Notice of proposed action can protect trustees

Families will always fight, and many of these disputes arise over money. This threat only increases with death, when the original owner of assets is no longer present to allocate money as they see fit. A key aspect of advising trustees involves their self-protection from discontented beneficiaries. The California Legislature recently expanded the use of a notice of proposed action, one such tool. Assembly Bill 1700, which went into effect on Jan. 1, 2017, now allows a trustee to use a notice of proposed Action for preliminary or final trust distributions. Traditionally, trustees had to petition the court for instructions in these situations. Deciding on when to use a notice of proposed action is a balancing act interwoven within a general strategy to avoid discord in the overall administration of a trust, which otherwise might lead to litigation. Basically, it's an added protective measure for trustees as they navigate dealing with beneficiaries, who vary in their attitudes toward the fiduciary's handling of assets.

Luckily, numerous legal options exist when advising a trustee in a more general sense. An easy rule to avoid potential problems is to communicate frequently with beneficiaries and to make timely distributions. Beneficiaries who feel ignored or who aren't getting the funds due to them are more likely to consider litigation. Certain factors are early indicators of potential trouble including blended families, substance abuse, lifestyle challenges, large estate tax payments due, and discord among family members. Meticulous record-keeping and utilizing the courts when necessary are added protections. Essentially, such steps protect the trustee from second-guessing later on in time, when other extraneous factors begin to take shape.

So what is a notice of proposed action and what sets it apart from a court petition for instruction? For a notice of proposed action, California Probate Code Sections 16500 to 16504 permit a trustee to give notice that the trustee will be taking or not taking certain actions. The notice procedure allows a trustee to obtain immunity from breach of trust claims without obtaining a related court order or waiting three years for the statute of limitations on breach of trust claims to pass. Notice is given to the income and principal beneficiaries, and then after waiting 45 days the trustee can proceed with the proposed action or lack thereof and will be free from liability for so proceeding (or not proceeding). Alternatively, beneficiaries can affirmatively consent before or after the proposed trustee action is taken. This notice of proposed action option is less expensive and faster (theoretically) than petitioning a court for instructions. And, while this action can be useful when dealing with certain types of beneficiaries, who complain but don't follow through, it is also subject to objection.

A notice of proposed action is also limited in scope thus while it can be used in contemplation of most actions, certain actions are outside its domain. Unfortunately, these actions are among those that most typically require protection for a trustee. A notice of proposed action cannot be used for: account settlements; the discharge of a trustee; matters related to trust compensation or that of the trust attorney; transactions in which the trustee or trustee attorney receives a right or property interest from the trust; and (previously) preliminary and final distributions (now allowed as of Jan. 1, 2017). Should a minor or disabled beneficiary be involved, a representative appointed on their behalf must be retained (such as a guardian ad litem or conservator).

To effectuate a notice of proposed action, a trustee mails a written notice to the trust beneficiaries. Included must be: the trustees name and address; a telephone number at which a beneficiaries can follow up to get more information on the proposed action; a description of the proposed action; the objection time period; and the date of the proposed action. Should a beneficiary wish to object, they must mail a written objection to the trustee within the established time period. If no objections are so received, the trustee is not liable to the noticed beneficiaries for going forward with the proposed action.

If a beneficiary does object, the process becomes more time consuming and expensive. The trustee still has the option of abandoning their proposed action. They can also go ahead with it and risk future liability should the related results harm the trust or its property. Either the trustee or objecting beneficiary can petition the court to get a final determination of the proposed action. In such a proceeding initiated by the beneficiary, the beneficiary has the burden of proof to show that the trustee's proposed action should not be taken. The trustee can typically charge the trust for related expenses, regardless of who petitions the court after a beneficiary objects, if acting on behalf of the trust's interests.

While the notice of proposed action has been an option for over a decade since the initial statutes were first enacted in 2005, the recent expansion of their usage is timely. Trust matters presented to the courts continue to grow quickly and getting a court hearing date can take months.

A court petition for instructions, under California Probate Code 17200 and following, does have some advantages over a notice of proposed action. Foremost, it covers a broader range of actions. These petitions can be used to address a wide range of situations, including those not covered in the terms of a trust, when disagreements arise as to the distribution of particular assets or if a beneficiary develops substance abuse or other problems. Overall, when a potential conflict or ambiguity exists, a wise trustee will often ask a court for instructions, structured such that their request attains the desired end result. Additionally, a court petition is specifically drafted with respect to the matter at hand and can provide a broader overview of the proposed action and supporting authority. By using the petition to state a more complete picture of the situation, a trustee may better ensure that their actions are less subject to question and ultimate potential liability. Overall, this option is much more flexible. The downsides of a court petition are the time and expense involved in seeking court intervention and a ruling. Like a notice of proposed action, beneficiaries may also object to the actions proposed by the trustee, or the relief sought. Currently, getting a hearing before the court can be an ordeal of months, during which the trustee is essentially frozen from taking action. While in urgent situations motions do exist to speed up the process, doing so is more an exception than a practical reality.

Determining which option to use, a notice of proposed action or a court petition for instruction, is based on a few key factors. First, is a notice of proposed action available as not all actions fall within its domain? Next comes a careful weighing of potential liability from the proposed action, with the desire for speed. Key is the litigious nature of the beneficiaries involved as sometimes the added time and expense of a court petition is best given the long-term landscape. And, are beneficiaries likely to object to a notice of proposed actions? If they are, the matter will likely end up in court anyway. Overall, the recent legislative expansion of the notice of proposed action procedure is a huge positive for trustees and gives them a better tool to administer trusts without taking on unnecessary risk and liability.

Ideally, trustees should be able to take action as they deem to be in the best interest of trust beneficiaries without worrying about undue liability. Realistically, they need to be advised not to skip steps in the name of efficacy, expense or timing. Both the expanded applications of a notice of proposed action and petitioning a court for instruction are tools that can better protect trustees from beneficiaries second-guessing their actions down the road. Each has its distinct advantages and limitations, but both achieve a degree of safety from potential liability for trustees.