If you are like most people entering the latter years of your life, you feel a genuine responsibility to not only look after your loved ones but ensure your assets and possessions remain secure as well. Most likely, you have discovered the value of estate planning—creating a plan to manage your assets if you pass away or become incapacitated—as a way to help achieve both goals.
Certainly, you will remain unable to determine who will control your assets after your death or incapacitation without a proper estate planning strategy. Worse, the task of settling your affairs could have a financially—and emotionally—significant impact on your loved ones if left unplanned. If you have taken steps to avoid this unfortunate situation, you have likely encountered a term describing one of the most common strategies utilized to structure the distribution of assets today—the trust.
As trusts become increasingly commonplace, so, too, does litigation surrounding them. What, exactly, is a trust? What is trust litigation? How could increasing your knowledge about the two affect the way you plan your estate and the way your descendants access your assets in the future? Huber Law Group is pleased to present this guide to trust litigation, designed to aid Sacramento residents in learning more about trusts and the legal considerations that arise during trust litigation. For additional questions and concerns regarding estate litigation or your unique needs, contact our offices today.
What Is a Trust?
First, it is important to define the center focus of trust litigation—the trust itself. As an estate planning method, a trust exists as a type of fiduciary relationship where one party (a trustor) establishes a legal title to various types of assets or property and gives its control over to another party (a trustee). The trustee’s control over this property or assets is solely for the benefit of the trustor’s beneficiaries.
After the trustor forms the trust, the trustee holds a fiduciary duty to make all decisions related to the assets in the beneficiaries’ best interest. Commonly, many individuals who choose to form trusts do so to provide this safeguard, protecting their assets for the benefit of others who stand to receive them at a later date. Drafting a will to outline the intended recipients of an estate’s assets often comes with establishing one or more trusts—either before or after the trustor’s death—to aid in this complicated endeavor.
Revocable Versus Irrevocable Trusts
Most trusts can be classified as either revocable or irrevocable trusts. Living trusts are revocable—meaning that the trustor can modify their terms at any time before death or incapacitation. These changes are often necessary to correct errors with the original trust or adjust to other circumstances as they fluctuate. As financial circumstances, relationships with beneficiaries, and other situations change, the trustor can add amendments to the trust, modify the assets included in the trust, remove assets, or even revoke the trust completely.
By contrast, irrevocable trusts cannot be altered before or after the trustor’s death. As noted above, certain types of irrevocable trusts are created to protect trustors and beneficiaries against estate, capital gains, and other taxes. Perhaps even more significantly, assets held within irrevocable trusts remain protected from lawsuits or debt collection actions against the trustor.
Elements of a Trust
Depending on your estate and your financial standing, one or more of the above trusts may apply to your estate planning. However, keep in mind that in the vast majority of cases, a valid trust must include five elements:
- The trustor must be legally mentally fit to create the trust and enter into the fiduciary relationship with the trustee.
- The trustor must have a present intent to complete the above.
- The trust must properly identify the property or assets in question.
- The trustor must name a trustee and either identify each beneficiary or describe how they wish to determine beneficiaries.
- The trustor must create the trust as the result of a valid purpose.
Establishing a valid trust results in creating three significant roles, one for each party (whether an individual or an entity) involved in the trust.
Roles of Each Party
The three parties involved in a trust—trustor, trustee, and beneficiaries—each hold a very specific role in a trust agreement. The trustor is the party establishing the trust relationship and entrusting the care and distribution of assets to another party. The trustee is the party agreeing to hold any assets placed in the trust for the beneficiaries. And the beneficiaries are the ultimate recipients of the assets placed in the trust. However, it is worth noting that people can hold multiple positions at once.
For example, many couples choose to create trusts where both individuals act as trustors and can be trustees and beneficiaries if the other spouse becomes incapacitated or passes away. Once the second spouse passes away or becomes incapacitated, the trustor and trustee’s roles would pass to surviving beneficiaries (often adult children) depending on the original trust’s language. Ultimately, the trust’s purpose remains the same—to allow the passing of assets to intended beneficiaries without depletion by outsiders or lengthy holdups in probate court.
Whether established as revocable or irrevocable, all trusts become irrevocable after death or incapacitation (such as the trustor’s persistent vegetative state). Once this occurs, the process of trust administration—the act of carrying out the trust’s instructions by the trustee—must begin. Depending on the trust’s instructions, the trustee may need to follow instructions to the letter or may hold some decision-making capabilities when it comes to investing or distributing the trust assets.
Regardless of the instructions, the trustee will hold several duties, including:
- Carrying out each of the instructions as outlined by the trustor
- Paying debts, taxes, and other duties owed by the trustor
- Making any investments assigned to the trustee responsibly
- Making any other decisions regarding asset distribution as outlined in the trust responsibly
- Keeping a comprehensive record of any actions while administering the trust
- Fiduciary duty to hold the interests of beneficiaries above their own, and act responsibly, honorably, and in a forthright manner
As you might expect, most trustees administer trusts to the best of their abilities and uphold each of the above duties. However, as trusts are not directly supervised by the courts (as in an analogous probate court decision), there remains an opportunity for the administration to go wrong. If a trustee breaches their fiduciary duty or otherwise acts inappropriately—or if there is a trust dispute of any kind—beneficiaries can begin trust litigation.
