When Can California Trustees Use Trust Funds to Hire Lawyers?

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Many family member trustees are uncertain about whether and to what extent they can use trust assets to obtain legal representation.  For example, when two parents choose their daughter, upon their incapacity or death, to administer their trust as the successor trustee, the daughter may be unsure whether she can use trust money to hire a lawyer to help her deal with demands and complaints from her brother.

In this post, we’ll review basic principles of California law with respect to when a trustee can pay a lawyer at the trust’s expense.  Spoiler alert: it may be best to take the Buick and leave the Rolls at home.

Yes, a Trustee Can Hire a Lawyer, But the Expense May Be Disallowed

Trustees have fiduciary duties to beneficiaries to prudently manage and administer trust assets per the terms of the trust instrument and applicable law.  Trust administration situations can be complex and most trustees benefit from obtaining legal advice from a knowledgeable attorney.  Such advice reduces the possibility of trustee missteps and personal liability down the road.

The good news is that the California Probate Code and most trust instruments authorize the trustee to hire and pay attorneys to advise the trustee about trust administration.

Probate Code section 16247 empowers trustees to hire attorneys, accountants and other agents to advise and assist the trustee in the performance of administrative duties.  Section 16243 authorizes trustees to pay “reasonable compensation” to such agents.  Most trust instruments include a specific authorization to hire legal counsel amongst the trustee’s enumerated powers.

A California trustee, however, does not have a blank check to pay lawyers.  Probate Code section 16202 provides that a trustee’s exercise of a power remains subject to that trustee’s fiduciary duties, including the duty of loyalty to the beneficiaries.

Trustees generally have a duty to provide a detailed accounting to beneficiaries, including an itemization of legal expenses.  Beneficiaries may ask a court to review such expenses and the trustee may be required to reimburse the trust to the extent the expenses are deemed inappropriate.

A Trustee Is Not Entitled to a “Rolls Royce” Defense When a “Buick” Will Do

Any California trustee embarking on litigation should consider the principles set forth in Donahue v. Donahue (2010) 182 Cal.App.4th 259, a leading California case on a trustee’s expenditure of assets in litigation.

In this case, beneficiary Michelle Donahue faulted her brother-in-law Patrick Donahue for the way he had administered the trust when he was trustee.  She claimed Patrick imprudently sold approximately 40 percent of the trust’s interest in a private real estate investment trust for below fair market value, thereby losing about $20 million in potential appreciation.  Patrick prevailed in the litigation and the court approved his accounting.

The issue on appeal was not whether Patrick was entitled to reimbursement from the trust for his successful defense of Michelle’s action, but whether the $5 million in legal expenses awarded by the trial court was excessive.  The court noted that eight attorneys from three major law firms comprised the former trustee’s legal team, with four to five of those attorneys simultaneously appearing at the 14-day bench trial.

The appellate court found that the trial court had not adequately scrutinized the trustee’s claimed legal expenses, observing that probate judges “have a special responsibility to ensure that fee awards are reasonable, given their supervisory responsibilities over trusts.”

According to the Donahue court, “[l]ong-established principles of trust law impose a double-barreled reasonableness requirement: the fee award must be reasonable in amount and reasonably necessary to the conduct of the litigation, but it also must be reasonable and appropriate for the benefit of the trust.”  Hence, the “underlying principle which guides the court in allowing costs and attorneys’ fees incidental to litigation out of a trust estate is that such litigation is a benefit and service to the trust.”

The trial court’s terse ruling was deficient because it did not explain how the trustee’s fee request met the governing standards.  The brevity of the ruling thwarted meaningful appellate review and also raised the concern the trial court used an overly deferential approach, the proverbial rubber stamp, to the fee request.

Patrick offered a “bet the farm” rationale to justify the high legal expense in that the beneficiaries were seeking many millions from him.  Yet such a “spare-no-expense strategy calls for close scrutiny on questions of reasonableness, proportionality and trust benefit.”  The court observed that “Patrick’s defense by so many top-flight lawyers may have benefitted Patrick, but was it also reasonable and beneficial to the trust?  Did Patrick demand a Rolls Royce defense when a prudent trustee could have arrived at the same destination in a Buick, Chrysler or Taurus?”

Thus, before spending large amounts of trust fund in litigation, and as the dispute evolves, the trustee should consider the scrutiny that might be applied to the expenditures under Donahue.  The trustee could win the underlying litigation but be surcharged (declared personally responsible for) for payments to lawyers that are deemed excessive.

Defense of Contested Trust Amendments

As noted in a prior post on Doolittle v. Exchange Bank (2015) 241 Cal.App.4th 529, a trustee should not defend a contested trust amendment unless the trust instrument expressly authorizes such defense, as such litigation is not considered of benefit and service to the trust.

Seeking Direction from the Court May Avoid a Surcharge

When it’s unclear whether legal expenses are appropriately chargeable to a trust, the trustee may seek direction from the court under Probate Code section 17200.

For example, the trustee may be uncertain about whether to pursue a claim to recover trust property.  If beneficiary consent is not readily obtainable, the trustee may file a petition asking the court to approve the trustee’s proposal to litigate or not litigate.  If the court approves litigation, then the trustee will still need to make prudent spending decisions, but at least the choice to embark on the litigation will be validated on the front end.

Confidentiality Concerns

As discussed in a prior post, a trustee who uses trust funds to hire counsel should be aware that, under California law, the attorney-client privilege generally follows the office of the trustee, not the incumbent of that office.  Hence, if the trustee resigns or is removed, the successor trustee will hold the prior trustee’s attorney-client privilege and be able to obtain and review communications between the prior trustee and counsel.  Such communications potentially could be detrimental to the prior trustee’s position.

In a recently-updated ethics guide for trusts and estates counsel, published by the Executive Committee of the Trusts and Estates Section of the California Lawyers Association, the authors write that the lawyer “should advise a fiduciary client that the privilege belongs to the fiduciary office, not the individual, and that confidential lawyer-client communications on trust matters may be discovered by successor fiduciaries.”

A trustee who wants to ensure that attorney-client communications remain confidential might hire counsel at the trustee’s personal expense and in the trustee’s personal capacity.  In that event, the attorney-client communications may remain privileged even if the trustee leaves office.

Takeaways

Trustees can and should hire lawyers to advise them regarding trust administration.  At the same time, a trustee’s entitlement to write checks on a trust’s account to pay counsel is subject to beneficiary review and objection, and a probate judge’s eventual scrutiny.  As they navigate the shoals of trust administration, trustees should ask their lawyers to advise them as to whether they are entering dangerously shallow waters in terms of a court’s potential disallowance of their legal expenses.

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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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