University of California Continuing Education of the Bar
Estate Planning & California Probate Reporter
Beware: All Fiduciary Law Is Not Created Equal
NOËL M. LAWRENCE & JAMES A. BARRINGER
Laws pertaining to decedents’ estates are similar in many ways to those pertaining to inter vivos and testamentary trusts. Personal representatives and trustees are both charged with the collection, management, and distribution of property. Each is a fiduciary having certain duties of care and loyalty, and each must be ready to account for the management of the assets under his or her control. Nevertheless, the laws applicable to trusts, in a given situation, can differ greatly from the laws applicable to estates in a comparable or identical situation. More often, these differences are accidents of statutory evolution rather than the result of deliberate legislative action.
Certain of these differences in the law are significant and can greatly influence the course and outcome of litigation to which an estate, a trust, or the beneficiaries of either might be a party. A particular difference can even determine whether or not litigation is pursued at all. Accordingly, it is usually a mistake, when handling estate litigation, to assume that the rules governing personal representatives and estate beneficiaries resemble those that apply to trustees and trust beneficiaries, and vice versa. This article discusses some of the more significant differences.
Access to Information
A trust beneficiary’s right to information about the trust and its management differs significantly from an estate beneficiary’s right to similar information concerning the estate. In some rather limited ways, estate beneficiaries have greater access to information than do trust beneficiaries, in particular during the period immediately after the decedent’s death. In general, however, trust beneficiaries have broader rights to information than do estate beneficiaries, especially if there is no question about their status as trust beneficiaries and they are beneficiaries of an on-going trust (as opposed to mere recipients of one-time gifts).
Notice of Death
The advantages of an estate plan built around a living trust include the ease with which the deceased settlor’s affairs can be wound up and the ability to distribute the settlor’s assets privately, without court supervision and with little information becoming a matter of public record. These advantages are in the nature of mixed blessings, however, because doing things easily and privately can mean doing them with stealth and secrecy. Estate practice differs from trust practice from the outset in that administration of a deceased settlor’s trust can begin and continue without notice of death to the decedent’s heirs and without notice to his or her creditors.
In short, a living trust can be administered and distributed without the knowledge of the settlor’s relatives, provided they are not named as beneficiaries under the trust instrument. By contrast, at the outset of a probate administration, all known and “reasonably ascertainable” persons interested in the estate are constitutionally and statutorily entitled to receive actual notice of the proceedings. Tulsa Prof. Collection Servo v Pope (1988) 485 US 478, 490,99 L Ed 2d 565, 578, 108 S Ct 1340; Prob C §§8003(b), 8110, 8120, 9050-9052. For example, suppose you are the sole heir at law to your great uncle’s estate, as his only living relative. You had a nice relationship with him but, aside from exchanging Christmas cards, you corresponded with him only at his birthday in the summer. For many years, you were the sole beneficiary of his will. In the absence of a will, you stood to inherit his estate because you are his sole heir at law.
Without your knowledge, your great uncle’s housekeeper procures a living trust. When your great uncle later dies shortly after Christmas, you know nothing about it. By the time you call him on his birthday and learn that he has died, six months have gone by. The housekeeper has distributed all of the trust assets to herself, converted them to cash, and moved to South America. You received no notice of the death. If there had been no living trust, you would have received notice of death as an heir at law or as beneficiary under a will before any action was taken to dispose of the decedent’s assets.
Information About Beneficial Interests
A person who is uncertain whether he or she is a beneficiary of a trust or uncertain about the terms of a trust is at a decided disadvantage. It is often impossible to obtain a copy of the trust document from its custodian, short of commencing litigation and engaging in discovery. By contrast, in the decedents’ estates arena, wills are a matter of public record. Anyone can visit the clerk’s office (and, indeed, even bring along an expert such as a handwriting expert) and review the instrument before instituting litigation.
Consider the plight of your new client, whose father has died and whose brother claims that he is named as successor trustee of their father’s living trust. Your client’s brother further states that your client is not entitled to anything under the trust. Your client asks her brother for a copy of the living trust in order to verify her brother’s assertions. The brother refuses to provide it, stating that his attorney told him that only persons named as beneficiaries in the trust instrument are entitled to information about the trust. What should you advise the client to do? Should the client institute a lawsuit so that a copy of the trust could be obtained through discovery?
