(“When do I get my money?”)
By: David L. Crockett, Attorney, Certified Public Accountant
UCLA Law School ’69, JD degree
UC Berkeley ’66, BS degree in Business Administration
901 Dove St., Suite 120
Newport Beach, CA 92660 Phone: 949-851-1771
WHEN IS MONEY REQUIRED TO BE DISTRIBUTED FROM A TRUST?
A trust is a legal document equivalent to a legal contract. The trust is embodied in a document typically called a “Declaration of Trust”. The declaration of trust is a set of instructions by which the Trustors (persons who formed the trust) tell the Trustees (persons who are administering the trust) what to do with the trust money and property and when to pay it out. The persons who are to receive trust money or property are called “beneficiaries”. Thus, the declaration of trust will say when money is to be distributed and who is to receive it and how much is to be paid out.
HOW DO THE BENEFICIARIES FIND OUT IF THEY ARE ENTITLED TO A TRUST DISTRIBUTION ?
First, it is the trustee’s job to read and interpret the trust and to follow the instructions in the trust and send out required distributions to the beneficiaries. Second, the trustee is required to notify the trust beneficiaries within 60 days of any change in the trusteeship or if the trust has become permanent and to provide copies of the trust to the beneficiaries if they request it. This typically happens when the trustors die and a new trustee (known as a successor trustee), takes over the trust administration. Once the beneficiaries are provided with a copy of the declaration of trust they can see what it says about when, how much, and to whom distributions are to be made.
WHAT IF THERE ARE DISAGREEMENTS?
If there are disagreements about when to pay, or who to pay or how much to pay, any interested person can file a court petition (lawsuit), to have a Judge decide these questions. Before filing any court petitions, beneficiaries write letters to the trustees to get further information and details on these matters. Beneficiaries always have the option of hiring their own lawyer to assist with demands and interpretation of the trust and to file a court petition if necessary.
“WHEN TO PAY” IS OFTEN VAGUE SO THEN WHAT?
The typical declaration of trust does not give specific dates or time deadlines to pay the beneficiaries. In that situation, it is up to the trustee to decide when to pay and the trustee just has to act reasonably under the circumstances. Trusts and trustees in California are governed by the California Probate Code and court cases decided which interpret the probate code. Trustees are “fiduciaries” under the law which means that they are held to high standards of honesty and fidelity and cannot engage in self-dealing. The law gives trustees broad latitude in administering trusts but the trustee’s activities can be questioned by beneficiaries if the trustee is taking an unreasonable position about “when to pay”. If a trustee is holding back money and not paying the beneficiaries then the trustee needs to have documented and businesslike reasons for withholding payment. Beneficiaries faced with failure to pay should be making written demands and if necessary hire a lawyer to make demands and file a court petition to compel payment and have the trustee removed for failure to pay.
PLANNING SUGGESTION-MAKE SPECIFIC “WHEN TO PAY” RULES
The typical declaration of trust does not give specific dates or time deadlines to pay the beneficiaries. The concept for not being specific is to allow the trustee sufficient time to deal with trust assets such as time to sell properties or liquidate a business. However, I advise clients as part of estate planning which includes a trust to look at the overall picture. Many people mistakenly assume that they can have some simple trust prepared which gives successor trustees control over millions of dollars worth of money or property and hope that the successor trustees will be businesslike and treat all the beneficiaries fairly. Some of my biggest trust litigation cases have been in situations where the trust is vague about when to make the payments to the beneficiaries.
Preliminary distributions. If there is substantial cash or securities I would recommend that the declaration of trust have a special paragraph requiring at least a partial distribution to the beneficiaries within 60 to 120 days. This could be a specific cash amount or a percentage amount. For example, “the Trustee is required to distribute the sum of $20,000 cash as a partial distribution to each beneficiary within 60 days of the death of the Trustors”. Preliminary distributions tend to keep the beneficiaries from running to the courthouse and filing trust petitions prematurely and make a lot of sense if the trust estate doesn’t need the cash to pay debts or taxes. I have seen a lot of sibling rivalry that drives trustees to withhold distributions out of pure spite. I have seen cases where some of the brothers and sisters are the successor trustees and simply because of dislike of the other beneficiaries hold back and not pay out millions of available money for 2 to 3 years after their parents (trustors’) death.
Timing of final distributions. The way to make the timing of final distributions happen in a reasonable time is to first look at likely trust liquidity upon the passing of the trustors. If there is real estate that needs to be sold then the trust can’t require a 60 day payout because that could force a sale at unreasonably low prices. If the real estate involves the family home, then there need to be specific deadlines to (a) list the home for sale and (b) to close the sale in a reasonable time and (c) to adjust the sales price so it is not priced so high it won’t sell. Also, there need to be restrictions against the trustee living in the home without paying rent if that is even allowed. I have had many court cases where the trustee was the favored son or daughter and lived with the trustors in their last days and then would never leave or sell. Or, they would pretend to be trying to sell and listing it at too high a price or failing to maintain it so it was not saleable. Simple common sense rules to deal with this will save tens of thousands of dollars in legal fees and years of uncertainty and delay at the courthouse. If there is no real estate and no other problems affecting liquidity, then the trust should make ending the trust and final payout be done in no more than a year or less.
Trustees fee factors. Unless the trust specifies differently, the trustee is entitled to “reasonable” trustees fees according to the probate code. Trustees fees can be as much as 1% to 2% or more of the trust estate each year. Thus, if the trustee can keep the trust open and not distribute at any specific date then the trustee can earn more in trustees fees. One way to stop this abuse in addition to having a specific final payout date, is to have the trust (a) limit the amount of trustees fees and (b) state that NO trustees fees are to be paid if the trust is not distributed within a certain period of time.
Lawyer advice in preparing trust declarations. Most of the millions of dollars that trust beneficiaries and trustees spend on trust litigation each year could have been avoided by the trustors being pro-active in the formation of the trust in the first place. Trust and estate lawyers who deal with trust disputes on a routine basis can recommend how the trust should be prepared to avoid these types of problems. A trust is a serious legal document that is supposed to plan and direct what will happen to a lifetime of work and accumulation by the trustors. It is not a simple task because the assets involved and the family considerations have to all be taken into account and discussed with the trustors so they can consider the options.