April 2017 Update
This book's goals, to demystify Probate Code accountings and describe a set of best practices for their preparation, are straightforward. Likewise, the path to achieving those goals is straightforward, but time intensive. Through continual review of the relevant literature, case law, and legislation, and annual updates based on that review, the Fiduciary Accounting Handbook will remain useful for fiduciaries, their accountants, and their attorneys who endeavor to tell an accurate and complete story through their accountings. Below, several updates in the 2017 edition have been highlighted.
In Estate of Giraldin (2012) 55 C4th 1058, 1065, the court answered the question, "[w]hen the settlor of a revocable inter vivos trust appoints, during his lifetime, someone other than himself to act as trustee, once the settlor dies and the trust becomes irrevocable, do the remainder beneficiaries have standing to sue the trustee for breaches of fiduciary duty committed during the period of revocability?" with a resounding "yes," underscoring the dilemma of the trustee who serves an incompetent beneficiary who holds the power of revocation. The result in Giraldin, left open the question of whether a trustee, who is not the settlor, would be liable to contingent beneficiaries for those acts undertaken while the settlor of a revocable inter vivos trust is alive and competent. The court in Babbitt v Superior Court (2016) 246 CA4th 1135, answered that question. In Babbitt, Leland and Mary Lynne created a revocable trust. The trust was revocable during their joint lifetimes, and on Leland's death, Mary Lynne divided the trust estate amongst two trusts, Trust A, which remained revocable during Mary Lynne's lifetime, and Trust B, which was settled with Leland's share of the trust estate and was irrevocable. After Leland's death, his daughter from a prior marriage sued for an accounting, and the court ordered Mary Lynne to account for a period beginning 3 years prior to the date of Leland's death. Mary Lynne sought and obtained a peremptory writ of mandate excluding from the court's order the pre-death period. The step-daughter had standing to petition under Prob C §17000 because Trust B had become irrevocable, but in the absence of any claim that Leland was incompetent or subject to undue influence, the step-daughter was not entitled to an accounting for the period of time during which the trust was revocable. 246 CA4th at 1145. During that period, no one owed her any duties, thus an accounting could not reveal facts that would support a claim for breach of trust. See §§2.67–2.69.
Previous editions of this book had not made clear how a fiduciary should treat advances or loans made by the trust to the fiduciary (or a third party). That oversight has been corrected. A loan is a change in form of asset: in exchange for trust money, the trustee receives the promise of repayment. Whether that promise is an oral promise or is a written promissory note, the exchange should be reported on the Changes in Form of Assets schedule. As the promisor repays the loan, receipts of principal reduce the balance due and also should be reported on the Changes in Form of Assets schedule. Receipts of interest should be reported on the Receipts schedule. See §11.15A.
In Gray v Jewish Fed'n of Palm Strings (2016) 243 CA4th 892, the court held that large disbursements chargeable to income may be made from principal, as if the principal account were a bank or a lender, provided the principal account is reimbursed over time. See Prob C §16373. In Gray, the primary trust asset was an interest in commercial rental property. A successor trustee had distributed principal in order to pay for repairs, tenant allowances, leasehold improvements, and broker's commissions on rental property—i.e., items that are normally chargeable to income. The trial court found, and the appellate court agreed, that under Prob C §16373, principal distributions could be used for such expenses, but only if the income reimburses the principal account over time. See §13.17.
While judges are required to take appropriate corrective action when confronted with unethical behavior by attorneys (see Code of Judicial Ethics, Canon 3(d)(2)), their authority is limited when misconduct will not have a continuing effect on the judicial proceedings. In In re Marriage of Murchison (2016) 245 CA4th 847, the court's purpose in removing the allegedly transgressing attorney appeared to be punitive not prophylactic. Considering the client still wished to retain the attorney and neither the court nor the other party would be prejudiced by such continuing representation, the attorney could continue to represent the client. See §14.4.