Trusts & Attorney Fees: Who Pays?

Trustees hire attorneys to assist with normal trust administration and with litigation. When are the attorney fees properly paid from trust assets?
In California, the law allows the trustee to pay reasonable attorney fees associated with the normal administration of the trust (See sections 16247 and 16243 of the Probate Code). Normal trust administration work done by attorneys includes advising the trustee on his or her duties, petitioning the court for instructions, sending notices to trust beneficiaries and creditors, work involved with transferring title to trust assets, and trustee accountings. The work billed by the attorneys should be supported by itemized invoices as the trustee has the burden of proof to show that charges made are proper (See Purdy V. Johnson (1917) 174 Cal. 521, 530).
In addition, trust litigation involving the validity of the trust and the assets and affairs of the trust are also paid by the trust estate because such litigation benefit the trust itself (section 15684 of the Probate Code). For example, if the trust sues to claim ownership and possession of an asset then the trustee’s attorney fees are payable out of the trust, even if the trustee is unsuccessful in suing on behalf of the trust.
However, if the trust litigation instead involves a dispute between competing trust beneficiaries over their inheritance rights in the trust, i.e., a trust contest, or involves whether the trustee is personally liable for a breach of trustee duties (i.e., for possible wrongdoings as trustee) then such litigation does not benefit the trust itself. Rather, such litigation personally benefits either a beneficiary or a trustee (See Whittlesey v. Aiello (2002), 104 Cath 1221).
In such cases where the litigation benefits someone personally, the general rule is that trustee must remain neutral, i.e., not use the trust assets to advocate for one side or another fighting over the terms of the trust distribution. However, if the trust itself contains express language authorizing the trustee to use trust funds to defend the terms of a trust against a contest the trustee may then use trust funds (See Doolittle v. Exchange Bank (2015) 241 Cath 529).
Also, when a trustee’s administration is the subject of lawsuit (e.g., a petition to remove the trustee or to penalize the trustee for breach of trust), the trustee is generally ill advised to use the trust funds to defend against himself or herself. If the trustee loses the litigation then he or she must repay the trust for the attorney fees paid for the unsuccessful defense of the trustee.
Moreover, the unsuccessful trustee is then wide open to further attack because the attorneys that the unsuccessful attorney had hired as trustee owe their attorney duties of loyalty and confidentiality to whomsoever occupies the office of the trustee (at any given time) and not to any person who once occupied that office.
Thus, when a trustee is replaced the successor (current) trustee (who may have sued to remove to the prior trustee) is legally able to ask the prior (removed) trustee’s attorneys for all confidential communications between the attorney and that prior trustee. Accordingly, a trustee who may be found to be personally liable is well advised to hire an attorney using his or her own money so that the attorney represents the trustee personally and not as trustee; so that the attorneys duty of loyalty and confidentiality is owed to the individual and not the trust. Of course, after the trustee has successfully defended him or herself against allegations of breach of trustee’s duty, then the now vindicated trustee may request that his or her attorney fees be reimbursed from the trust assets.
Furthermore, if a beneficiary contests a trustee’s accounting either without reasonable cause or in bad faith then the court may award against the contestant the compensation and costs of the trustee and other expenses and costs of litigation, including attorney fees, incurred to defend the account (Section 17211 Probate Code).
The foregoing discussion is not legal advice. Consult an attorney for guidance. Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.