Last year my family and I went on vacation to the east coast. Despite the fact that I was out of my beloved home state for practicing law (California), a friend of a friend pulled me aside for legal advice. Here's what I was asked: Is it legal to use your child's trust fund for a parent's expenses?
Well, the answer is this - maybe, maybe not. In truth, it's a bit of a grey area that parents and caregivers should tread lightly.
In this particular case, trust documents stated that trust funds may be used for the "care and well being of the children, and/or in the best interest of the child." This is typical language for a minor's trust fund. And it makes perfect sense if you consider that the trustee who is named to preside over the trust is most likely a person who the grantor (typically a grandparent) places a great amount of trust in (no pun intended). In other words, when someone decides to leave a minor assets such as cash, property, stocks, or investment accounts, they need to name someone to manage those assets should the grantor die before the child is able to inherit the assets.
So the question becomes: do expenses of a parent caring for the minor qualify as "for the care and well being of the child," or "in the best interest of the child"?
Before we address the question at hand, I feel obliged to tell you the story behind the actual question I received. So here goes.
Two parents are raising their two children in a quiet east coast town. The childrens' paternal grandfather has a substantial amount of money, a large sum of which he places in two separate trust funds, one for each grandchild. He does not, however, name the father of the children as successor trustee (the grandfather, mind you is primary trustee during his lifetime). We won't speculate here as to why that is, but will just stick with the facts. But, were it a crime drama - this would be fact numero uno. Instead, the grandfather names the children's aunt (his daughter) as successor trustee. The aunt lives in the big apple, and let's just assume for fun that she has a posh, glamorous life - a bit of a socialite with celebrity friends.
Ok, skip ahead ten years. The parents are on the verge of divorce. A torrid affair has taken place which the whole small town becomes privy too. Family skeletons are emptied - nay thrown out of the closet - and the father is revealed to be abusive and mentally unstable. Were this a movie, this would be fact numero dos.
And here's our next fact: while the father has always maintained well paying jobs, money has been mismanaged and there's nothing left. On top of that, the father has just lost his job. And, on top of this, one of the minors is about to turn 18. Let's assume (because it adds to the drama) that his trust was set up to be given to him at 18. In truth, trust funds can be set up to be distributed at the discretion of the decedent, be it 18, 30, upon college graduation, or any number of specific events or ages.
So the father is essentially broke. The mother (just in case you're wondering) is okay for the moment because her lover happens to be quite wealthy. Now, what happens next is perhaps the climax of our drama - the New York aunt (and trustee) is suddenly killed by a trash truck in the streets of NYC.
Ok, STOP. Haven't I seen a movie where the mob owns trash companies to launder money??
And who does the court appoint to act as backup trustee? Well, the father obviously.
So now we jump to my conversation with the suspect and cash poor father. He essentially asks me if anyone can come after him for using his children's trust funds for his own purposes. And the answer is yes, they could. Would they be successful in removing him as trustee or having any of the funds returned to the children? Well, that depends on the evidence. Now, I will note that the real story ends here.
Just for fun, let's say the father is rapidly using up money, spending on things that are above and beyond necessary expenses. Maybe he has a penchant for designer clothes, fancy cars and lavish vacations, for example. The children's mother finds out about this, and is determined to stop him, before all the children's money is gone.
So what recourse does a family have when it comes to misappropriation or mismanagement of trust funds? Here's a peek inside the legal world of probate and trust law, and a proposed action plan for holding trustees liable:
If the mother came to me, I would recommend to her that she petition to have the father removed as trustee. Granted, I would only recommend this if she had sufficient proof that funds had been misused, or was able to attain such proof. Now, in order to accomplish his removal as trustee, I would start with two steps. First, I would file an emergency ex parte application for suspension of the father as trustee, with a waiving of notice to any party. The "waiving of notice" is particularly important, as we would not want the father to know what we were doing. Normally, all parties must be given written notice of court proceedings. Nevertheless, the primary purpose of the ex parte application with waiving of notice would be to have the father suspended as trustee pending the hearing on his removal. "The emergency" application would be justified by the concern of additional trust fund waste, and would allow us to get into court much sooner. The application could be filed and signed off by the court in one day, assuming we had evidence to justify our actions. Evidence could include bank statements, receipts, testimonies, and declarations under penalty of perjury.
As soon as we had a court order to suspend the father as trustee, I would file a petition to permanently remove him as trustee. These two things could be done on the same day, and a hearing date would be set 6-8 weeks out if we were in Contra Costa County (longer in Alameda).
Now, it should be noted that at the time we ask to have the father suspended as trustee, someone would need to be appointed to act as interim trustee. Hiring a professional fiduciary to act as trustee would be the mother's best bet in getting her action approved by the court. We could then decide who we would like to request as permanent trustee at our upcoming hearing. Again, the best bet would be to elect a professional, as they are a neutral third party with no potential competing interests. If she tried to make herself trustee, for example, success is less likely as the probate judge could not be sure she didn't want the money for her own purposes.
Here's what would likely happen if we had our ducks in a row: the judge would grant our order to temporarily suspend the father as trustee and appoint the fiduciary as temporary trustee. We would get certified copies of the order from the court, and take them to the bank (s) to ensure the father no longer had access to the funds. The hearing date for his removal would be set 5-8 weeks out. During this time, I would request that our professional fiduciary do a forensic accounting to analyze all accounts prior to our hearing date.
Now, assuming everything goes smoothly, we make it to our hearing date and the matter is not continued by the court. The questions at hand for the court are as follows: what needs to be done in the short term to protect trust assets? What needs to be done in the long term? Will the parties agree to mediation? Does more discovery (evidence gathering) need to take place?
Trust litigation cases are often complex, and no two cases are the same. The story I wrote about here is just a brief overview of one possible way for a family member to seek justice for their children's trust. A good trust attorney will tailor each legal action he/she makes to fit the particular family dynamics, evidence on hand, and best interest of the client.
In most situations, it is in both parties best interest to settle the case. This is where the majority of trust litigation cases find their resolution. Trial dates are set many months out, and incur a significant legal and emotional cost. With experienced trust attorneys on both sides, a deal can be struck that resolves the matter without causing further harm to the family members involved.
After all, once attorneys are gone and cases completed (trial or settlement), families will still be families, and they've got to figure out a way to move forward and move on.
If you have a legal question about a trust issue, and you live in the San Francisco East Bay, call my office at 925-322-1763 for a free consultation.