Show Me the Money: When Can Trustees Use Trust Funds to Litigate?

Over the past 30 years, the use of revocable living trusts has rightly become the preferred estate planning vehicle for persons seeking to protect and pass on their estates.  With that growth has come a corresponding increase in trust-related litigation.  As a result, an increasing number of civil litigators are finding themselves directly or indirectly involved in such disputes, many times without the necessary knowledge or understanding of the intricacies of trust law and probate court procedure.  In the March 2016 issue of the Contra Costa Lawyer Magazine,  Geoffrey Wm. Steele, Esq., provided us with a great primer on some of the “potholes and advantages” that a civil litigator may encounter when stepping into the world of trust and estate litigation.  At the end of his article, Mr. Steele identified one of the more common and challenging issues that arises in trust-related litigation – whether the litigants’ attorneys’ fees are chargeable to the trust.  This article serves to supplement Mr. Steele’s article by delving deeper into the issue of when a trustee can and cannot use trust assets to participate in trust-related litigation – an issue that should be understood and analyzed at the outset of any attorney’s representation of a trustee.

Probate Code section 16249 provides that a “trustee has the power to prosecute or defend actions, claims, or proceedings for the protection of trust property and of the trustee in the performance of the trustee’s duties.”  Likewise, Probate Code section 16247 authorizes trustees “to hire…attorneys…even if they are associated or affiliated with the trustee, to advise or assist the trustee in the performance of administrative duties.”  Indeed, most trust agreements include boilerplate language authorizing the same.  At first glance, these provisions seem to authorize the trustee with fairly broad authority to use trust funds to pay the trustee’s attorney in trust related litigation.  However, while a trustee may certainly charge their trust-related attorneys’ fees to the trust in some instances, there are limits to this ability that may not be obvious to a trustee or to their attorney.  The general rule in reviewing a trustee’s attorneys’ fees is that the fees must be “reasonable in amount and reasonably necessary to the conduct of the litigation, but [they] must also be reasonable and appropriate for the benefit of the trust.”  (Donahue v. Donahue (2010) 182 Cal.App.4th 259; see also Prob. Code § 15684.)  It is the latter part of that standard, whether the trustee’s fees were “for the benefit of the trust,” that causes the most consternation for trustees and their counsel.

One of the trickier situations this issue may arise is in a dispute alleging that a trustee has breached one or more fiduciary duties and should be either removed or surcharged as a result.  Essentially, the issue is whether the trustee’s defense is a benefit to themselves individually, or whether it is a benefit to the trust.  In an action to remove and/or surcharge the trustee, whether the trustee’s defense benefits the trust is ultimately determined by the success of the trustee’s defense.  Where a trustee successfully defends against a removal or surcharge petition, courts have held that the costs of such a defense is generally chargeable against the trust even though the trustee is personally benefitting by eliminating the threat of their own personal liability.  (Holloway v. Edwards (1998) 68 Cal.App.4th 94, 99.)  Not only that, but the attorneys’ fees incurred by the trustee in defending against a beneficiary’s unmeritorious action may be chargeable solely to that beneficiary’s interest in the trust, as opposed to the trust as a whole.  The obvious corollary of this is that a trustee who is unsuccessful in defending against a removal or a surcharge action will be held personally liable for their attorneys’ fees unless (1) the trustee had a subjective good faith belief that the defense benefitted the trust and (2) the defense was objectively reasonable.  (Conservatorship of Lefkowitz (1996) 50 Cal.App.4th 1310, 1314.)

In light of these rules, attorneys defending trustees in removal or surcharge actions should be sure to properly advise a trustee that if they are unsuccessful, the trustee may very well end up footing the bill for their defense personally.  Similarly, for attorneys representing beneficiaries in these actions, it means that the merits of the litigation should be thoroughly vetted before engaging the trustee in a costly and protracted dispute, since an unsuccessful beneficiary may be on the hook for not only her attorneys’ fees but the successful trustee’s attorneys’ fees may be charged against that beneficiary’s interest in the trust.

Another common situation in which a trustee’s ability to use trust funds to participate in a trust-related litigation will arise is where a beneficiary or potential beneficiary is contesting the validity of a trust or a trust amendment.  Here, the general rule is that if a beneficiary or potential beneficiary is contesting the validity of the entire trust—meaning that, if successful, the trust will cease to exist—then the trustee has the authority and likely a duty to defend the trust’s existence, even if they are ultimately unsuccessful.  (Whittlesey v. Aiello (2002) 104 Cal.App.4th 1221, 1228.)

However, the same rule does not hold true in the more common situation in which a beneficiary or potential beneficiary is merely contesting one or more amendments of a trust.  In that situation, courts have held that because the existence of the trust is not being challenged, the trustee should remain neutral.  (Id.; Terry v. Conlan (2005) 131 Cal.App.4th 1445.)  The courts have reasoned that in these cases, the dispute is one among the beneficiaries or potential beneficiaries—essentially, who gets what?  Therefore, the trustee is bound by his or her duty of impartiality to serve as a neutral placeholder while the beneficiaries battle it out at their own cost.  However, a more recent case held that a trustee may be able to defend against a challenge to a trust amendment if they are specifically granted that authority in the trust instrument.  (Doolittle v. Exchange Bank (2015) 241 Cal.App.4th 529, 537-539.)  In Doolittle, the trust amendment included very specific language authorizing the trustee to act in such situations.  While such language was previously uncommon in revocable trusts, estate planners are now including such provisions in trust amendments more regularly.  However, even where such a provision is in a trust amendment, a prudent course of action would be for the trustee to seek the court’s instruction at the outset of an action as to whether they should participate in a dispute concerning the validity of a trust amendment.

A trustee’s ability to access trust assets to fund their participation in trust-related litigation has become a hotly disputed issue in trust-related litigation.  Attorneys involved in these matters should vet these issues from the outset, so that they may properly advise their clients and tailor their litigation strategy accordingly.