The last steps in a trust administration include:
- Filing the final income tax return
- Obtaining an estate tax closing letter from the IRS
- Calculating and paying the trustee’s final compensation
- Preparing a formal accounting
- Distributing the last trust funds to beneficiaries
Rather than take these last two steps, some trustees ask beneficiaries to acknowledge receipt of their final distribution and release the trustee of liability. Bellows v. Bellows highlights problems with this approach.
While trustees may request a release under California Probate Code Section 16004.5, the beneficiary’s release must be voluntary. This article discusses Section 16004.5 in the context of Bellows v. Bellows, which provides helpful guidance to trustee’s seeking a release of liability. (Bellows v. Bellows (2011) 196 Cal.App.4th 505.)
Section 16004.5, subdivision (a) provides:
A trustee may not require a beneficiary to relieve the trustee of liability as a condition for making a distribution or payment to, or for the benefit of, the beneficiary, if the distribution or payment is required by the trust instrument.” Subdivision (b) provides that, “This section may not be construed as affecting the trustee’s right to: … (2) Seek a voluntary release or discharge of a trustee’s liability from the beneficiary. … (4) Withhold any portion of an otherwise required distribution that is reasonably in dispute. (5) Seek court or beneficiary approval of an accounting of trust activities.
Beverly Bellows had two sons—Fred and Donald. In 2003, Beverly executed the Beverly Bellows Trust, which provided that upon Beverly’s death, Fred would become sole trustee and the assets would be distributed equally to Fred and to a special needs trust for Donald.
Following Beverly’s death in December 2008, Donald requested a distribution of his share of the Trust. When Fred failed to make a distribution by September 2009, Donald filed a petition in probate court seeking an accounting and distribution. The court ordered Fred to provide an accounting of the trust assets and to distribute one-half of the assets to Donald within 10 days. Fred mailed Donald’s attorney a check for $30,376.80, which he advised was one-half of the trust assets, along with a document entitled “Final Trust Accounting.” Donald’s attorney returned the check with letter asserting that the amount was insufficient because Fred had improperly deducted his attorney’s fees of $13,000 from the trust.
Fred’s attorney responded with a letter explaining why he believed the deduction for his attorney fees was proper, but despite that position, he offered “to give Donald one-half of the fees actually paid by [the] trust, i.e., $6,718.25, provided there is no petition forthcoming soon. . . ” Soon thereafter, Fred’s attorney forwarded a check to Donald’s attorney for $37,520.48, together with a letter advising that Donald was “authorized to negotiate the check when he has signed and returned the enclosed receipt of final distribution.” The receipt included an acknowledgment that the payment represented “a final distribution of the trust estate.” Donald cashed the check but did not sign and return the receipt.
Donald then moved to compel compliance with the court’s prior order. Donald sought an order “compelling trustee Frederick Bellows to provide a full and complete accounting within ten (10) days, including sufficient documentation reflecting the activity on all sums in the original Beverly Bellows trust from June 2003 through her death in 2008 and until final distribution in November 2009” and that “a check be provided to Donald Bellows and his attorney within ten (10) days for one-half of any additions to the trust corpus not previously accounted for.” Fred argued that the request for a further accounting should be denied because Donald had cashed the check in full satisfaction of his claim for half the trust assets. The court ruled that by negotiating the check, “Don agreed to the terms under which it was tendered, that is to say that Donald agreed that it was a final distribution of all assets of the trust and that Donald thereby effected an accord and satisfaction of all obligations that Fred owed under [the trust].”
Donald appealed, arguing that the release of liability Fred imposed as a condition of accepting the final distribution violated Probate Code Section 16004.5. The Court of Appeals agreed with Donald and reversed the lower court’s order.
Under the plain language of section 16004.5, subdivision (a), Fred could not condition the payment on a release of liability…Fred, as trustee, was required to make this distribution to Donald without any strings attached. He was not entitled to condition the payment on the release of other claims or demands of the trust beneficiary…A release obtained as a condition of accepting payment to which the beneficiary is entitled is in no sense voluntary. Such an interpretation would render subdivision (a) entirely meaningless.
The court determined that, “The conditional distribution made by Fred in this case is precisely the conduct the statute is designed to prevent.”
The obvious lesson is that Trustees should never condition the distribution of assets on the execution of a release. A more important lesson is that trustees should always consider the advantages of filing a court accounting.
A “court accounting” is an accounting filed with the court with a petition in which the trustee asks the court to approve the accounting. Equally important, the petition asks the court to “confirm and approve” the trustee’s “actions and transactions” disclosed in the accounting. If no beneficiary objects to the accounting, the court issues an order that effectively releases the trustee from liability for acts disclosed in the accounting. In Bellows, the order would have looked something like this:
IT IS ORDERED THAT:
- The First Account of FRED BELLOWS, Trustee of the Beverly Bellows Trust, is settled and allowed;
- All actions and transactions of FRED BELLOWS, Trustee of the Beverly Bellows Trust, as set forth in the First Account and Report, and all related pleadings, are confirmed and approved;
- The Trustee, FRED BELLOWS, is authorized to distribute the remaining trust assets in equal shares between the Trustee and beneficiary Donald Bellows.
It’s easy to see how valuable this order would have been to Fred. All of his acts—including the payment of his attorneys’ fees—would have been disclosed to Donald and the Court., forcing Donald to “put up (by paying his lawyer to file an objection) or shut up” (by not objecting and accepting the court’s order approving the payment of the fees).
This is why the instructions we give to all our trustees say: “Give serious consideration to taking advantage of this benefit [the benefit of a formal accounting] even if the trust does not require accountings or the beneficiaries are willing to waive this requirement.”