** Reprinted with permission of the State Bar of California, Trusts and Estates Section, From Volume 21, Issue 4, (2015) of the California Trusts and Estates Quarterly**

INTRODUCTION The majority of contested trust proceedings are resolved before trial, frequently as a result of a successful mediation between the parties. The settlement is often memorialized in a written agreement signed by all fiduciaries, beneficiaries, heirs, and other litigants. With the goal of bringing finality to present disputes and avoiding future ones, the settlement agreement often includes a broadly drafted general release. Usually, the general release in the settlement agreement purports to absolve the trustee (and the other parties) from past errors, omissions, breaches, and other wrongdoings. The general releases typically include language waiving the protections of Civil Code section 1542, intending to release all of the parties from existing claims that are not yet known or discovered by the parties at the time of signing the settlement agreement. Despite the all-encompassing language, broadly drafted general releases may still have limited effectiveness for fiduciaries in light of Probate Code section 16464, subdivision (b). To enforce the release, the trustee will bear the burden of proving that the beneficiary was on "equal footing" with the trustee. 1 In the event of a future dispute concerning the scope of the release, the trustee will have the burden of establishing that the beneficiary was aware of all material facts, the beneficiary had a full understanding of his or her legal rights and the settlement/release was fair and reasonable to the beneficiary. 2 Where the trustee has failed to disclose material facts, or the release is economically unfair to a beneficiary not represented by counsel, the release may be voidable by the beneficiary through an action for rescission. 3 Regardless of the recitals set forth in the settlement agreement containing the release, the enforceability of a release in favor of a trustee is always a fact-specific inquiry. The courts will look beyond the language of the agreement into the circumstances surrounding the beneficiary’s execution of the settlement agreement containing the release. 4 Whether the beneficiary was represented by legal counsel in executing the agreement containing the release may be the most pivotal factor. In the absence of independent counsel, it will be very difficult for the trustee to establish that the beneficiary fully understood his or her legal rights. A thorough understanding of the limitations imposed by law on releases favoring trustees is needed to avoid a future finding by a court of over-reaching. Until a court order approving the release becomes final, the over-reaching release may jeopardize the entire settlement. 5 California decisional law interpreting subdivision (b) of section 16464 and its predecessor statute in the context of general releases is sparse. By virtue of Probate Code section 15002, the decisional law of sister states is relevant and applicable in California except as otherwise modified by statute. 6 Subdivision (b) of section 16464 is taken almost verbatim from section 217 of the Restatement of Trusts, 7 which was derived in substance from even earlier versions of the Restatement of Trusts and Contracts. 8 Section 217 has remained largely unchanged for nearly a century. California courts generally recognize the Restatement of Trusts (second and third editions) as embodying the common law of trusts.

