At the conclusion of a trust administration, trustees sometimes ask beneficiaries to acknowledge receipt of their final distribution and release the trustee of liability. While seeking a release is permitted under California Probate Code Section 16004.5, the release must be given voluntarily by the beneficiary. 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 benefitting Donald.
Following Beverly’s death in December 2008, Donald requested a distribution of his share of the Trust. When a distribution had not been made 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 a cover letter, asserting that the amount was insufficient because Fred had improperly deducted his own attorney’s fees of $13,000 from the trust before dividing the assets. 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.
Applying Section 16004.5, the Court held:
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 concluded 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. In more important lesson is that trustees should always consider the advantages of filing a court accounting . After all, Fred would not have needed a release from Donald if he had simply filed an accounting and obtained court approval of his acts as trustee.