Trusts and Trustees Explained
The concept of a trust is meant to be simple in that when an individual creates a trust, she creates a separate person or entity that is operated by a trustee for the benefit of the beneficiaries at the direction of the trust document itself (which is drafted by the person who created the trust). The trust must have assets and only the trustee (and not the beneficiary) has the authority to control the assets (i.e. sell, buy, gift, etc.). The trust assets are actually owned by the trustee as the trustee legally owns the assets of the trust.
A beneficiary is someone who receives distributions from the trust . Since a trust is an entity that can own assets in its own name, the trustee can receive and transfer assets without the need for court intervention or approval as she does in her capacity as a guardian. In other words, the trustee acts much as any other business or corporation acts. But, the trustee has fiduciary duties that require the trustee to use the trust property for the beneficiaries’ exclusive benefit. This means that the trustee must act in the beneficiaries’ best interest and exercise loyalty to the trust beneficiaries. Again, this is where the duties and obligations of a Trustee differ from a guardian.
Who Has Legal Control?
While the law and the investment community may have little familiarity with a trust, courts recognize that a trust is an established legal entity that requires formal representation to function in legal proceedings like any other legal entity. In fact, to the extent there is a trustee, courts are generally willing to let a trustee represent the trust in legal halls. An individual serving as a trustee in New York is authorized under SCPA 1610 to "conduct the trial of any action or proceeding by or against him, or in which the trust is interested, without joining with him as a party" (SCPA 1610). This is reaffirmed by accountings routinely filed by trustees (either voluntarily or pursuant to a court order) on behalf of any trusts not otherwise supervised by the Surrogate’s Court which are routinely and regularly granted upon consent by the interested parties (all the parties with a vested interest in the trust property) and entered by courts.
On the flip side however, if a trustee does not file an accounting with the Surrogate’s Court and the trust is not under the Court’s jurisdiction (as frequently occurs with lifetime trusts), litigation arises where the existence of the trust must be established. As discussed below, a trust cannot exist without a trust agreement, but where the trust agreement is absent, a finding of a trust agreement may still be established by the surrounding facts and circumstances. Accordingly, without the existence of a trust agreement, trustees lack statutory authority to act on behalf of the trust. However, trustees operating under the authority granted them by the trust agreement have full authority to represent the trust in courts but if they operate outside that authority, such as where no trust agreement has been located, the Court may require the trustee to be represented by counsel and assert that the trustee may not represent the trust without filing a bond. See e.g., In re Galinsky, 254 NY 236, 172 NE 164, 1930 NY Slip Op 52664U; In re Estate of Schneider, 230 AD2d 586, 646 NYS2d 867, 1996 NY Slip Op 6448 (2nd Dept 1996).
Can a Trustee Appear in Court for a Trust?
When the trust is the plaintiff or the defendant, the management of the trust falls to the trustee. Most states allow a trustee to litigate on behalf of the trust.
The question of whether a trustee can represent a trust in court is highly fact-intensive and often driven primarily by the type of action brought on behalf of the trust. If the trustee is to prosecute a will contest on behalf of the trust, the trustee must have the same standing as the beneficiary for whom the action is filed, understood as having an interest in the estate on or after the decedent’s death. However, not all states require the trustee to have standing equal to a beneficiary to file an action on behalf of a trust.
Even when a trustee has standing it may lack the authority. Some states permit trustees to bring a lawsuit on behalf of the trust only if the trust instrument specifically authorizes such action. In many of those states, without such provision in the trust instrument, the trustee may bring the lawsuit if the beneficiaries agree to permit the trust to commence the action. Other states authorize the trustee to bring the action on behalf of the trust even though there is no express provision in the trust.
Some questions also need to be answered before a trustee can make an appearance in court on behalf of the trust. For example, does the litigation require a "fiduciary," and if so, is the trustee permitted to act as a fiduciary. Some states define fiduciaries while others state that the term includes but is not limited to an executor, administrator, guardian, curator, and any other person appointed by the court for the supervision or control of another person’s property.
Most states take the position that a trustee is entitled to appear in court only where there is no other fiduciary of the trust, and may not do so where there is a co-trustee performing those services. If there is a vacant office of trustee, most states allow the trustee to appear on behalf of the trust unless the court enters an order prohibiting such representation.