“You are flying blind, drafting a complaint in total or near total ignorance. “
There are serious problems inherent in commencing litigation without any knowledge of the terms of the instrument. You are flying blind, drafting a complaint in total or near total ignorance. Very possibly when you file the complaint you would not have probable cause (because you have no information yet); the risk of exposing yourself and your client to liability for malicious prosecution is very real. A person who is interested in a decedent’s will and probate estate would not face the threshold question of entitlement. He or she could simply review the provisions of the will, the information regarding the estimated value of the estate (contained in the petition for probate). And, in the case of a postprobate contest, any inventories in the court’s file.
Consider the same facts as in the preceding example, except your client’s brother says that all your client receives is $25,000 under the living trust. Your client is not sure how much money her father had (and, unlike an estate beneficiary, has no easy way to find out). On behalf of your client you request a copy of the trust and a statement of the assets and liabilities of the trust in order to advise your client about her beneficial interest. In reply the brother’s attorney provides only a narrowly redacted version of the trust showing your client’s $25,000 gift. This copy is accompanied by a learned letter citing Prob C §16061, which provides 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 that describe or affect the beneficiary’s interest. (Emphasis added.)
The brother’s counsel takes the position that only the redacted terms of the trust describing your client’s gift need be supplied. The attorney further states that, because your client receives only a $25,000 “specific gift” under the trust, general information concerning the trust’s assets and liabilities is not relevant to your client’s interest and will not be provided. Should you meekly submit to these contentions, or file a petition under Prob C §17200(b )(7) to compel further disclosure of the trust’s terms and its assets and liabilities? Dealing with an evasive trustee can be frustrating; before filing such a petition, it would be wise to request a copy of any “no contest” provision of the trust and, if necessary, to petition under Prob C §21320 to avoid triggering such a clause.
Information About Estate or Trust Management
In some situations, a trust beneficiary’s rights to request information under Prob C §16061 are far greater than an estate beneficiary’s rights to similar information. The trust beneficiary is entitled to petition the court to compel the trustee to provide the requested information or accounting if the trustee has failed to do so within 60 days after the beneficiary’s request and more than six months have expired since the last report or account. Prob C §17200(b)(7). An estate beneficiary has no similar right to serve a 60-day demand on the personal representative to provide information. The estate beneficiary’s right to information about the administration of the estate is restricted by the Probate Code rules pertaining to status reports and accounts. Prob C §§ 10900-11052.
Unlike trust beneficiaries, who are entitled to any kind of information they want (so long as the request is “reasonable”), estate beneficiaries must be satisfied with what is disclosed in a status report or an accounting. Moreover, an estate beneficiary must wait at least 12 months, and often 18 months, for the status report. If no federal estate tax return is required, the personal representative is supposed to petition for final distribution within one year from the date of issuance of letters. Prob C §12200(a). If a federal estate tax return is required, the petition for final distribution must be filed within 18 months from the date letters are issued. Prob C §12200(b). Only after the applicable period of time has elapsed and the deadline has not been met must the personal representative file the verified report of the status of administration showing the condition of the estate, the reasons why it cannot be distributed and closed, and an estimate of the time needed to close the estate administration. Prob C §12201(a).
If the personal representative fails to petition for final distribution or file a status report within the required time limit, the court may, on petition of an interested person or on its own motion, require the personal representative to appear and show the condition of the estate and why it cannot be closed. Prob C §12202(a). At the hearing, the court can either order the estate administration to continue or order the personal representative to petition for final distribution. Probe §12202(b).
In sharp contrast to the usual protection afforded a client by the attorney-client privilege, a trustee can be compelled to disclose to beneficiaries any legal advice the trustee receives concerning the administration of the trust. Strauss v Superior Court (1950) 36 C2d 396, 401, 224 P2d 726; Riggs Nat’l Bank v Zimmer (Del 1976) 355 A2d 709; Restatement (Second) of Trusts §173; see dicta in Lasky, Haas, Cohler & Munter v Superior Court (1985) 172 CA3d 264, 280, 218 CR 205. This rule apparently does not, however, extend to legal advice obtained at the trustee’s expense that concerns a dispute with a beneficiary. Restatement (Second) of Trusts §173, Comment b.
