Openness and Transparency Help Avoid Trust Disputes – An Interview with Tracy Potts

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Tracy PottsTracy M. Potts has nearly three decades of experience in California with estate planning, administration and litigation.  A Texas native, she earned her law degree from Southern Methodist University School of Law.  Her leadership experience includes chairing the Executive Committee of the State Bar of California, Trusts and Estates Section, as well as the Sacramento County Bar Association, Probate and Estate Planning Section.  She is a certified specialist in estate planning, trust, and probate by the State Bar of California, Board of Legal Specialization.  She also is a fellow of the The American College of Trust and Estate Counsel.

Tracy’s law firm, Legacy Law Group, operates from the Natomas area of Sacramento.  I sat down with Tracy at her office in February 2020 to discuss estate planning and dispute avoidance.

How did you get into estate planning?

A Sacramento law firm hired me as a business attorney in 1989.  When I started, California was having a recession so there was not much work to be done, but the trusts and estates group had two old cases that nobody had been able to wrap up.  I completed those cases and there was no looking back.  I started with administering trusts and saw the problems that people were having, and then moved over to the planning side.  I became the only one in the firm with both estate planning and litigation experience, so when trust disputes came in I handled them.

How does your family experience inform your estate planning?

My grandmother and father came from large families, and I’m from a blended family. I have step-parents and step-siblings and sometimes have acted as a peacemaker.  So I am used to complicated family dynamics.

How important is parent-child communication about estate planning?

Very important.  I encourage parents to have conversations with their kids about the contents of their estate plans.  This is especially key if they have decided to favor one family member over another or if they are choosing one child instead of the others to act as their successor trustee.  By explaining what they’ve done and why, parents can avoid surprises, hurt feelings, and litigation.  The kids should understand that the decisions their parents have made do not indicate that they love anyone less.

Writing a note to the children that explains the thoughts behind the plan is also an option, but it should come directly from the parent.

What issues spark controversy?

Many families have more conflict over dividing up tangible personal property, such as who gets the silverware, than they do as to anything else.  With some thought, that sort of conflict can be reduced.  If a parent decides to give important family items to a particular person, a brief explanatory note may help the others accept that gift.  Otherwise, a trust instrument can provide a process so that all family members have a turn in selecting items, but the trust should name someone (perhaps the trustee) with the final say over who receives what, e.g., who gets the couch and who gets the love seat.

The selection of the trustee also can lead to controversy.  If the parents want to choose one or more children to serve as successor trustee, I try to gauge in the meeting how well the family structure works.  A trustee who is not a family member, such as a private professional fiduciary, may be better able to manage the assets.

If parents propose to name multiple children to serve together as co-trustees, I push back and discuss how that could become a logistical nightmare.  But sometimes one child is in a good position to manage one aspect of the trust while another child is better suited to manage another aspect, and the children can effectively divide up the tasks.

How specific should a trust be?

While clear language is important, I generally try to put as much malleability in the trust terms as I can.  This allows the trustee room to maneuver while still serving the overall purposes of the trust’s creator.

As an example of a flex point, the trustee may be given discretion as to when adult children receive their distributions from the trust, instead of locking in specific distributions as they attain certain ages.  Some beneficiaries may need distributions earlier while others may not be ready to handle them.  If empowered to change the distribution ages, the trustee can deal with whatever is going on at the time.

An independent trustee may be better situated to make these discretionary calls, rather than forcing one child as trustee to be the keeper of the other.  If the parents name Brother A to be the trustee, having a professional fiduciary as a backup will allow Brother A to resign if it’s too hard or divisive to make decisions about what Brother B receives from the trust.  Sometimes, Brother A can better support Brother B emotionally if Brother A is not the trustee.

How do you feel about no contest clauses?

We used to have a lot of litigation about whether a filing was a contest, but now California law (Probate Code sections 21310-21315) is clearer, which is good.

I discuss no contest clauses with clients and let them decide what to do, including how to customize them.  For example, I put no contest clauses in when clients are adamant that they want their plans followed.  But adding no contest clauses could create problems, as where a guardian files a contest on behalf of a minor, which could expose the minor to disinheritance.  Also, a parent may want a child to inherit even if he or she contests the trust.

As an alternative to a traditional no contest clause, the creator of a trust could require that the expenses of an unsuccessful contest be charged to the beneficiary’s share.

What about multi-generational trusts to provide for downstream generations?

Grandparents who want to create multi-generation trusts need (in addition to substantial assets) a more elaborate planning process that might include meetings with the younger generations.  I tell them that if they really want to make an impact on their family they’re going to have to show them how to sustain their assets.

Sometimes we start with smaller trusts so adult children can learn how to manage assets with guidance from the attorney and accountant.  Without such a teaching process, the money may be gone soon.  I suggest that grandparents stop bailing out their children and grandchildren, as they won’t be able to do so forever.  You don’t want your descendants to live in squalor, but you also want to teach them financial responsibility.

It’s often said that the first generation develops the wealth, the second generation works hard, and the third generation spends it all.  To avoid that outcome, families have to teach the younger generations.

What are the keys to success for a successor trustee after the parents have passed?

Be transparent.  There should be no secret in what’s happening.  That does not always eliminate conflict, but it helps.  If the beneficiaries have questions, you answer them.  But if they become confrontational, the trustee’s attorney can intervene.  We apply more formalities in higher conflict situations.

Also, set expectations by telling beneficiaries it will take a while before they get distributions.  A phone call to beneficiaries before a letter is sent can be comforting.

What’s a “reasonable” trustee’s fee in California?

I tell trustees to keep logs of their time as trustee, but they often don’t!  Most trustees intend to waive the fee so they may not keep time records, but then if they decide to charge they have to go back and create a time log.

If push comes to shove, trustees will have to come up with an hours estimate to justify the fee they claim, not calculate the fee based on a percentage.

Why might trust and estate litigation be increasing?

The current generation seems to have more experience with being in court than prior generations, whether it’s family law cases (divorce) or civil suits.  We’ve become a more litigious society so it’s not uncommon for family members to have experienced litigation before a trust dispute comes up.  Folks now are not as sensitized about going to court.

Also, I’m seeing many disputes in intestacy situations, where people have no estate planning at all, or where there is a lost will, as opposed to disputes about trust documents.

On the trust side of things, I most often see economic disputes about things like overpaying painters or not getting distributions paid out fast enough.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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