What Is Trust Litigation?
Put simply, trust litigation encompasses any situation where an individual or entity files a legal claim to resolve a trust dispute in court. The legal claim proceeds like a claim against an individual, except that the claim names the trust—usually the trustee—as the defendant. Trust disputes can arise from many situations, often from breaches of fiduciary duties or inappropriate acts of a trustee, as mentioned above.
While trust disputes can potentially be resolved out of court with a settlement, the settlement must be mutually agreed upon by all parties. If a settlement proves elusive, trust litigation may be the most effective solution. However, it is important to note that both parties still hold the option to settle at any point during the trust litigation process.
How Does Trust Litigation Occur?
As with any other type of estate litigation, trust litigation begins when one party (most often the beneficiary) files a petition, which initiates probate court proceedings. The responding party (most often the trustee) must then respond before both sides begin the discovery phase—the trust litigation phase, where those involved gather documents and information. Finally, the court will schedule the trial, which takes place in probate court and may take anywhere from several days to months, depending on the complexity of the dispute.
During the trial, beneficiaries often request that a trustee be removed, and the trust be taken over by a temporary trustee. The temporary trustee is then assigned fiduciary duty until the court determines whether there was a breach of fiduciary duty by the initial trustee or some other form of wrongdoing regarding the trust’s creation. In addition, most trustees request that the trust itself cover trust litigation costs during the proceedings. However, if the trustee is found to be in breach of fiduciary duty at the end of litigation, the court will likely insist that the trustee repay the trust for any litigation fees.
Common Trust Disputes
There are several reasons an individual may bring a trust litigation legal claim against a trust, many involving some sort of mismanagement by the trustee. However, other trust disputes—and the eventual trust litigation—can arise from doubts regarding the validity of the trust in the first place. Here, we have listed several common sources of trust disputes:
- Opportunistic trustees. In some cases, a trustee who is also a beneficiary (such as a surviving spouse or adult child) or another trustee believes they may have assets to gain by acting as a trustee takes advantage of their position. In more obvious cases, they may use the trustee position to unfairly assign themselves an outsized portion of assets in the trust. In general, however, opportunistic trustees use their position in the power of the estate to gain an advantage to the detriment of other beneficiaries.
- Coercive care providers, family, and friends. Sometimes, care providers, family members, friends, or trustees make a concerted effort to influence the decisions of the trustor in their favor—a form of elder financial abuse. Often, this behavior occurs during the creation of the trust but can also result in amendments and changes made to the trust before the trustor’s death. If this behavior is found to be coercive—denying the trustor the opportunity to create the terms of the trust under their own free will—and benefits the individuals in the question beyond what the court may consider normal, trust disputes may arise.
- Ineffective trustees. In some cases, trustees find themselves unaware of the requirements placed upon them due to fiduciary duty or ill-informed regarding the actions they may or may not take. Courts may not choose to penalize trustees acting in good faith. However, when this ignorance takes the form of negligence or results in a conflict of interest, the court may remove the trustee.
- Other breaches of fiduciary duty. In general, trustees are legally required to adhere to the instructions within a trust. If at any point, the trustee fails to carry out these instructions or otherwise breaches their duty to act in the best interests of all beneficiaries, trust litigation may ensue.
- The trustor lacked legal authority. In some cases, the trustor may have lacked the authority to create the trust in the first place. For example, the trustor may not have had legal control over the assets in question or may not have been of legally sound mind to make the decisions resulting in the trust. If disputers can show indisputable evidence in court that the trustor had the authority to create the trust or was unfit, the entire document may be nullified.
- Forgery. In rare cases, documents relevant to the creation or administration of the trust are outright forgeries, which will likely result in criminal charges for those involved.
When Should You Hire a Trust Litigation Attorney?
Of course, appointing a trusted professional fiduciary like an attorney or accountant to handle each step of the trust creation and its administration is your first step to a seamless trust process. The next step is ensuring frequent, honest communication between the trustee and all beneficiaries. However, if a trust dispute does arise, whether for the reasons listed above or some other purpose, hiring a trust litigation attorney is crucial.
A trust litigation attorney like the professionals at Huber Law Group can help those involved in the dispute engage in dispute resolution, enter into negotiations, and perhaps even reach a settlement before litigation in court is necessary—reducing costs and achieving quicker resolution. Should litigation proceed, skilled representation is essential to ensure relief is available for any individuals wronged by a trustee. For more information regarding trust litigation or to request a free consultation, call (916) 603-2515 or contact the offices of Huber Law Group, APC online.