There are potential pitfalls with bringing the action in the name of the trust. The trustee may be prohibited from bringing the action in the first instance, and in such case the trust may be subject to being dismissed for lack of prosecution. Further, if the trustee brings the action in the name of the trust and the trust does not own the claim, the court may hold the trustee personally liable for the defendant’s legal fees and costs associated with defending the action.
Cases involving the application of statutes of limitations present yet another potential trap for the unwary trustee. A suit filed in the name of the trust tolls the statute of limitation as to the trust but may not begin to run again until the action is dismissed or otherwise prosecuted to judgment. As a result, the time remaining for a beneficiary to bring a claim on behalf of the trust may be significantly shortened.
Because each state has different statutes that may affect the ability of a trustee to appear in court on behalf of the trust, and because each requires its own nuances and fact-intensive inquiries, consultation with a lawyer with experience in trust litigation is essential.
Trustee Representation Limitations
Upon request the Court may permit a non-attorney trustee to prepare and file a single instrument or pleadings. Also, substitute judges may file Trusts along with other instruments. Furthermore, they may also grant an application by a non-attorney trustee to be substituted for "Trustee" or "successor Trustee" in place of a person appointed as a trustee under terms of a written instrument that is filed with the surrogate.
However, there are limitations for Trustee representation in a case. For example, a non-lawyer appointed as trustee may only be permitted to file one instrument in each litigation or proceeding. Without leave of court, a non-attorney trustee cannot make oral statements or argue at a hearing or trial. In addition, the non-attorney trustee would not have the right to participate or control discovery.
For this reason, a non-attorney trustee may be required to retain an attorney to handle the proceeding. Even though he or she may file a motion under Rule 3:7-5(a) granting an order permitting the non-attorney to represent the trust or estate in a proceeding, the court may deny the request as unopposed if the notice of the motion is properly served and the time for making objections to the motion has passed. So it may be advisable for counsel to represent the trustee.
Differences Between Trusteeship and Legal Representation
In estate planning and settlement matters, the role of the trustee is well understood; we want our trustees to serve as impartial fiduciaries and hold and administer our property on behalf of our beneficiaries. That role is a far cry from that of our legal counsel, who we expect to be our zealous advocates in front of a judge and jury, and perhaps even some unsympathetic family members.
To that end, California Probate Code 16250 states in part the following:
(unless expressly authorized or directed by the court afterwards) (a) The trustee is a necessary party to any proceeding that seeks either of the following:
(1) To remove the trustee.
(2) To constrain the trustee to do or refrain from doing any act.
So, as important as the trustee’s role is, it’s still basically an administrative role. In fact, section 10800 of the Probate Code supports this notion:
(a) Except as provided in paragraph (b), a holder of the power to direct or restrain fiduciary power, including, but not limited to, a guardian ad litem, conservator of estates, trustee, attorney-in-fact, agent, settlor of a trust, or a custodian of property under Part 6 (commencing with Section 3900) of Division 4 of the Family Code, shall not appear in any judicial proceedings by or against the trust, estate, or conservatorship because of the power held, including, but not limited to the powers described in Item 88 of the Judicial Council form No. DE-111EL, Declaration for Ex parte Communications with Court Personnel (Probate). (b) A guardian ad litem, conservator of estates, trustee, attorney-in-fact, agent, settlor of trust, custodian of property, or guardian of a person who has a personal interest in the assets of the conservatorship, estate, or trust for which the fiduciary is serving may appear in a judicial proceeding by (1) filing a statement indicating that the fiduciary is authorized under this section to represent the conservatorship, estate , or trust in the judicial proceeding and (2) serving a courtesy copy of that statement in the manner provided in California Rules of Court, rule 1.21. (c) This section does not apply to actions under Section 104(a), 105(b), 2630, 2652, or 2653 or to proceedings before or with a court officer, referee, or referee assistant at which a right to a hearing is not provided.
Trustees have a duty to account for their actions, and clients will expect that their trustee will argue for the acceptance of an accounting and against the removal of the trustee. But the trustee can’t file the accounting individually and tell their attorney to represent them in court. The trustee can only authorize their attorney to file documents on their behalf that the probate code doesn’t explicitly require the trustee to file and tell them to represent the trust in the court. Otherwise the attorney is essentially becoming a party in the action which creates conflicts of interest making them subject to removal by the court and liability for legal malpractice.
