Under Probate Code section 16004.5, a Trustee cannot require a beneficiary to sign a release in exchange for making a distribution of Trust assets, provided that the Trust distribution is required to be made as stated in the Trust document. For example, if you are entitled to an outright distribution of your share of the Trust estate, then a Trustee cannot force you to sign a release before receiving your distribution. That sounds fair, but there are a few exceptions to the rule.
First, this rule does not apply to a voluntarily release or discharge of liability. In other words, the trustee can ask you to sign a release, and you can voluntarily agree to do so. The release is valid so long as the Trustee does not threaten to withhold your Trust distribution until you sign the release.
Second, the Trustee has the right to withhold a reasonable reserve of Trust assets to pay for anticipated Trust expenses, including taxes, debts, trustee and accounting fees, and other costs of administration. A reasonable reserve will vary depending on the size of the Trust estate and the anticipated expenses. In most cases, however, the Trustee should be able to distribute most Trust assets to you even while retaining a reasonable reserve. A reasonable reserve should never be your entire Trust distribution (unless the Trust is facing a major expense or liability).
Third, a Trustee may require you to indemnify them against a claim by a third-party that may reasonably arise as a result of the distribution. For example, a Trustee can distribute funds to you before the Trust tax returns are finalized, but then ask you for an indemnification in the event the Trustee is sued by the IRS or FTB. An indemnification means that you agree to pay for all costs and expenses incurred by the Trustee and cover any tax liability that may arise.
Fourth, a Trustee is allowed to withhold any part of a Trust distribution that is in dispute. If there is a Trust contest lawsuit, or some other lawsuit that puts the Trust assets at risk of being paid to someone else, then the Trustee has the right to retain the disputed property until all court action is finalized.
Fifth, the Trustee may retain enough Trust assets to seek court approval of an accounting of trust activities. That means the Trustee can hire an accountant to prepare a Trust accounting, and then a lawyer to prepare an accounting report petition and file it with the court. In other words, the Trustee cannot hold your money pending your signature on a release, but the Trustee can spend your money to seek court approval of a Trust accounting.
The fifth exception may be a bit hard to believe for many beneficiaries. And I am not certain there is a good explanation for it. One the one hand, if you have a large Trust estate, then the costs of a court-approved accounting is probably small compared to the amount of your Trust distribution. If the accounting costs $20,000 (between accounting fees, attorneys’ fees, and other court costs), and your Trust distribution is $1 million, then maybe a court-approved accounting is not so bad. But if your Trust distribution is $100,000, then a court-approved accounting becomes a more significant expense.
In any event, the law allows a Trustee to seek court approval of a Trust accounting because it allows the Trustee to finalize the Trust administration. Once a court approves a Trust accounting, then all actions reported in that accounting cannot later become the subject of a lawsuit by the beneficiaries against the Trustee. If the beneficiaries object to any activity disclosed in the Trust accounting, then they must state those objections in court prior to court approval of the accounting. If the beneficiaries fail to do so, then the beneficiaries are forever barred from suing the Trustee. That’s what gives the Trustee finality.
While it is true that a Trustee cannot force you to sign a release, a release may be the cheapest alternative to finalizing a Trust administration. Just do us one favor. Don’t sign anything until you have a full understanding of all actions your Trustee took while acting as Trustee.