Anyone Can Sue You, But Here’s How to Protect Your Trust and Avoid Litigation
By Christine M. Allen, Esq.
Trust litigation is becoming an increasingly common occurrence after the death of a loved one in California. Regardless of how well-drafted or thought-out a trust is, anyone with a grievance or perceived grievance can file a lawsuit. While you can’t necessarily stop someone from suing, there are proactive measures you can take to minimize the likelihood of litigation or mitigate its impact. Here’s a comprehensive look at strategies to help trustees and estate planners avoid and manage trust disputes effectively.
The Reality: You Can’t Prevent Lawsuits
Let’s face it. One hard truth is that no matter how carefully you act as a trustee or how well-drafted a trust is, you cannot prevent someone from filing a lawsuit. California’s judicial system allows people to sue if they believe they have a legitimate claim. Even if a lawsuit is ultimately deemed meritless, it can still consume time, energy, and financial resources to resolve.
However, there are tools and techniques you can use to discourage frivolous claims, reduce the likelihood of disputes, and protect yourself and the trust from unnecessary exposure. Below, we delve into these strategies in the context of California trust law.
Strategies to Avoid Litigation
1. Include a No-Contest Clause in the Trust
A no-contest clause included in a trust, which is properly drafted and enforceable under California Probate Code Section 21310, can be an effective deterrent. This provision penalizes beneficiaries who challenge the trust’s validity without probable cause by disinheriting them if they lose. While it won’t prevent lawsuits outright, it forces potential litigants to weigh the risk of losing their inheritance. One important point to consider in setting up your trust with a no-contest clause, is that such a clause is only likely to discourage litigation by those individuals who stand to receive something if they do not challenge the trust. In other words, a person who has been entirely disinherited has nothing to lose in bringing a lawsuit challenging a trust or trust amendment. If you want to discourage a difficult relative from bringing a lawsuit, consider leaving them just enough of a gift in your trust that they would not want to risk challenging the trust. One second point to consider is that if you amend your trust, each amendment should contain its own no-contest clause. The no-contest clause contained in the original trust generally will not apply to protect a future amendment.
2. Require Beneficiaries to Object to Accountings within 180 Days
California Probate Code Section 16461 allows for the inclusion of a provision in the trust that requires any objections to a trustee’s accountings to be made within 180 days. If this provision is included in the trust, it can limit the trustee’s period of exposure to a lawsuit for his or her actions taken with regard to the trust that are disclosed in the accounting to that 180-day time period. Otherwise, the trustee may be exposed to liability for those same actions for a period of three to four years! Please note, however, that in addition to the 180-day objection period language appearing in the trust itself, when the trustee sends out an accounting to the trust beneficiaries, there is a very specific notice that must be included with the accounting for this 180-day provision to apply. An experienced attorney can assist in ensuring the notice is properly included.
3. Limit Trustee Liability in the Trust Document
Trusts can include provisions that limit the trustee’s liability for honest mistakes. For example, language might specify that the trustee is only liable for actions involving gross negligence or intentional misconduct. This can reduce exposure to lawsuits stemming from minor errors.
4. Authorize the Trustee to Use Trust Funds for Legal Defense
Drafting language that permits the trustee to use trust assets to defend against legal challenges can protect the trustee’s personal finances. This provision can be custom-drafted and may explicitly cover disputes related to the trust’s validity, any amendments’ validity, and the trust administration.
5. Penalize a Bad-Acting Trustee
Conversely, the trust may also provide that if a trustee is found liable for misappropriation, fraud, gross negligence, and/or intentional misconduct, they will lose their right to receive any trustee’s fees and lose any gift left to them as a beneficiary of the trust. This kind of provision can create balance in a trust and put trustees on notice they stand to lose big if they do the wrong thing with trust assets.
6. Use Clear and Precise Trust Terms
Consider creating clear standards in the trust for things like trustee compensation. Under California law, a trustee is generally entitled to “reasonable” trustee fees. However, that standard is incredibly vague and therefore subject to interpretation – often leading to disputes. A clear standard, such as setting forth that the trustee shall receive 1% of the Trust estate per year for trustee services rendered may avoid any dispute. Consider including a specific disinheritance clause that identifies individuals by name who are not receiving trust assets. This is particularly important for excluded close relatives such as a current or future spouse, children, grandchildren and any others who may naturally be in line to inherit or who may be otherwise expecting something. This can make plain a trustor’s intentions and discourage those individuals from later suing.
7. Obtain a Certificate of Independent Review
If the trust includes provisions favoring certain beneficiaries (e.g., disinheriting a child or favoring a caretaker), a Certificate of Independent Review under California Probate Code Section 21384 can help ensure enforceability. An independent attorney evaluates the trustor’s understanding and intent, providing evidence that the trust was not the product of undue influence.
8. Secure a Medical Letter of Capacity
Obtaining a letter from a physician affirming the trustor’s mental capacity at the time the trust is executed can be a strong defense against claims of incapacity. California courts give significant weight to such evidence when determining a trustor’s competency.
9. Leave a Separate Handwritten Letter
Leaving a separate handwritten letter explaining your decisions about to whom you have decided to leave your assets can assist your future trust beneficiaries and trustee in the event someone challenges your trust, as it may serve as evidence of your intent, which is often the crux of trust litigation disputes.
10. Serve a 16061.7 Notification
Following the death of a trust settlor or upon the incapacity of a trust settlor, a trustee has a duty under California Probate Code Section 16061.7 to serve a notification on the trust beneficiaries and the trust settlor’s natural heirs-at-law, meaning those who would inherit if there was no trust in existence. Serving this notification triggers a 120-day period within which beneficiaries can contest the trust. By starting this clock, you create a clear deadline for disputes, ensuring that challenges are addressed promptly rather than lingering for years. It is best to work with an attorney to ensure this notification is properly prepared, and that proof of the service of the document is made and maintained. Once the deadline has passed, if an individual files a lawsuit to challenge the Trust, the statute of limitations can be raised as a defense to the lawsuit, and often, a demurrer can be filed to stop the case from proceeding right at the outset.
Ending Meritless Lawsuits Early
If a lawsuit arises despite these precautions, several strategies can help resolve it quickly and efficiently:
1. File a Demurrer
A demurrer challenges the legal sufficiency of a complaint. If the lawsuit lacks legal merit—for example, if the plaintiff’s claim doesn’t fall within the statute of limitations—a court may dismiss it outright.
2. File a Motion to Strike
A motion to strike can target irrelevant, improper, or legally baseless portions of a complaint. For instance, if a plaintiff includes inflammatory allegations without evidence, you can request that those parts be removed.
3. Negotiate a Resolution
Litigation can be expensive and emotionally draining. Engaging in mediation or settlement negotiations can often resolve disputes faster and more amicably than going to trial.
4. Request Summary Judgment
If discovery reveals that the plaintiff has no evidence to support their claims, you can file a motion for summary judgment. This asks the court to rule in your favor without a trial based on the lack of genuine issues of material fact.
Conclusion
While you can’t stop someone from suing you as a trustee or disputing a trust, careful planning and proactive measures can significantly reduce the risk and impact of litigation. Incorporating strong no-contest clauses, enforcing statutory deadlines, and including trustee protections in the trust document are key strategies. If litigation does arise, there are tools—like demurrers, motions to strike, and settlement negotiations—to end meritless claims swiftly.
Trustees and estate planners should work closely with experienced legal counsel to ensure all available precautions are in place and to address disputes efficiently if they occur. With the right strategies, you can navigate the complexities of California trust law and protect the integrity of your estate plan.