Course 6 — Lesson 3 The Talk for California Failed Trust Distributions

[Music] Now let's listen to Stuart and Keith discuss the options and their recommended approach to this difficult problem hi this is Keith and Stuart and we're here to round house the issues going on with Tom and Brian and obviously there's been a lot of problems with Tom's administration of this particular trust and Brian's none too happy but he's a little confused as to what he should do and what his rights are and before we really get into the substance of the issue the one thing that pops into my mind when I read through this hypothetical is why would Tom do this why would Tom take the actions that he's taking trying to keep everything in the trust he wants to maintain the status quo he wants to just keep renting out the apartments and getting the money and he only wants to give Brian a thousand a month because he knows that Brian is a is not good with money he's gonna waste all of his money so why would somebody even want to do that that's a good question and first of all this is obviously one of the cases many cases and these hypotheticals that we've actually handled many times and I remember this specific case here you had a trustee who was a brother Tom brother with Brian cares about Brian Brian has made decisions in his life that Tom disagrees with and I think that probably many people in society would say that Brian is probably not a responsible person he doesn't control his alcohol consumption he goes to casinos he enjoys life he spends his money on his friends and family as he wants to he doesn't plan on saving and tom is thinking that is bad decision-making tom's thinking I've been responsible my whole life our father was responsible his whole life so I'm not gonna allow you to destroy your life with this money so really if you think about it Tom's not a bad person per se he's not doing anything that most people would say is immoral he's actually trying to help his brother who is a little bit of a spendthrift and probably doesn't make very many wise decisions so I don't think we look at Tom here and say he's a terrible awful person but I think this is where as you've said many times you wish that individual trustees we take some time to learn the duties that they have the rules that are applied against them as trustees in California and I think if Tom fully appreciated and understood those rules he would say well I've got to give this money over to Brian and Brian will decide what Brian wants to do and he's entitled to do that so Tom's being a little paternalistic here and does Tom have the right to be paternalistic I mean Tom's the trustee he's in control of the trust does he have the right to be eternal eternal istic with Brian in this particular trust scenario legally speaking no he has no right to be paternalistic as a brother he can use all his arts of persuasion that he can to help his brother out but as a trustee goes the trust terms say to make a distribution it doesn't say to leave the assets in apartment buildings and let Tom continue to run them collect a paycheck and make small distributions to Brian when Tom thinks that that is appropriate that's not what the settlor intended and if you think about most of these trusts if you always go back to what did the set lor intend that's king or queen in the analysis of a trust document and whatever that set lor intended that's what the courts gonna hone in on and here Brian was supposed to get his share of the trust assets within a reasonably short period of time after his father passed it's really interesting too because in this example Brian is supposed to get an outright distribution and that's why legally speaking Tom can't be paternalistic right but Frank could have arranged the trust in such a way where Brian share was held in a trust for Brian and a trustee let's say it was Tom would then have the right to make distributions based on whatever the distribution requirements of Brian's trust would be and so in other words Frank could have done something if he chose to do so to help protect Brian and Brian's money but he didn't instead what the Trust says is give it to Brian outright and you have to assume that Frank knew Brian Frank knew what Brian was like Frank knew that Brian had you know liked alcohol and gambling and and was a spendthrift and yet he wanted to give the money out to Brian anyway and so the law has to us that Frank wanted Brian to have it and once Brian has it as his money he can do whatever he likes people are allowed to do those things that's right and I think the one point I'd make is let's change this facts the fact justice you suggested and that is let's make this a discretionary trust where we have Tom the trustee who has the ability to make distributions to Bryant as he sees fit and also based on an ascertainable standard the ascertainable standard being Brian's health maintenance welfare those kind of things doctor visits those will be paid for medications and there we do have this paternalistic relationship you're talking about is Brian going to be in trouble if he comes to see you and it's a completely discretionary trust yeah I mean it's gonna be a much harder for Brian to get his money out now there's still standards there's still distribution standards where Brian can't be given nothing but man it's much harder whereas an outright distribution Brian's got way more rights because he's entitled to 50 percent give it to me right now I'm entitled to it I mean there's a period of reasonable trust administration but other than that Brian gets it all and that's kind of the interesting part of these cases is that the type of rights the beneficiary has makes a big difference on what we can do as lawyers to help those people and so the first thing that comes to my mind for Brian on this type of case is get the assets out of the trust right I mean that's got to be job number one and if they have to be sold or liquidated whatever you know that's what's gonna have to happen so how do you help Brian what's the number one way to help Brian in this situation well I think you do I always have a one letter rule I know you and I agree on that we send one letter and that's it and when that letter isn't responded to in a very short period of time we're gonna file a petition with the probate court the petition for accounting is good but I think ultimately I want to tell the court look it's been two years three years since dad