TAPPING THE TRUST TO FUND THE BATTLE: When Trustees Can Use Trust Funds To Litigate With Beneficiaries

By Adam F. Streisand, Esq.^* and Miguel Sanqui, Esq.*

In litigation with a beneficiary, the trustee’s ability to access the trust as a war chest is a major strategy consideration for both sides. By cutting off the trustee’s money supply, a beneficiary can gain enormous leverage. Even if the beneficiary fails to cut the money supply short, the threat of removal and surcharge against a trustee for improperly tapping the trust to fund the battle can be distracting (if not debilitating). Thus, it was with great consternation to trustees (and their attorneys) that on December 27, 2002, the Third District of the Court of Appeal, in dictum, made this remarkable statement:

Not surprisingly, petitions to remove and surcharge trustees are already quoting this language from Estate of McAdams with emphasis and fanfare. But the statement, which is nothing more than dictum (the opinion had nothing to do with removal and surcharge petitions), also contradicts long established California law. On the frontline of these battles, lawyers for trustees should be armed to respond and, in a broader sense, to advise their clients when they can use trust funds to litigate with beneficiaries. The following discussion is intended to help arm our fellow frontline lawyers.

I. A TRUSTEE ACTING IN GOOD FAITH CAN AND SHOULD USE TRUST ASSETS TO DEFEND AGAINST REMOVAL AND/OR SURCHARGE