A trust is a legal device often used in estate planning. A trust may be established in the trustor’s lifetime, or it may be established in the trustor’s will where it takes effect once the trustor dies and the will is admitted in probate. Generally, assets in a trust are distributed according to the trustor’s intent, which can be specified in the trust instrument or document.
If a trust instrument is not specific, the Probate Code gives trustees broad discretion to distribute the trust’s assets by: (1) liquidating them and distributing the proceeds between the beneficiaries (in cash distribution); (2) allocating equal shares in interest in the trust’s assets between the beneficiaries (pro rata in kind distribution); or (3) allocating whole assets separately to different beneficiaries (non-pro rata in kind distribution).
What is a trust?
The trust represents “a collection of assets and liabilities” that can be held and transferred by an individual – the “trustor” – to another individual – the “beneficiary.” (Portico Mgmt. Grp., LLC v. Harrison (2011) 202 Cal.App.4th 464, 473.) The trustor typically names a “trustee” who holds legal title to the property owned by the trust.
A trustor can establish a trust during their lifetime, in which case the trust’s contents are the trustor’s property as long as the trustor is alive. (Estate of Giraldin (2012) 55 Cal.4th 1058, 1065-66.) This is called a revocable inter vivos trust. It is revocable because the trustor, while alive and competent, can change their mind about the trust and its beneficiaries.
A testamentary trust, on the other hand, is a trust created by the trustor’s will. This type of trust is not created until the will is admitted in probate court and the court orders the trust to be established. (Ross & Cohen, Cal. Prac. Guide: Probate (The Rutter Group 2023 Update) § 2:107.) In making its order for distribution, the court must confirm the trust’s validity, terms, and scope, as well as “any interest that could pass to the trustee under th[e] will.” (Wells Fargo Bank & Union Trust Co. v. Superior Court (1948) 32 Cal.2d 1, 8.) It is important that the probate court’s order for distribution contain all of the necessary terms of the trust because once the order is issued, it supersedes the terms of the will. (In re Callnon’s Est. (1969) 70 Cal.2d 150, 156.)
What happens when beneficiaries dispute the trust’s terms?
In the case of a testamentary trust, the probate court’s order should identify the trust’s beneficiaries and their property interests as instructed by the will. Once the court’s order is final, the trustee can then distribute the trust’s assets to the beneficiaries. In some cases, a trust will specify which beneficiaries receive which assets. It may also specify the manner in which the assets should be distributed. If that is the case, the trustee is generally required to adhere to the trustor’s instructions.
Consider the following case. A married couple established a trust, and when the husband died, the wife was left as the sole trustee. The wife subsequently added her six children as successors of the trust, and when the wife died, the children became cotrustees. The trust instrument specifically provided that the trust assets should be distributed to its beneficiaries at the time of the wife’s death if the beneficiaries had reached 30 years of age.
One of the children, Nellie, wanted to get her share of the trust’s assets when her mother passed away, but the other five children “wanted to retain the real property in trust hoping the property would appreciate in value.” (Trolan v. Trolan (2019) 31 Cal.App.5th 939, 944.) The siblings appointed a probate referee to appraise the real property, which led to a dispute about the appraiser’s conclusions. The five siblings filed a court petition to get assistance in valuing the trust’s assets. The trial court held that the trust’s “Age 30” provision meant the trust should have been distributed upon the mother’s death and ordered its assets to be liquidated.
The appeals court affirmed the trial court’s order, holding that the trust language unambiguously demonstrated the mother’s intent to distribute the trust upon her death if all of the beneficiaries had reached the age of 30. (Id. at 951-52.) The court Because all of the children had reached 30 years of age when the mother died, Nellie’s demand to receive her share of the trust’s assets was proper, despite her siblings’ desire to hold the property in the trust in hopes that the property value would increase.
What happens when the trust does not specify distribution?
Other times, however, the trustor does not specifically instruct how the assets should be distributed among beneficiaries. Probate Code § 16246 gives a trustee the power to decide how these assets will be distributed. For example, if a trust owns real property, the trustee has the discretion to sell the property and distribute those proceeds to the beneficiaries. Alternatively, the trustee may choose to distribute the property in kind, meaning the trustee divides the interest in the property between the beneficiaries.
Sometimes, a trust’s language may seem like a clear instruction that the assets be distributed in a certain way. However, once a dispute about the interpretation arises, a court might find that the trust’s instructions were not so clear. For example, when a trustor simply requested that the trustee sell the trust’s assets, the court held that this “request” was not a “strict command” to sell the trust properties. (Städel Art Museum v. Mulvihill (2023) 96 Cal.App.5th 283, 294.) Instead, the court said, this language gave the trustee discretion to distribute the trust’s assets either in cash or in kind. (Id.)
If a trustee opts for an in kind distribution of a trust’s assets, they may choose “pro rata” or “non pro rata” distribution. Pro rata distribution gives the beneficiaries an equal share in the interest of each of the trust’s assets. For example, if one of the assets is a piece of land, the beneficiaries would receive an equal undivided interest in the land. In this situation, the beneficiaries typically become tenants in common.
Non-pro rata distribution occurs when a trustee distributes different assets of proportional value to the beneficiaries. For example, if there are two properties of relatively equal value owned by the trust and two beneficiaries, the trustee may distribute one of the properties to each of the two beneficiaries.
How the Attorneys at Underwood Law Firm Can Help
Probate Code § 16246 gives trustees wide discretion in determining how trust assets are distributed between beneficiaries. If a trust instrument is not explicit regarding how the assets should be distributed, a dispute about what, when, how, and to whom will almost certainly ensue. Even when a trust instrument is clear about distribution, beneficiaries may still disagree and bring that disagreement to a court for a ruling. If you are named as a trustee or beneficiary of a trust, it is important that you understand your rights and responsibilities when it comes to distributing the trust’s assets. The dedicated and experienced attorneys at Underwood Law Firm, P.C. can help you preserve your rights as a trustee or beneficiary when you are involved in a dispute about a trust’s distribution. Contact us today.