Trustee Mismanagement & Theft, with Scott Rahn
Should we trust the trustee? Do trustees really steal from the trust? Maybe not, and yes, they do. On today's episode of I Know a Lawyer, I speak with Scott Rahn of RMO LLP about bad trustees and their bad actions, including theft. Scott is a top-notch trust & estate litigator who has seen the full range of bad trustee actions. In the episode, we discuss:
Trustee's failure to provide information. (01:21)
How a lawyer can help break the ice between trustees and beneficiaries. (03:27) Can a Court compel an accounting even if waived in the trust? (06:43)
Two most common examples of bad trustee actions. (08:55)
Trustee's fiduciary duty and acting on behalf of the beneficiaries. (11:40)
Example of a truly bad trustee. (14:20)
Thank you Scott Rahn for joining me on the show. I thoroughly enjoyed the conversation. If you have questions for Scott or his team at rmolawyers.com, reach out to them or give them a call at 424-320-9444.
This podcast is brought to you by McKenna Brink Signorotti LLP and nothing in this episode or any episode of I Know a Lawyer is meant to be taken as legal advice. If you need legal advice, call an attorney, don't rely on podcasts.
Transcript
Ryan Lockhart (00:01):
Hello, everyone. Welcome to I know a lawyer. My name is Ryan Lockhart, and thank you for joining us today. As you know, this podcast is brought to you by McKenna Brink Signorotti LLP, a boutique law firm in Walnut Creek, California. Check us out at mckennabrink.com and see what we're all about. See what we can do to help you today. I am joined by Scott, Ron of RMO, LLP. How are you doing today, Scott? I'm great. Thanks for having me, Ryan, just tell you how it's a little bit about yourself and what you do.
Scott Rahn (00:32):
I am the managing partner of RMO. We are a litigation law firm focused on trust estate, probate and conservatorship litigation matters. All we do is litigation. We are trial lawyers. We don't do any estate planning. We don't do any estate administration unless it's tangential to the litigation we're handling. And we don't do any taxes. We do what we do. We do it well, and we don't do what we don't do.
Ryan Lockhart (00:59):
Awesome. So that kind of leads us into the topic today that we want to talk about. And that's trustee, mismanagement and theft. So I know I've seen plenty of cases where trustees let's just call them the bad trustees who are, you know, stealing from the family, stealing from the trust. And I know you have a lot of good stories, so I want you to start us off. What do you, what do you want to talk about this part?
Scott Rahn (01:21):
Sure. Well, I think what we're seeing coming out of the pandemic and the quarantine is that a lot of trustees are making a critical mistake in not sharing information. They're lacking transparency and that's something that has existed for a long, long time. Oftentimes parents will appoint a child. The eldest child is a perfect example to take care of all of their affairs. After they're gone, perhaps they're the most responsible or where they were just the one who was closest to them. And then once the second parent passes, that child takes over and they become, we'll call it high and mighty, and they don't want to answer to their younger siblings, or they don't want to answer to their siblings who weren't there to help mom in her final days because they were busy building their careers or traveling the world or, or what have you.
Scott Rahn (02:17):
So when the beneficiaries, the other beneficiaries asked for information, the trustee shuts them out. And during a time of quarantine, you can see how that would happen even more frequently. And sometimes it's because the trustee is, is still dealing emotionally with the loss of their parent, especially if they were extra close to them. And sometimes it's out of hubris frankly, and whatever the cause the reality is, is all that, that does the lack of transparency. All that that does is lead to conspiracy theories and allows them to run a muck. Because when you're asking for information from someone who charged with handling these affairs and they don't respond to you or they dismiss you, or they provide half information or misinformation it just leads you to believe. And sometimes rightly so, as we all know that they're doing things they shouldn't be doing, whether it's taking assets for themselves, taking assets for their family members or just fumbling and mismanaging assets altogether.
Scott Rahn (03:27):
So we find that in these instances, when the beneficiaries come to us and say, Hey, look, my brother or sister is or step parent as is often the case is mismanaging the trust. You know, they won't give me any information. We like to start off with either a phone call or a phone call to their lawyer, if they're represented and initiate a dialogue because sometimes it's as simple as breaking that ice, perhaps the sibling didn't want to talk to their sibling, right? There's animosity between them and that emotional gap just cannot be bridged. So oftentimes hiring a lawyer will allow you to, to bridge that gap. But if that's ineffective than what you have by hiring a lawyer is you have the ability to put a process in place to get the information that you ultimately need. And what does that mean? It means making a formal demand for an accounting, which you're required to do under California probate law.
