As an estate planning attorney who represents trustees whose actions have been challenged as well as parties who allege wrongdoing by a trustee, I stay current with legal developments in the field. A recent case before the California Court of Appeal for the Fourth District is a good lesson. It demonstrates what is ultimately expected of a trustee and what’s at stake in lawsuits involving trusts.

So here’s what happened, or at least a summarized account of the case and the court’s opinion. In Gray v Jewish Federation of Palm Springs and Desert Area, the plaintiff and appellant, Laura Gray, was a former co-trustee and the sole beneficiary for the income that the trust of Edward B. Cantor generated. (Cantor died 25 years ago.) The defendant and respondent, Jewish Federation, was one of three remainder beneficiaries. The main asset in the Cantor Trust consisted of an interest in commercial rental property, and Gray had been involved in the day-to-day operations of that property.

The dispute between Gray and Jewish Federation began with an objection of Jewish Federation to accounting that Gray had provided. The objection was ultimately followed by no less than six amended accountings. Sticking points in the case revolved around Gray’s allocation of large expenses for the property in Las Vegas and around her compensation as a trustee.

In January, the appeals court affirmed the trial court’s decision against the plaintiff. Based on statutory requirements set forth in the California Probate Code that detail how trustees should manage money and property in their care, it found: A trustee may pay for large expenses out of principal if there isn’t enough income to pay for the item and maintain disbursements to the income beneficiary. However, the trustee must pay back the principal over time. In Gray’s case, it ruled that Gray was owed $47,913.58 in underpaid income, but that she had overcharged the principal $61,749.01. She would pay the difference out of income.

The trial court further found that Gray had prepared all but the first two accountings in direct violation of the court’s order to prepare a proper accounting and that this constituted bad faith. It therefore ordered her to pay $28,000 in attorney’s fees to Jewish Federation, plus $12,709.45 for the objections and appeal to the petition. In addition, she was to reimburse the Cantor Trust for $12,608 in trustee fees.

Gray v Jewish Federation holds a couple of lessons. First of all, trustees can be found liable not only for violating technical requirements but also for wrongful intent, and they might not receive payment for their services if they don’t hold themselves to the highest standards of accounting. Secondly, plaintiffs must realize that disputes over trusts can drag on for years or even decades, and that attorney’s fees can sometimes exceed the amount that is in dispute.

By Kevin J. Moore