Legal Question in Real Estate Law in California

Re: Use of Escrow to cover repair expenses

I assume you mean your youngest sister was trustee of the trust. Executors carry out wills, trustees manage property held in trust.

The statement that the house "was taken out of trust" raises real questions. The trustee is required to carry out the intentions and purposes for which the trust was created and to work faithfully in the interests of all trust beneficiaries. If the trust disposes of a particular asset, the proceeds from disposition are also trust property, held and managed by the trustee for all of the beneficiaries. It sounds as though the trust was terminated and its asset distributed, each of you receiving from the trust a 1/3 interest as a co-tenant.

While the house was held in trust, it would have been within the power of the trustee to arrange for the cosmetic repairs without the necessity of consent of the beneficiaries, because, while the house was held in trust, the trust, rather than the three beneficiaries, was the owner and the trustee had the power to manage the property.

It is legally permissible for someone to be both trustee and beneficiary, and that seems to have been the case here. However, the trustee-beneficiary must charge herself for costs incurred to the same extent as she charges the other two beneficiaries, UNLESS the express terms of the trust require otherwise.

The trustee sister perhaps should not have expended her own funds for repairs. This may be self-dealing, which is impermissible. The repairs should have been paid for in the first instance out of trust gross income or trust assets. However, if everyone agreed, or if it were an emergency, it may be forgiven.

So therefore, if $20,000 was expended by the trustee to maintain the property, and the trustee did not act improperly, each beneficiary should (normally, and assuming the trust instrument calls for equal sharing) bear $6,667 of the burden. If the trustee sister has not been reimbursed for advancing her own cash, and the impropriety of self-dealing is overlooked, both of the other two sisters should give up 1/3 of the total amount (in the example, $6,667) at close of escrow. I can see no basis for docking the non-trustee sisters 1/2, or $10,000 each.

This would be the usual situation. Keep in mind that trusts can be highly 'personalized' by the grantor and, for example, the trustee might be entitled to a fee for services, or the like, which would affect the cash distributions upon close of escrow.

It also seems to me that a trustee's claim for reimbursement should be brought when the trust is dissolved (2000) and not when the now co-owned asset is sold by the former beneficaries. This is another "amateur trustee" error which may be forgiveable.