ADR: A Better Way to Resolve Fiduciary Probate Cases
Fiduciary trustees are given tremendous responsibility and leeway when executing a will or managing a trust, which can lead to perceived misuse, or even abuse, of that role. This can result in disputes with beneficiaries regarding expenditures, excessive fees, dispensing treasured keepsakes or jewelry to family members, or selling stocks and other assets for less than their perceived value, with even the timing of the sale leading to questions.
Hon. Melinda A. Johnson, who has been a neutral with JAMS for 14 years and who served as a judge for 21 years, recalled the case of a trustee who paid herself $10,000 a month with no documentation of whether she worked 10 or 100 hours in any given month. As is often the case, the trust only said “reasonable fees” and the trustee apparently thought this was reasonable. When the beneficiary began questioning the fees, it came to Johnson for mediation.
“I talk the issues through with each side and produce a range of fees that I think a court would find reasonable,” Johnson said. “Most courts have a schedule of fees they consider for fiduciaries.”
The next step is to negotiate how much the trustee has to return to the trust. Sometimes the trustees are able to provide a refund, but often, they don’t have money left to return, which leaves the beneficiaries in a dire situation of whether to cut their losses and forget about getting their money back.
Such cases are difficult to try in court, and judges on the bench rarely have the time to sift through all the financial data or listen in detail to both sides of the story. In these cases, mediation is a better, quicker and less expensive way to resolve fiduciary probate cases.
Mediators, like Johnson, take the time to sit down with both sides and go through the accounting line by line. Sometimes the beneficiaries withdraw their accusations when they realize the expenses are justified, or that the stock market was in a down swing and that’s why gains were low during a certain period. This is something that an experienced neutral can analyze and explain. A judge can’t take the time to do this in many cases.
Family battles involve baggage
Mediation also allows for creative dispute resolution. Johnson had a case where three cousins were all equally certain their grandfather had promised to give them his vehicle, a “hot car.” She brought them around to agree that instead of any one cousin getting it, the car would be donated to charity and go to auction, where they could bid on it if they wanted to do so.
“Each cousin was more interested in keeping the car away from the others,” she recalled. “A lot of this baggage is from a long time ago, and most trusts involve beneficiaries with a lot of baggage. You’re really fighting 50 year-old battles.”
Family disputes inevitably involve deep fissures in relationships that spill over into trust disputes. She recounted the case of three brothers, with two aligned against the third. The driving force behind their enmity was that from when they were 5 and 7 years of age, they were forced to take care of their 3 year-old brother, which had led to bitter angst that lasted a lifetime.
“No court would ever have the time to listen to all of this,” Johnson said. “Mediators have the time to get to know the parties and when they realize you understand where they’re coming from, they relax. Then, they’re ready to start making business-like decisions. It’s about moving from feelings to facts.”
As the fees add up for attorneys and the realization sets in that the estate is paying for everything, then, they’re willing to settle.
Aside from such disputes, asset evaluation is often a battleground among families, especially when it involves real estate. One party might feel that grandmother’s home is worth $900,000, but the trustee may only get $650,000 for it. It is a mediator that assesses the market value and explains market conditions to the beneficiary.
When siblings or cousins own a quarter of a beach house worth $2 million, the disputing beneficiary might seek $500,000 as their share, but each quarter is not actually worth that much. It takes a patient mediator to explain all this to angry parties, Johnson explained.
When there are multiple pieces of property to be apportioned, typically, the party that gets a higher valued property is expected to give the difference in value to the other beneficiaries. But, if they are unable to pay the $500,000 in cash, and if the trust also does not have the funds, then Johnson would suggest that one of the parties buy out the other. If that’s also not possible, then, the properties have to be put up for sale and the proceeds shared.
Another option is when they own it in common, and rent them out for the long-term. She typically works through several options with the disputing parties and brings them to the table to agree on a choice that would be fair to all parties.
However, businesses that are sold, especially if they are limited liability corporations (LLC) or S corporations, can be very difficult to evaluate, Johnson said. One party might claim their business is worth $1 million, but, the other side would question why they need to pay so much for two plumbing trucks and some customer accounts.
Mistrust of trustees
But typically, the most common fiduciary accounting cases involve trustees who take too much in fees, delay disbursement to beneficiaries or hire dubious contractors to perform work.
Sometimes, when the trustor is still alive but needs care, as with an aging parent or relative, trustees who move in to care for them, or make arrangements for their care, may be questioned by family members about mounting expenses for medical treatment, or for expenses they charge to the trust for their time and efforts.
