October 28th, 2022 in Trusts
Can the trustee withhold my distribution until I sign a release? As a trust litigator in Santa Clara County, I get this question often. Recently, I was representing a beneficiary of a trust. The trustee was represented by a large law firm. The trust administration was complete and my client was anticipating his distribution. I was surprised when I received a release from the trustee along with a letter stating that until the trustee received a release from all of the beneficiaries, the distributions would not be forthcoming. The beneficiaries had questioned some of the actions of the trustee and the trustee was threatening not to distribute until he received a release from the beneficiaries. A release can be called different things: trust settlement agreement, trust closing agreement, distribution agreement, etc. A release, no matter what it is called, requires the beneficiaries to consent to the trustee’s actions and release the trustee from any liability. Can they do this? The answer is a resounding no if the trust distribution is being made in accordance to the terms of the trust. There are a few exceptions to this rule.
Per California Probate Code Section 16004.5, a trustee can withhold a reserve for expenses. This is an amount held back from the distribution to pay for trust expenses such as tax preparation fees, taxes, recording costs, trustee fees, accounting fees, and other costs and expenses related to the administration. The amount of the reserve will depend upon the size of the trust estate and the estimated expenses.
The trustee and the beneficiary can voluntarily request you sign a release and you can voluntarily agree to do so. However, the trustee cannot hold your distribution hostage if you refuse to sign the release.
The third exception is the trustee can request to be indemnified against the claim of a third party that arises as the result of the distribution. Indemnification is when you agree to pay any costs and fees that may arise and cover any liability that may arise. For example, if the trustee agrees to make a distribution before the tax returns are processed. If the Internal Revenue Service or the Franchise Tax Board audits the tax returns, the beneficiaries agree to pay any fees and costs to defend the tax return along with any tax liability that is owed because of the audit.
The trustee can withhold any portion of the trust that is in dispute. For example, if there is a disagreement or contest over who Is a 20% beneficiary because of an ambiguity, the trustee can retain the portion of the property or funds. The trustee can retain the portion of the trust which is in dispute until the dispute is resolved.
The trustee can retain an amount to seek court approval of the trustee’s activities through a petition and an accounting filed with the court. The fees associated with a petition and accounting are the accountant fees to prepare the accounting, attorney fees to prepare the petition and represent the trustee, and the court filing fees. The trustee can charge the trust for these expenses.
The trustee cannot hold your distribution hostage. However, the trustee can choose to do request court approval of the trustee’s actions and provide a formal accounting. This will delay distribution to the beneficiaries. The trustee can charge the trust for the expenses related to the petition and the accounting which means diminishing the funds available to the beneficiaries. In Santa Clara County, a formal petition filed with Santa Clara County Superior Court Probate Division can delay the distribution several months as the hearing dates are approximately 3-4 months after you file your petition. Add this time to the time it takes prepare the petition, about 4-6 weeks, and this can delay distributions for six months.
If a beneficiary contests the accounting or actions of the trustee, the trustee can use trust funds to defend the trust. The court will adjudicate the matter. This allows the trust administration to be finalized through the court process. By seeking court approval, the trustee protects himself or herself from future lawsuits from the beneficiaries for actions or inactions.
While a trustee cannot withhold distributions in exchange for a release, it can be advantageous for the beneficiary to agree to a release. Sometimes it comes down to the beneficiary can sign a release and receive their funds within the week or, alternatively, do not sign the release and the distribution can be delayed several months and the amount distributed will be less as the trustee will seek court approval to settle the trust.
For my client the trustee cannot hold the distribution hostage. However, he can state if the beneficiaries are not willing to sign a release he will file a petition and a formal accounting with the Santa Clara County Superior Court Probate Division to obtain court approval and finalize the trust administration. In my case, it was imperative the beneficiaries knew what actions the trustee took or did not take so we knew what was being waived. Additionally, there were some provisions of the release agreement which were too broad that had to be removed in the finalized document.
If the trustee requests you sign a release, be sure to understand all of the trustee’s actions or inactions so you know what you are releasing. It is always a good idea to have an experienced attorney review the agreement to ensure your rights are protected. Even if the trustee has an attorney, that attorney represents the trustee’s interest and does not represent your interests as a beneficiary.