Scott Rahn (04:35):
Before you can go to the court and ask the court to order that trustee to account. And the accounting is the secret sauce. Oftentimes people will come and they'll want a little bit of this information or a little bit of that information. And if you have a trustee who is playing games and is up to shenanigans, getting partial information may not tell not only the whole story. It may not tell the story at all. So getting an accounting, whether it's an informal accounting, perhaps with some backup documents or a court style probate court style, accounting is usually for us the first step in investigating a trustee's malfeasance, that accounting, whether we get it informally or whether we're forced to go to the court. And as you know, Ryan, the court is always going to compel a trustee to account because once you come to court and tell the court, I'm asking for information, but the trustee won't provide it. The court wants to know why the trustee is not providing that information. And so once you get that information, whether informally or formally, then you have what you need to dig into to really determine what's gone wrong, how badly it's gone wrong. And perhaps whether that trustee needs to be suspended and removed, suspended, removed, and surcharged, or some other action needs to be taken, but that will give you a roadmap to basically explain to the court what went wrong, how you've been harmed and how the court can help you address that.
Ryan Lockhart (06:21):
So I was very excited to have you on, because I love talking to estate litigators, cause you get to test what people like me draft. So this is how I learn how to draft better is to hear these stories. And I know other state planners that when you talk about the accounting, their first response would be, well, the trust waives accounting is that really tend to work or is it, I think that the judge is going to compel it if, unless there's a really good reason not to.
Scott Rahn (06:43):
Right? Yeah. That's a great question. And I always appreciate the jousting one between you tax planners and the IRS and FTB. Thank you. But also the jousting thing or the responsiveness by the estate planning bar to what we litigators do every day. And the short answer to your question is you can try to draft around it. But the reality is is that the court is going to compel the accounting. I think some of the best, most clever planning I've seen done around these issues is to put in different alternative dispute resolution obligations into the document to frankly, expedite what is ultimately going to happen to the core processes, which is push the parties to a place, to a point where they're going to have to sit down together, either with a mediator or an arbitrator or some sort of neutral and put their dispute in front of someone who's going to help them resolve it. Whether with an award, if it's an arbitration or with a settlement agreement, if it's a mediation. So the courts going, if it goes formal and it goes to the court process, they're going to be compelled regardless of what you put in the documents. That's an unbelievable right. Under California law.
Ryan Lockhart (08:04):
Yep. Good. So that just tells me that I'm doing it right. When I advise clients like, look, we can put the waiver in, but if they push for it, they're going to get it.
Scott Rahn (08:11):
Yeah, no, that's right. And I mean, sometimes you'll discourage, you know, we, we don't hear, frankly, from those benes, who've read those documents and said, Oh, well, there's no accounting. Right, right. The document says that. So there's nothing I can do. So, you know, my guess is it w you know, like most things that are written into contracts or any other agreement that are not binding under the law, we don't hear from the people who, you know, are persuaded by them.
Ryan Lockhart (08:39):
I tell you about the no contest clause, make it look scary, but there's not much teeth there. Yeah, exactly. So talk about, I want to think about trustees and like the bad trustees. Can you give me an example? Like, what's the most common example that you see a bad trait?
Scott Rahn (08:55):
Sure. I think the, the two most common are the trustee who's taking money and has been taking money usually from mom or dad, because they've never done anything in their lives. Right. They've relied on mom or dad for their support. Right. Probably from the time they were young adults through. Yup. Exactly. And they're continuing to do that. Right. They did it, they were taking money from mom's account after she was put in the home, they've been paying their rent. And now that mom's gone, you know, they really look at, you know, this is, if I have to split this pot now with my siblings, you know, what am I going to do for the rest of my life? And they just start taking, and whether it's, you know, accounts or property, or what have you they just, they, they respond in a very, you know, ego-driven way to, to protect themselves and protect their future.
Scott Rahn (09:57):
And the second, most popular thing I think is personal property. I mean, if it's not nailed down and somebody has access to the house and chances are, it's going to disappear you know, diamond, diamond necklaces, diamond earrings, watches, you know, China, you name it. I don't, I don't know how someone hides, you know, a full China set, but you know that silver, you know, the Sterling silver, that was great, great grandmas. You know, those things all seem to, to disappear magically into thin air. Anytime there there's a family that has these kinds of issues.
Ryan Lockhart (10:37):
Yeah. This makes, makes me think about the conversation I usually have with clients. When we come to the choice of trustee, I tell them it's the most important part. Yes. It's going to be the person who's going to do this job. It is a job after somebody dies. The administration's not something simple usually. So yeah, so the personal property one is very interesting because I've had to advise clients to go and change locks immediately because they were worried about people with access and things disappearing.
Scott Rahn (11:03):
Absolutely well, and we've all had to run to court, right. Because, and get somebody appointed as a special administrator simply for the purpose of securing property. And, you know, that's, it's, it's difficult and you don't know how quickly you're going to be able to get there right. In 24 hours, everything could be gone.
Ryan Lockhart (11:24):
Absolutely. So thinking about the trustees duty, not the bad trustee, but let's think of the trustee who just doesn't really know any better, because talk a little bit more about the trustee's fiduciary duty and how trustees can kind of step on a landmine that they don't even realize they just stepped on.
