nor to take an action in which they may personally benefit. While the Trustee may have paid fair market value, the action is still questionable at best. A Trustee should not “buy” property from a trust they are administering. Sometimes Trustees buy property after fully disclosing the purchase to the beneficiaries and getting the beneficiaries to “sign off” on the purchase, but even this should be avoided because it is questionable on its face.
Q. My father passed away a year ago and I want to contest the trust. How do I go about filing a contest?
A. Your first step is to speak with an attorney regarding your right to contest. As outlined above, the Trustee should have sent you a notice regarding the administration within 60-days of your father’s death. The notice would have contained information regarding where the trust was being administered and how you could obtain a copy of the document. If you received this notice, it would have contained the following language:

“You may not bring an action to contest the trust more than 120 days from the date this notification by the trustee is served upon you or 60 days from the date on which a copy of the terms of the trust is mailed or personally delivered to you during that 120-day period, whichever is later.”

This means that you may be barred from bringing an action one-year later – assuming you received the notice.
Also keep in mind that the Trustee has a duty to defend the trust so if you bring an action, the trustee will hire attorneys to defend against your suit and the fees for that legal service will be paid from the trust – thereby reducing your eventual share of the estate. Finally, many trusts contain language that if a beneficiary brings suit against the trust and does not win that suit, that beneficiary will lose their right to inherit under the document.

Q. My Aunt was named Trustee, but she asked my brother to take over the administration. He is a beneficiary of the trust and he seems to be favoring his kids over me. What can I do?
A. At least two issues are at play here. First, your Aunt cannot transfer her duties as trustee unless the document gives her the right to do so (see PC. 16012). Secondly, even if your brother can rightfully step in as trustee under the terms of the trust, he has a duty to deal impartially with the beneficiaries. Point this out to your Aunt and ask that she immediately remedy the situation. If she does not, seek the services of an attorney.
Q. My parents both passed away and my sister and I will receive distribution of the trust assets when we each reach age 35 (7 and 10 years from now, respectively). The Trustee has all the investments in Treasury Bills paying 2%. I want a better return but the Trustee said it’s “too risky”. What are my options?
A. A Trustee has the duty to invest as a “prudent investor” would. This means your Trustee has an obligation to take into consideration the time horizon of the trust, in this case 7 and 10 years to distribution, and construct an appropriate investment strategy. If inflation is 3% and your Trustee is getting 2%, then paying income taxes and a trustee fee, the corpus of the trust is ostensibly declining in value and will be worth less when you receive it in 7 or 10 years. This is not appropriate. If your Trustee is unknowledgeable about investing, he or she should delegate this part of the administration to an investment manager. The Trustee still has a duty to supervise the management and he or she continues to be liable for the management so they should work with an investment manager who is experienced in “fiduciary” investment management – like a bank trust company. Taking high flyer risks like investing in .com businesses is not appropriate, but constructing a portfolio of stocks and bonds or other investments that will yield some growth over time with an acceptable level of risk is a duty of the trustee.

Notwithstanding the above, if there are other assets of the Trust that are producing growth (other assets than the Treasury Bill investments), your Trustee may not have an obligation to take on more risk. The investments of the Trust must be considered as a whole.
Q. Does the Trustee need to work with the Court in the administration of a Trust?
A. Not necessarily in fact, one of the attractions of a Trust is that it avoids Probate and the perceived delay and expense of Court involvement. However, at any time a Trustee can go to Court for instructions on how to deal with a particular issue of the trust or for clarification of their duty as trustee. Additionally, a beneficiary can ask the Court to bring the Trustee in to clarify certain actions or lack of action taken by the Trustee. This latter action should be pursued with the help of an attorney and only after the Court has read the complaint will they decide if it has merit to warrant the Trustee’s appearance in Court.
Q. The Trustee has been a complete failure in my opinion. They have not carried out their duties to the beneficiaries. What action can I take to remove them and, if I take action to remove them how can I know they won’t spend all the assets while I’m trying to get them out?
A. The Trust document itself may provide a means to remove the trustee. Short such provisions, the court on its own motion or on the petition of a co-trustee or beneficiary, can seek removal of a trustee on the following grounds:

(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 the administration of the trust.
(4) Where a trustee fails or declines to act.
(5) Where the trustee’s compensation is excessive under the circumstances.

Additionally, there are grounds for removal in some circumstances where the Trustee appointed is the attorney who drafted the trust (absent independent review of the trust) or a caregiver who worked for the Grantor prior to the Grantor’s death, and some additional “questionable” circumstances.

If you believe any of these issues exist, you can first ask the trustee to resign. If they do, the next named person or institution in the document would step in as trustee. If there is no successor trustee named in the document, a vacancy is created in the office of trustee and, barring any provision in the trust to the contrary, the adult beneficiaries of the trust can elect a trust company step in as trustee.

Q. How much tax will I have to pay on the assets I receive from my mother’s trust?
A. There are several tax implications on the transfer of wealth. The estate will pay an estate tax on the estate assets, your mother’s final income tax return will be due and an annual income tax is payable on the trust income each year it is in existence. While the assets you receive are generally tax-free to you (since the estate and income taxes have already been paid), you may have some income tax due during a year when you receive either income or principal distributions from the Trust. It is advisable to work closely with the Trustee and your accountant so income of the trust can receive the most beneficial tax treatment and also so you don’t get any nasty surprises if the trust has reported taxable income to you and you forget to claim it on your 1040.
Q. I’ve been working with the same Bank for trust services and I’m sick of the constant turnover of trust officers and the general lack of interest they display in my concerns and questions. Can I remove the current trustee and name another bank as trustee?
A. Many trust documents provide the beneficiaries the right to remove a trustee and replace that trustee. Absent such a right, unless the Trustee has committed a breach of trust, the beneficiaries cannot remove them. However, if the beneficiaries of a trust unanimously agree that the trustee is not fulfilling their needs, they can ask the trustee to resign and then, when there is a vacancy in office and absent the trust addressing this type of a vacancy, the adult beneficiaries of the trust can appoint a trust company to fill that vacancy. It’s been our experience that when asked, most trustees will step down and allow a trust company to step into the trustee position.
Q. The trust my parents set up provides special treatment of my brother, who has been and continues to be a drug user. I’m not sure exactly how the trustee is handling this – or how the trustee should handle this. Any suggestions?
A. The way the trustee handles this difficult situation is most likely spelled out in the trust document and hopefully the trustee is sticking to the finer points of such an administration. If the trust is drafted with these types of issues present, often times the trust will require that the particular beneficiary test clean prior to receiving distributions, and that the trustee provide distribution for detox or other treatment. Distributions for detox or such treatment are generally made directly to the facility rather than to the effected beneficiary for obvious reasons.
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