That’s not to say that the trustee must always hire an attorney. First of all, the trustee can often handle simple matters without legal help. Many people are able to quickly transfer cash between bank accounts early on, for example. However, once trust litigation arises, or a significant dispute starts to enter the picture, then the trustee has an obligation to have their own legal counsel.
Also, although the trustee is a necessary party to probate proceedings, they have some options. For example, in contested petition proceedings where there is a request to remove the trustee, the trustee can file a non opposition to the petition and allow the court to order the removal of the trustee. Or, in other matters, most petitioners will not require that the trustee join in the actual petition. So, the trustee can sign a joinder to the petition, which simply states that the trustee will abide by and perform any order the court enters.
Lawyer Consultation
Hiring legal professionals is important to ensure compliance and adherence to legal standards, especially in the area of estates, wills and trusts. Lawyers are bound by certain rules and procedures that must be adhered to at all times. Non-lawyers who represent individuals before a court or in the Administrative Tribunal must adhere to the Code of Civil Procedure governing appearances in court as a litigant and to the Tribunal.
Further, non-lawyers must be cognizant of the impact of any representation they may do on an individual or the trust estate. In many case, these individuals may cross the boundary between what is a permissible activity for a layman and what constitutes the unauthorized practice of law. If this conduct is perceived by the court as unauthorized, this could expose the Trust estate to negative consequences and ultimately to the loss of the estate should the proper outcome not be achieved without legal assistance.
Cases and Illustrations
For a practical understanding of how conflicts may arise, examples involving the use of a bank as both trustee and administrator are instructive. The case of Nelson v. American Nat’l Bank & Trust Co. of Orlando, 913 So. 2d 748, 749 (Fla. 4th Dist. Ct. App. 2005) offers a clear example of how the commingling of trustee and executor duties can lead to litigation.
In Nelson, the decedent created an inter-vivos trust and named a bank as trustee. The trust deed included standard terms, transferring all real property by specific devise to the trustee, and subjecting such property to the trust, including the right to sell in order to pay debts and expenses.
After decedent’s death, the bank conveyed the devised property from the estate to itself, in its capacity as trustee for the distribution of the decedent’s trust assets. The former named executor of the decedent’s estate, brought an action for declaratory judgment against the trust. The lower court ruled that the trust should not be burdened with paying the decedent’s estate debts, such as funeral expenses and probate administration expenses, because the trust property was subject to the payment of such debts.
On appeal, the court reversed. The trust deed states that all property, real or personal, is subject to the payment of debt "which shall attach to such property in the same manner as in the hands of an individual." 913 So.2d at 751. The appellate court opined that "Florida law holds real property to be chargeable with the payment of debts owed … so long as no other statutory provision . . . vests priority in other claims." Id.
In other words, where the decedent’s Will provides that the property of his estate is chargeable with debts of the estate but does not preclude charging the trust property , then the charges against his estate shall be levied against the trust property in addition to his estate property. See also Mallon v. Bank of Amelia Island Trust Co., 638 So.2d 1072, 1073 (Fla. 1st Dist. Ct. App. 1994).
The cases of Mehta v. Paulson, 158 P.3d 541, 544 (Utah 2007) and Mulligan v. Silva, 2005 WL 1522815 (E.D. Pa. June 27, 2005), also highlight the need for caution when a bank (or other fiduciary) endeavors to serve in more than one capacity for the next generation of a family. Though they involve the combination of trustee and guardian, the lessons are similar.
In Mehta, the court determined that a corporation serving as trustee was disqualified from serving as guardian simultaneously. 158 P.3d at 545. A guardian of an incapacitated person must be able to "act on her own behalf without unnecessary conflicts of interest, which the guardianship statute indicates [is] impossible for corporate fiduciaries." Id. at 545, n. 2. The court advised that "if a corporation acts in a dual capacity where conflicting interests are likely to impede the duties of either, the trial court must scrutinize closely the actions of the corporation to ensure it is acting solely in the best interest of the incapacitated person." Id.
In Mulligan, the corporation serving as trustee attempted to force the trust grantor to resume her duties as trustee. The Court concluded that the grantor actually retained control over the trust. The trust grantor conceded that she had unduly influenced the LLC and its officers to benefit the trust and cause the trust to benefit her. The Court noted that the fact that one individual can establish and serve in multiple roles within a single company (or corporation) does not allow the interested party to serve in both trustee and corporate representative capacities.