Further, the holding in Lasky, is that internal, uncommunicated attorney work product is privileged against disclosure. It is not clear to what degree these special rules apply to decedents’ estates. The rulings in Strauss and Riggs, requiring disclosure in the trust context, were based on the trustee’s duty to provide beneficiaries with information on reasonable request, which duty is codified in Prob C §16061. As mentioned above, however, the disclosure duties of estate representatives are not as broad as the trustee’s disclosure duties, and it is conceivable that the attorney-client privilege could be given stronger application in the estate context.
Investments are one of the areas in which the laws applicable to trustees and personal representatives differ most significantly. The fiduciary duty of care imposed on trustees with respect to investments is considerably more stringent than that imposed on estate representatives, and counsel should consider this difference before taking an estate representative to task for portfolio losses. The trustee has a duty to invest and to exercise care in investments. The trustee must make the trust assets productive and must diversify the trust portfolio to protect the interests of both the income and remainder beneficiaries. It is much less clear whether an estate representative has an affirmative obligation to make prudent investments for the estate or to divest the estate of imprudent investments, and the statutory and case law guidance is minimal.
“The fiduciary duty of care imposed on trustees with respect to investments is considerably more stringent than that imposed on estate representatives. ” The personal representative has a duty to use “ordinary care and diligence” in managing and controlling the estate. Prob C §9600. The personal representative must exercise, or refrain from exercising, a power (including the power to invest) to the extent required by “ordinary care and diligence.” Prob C §9600(b). In either event, the personal representative is held to “that degree of prudence and diligence which a [person] of ordinary judgment would be expected to bestow upon his [or her] own affairs of a like nature.” Estate of Beach (1975) 15 C3d 623, 631, 125 CR 570. Professional personal representatives, such as banks and trust companies, are held to a somewhat higher standard of care, and must apply “the skill and knowledge ordinarily possessed by such professional fiduciaries.” 15 C3d at 631. Most significantly, estate representatives are not subject to the “prudent investor rule.”
Moreover, even if the same person serves first as personal representative and then as trustee under a testamentary trust, the prudent investor rule does not apply until the estate is closed and the property is distributed to the trust. 15 C3d at 638. A lay personal representative has a duty to invest and reinvest estate property only if the exercise of “ordinary care and diligence” would require a “reasonable person” in like circumstances to invest or reinvest. Prob C §9600(b). The personal representative is not liable for any decreases in value of estate assets attributable to his or her “good faith” acts or omissions to act under the circumstances. See Prob C §9601(b); Estate of Beach (1975) 15 C3d 623, 639, 125 CR 570.
By contrast, a trustee’s good faith is no excuse for otherwise imprudent investments. Trustees are held to the highest standard of care under the detailed provisions of the recently enacted Uniform Prudent Investor Act (Prob C §§16045-16054). Under that statute, trustees are required to “invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust . . . exercis[ing] reasonable care, skill, and caution.” Prob C §16047(a). A trustee’s investment and management decisions “must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust.” Prob C §16047(b).
In investing, the trustee should consider (1) the general Economic conditions; (2) the possible effect of inflation or deflation; (3) tax consequences; (4) the role that each investment plays within the overall portfolio; (5) the expected total return from income and capital appreciation; (6) other resources of the beneficiaries known to the trustee; (7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and (8) “[a]n asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.” Prob C §16047(c). The trustee must “make a reasonable effort to ascertain facts relevant to the investment and management of trust assets.” Prob C §16047(d). The trustee also has a “duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.” Prob C §16048.
If estate representatives and trustees are both fiduciaries, why should trustees be held to a much higher and more detailed investment duty? If the rationale is that estate representatives serve for only a limited and (usually) shorter period of time than trustees, it is a dubious one indeed, because the estates usually remain open for at least two years, especially estates with extensive investments. It is also said that an estate representative’s management of estate assets is only “incidental” to other duties of probate administration such as presenting the will for probate, marshaling assets, paying creditors and taxes, and distributing assets. This does not explain why estate representatives should not be subject to the prudent investor rule, as long as allowances are made for the limited duration of the estate administration and the estate’s needs for liquidity and comparatively low volatility.
