Multiple Trustees for Trusts – Pros and Cons
Introduction:
The person who creates the trust (“trustor”), whether the trust is living or testamentary, normally nominates who shall serve as trustee or nominates multiple trustees and normally provides for backup nominations in case the first-named trustee is unable or unwilling to serve.
The question often arises as to how many trustees to appoint to serve at the same time. Many trustors have numerous children and do not want to favor one child over another, thus appoint them all as co-trustees. Sometimes the trustor is afraid the spouse will not be able to handle the many duties imposed upon a trustee and appoints one or more children to act as co-trustees with the spouse. Sometimes a trustor wants a professional to serve as a trustee alongside family members.
Multiple trustees can be useful, but it is up to the trustor to anticipate issues and problems that might arise before determining the number and identity of trustees. This article shall discuss the basic law and issues that arise when the trustor wishes to appoint multiple trustees.
The Basic Law:
A trust in California can have multiple trustees (known as co-trustees). This arrangement may be appropriate, but it entails specific legal requirements and potential challenges:
Legal Requirements Imposed on Co-Trustees:
Unanimous Action Imposed: Under California Probate Code § 15620, co-trustees must act unanimously unless the trust document explicitly states otherwise (such as allowing a majority vote). As such, every decision, from hiring an accountant to paying a bill, needs the consent of all trustees.
Duty to Act: Each co-trustee has an independent duty to actively participate in the trust's administration and, just as importantly, must take reasonable steps to monitor and prevent a co-trustee from breaching the fiduciary duties. A co-trustee cannot be passive or simply defer to others. Under California Probate Code section 16013, each co-trustee has an independent duty to participate in the administration of the trust.
Liability: All co-trustees can be held jointly and severally liable for a breach of trust, even if one was not directly involved in the action, if they improperly delegated their duties or failed to take reasonable steps to address the breach.
Vacancies and Incapacity: If a co-trustee position becomes vacant or a co-trustee is temporarily incapacitated, the remaining co-trustee(s) can act as the sole trustee, provided the trust instrument does not specify a different procedure. This requires wording in the trust as to what steps must be taken in the event of resignation or incapacity of a co-trustee.
Typical Problems that Co-Trustees Entail:
Potential for Conflict/Deadlock: Trustees do not always agree, and within a family, dynamics can be emotional and laden with past disputes. Absent contrary provisions in the trust instrument, unanimous decision-making is required. A deadlock normally requires a court appearance to break, and that process is time-consuming and expensive.
Slower Decision-Making: A committee is always more inefficient than a single executive, and the need for unanimous decisions requires both trustees (or all trustees if more than two) to be available and have the time and energy to make informed decisions. With vacations and work schedules often at odds with trustee duties, this can cause delay.
Increased Administrative Costs: costs incurred by trustees are normally reimbursed by the trust, and such costs as travel, copying, and media will be increased.
Potential for Litigation: Any trustee can go to court if he/she feels that a co-trustee is acting improperly, and the trust will likely pay for the costs, which can be substantial. If co-trustees who are subject to the default unanimous decision rule cannot reach a consensus, any of them can file a petition for instructions under California Probate Code section 17200, asking a judge of the Superior Court to provide directions to the co-trustees. Each such event can be an expense of the trust. A co-trustee who petitions for instructions must provide notice of hearing to all co-trustees and all beneficiaries, using Judicial Council Form DE-120. While a minimum of 30 days’ notice is required under California Probate Code section 17203, the notice period will depend on the availability of hearing dates.
Perceived Fairness (among family). If one or two siblings are selected, the remaining members of the family may feel insulted or disrespected. It can divide a family.
Increased trustee fee: Each trustee is allowed a statutory fee, and the more trustees, the greater the total cost. While many trustees waive the fees, many do not, and the other family members may find that cost upsetting.
Escalation of Disputes: A petition for instructions by one co-trustee may spark objections and cross-petitions by other co-trustees, and beneficiaries who are not co-trustees may join in the hearing. If there is an objection, the court typically will set the matter over for further hearings. The parties will have time to engage in discovery, including interrogatories, document requests, and depositions. Ultimately, under California Probate Code section 1022, if a compromise cannot be reached, the court may hold an evidentiary hearing (bench trial) on the petition(s) and objection(s).