“Very often, a child moves in to take care of mom and has had to give up their job or part of their income, and I see complaints about how much this sibling is accounting for care. But the other family members don’t consider that they did not forfeit income or time to provide the care,” Johnson said. “Then, you have to explain how the money was spent, how much care was involved and why it’s reasonable.”
The toughest cases involve beneficiaries questioning attorney’s fees. A mediators will try to settle the matter, and sometimes attorneys will offer to take lower fees so they won’t stand in the way of resolution. Other times, the attorney will refuse to lower their fees and the case could end up in court.
Tamara Lopez was a probate attorney for 14 years before she moved to private mediation. Lopez, who joined JAMS last year, recalled the case of a private fiduciary who managed the estate of a young woman after her parents died. Once the woman reached an age when she could manage the remaining funds on her own, she began questioning expenditures and met with Lopez for the final accounting mediation.
Typically, fiduciary accounting covers fixed periods and comes up for periodic review. Reviews are scheduled usually for two-year periods, since most trustees don’t want to look beyond that to re-create records. Lopez took the time to go through years of detailed accounting with the young woman, which requires a lot of experience to grasp, since it’s different from typical accounting. No one had ever bothered to go through and explain things in detail, and once Lopez did that, the beneficiary understood some basic financial principles – why certain stocks were sold during certain periods and why some gains were lower. She eventually dropped her lawsuit against her trustee.
“Fiduciary accounting is not very glamorous, like someone testifying on the stand,” explained Lopez. “But I love this type of accounting because it always tell the story. Document driven cases are very challenging, and even with electronic filing, it’s hard for judges to keep up with all the details.”
When such cases go to court, the fees also add up quickly, but arbitration or mediation can bring them to a quicker and smoother resolution. It can also be less expensive, since parties can save money if their attorneys only submit documents, and it’s the arbitrator that spends time reviewing documents.
Her longest case lasted an entire day and her shortest case was resolved in four hours, Lopez said. The most complicated cases have involved investment strategies; how a trustee should or should not invest and having the cash they need to do so.
“It’s kind of like Monday morning quarterbacking,” Lopez said. “ Beneficiaries will be upset because they feel fiduciaries should have done something sooner, or waited to do something, and it takes time for the trustee to set the stage for what was going on and why they did what they did.”
She prefers to keep testimony at a minimum and rely on the documents. But sometimes the documents can’t help with a highly sentimental dispute, like in the case where family members disputed who got to keep a cherished Christmas ornament. Lopez worked out a schedule where the ornament rotated each holiday, and even when it had to be shipped to the next relative.
ADR a preferable alternative
Fraud cases, which sometimes call for handwriting experts, are also well-suited to arbitration, Lopez said. Such cases need to examine years’ worth of documents, since signatures can change over time. These matters are better suited for arbitration than court.
Family disputes also fall within this realm and are better suited to mediation.
“Sometimes it’s easier for someone else to make the decision, since these are long, ongoing disputes. Unpopular decisions that come from a neutral party make it easier for family relationships to survive in the long term, because, otherwise, the fallout can have lasting consequences,” she said.
ADR offers an alternative to several days of court and the expense and stress of litigating, which can be very unpleasant. Most people feel much better after resolving it with a mediator instead of trying it in court, Johnson has found.
“The main benefit of ADR is that everyone tells the judge the facts and no one tells the judge the truth. With ADR, there’s time for the neutral to get to the truth,” Johnson summarized. “It’s about showing you understand their case.”
Hon. Melinda A. Johnson has presided over and settled a wide variety of cases, including Family law, Probate/Trusts, Commercial Lease and Contract trials, Complex civil litigation and Real estate, among other practice areas. She tried Ventura County’s first designated “complex” litigation, a toxic tort case involving more than 140 plaintiffs and 40 defendants. She lent her leadership in consolidating the Ventura Superior and Municipal Courts while Presiding Judge of the Superior Court in 1994-1995. She has been considered one of Ventura County’s top judges and is ranked as outstanding by the local bar association.
Tamara Lopez, Esq. is a seasoned independent mediator. She has handled matters involving probate litigation and appeals, conservatorships, trusts, decedent estates, financial elder abuse, Public Records Act, school districts, real property and contract law. She served in the Office of the County Counsel, Town of Los Gatos and Santa Clara County Water District for more than 20 years, handling a broad range of land use and water disputes, including water rights, water use, eminent domain and relocation.