Standards for Removal
The statutory grounds for removal of estate representatives differ from the grounds for removal of trustees without any apparent rational basis:
Removal of Estate Representatives
In the estates area, there is a basic removal statute and there are some specific removal statutes. The basic removal statute is Prob C §8502, which provides that a personal representative may be removed from office for any of the following causes: (a) The personal representative has wasted, embezzled, mismanaged, or committed a fraud on the estate, or is about to do so. (b) The personal representative is incapable of properly executing the duties of the office, or is otherwise not qualified for appointment as personal representative. (c) The personal representative has wrongfully neglected the estate, or has long neglected to perform any act as personal representative. (d) Removal is otherwise necessary to protect the estate or interested persons. (e) Any other cause provided by statute.
There are seven additional “other causes” for removal listed in other statutes: 1. Failure to file an inventory within the prescribed time (Prob C §8804(b). Case law provides that there must be a loss to the estate resulting from the failure to inventory in order to justify removal. See, e.g., Estate of Hammer (1993) 19 CA4th 1621, 1636, 24 CR2d 190, reported at 15 CEB Est Plan R 79 (Dec. 1993). 2. Failure to give a bond ordered by the court (Prob C §8480(c)). 3. Failure to render an account (Prob C §§1l051(b), 11052). 4. Being found in contempt for disobeying a court order (Prob C §8505(a)). 5. Failure of a nonresident personal representative to comply with the statement of permanent address requirements (Prob C §8577(a)). 6. Taking a proposed action without complying with notice requirements (Prob C §§10592(b), 10589). 7. Failure to comply with an order regarding final distribution (Prob C §12204).
A personal representative may also be removed for conflicts of interest, based on Prob C §8502(d) (“necessary for protection of the estate or interested persons”). Comment to Prob C §8502; see Estate of Hammer (1993) 19 CA4th 1621, 1641,24 CR2d 190; Luckey v Superior Court (1930) 209 C 360, 366,287 P 450. The conflict must be one that presently threatens the security of the estate or compromises the personal representative’s fiduciary obligations. See Maltaman v State Bar (1987) 43 C3d 924,952,239 CR 687; Estate of Guzzetta (1950) 97 CA2d 169, 217 P2d 460. A mere potential conflict of interest is not enough for removal. Estate of Wemyss (1975) 49 CA3d 53,61, 122 CR 134.
Removal of Trustees
The statutory grounds for removal of a trustee are listed in Prob C §15642(b): (1) Where the trustee has committed a breach of the trust. (2) Where the trustee is insolvent or otherwise unfit to administer the trust. (3) Where hostility or lack of cooperation among cotrustees impairs the administration of the trust. (4) Where the trustee fails or declines to act. (5) Where the trustee’s compensation is excessive under the circumstances. (6) Where the sale trustee is [a disqualified person under Prob C §21350(a), e.g., an instrument drafter]. (7) For other good cause.
The insolvency ground for removal of a trustee (Prob C §15642(b)(2) is not specifically available in the decedent’s estate context. It might be possible, however, if an estate representative filed for bankruptcy, to petition for his or her removal on the grounds that it was “necessary for protection of the estate” or that he or she was “incapable of executing the office” under Prob C §8502. An argument to the contrary would be that the legislature, by specifically including insolvency in the trustee removal statute and not in the estate representative removal statute, has expressed its intent not to include it by implication in the estates area.
Similarly, although hostility or lack of cooperation among cotrustees is a specific statutory ground for removal under Prob C §15642(b)(3), there are no parallel provisions in the estate context. The argument for removal of warring estate representatives would be that they are “incapable of properly executing the duties of the office” under Prob C §8502(b) or that removal is “necessary for protection of the estate or interested persons” under Prob C §8502(c).
It would be conceptually neater if the Probate Code rules regarding estates and trusts were the same where they ought logically to be the same, and differed only where it was sensible that they should be different. Often the rules are the same or substantially similar; but just as often they are not. The only safe way to practice in this area is to return to the statute with each new matter and never assume anything.
JAMES A. BARRINGER received his B.A. from the University of California (Santa Barbara) and his J.D. from Hastings College of the Law.
NOËL M. LAWRENCE received her B.A. from the University of California (Berkeley) and her J.D. from the University of San Francisco. She is Co-Chair of the Litigation Subcommittee of the Probate Section of the Bar Association of San Francisco.
The authors are both Certified Specialists in Estate Planning, Trust, and Probate Law and members of the firm of Barringer & Lawrence, San Francisco. Their practice emphasizes estate and trust-related litigation.