Multiple Attorneys and Expense. A trust is not a legal entity, but rather a fiduciary relationship where one or more trustees holds property for the benefit of certain beneficiaries. The lawyer does not represent “the trust” but instead represents one or more co-trustees to guide them with respect to trust administration. While co-trustees often share legal counsel, each co-trustee has the option of engaging his or her own attorney to represent him or her in a co-trustee capacity. In fact, where co-trustees are in substantial disagreement, an attorney or law firm may be unable to represent (or continue to represent) them all, given the ethical rules that require attorneys to avoid conflicts of interest in the absence of informed consent by the affected clients.
a. The separate legal representation of co-trustees can raise complications over and above an increase in administration costs. Co-trustees may decline to provide funding for one another’s legal counsel, forcing each co-trustee to either (1) advance legal expenses and seek reimbursement, or (2) ask the court on the front end to approve the engagement and payment of counsel.
In a strained environment, co-trustees are likely to accuse each other of spending too much on lawyers or having lawyers advance their personal interests as opposed to representing them in their fiduciary capacities. By the time co-trustees get separate counsel, communications often will have broken down to the extent that the co-trustees are no longer able or willing to collaborate informally in trust administration. The lawyers then play an increasing role in attempting to move forward, at substantial expense to the trust.
Typical Benefits from Co-Trustees:
Shared Workload: As seen in our other articles on duties of a trustee, the job is a significant drain on time and energy, and when certain assets are owned by the trust, such as businesses or real property, can take up dozens of hours a month. Co-trustees can share the workload and divide up the obligations.
Checks and Balances: A co-trustee can and, indeed, must oversee the actions of the other trustee(s) and can both advise and object to actions or inactions that are not to the benefit of the trust.
Diverse Expertise: Assuming the co-trustees have experience or training in various fields, the addition of such expertise can be beneficial to the trust. A CPA or attorney acting as a trustee, or a real estate agent or contractor, can provide professional advice readily available.
Continuity: If a trustee retires or becomes unable to serve, having a remaining trustee(s) with knowledge of past actions, trends, and events can be extremely useful.
What the Court Can Do:
Under California Probate Code section 15642, if hostility or lack of cooperation among family member co-trustees impairs trust administration to the detriment of the beneficiaries, the court can end the gridlock by removing all of the co-trustees and appointing a third party to serve as sole successor trustee. The third party may be a bank, trust department, or a private professional fiduciary licensed by the California Department of Consumer Affairs. The cost of such professional trustees can be substantial.
Often, one co-trustee will petition the court to remove the “problem” co-trustee. The court, if persuaded that one co-trustee indeed is having a damaging effect on trust administration, may grant such a petition. But most judges approach such requests with skepticism. Often, it may not be easy to sort the good trustee from the bad one. Also, judges generally give deference to the trustor’s selection of the co-trustees and will be reluctant to remove one trustee in contravention of the trustor’s wishes.
Solutions:
The key is care in trust drafting, and that includes all aspects of the instrument. Most of the issues above can be eliminated or minimized by careful consideration of the problems.
First, if there are to be multiple trustees, make it an odd number so that a tie cannot occur, and require majority rule, not unanimous votes.
Second, carefully spell out in the trust instrument instructions for the trustees. This is particularly vital if real property is to be sold, managed, or a business operated. In broad terms, the trustor should indicate his or her overall goal.
If the business is too complex to expect trustees to operate or if there may be a dispute as to the use of real property, such as who can live there and who pays for upkeep, then simplify the matter by having the trustees sell the property or business and the trustor can even recommend methods for doing that.
It is hard for parents to really know if their children are capable of being trustees. Parents should consider carefully before appointing siblings to serve together as successor co-trustees. While majority rules provisions can help resolve disagreements without a trip to the courthouse, they also can result in the marginalization of a co-trustee with valid concerns. Parents who anticipate conflict should consider naming a third party to serve as trustee. The fees charged by such a third party may be much less than the expenses incurred by a fight in court.
One elderly lawyer told his clients in an email the following, which strikes the writer as true:
“You took care of your children all your life. You love them. Creating the right provisions in your Will and Trust is just one example of you taking care of your kids. Do it.”