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How Does a California Trust Get “Under Court Supervision” (Part 1 of 2)?

Torrance Probate and Estate Planning Attorney

How Does a California Trust Get “Under Court Supervision” (Part 1 of 2)?

Many of us have learned that in California having a trust is critical to avoiding court involvement. Otherwise, so we’ve been told, there will be a probate decedent’s estate court proceeding or a conservatorship court proceeding, respectively, when we:

  1. Pass away; or
  2. Become unable to take care of ourselves anymore.

So what is a trust under court supervision? Is it an oxymoron? Is it blasphemy? Is it fictional?

A trust subject to court supervision is something very real, and it’s exactly what you think it is. It’s a trust carried out under court oversight.

It’s normally the result of a plan not carried out correctly. So the good news is that a trust subject to court supervision often is avoidable.

Before we get to that, however, let’s discuss how a trust gets under court supervision.

Then in our next post we will discuss how that impacts carrying out the trust requirements (i.e., “trust administration”).

How Does a Trust Get Under Court Supervision?

There are 2 ways that a trust can get under court supervision:

  1. The trust is funded by a court order; or
  2. There is court litigation involving the trust (normally due to alleged malfeasance of the trustee in charge of carrying out the terms of the trust).

Trust Funded by Court Order

The California Rules of Court exist to standardize the ways that courts manage their cases across all of California. For a discussion of the California Rules of Court and other applicable rules and laws, see our How To Proceed After Filing Probate Court Case post.

The California Rules of Court provide that a “trust funded by court order” is a trust that will receive funds through any one of a variety of court orders. Those court orders are:

  1. Substituted judgment orders;
  2. Spousal property orders; or
  3. Court orders resulting in proceeds for minors or people with disabilities (California Probate Code 3600 and following).

Each one of these types of orders would require an entire post, if not an entire treatise, to explain. You need a working understanding of each of them. So I’m going to try to explain each of them to you briefly and clearly.

Substituted Judgment Orders

Substituted judgment orders occur only in conservatorship court proceedings and guardianship court proceedings. They authorize the conservator of a conservatorship to take certain actions on behalf of the conservatee.

For example a substituted judgment order could authorize the conservator to sign a trust for the conservatee and transfer the conservatee’s assets into the trust. The same applies to guardianships.

Spousal Property Orders

Spousal property orders arise only under 2 narrow sets of circumstances:

  1. When 2 people are married, one of them lacks capacity, and the other of them does not lack capacity; and
  2. When 2 people are registered domestic partners, one of them lacks capacity, and the other does not lack capacity.

Similar to a substituted judgment order in a conservatorship or a guardianship, a spousal property order authorizes the spouse who has capacity to take certain actions on behalf of the spouse who does not have capacity.

For example a spousal property order could authorize the spouse with capacity to sign a trust for the spouse who does not have capacity and transfer their assets into the trust. The same applies to registered domestic partners.

Litigation Settlements or Court Judgments Involving Minors or Adults with Disabilities

These are a bit different. Litigation settlements or court judgments resulting in proceeds for minors or people with disabilities often occur when the minor and/or disabled adult was involved in an accident that resulted in litigation.

The litigation may result in a settlement agreement. Alternatively, the court judgment may provide for payment of funds to the minor or disabled adult. In either case, the funds often transfer to a special type of trust called a special needs trust.

Court Litigation Involving a Trust (The Ballad of Hellion and Angel)

Court litigation regarding trust administration may result in the court bringing the trust under court supervision.

Let’s say, for example, that you’re not married. You create a trust and nominate yourself as trustee to be in charge of administering the trust. In this hypothetical, you also nominate your good-for-nothing son Hellion to be the trustee after your death. You nominate your reliable and trustworthy daughter Angel to act as trustee after Hellion. Finally, the trust provides for Hellion and Angel to receive all of the assets equally and outright after your death.
Then you die.

For 3 years after your death Hellion has been treating the trust as his personal piggy bank. He has been living in your house rent-free and letting it fall into disrepair. He has been draining your bank accounts for his personal use. He is also refusing to follow the terms of the trust or distribute any assets to Angel.

So Angel files a petition with the court seeking a court order removing Hellion as successor trustee. She requests to be appointed as successor trustee and that Hellion be required to distribute to her the remaining assets.

These cases take months or years to resolve in court. If the court is sufficiently concerned that Hellion has mismanaged the trust assets to the benefit of himself and to the detriment of Angel, then the court may bring the trust under court supervision, at least partially.

As I will discuss in the next post, taking the trust under court supervision will enable the court to implement some safeguards to protect against Hellion continuing to mismanage the trust assets to the benefit of himself and to the detriment of Angel.

Lack of Effective Planning

As you can see, for the most part it is possible to avoid having a trust get under court supervision. Trusts get under court supervision when:

  1. The trusts are created and funded through substituted judgment orders in conservatorship and guardianships;
  2. The trusts are created and funded through spousal property orders;
  3. The trusts are created and funded by court orders regarding settlements or court judgments providing proceeds for minors or people with disabilities in litigation; or
  4. Sometimes in court litigation regarding trust administration when the court wants to implement safeguards to protect against the current trustee possibly continuing to mismanage the trust assets to the benefit of himself or herself and to the detriment of other trust beneficiaries.

Items 1 and 2 are avoidable if someone has a good estate plan with a trust and powers of attorney. Likely there will be no need for a conservatorship if that person becomes unable to care for himself anymore. Similarly, someone who has a good estate plan with a trust should be able to avoid a guardianship for his children if the children inherit his assets while they’re still minors.

Item 4 also is largely avoidable. It is critical to select successor trustees who are trustworthy above all else.

Get Help from an Experienced Trust Attorney

We’ve covered a lot of ground in this post regarding trusts under court supervision. Now you know how and when the court can get involved.

In the next post “What Are the Consequences of a California Trust Being ‘Under Court Supervision’ (Part 2 of 2)? ” we will discuss the consequences of a trust being under court supervision.

Hiring an attorney experienced with trusts can help avoid a lot of this. In addition, the advice and guidance of an attorney experienced with trust court cases is invaluable for attaining your goals in these types of cases.

At Meinzer Law Firm, P.C., we have over 20 years of experience helping clients achieve their goals in trust cases. Contact Meinzer Law Firm, P.C., in Torrance to assist you with your Los Angeles County probate court case.