died this was supposed to be what we call it blow through trust the idea that it be administered in a reasonably short period of time here if there was a 706 and a state tax return that had to be done you might want to wait about 18 months or so but you could make some small preliminary distributions along the way well but let's say you didn't 18 months through you have a right to a distribution once that IRS clearance letter comes through you you there's no reason the trustee can continue to hang on to all of those assets so I'd be asking a court immediately to rule on that and that's where a little bit of luring comes in Laureen is an art it's not a science every lawyer will give you a different opinion just call them up and ask three lawyers the same hypothetical and you're gonna get a different opinion but one thing we've done over the last few years Keith that I like is even though we've had a right to bring multiple causes of action for such as removal accounting and for a trust distribution we might just file a petition for trust distribution in and of itself by itself to start the case off because the court can make that decision right there at the bench in many cases if you throw in trustee removal and accounting and trust distribution well now you got this big giant lawsuit the court doesn't quite know what to do and the courts gonna put it over and let you do discovery and so then there's no distribution stuff that's kind of the interesting thing about probate court is you can fire multiple petitions so you can start with one petition distribute the assets and then a second petition give us an accounting and you know let's go for surcharge if we have to but I think getting the money out of the trust is job number one and if we have an order from the court ordering Tom to make a distribution well now Tom can ignore Brian right because now you're under court order if you don't do it we're gonna go back in and ask for contempt sanctions and the courts going to give it because courts do not appreciate when trustees neglect their orders now what about this issue that and we get this quite a bit Brian is concerned about taking any action in court because Tom has told them that if you take any action questioning what I'm doing you're gonna be disinherited under the no contest clause yeah there's a lot of misunderstandings about no contest clauses in California and that's more than we can talk about right now in this Roundtable but I will say that you're never gonna trigger a no-contest clause for challenging the actions the administration of a trustee it's it's against social policy and many trustees used as they read the no contest clause and they use that as a as a procedural two-by-four against the beneficiaries and beneficiaries it scares them to think you could never challenge this person in court of course you can challenge a trustees at as the courts want you to be able to challenge the trustees actions because you want to be make sure that the set lures intent is followed if if the trustee was right here that you could lose your inheritance if you ever questioned anything they did then they could take all the money for themselves and you could never challenge it right so you know it's it's it's one of those things that you're darned if you do you're darned if you don't but but the trustee is wrong that's not how this works the one thing I wanted to point out was it's interesting because in this case this actual case that we had and obviously these are fictional names but in this case tom was so worried that Brian was gonna go out and blow the inheritance right and in reality what happened in this case it did Brian go out and blow the inheritor no no actually I mean in arc and keep in mind we always changed the names to protect the confidentiality of our clients but I can tell you that in our experience that doesn't happen because yes Brian we probably went out and had a good time but there was plenty left over because I'll tell you at the end of the day Brian's not an idiot Brian knows that this is all he's gonna have to live on for the rest of his life and he doesn't he's old enough you know he's in his 60s let's say doesn't want to work wants to retire as most people in their 60s want to do and should do and and and they kind of take care of themselves so a lot of times in these cases either Tom's misperception or Mis misconception of Brian causes this situation whereas Brian's not as irresponsible with money as Tom thinks he is or maybe Brian's changed and coming into a lot of money has changed him I remember when Brian first he bought a what do they call those mobile homes those big giant mobile homes that you drive around are Vig yeah you know so Brian buys this beautiful beautiful RV and he comes and he comes to our parking lot and we comes out and he shows us through it he is so excited the gleam in his eye he's never had the ability to do that he's never had the he's never had the respect of walking into a dealership and being treated well and I know he put a lot of miles on that I don't know if he still has it or not but I know he enjoyed it and he drove it a lot I think it opened up a lot of opportunities for him such as health care he didn't have good access to health care prior to this now he has access to good health care so while Tom again was not an evil person Tom had concerns based upon some evidence that he thought he was seeing Brian actually ended up being a very in my mind a very responsible person with the money he ultimately got well there is another aspect to this which is Tom didn't want to sell the apartments he kind of liked the status quo and ultimately in this case Tom refinanced the apartment so that he could pay out Brian and keep the properties and so I mean I agree that Tom's not necessarily an evil person but Tom also has his own self interests in this which is I like owning these properties I don't want to sell them because I like the income they produce and I don't particularly want to refinance them because then I have to pay a mortgage for that and so there was some self interest I think on behalf of the trustee and I think there there always is in these cases but I think there also was a lot of paternalism involved - and misconceptions of what Brian was capable of and maybe Brian hadn't been given that responsibility in the past but once he had that responsibility he actually handled it fairly well. [Music] [Applause] [Music]