One of the first questions our office often hears from a newly appointed Trustee is how they will be able to handle the myriad specialized duties that often are required of a fiduciary. The new Trustee is fully aware that he or she has a personal obligation to perform up to certain standards in managing the Trust assets and that this obligation can last for decades. Most Trustees are not professional trustees or accountants, lawyers or bankers. Yet they are required to invest wisely, pay the taxes with tax planning considered, execute contracts, sue or defend suits as necessary and care for the assets of the Trust and beneficiaries.
And all this may be suddenly thrust upon the Trustee without prior warning or preparation.
What we say to the new Trustee when asked is that the Trustee is normally selected in the first place by a Settlor who trusts the Trustee to do what is right. The specialized skills necessary can be learned but more often are allocated to professionals who are hired by the Trustee to advise and perform the duties.
In short, the Trustee will perform more as the “president” of the entity known as the Trust and will hire those contractors necessary to adequately perform the specialized duties. Indeed, the retention of competent professionals may be considered a fiduciary duty imposed upon the Trustee. At the same time, the Trustee must perform all duties required of a Trustee and cannot simply hire a group of people to assume the responsibility and ignore the needs of the Trust. A balance of involvement of professionals and final decision making authority and supervision is required.
This article shall consider what rights and obligations a Trustee has to hire, retain, pay and delegate responsibility to professionals and assistants. The reader should first review our articles on Duties of a Trustee in Administration of a Typical Trust as well as Wills and Trusts to get the basics of what they are and how they work.
The Right to Hire Professionals:
Most trust instruments specifically grant the Trustee the right to hire professionals at trust expense but even if such a right is not granted in the Trust, the law grants the Trustee such discretion. The Trust is authorized to pay the reasonable fees of such professionals during the Trust administration in most cases.
The Trust Instrument:
Compensation of professionals hired to assist with the administration of a trust may be governed by the trust instrument, to the extent it addresses the issue. A typical clause in a Trust would state something along the following lines:
“The Trustee shall pay from income or principal of the Trust Estate or partly from each, in its discretion, all expenses incurred in the administration of this trust, and the protection of this trust against legal attack, including counsel fees and a reasonable compensation for its own services as such Trustee, which compensation and expenses constitute a first lien on the Trust Estate.”
California Law Independent of Trust Authorization:
Under Probate Code §16247, the trustee has the power to hire persons, including accountants and auditors, even if they are associated or affiliated with the trustee, to advise or assist the trustee in the performance of administrative duties.
Prob C §15684 entitles the trustee to repayment out of the trust property for expenditures properly incurred in the administration of the trust, and for expenditures that were not properly incurred in the administration of the trust to the extent that they benefited the trust.
Trust instruments usually do not contain specific compensation provisions, but some trusts provide that the trustee take a reduced fee when professionals are used for services that the trustee would otherwise be expected to perform.
Without contrary provisions in the governing instrument of an non-court supervised trust, a trustee may take a full fee even if agents or consultants are employed.
However, a beneficiary may object to this procedure and file a petition under Prob C §17200(b)(9) [fixing or allowing payment of the trustee's compensation or reviewing the reasonableness of the trustee's compensation].
The trustee should be prepared to document why a request for apparently duplicate fees is reasonable under the circumstances. The court should be advised of any unusual factors which make the employment of such professionals desirable without a reduction in the trustee’s compensation. See Estate of McLaughlin (1954) 43 C2d 462, 274 P2d 868, in which the court found that as long as the fees to agents for services to the trust were reasonable, the court was justified in allowing them.
The trustee normally pays consultant fees as they become due, preferably after services are rendered. The trustee may pay fees directly out of the trust or may pay them from its own funds and then seek reimbursement from the trust, assuming the expenditure was properly incurred or benefitted the trust. Prob C §15684, supra.
If the trustee foresees beneficiary objections to a particular expenditure, the trustee may consider bringing a petition under Prob C §17200(b)(6) [instructing the trustee], (8) [granting powers to the trustee], or Prob C §6325 [providing the court jurisdiction to instruct the trustee or grant additional powers, etc.], seeking advance approval.
If a professional is likely to bill the trust frequently, as in prolonged litigation, the trustee may seek a blanket order authorizing periodic payment. In Kasperbauer v. Fairfield (2009) 171 CA 4th 229, 235, the court held that an attorney who assisted a removed trustee in preparation of his final accounting could be paid from trust funds, and that such payment need not wait until a final adjudication of the beneficiaries’ claims against the trustee. The court also held that the trustee has a lien on trust property for the reimbursement of expenses properly incurred, citing Prob C §15685.
The Probate Code further specifies compensation of trustee and professional fees in litigation when the trustee prevails, partially prevails or loses.
Practicalities:
One client put it well. Speaking of his mother who had recently died, he stated, “She picked me as Trustee rather than her lawyer, financial advisor or my sister because she trusted me to do the right thing. That’s what “trustee” means, right? It’s the trust part I represent…the expertise I can buy.”
And the law supports that position. At the same time, one cannot simply hire at great expense an unlimited number of experts, expect them to do all the work in the Trust, and then apply for trustee fees along with all the experts. One maintains full responsibility for the actions of the Trust and protecting the beneficiaries. The Trustee remains personally liable for the results and must demonstrate good reasonable common sense in his or her actions, including selection of the appropriate experts to provide advice and to demonstrate reasonable supervision of what the experts do.
Many professionals do not control their own fees and do not consider cost benefit in making decisions as to tasks to perform. To spend fifty thousand dollars on a trust tax return for a two hundred thousand dollar trust will result in protests from the beneficiaries and possibly the Court. Spending five hundred thousand for attorneys to pursue a two hundred thousand dollar judgment would also give pause to the Court unless justified.
The Trustee does not guaranty results. In the case of litigation, one can always lose and the Courts are fully aware of that. What the Court will consider was whether the decisions on what professionals to hire for what tasks was reasonable under the circumstances. Our experience is that the Courts give extremely wide latitude to the Trustee to make such decisions and will only second guess the Trustee if the expense was truly incommensurate to the results.
Thus, hiring lawyers to sue over one thousand dollars may be frowned upon, but hiring lawyers to evict a tenant who threatens property or to collect a hundred thousand dollars will be considered not only appropriate but required of a good Trustee.
And when in doubt, the Trustee can always petition the Court for instructions and once given, the Trustee is fully protected from later claims of misconduct. This petition should only be used for truly questionable decisions. The writer remembers well a Probate Judge who looked at a Trustee asking for instructions on whether to sue to collect a quarter million dollar Note owed to the Trust by a third party. The Judge glanced at the Petition for Instructions, looked at the Trustee, and said simply, “Use your common sense. Of course you should sue. You don’t need to ask me that.” And granted the Petition.
But all of us in the Court room knew that when that Trustee eventually asked for higher fees for bringing that Petition, the Judge was not going to grant them.
As your mother would tell you-use common sense and things will almost always work out…and that includes hiring of professionals.