Scott Rahn (11:40):
Sure. That's a great question. And a great point. So a trustee has a fiduciary duty to all of the trust beneficiaries first and foremost, to put all of their interests ahead of their own and what we see sometimes our trustees who think that they're acting on behalf of the trust, but they don't really appreciate what that means, because what that means is they're supposed to act on behalf of all of the beneficiaries, including the siblings they don't get along with, or the stepchildren or step-parent they don't get along with. So what they end up doing is they end up taking action that they think is what's best for the trust, whatever that means to them. But again, it's really just acting out of ego and is acting out of hubris. So for example, you'll have, where perhaps you have a piece of real property that should be sold and the proceeds divided amongst the beneficiaries.
Scott Rahn (12:41):
Well, the trustee who is now on their high horse, because they were the chosen one, they decide that I'm going to remodel this property. I'm going to rehabilitate it. I'm going to turn it into this and then I'm going to sell it. And the reality is, is that that is an undertaking, a, an experienced or a professional licensed fiduciary would likely never do because they understand that there's no real value to the trust beneficiaries and investing 50,000 or a hundred thousand dollars into a parcel that is going to net you 50,000 or a hundred thousand dollars and take, you know, a year or two years. And we see those, we see those instances with some frequency, some regularity where the, the trustees in charge, they think they're doing what's best for the trust, but they're just not sophisticated enough to understand or appreciate what they're doing. Especially with real property. We see that similarly with investments but it seems less frequent with the investment securities, et cetera, because they usually have an investment advisor
Ryan Lockhart (13:57):
And on Bitcoin or something like that,
Scott Rahn (14:00):
They're all going in big on Bitcoin or Tesla or whoever, you know, waiting for the tick tock IPO. That's right.
Ryan Lockhart (14:11):
Alright. So I'm gonna put you on the spot right here, right here. What is the worst or craziest thing you've seen a trustee do?
Scott Rahn (14:20):
There's no shortage. I mean, you know, there's crazy stories out there. I hear them. Yeah. Yeah. Crazy stories. I mean, literally one instance where a trustee was a co-trustee did not want to be co-trustee with her brother and basically ignored. And in California, if you're a co-trustee, unless the document says, otherwise it's unanimous consent. So you have to act together. She blew off her brother. She took control over all of the trusts real properties, and they add a nice portfolio and proceeded to try to evict people without following any of the protocols which ended up in lawsuits. She removed benefits from people who were living in some of the rent controlled units, which ended up in lawsuits. She stole money from one of the trust accounts, put it in her own account and was just nonplussed about it. Did not think she had done anything wrong. She was doing what she thought was best for the trust, despite creating all of these problems and breaking all of this habit, we were able to get her suspended on an ex-parte basis. So we were successful, but it was just a very difficult personality to, to deal with. And to be fair, that's all we do. That's all we deal with every day. These personalities are the bread and butter of the RMO business.
Ryan Lockhart (16:05):
Yeah. As much as I try to avoid litigation, my planning, I know that there's just some families. This is going to be the battleground that those siblings are going to fight it out. This is,
Scott Rahn (16:16):
Yeah, that's exactly right, Scott. And we're happy to help. I mean, these people, you know, we represent sometimes the trustees who are caught up in these things, sometimes they got bad advice. Sometimes it was their own bad advice, but sometimes they got bad advice from their CPAs or a friend at the country club who told them they can do whatever they want. And you know, whether it's the beneficiary or the trustee, the reality is, is that there is an answer. There is a solution. And oftentimes it's just a matter of walking, whoever it is through it and giving them an out, creating an opportunity to resolve it. Because the last thing any of these families really want, and there are exceptions is to fight with their siblings for the next five, 10, 15, 20 years. Usually they've been fighting for decades already. And it's our job. It's our ethos to try to put people in a place where they can move on with their lives by finding or creating solutions for them.
Ryan Lockhart (17:20):
How can I get a hold of you?
Scott Rahn (17:23):
Yeah. The website is RMOlawyers.com or our direct line is (424) 320-9444. Or you can find me on LinkedIn Scott, Ron, it's R a H N a or just on the interweb by Googling my name. I'm sure I'll pop up and you can take a look at some of our videos, some of the fun stuff we we've been able to put out to try and help people.
Ryan Lockhart (17:53):
Thank you. Is any listener out there wants to get hold of Scott? I will have links in the show notes, and obviously that phone number will also be in the show notes as well. So give them a call, reach out to him. If you have any questions or concerns about essentially what's going on, you're in a trust that you're dealing with trust issues or personal and family dynamics come into play in a big way. Just like you illustrate it with some of your examples today. So I really appreciate you coming on the show today to talk about this. I think it's a big issue, topic that I kind of track like a little bit about, it seems like trust litigation issues are almost like, it doesn't matter what the economy is doing. Like this is just what families are going to go fight over. Especially if there's actual value and money involved. It's just going to happen and trying to find that resolution, like you just said, there's a way out, there's a solution there. Just trying to maybe bridge that gap between siblings or break that ice just so they can start getting that process to resolution going. Yep. All right. Well, thank you, Scott. That was my pleasure. That was Scott Rahn of RMO, LLP, check out his website in the show notes. I'm Ryan Lockhart. This is, I know a lawyer. Thank you everybody. Take care. Bye bye.