9 Where California cases or statutes are not on point, the common law interpreting section 217 of the Restatement of Trusts can be determinative. This article begins by summarizing the current California law restricting the enforceability of releases protecting fiduciaries, as embodied in subdivision (b) of section 16464 of the Probate Code. This summary is followed by an analysis concerning the burden of proof when such releases are disputed. This article then separately discusses each of the four subparts of subdivision (b) of section 16464. To explain each subpart, the authors draw upon California statutory law, California decisional law, current and prior versions of the Restatement of Trusts and the Restatement of Contracts and the decisional law of other states. With the discussion of each subpart of section 16464, the authors provide their own practical suggestions on how to structure settlements so that releases are protected against future challenges. The authors conclude with recommendations of model language for release provisions in settlement agreements for practitioners who are concerned a release might be challenged in the future. II. OPERATIVE LAW GOVERNING RELEASES Releases are contracts, subject to the same statutory and common law defenses against enforcement as any other contract. Such defenses include, mistake, fraud, undue influence, duress, lack of consideration, and unconscionability. 10 Enforcement of releases in favor of trustees is further restricted by well-established common law rules specifically governing contracts between fiduciaries (i.e., trustees, attorneys, directors, agents, and brokers) and their charges. 11 In California, the common law rules limiting the efficacy of releases favoring fiduciaries, particularly trustees, are codified in Probate Code section 16464. 12 Subdivision (b) of Probate Code section 16464, which restricts the enforcement of releases in favor of trustees against beneficiaries, reads in pertinent part as follows: [Page 39] (b) A release or contract is not effective to discharge the trustee’s liability for breach of trust in any of the following circumstances: (1) Where the beneficiary was under an incapacity at the time of the making of the release or contract. (2) Where the beneficiary did not know of his or her rights and of material facts (A) that the trustee knew or reasonably should have known and (B) that the trustee did not reasonably believe that the trustee knew. (3) Where the release or contract of the beneficiary was induced by improper conduct of the trustee. (4) Where the transaction involved a bargain with the trustee that was not fair and reasonable. 13 III. BURDEN OF PROOF Where a trustee gains an advantage from a transaction with a beneficiary, the trustee is presumed to have breached a fiduciary duty. 14 The presumption is rebuttable by the trustee. Almost by definition, a trustee who receives a release from a beneficiary has obtained an advantage from the beneficiary. Without any prima facie showing by the beneficiary to the contrary, the burden of proving that the transaction was fair and reasonable, with adequate consideration being received by the beneficiary in exchange for granting the release, is shifted to the trustee. 15 To uphold the release, the onus is on the trustee to disprove the existence of the conditions of Probate Code section 16464, subdivision (b). 16 Since a release protecting the fiduciary remains voidable by a beneficiary in the absence of the trustee proving it is fair and reasonable, the safest way to protect future enforceability of a release is to obtain immediate court approval of the settlement agreement containing the release. To ensure that the court’s order approving the settlement contains the necessary findings, the authors recommend that the petition for approval of the settlement agreement allege (among other things) the following, taken directly from the statute: (1) The beneficiary was not under any incapacity at the time of the making of the release or contract. (2) The beneficiary knew of his or her rights and of material facts that the trustee knew or reasonably should have known. (3) The release was not induced by any improper conduct of the trustee. (4) The consideration received by the beneficiary in exchange for executing the settlement agreement containing the release was fair and reasonable. In the absence of immediate court approval, the trustee could face a steep uphill battle against a beneficiary seeking rescission of settlement agreement based on an after-discovered claim. Given the detriment of hindsight, the trustee’s burden of proving to the court that the trustee should not have known and disclosed that claim to the beneficiary prior to obtaining the release is substantial. 17 IV. UNDER INCAPACITY A release is invalid where the beneficiary was under an incapacity at the time of the making of the release or contract. 18 Individuals are presumed to have capacity to contract. 19 The presumption does not apply to a minor or person subject to a general conservatorship of the estate. 20 Where the trustee seeks a complete release and there is a clear case of legal incapacity of a beneficiary, such as minority or a general conservatorship, the initial step is to secure the appointment of a guardian ad litem ("GAL") to participate in the settlement negotiations and/or to consent to the petition for approval of the settlement. 21 The appointment can usually be obtained ex parte. 22 In practice, an individual’s decisional capacity to understand a transaction may be unclear. Where an individual’s decisional capacity is partially impaired, the complexity of the transaction, the level of impairment, and the correlation between the impairment and the inability to understand the transaction determine whether the individual lacks capacity for the particular transaction—in this case executing the settlement and release. 23 Probate Code section 812 provides that a person lacks capacity to make decisions unless, among other things, he or she is able to understand and appreciate his or her rights affected by the decision, the probable consequences to him or her, and the risks, benefits, and reasonable alternatives involved in the decision. 24 Practically speaking, the more complex the transaction, the lower the level of impairment needed to find lack of decisional capacity. Probate Code section 811 adds an additional requirement for a finding of lack of capacity for a particular transaction, namely that the individual evidences a deficit in at least one area of mental function and that the mental function deficit is the cause of the lack of capacity. [Page 40] With the adoption of Probate Code sections 810 through 814, the "all-or-nothing" approach to capacity has effectively been replaced by a sliding scale 25 An individual may have legal capacity to execute a will, nominate a conservator, or appoint a trustee or agent, but lack the capacity to make donative transfers or execute complex contracts. 26 In prior years, the appointment of a GAL only required a finding that the individual was a categorically "incompetent person" for all purposes. Now, the focus under section 372 of the Code of Civil Procedure is centered on whether a person lacks capacity to make a particular decision. Given the complexity and abstractness of the concept of releasing unknown claims, as well as the frequent reallocation of financial benefits among the parties as a result of the settlement, a mild deficit in certain mental functions, such as the "ability to understand and appreciate quantities," the "ability to reason using abstract concepts" and the "ability to reason logically" may be sufficient to cause an individual to lack capacity to execute a release. When in doubt, the safest course of action is to seek the appointment of a GAL. 27 If the questionably competent beneficiary objects to the appointment of a GAL, which he or she may do out of pride, claiming that he or she is "just fine" to make his or her own decisions, then the issue of the beneficiary’s decisional capacity has been squarely placed before the court and cannot later be used as a basis for challenging the settlement. Appointment of a GAL is not necessarily a panacea; appointment comes with its own set of drawbacks. First, the financial expense of obtaining the appointment of a GAL is not insignificant. Some counties still allow the appointment of other family members to serve as GAL.

However, if the family member is not a licensed attorney, he or she must still retain private counsel to appear in court. 28 Some counties permit family members to nominate an attorney of their choosing to serve as GAL, but this trend appears to be changing and even friendly attorneys charge for their services. Courts in the larger counties now frequently appoint an independent attorney, usually very experienced and with no connection to the parties or their counsel, to serve in the role of GAL. Often, the hourly rate for an experienced GAL is not capped at the county rate as it is for court-appointed counsel. 29 Since the experienced, independent GAL is selected by the court to carefully scrutinize the transaction for the impaired beneficiary, the GAL may incur significant time in interviewing interested parties and researching facts and law to gain a full understanding of the beneficiary’s interest in the trust estate and how the settlement agreement will impact those rights. Further, while some counties may still permit the GAL to consent to the settlement without court approval, a strict reading of statutory and common law support the trend requiring that the GAL obtain court approval to any compromise, including a release of claims. 3 0 Where the individual’s capacity to fully understand and appreciate the consequences of signing the release is unclear, counsel should consider an examination by a qualified psychiatrist or psychologist concerning the client’s ability to contract. This evaluation would not only apply for purposes of executing the settlement agreement, but also in connection with the engagement of legal counsel to represent the beneficiary in the settlement process. V. FULL DISCLOSURE OF INFORMATION For a release to be enforceable in favor of a trustee, the trustee must have provided the beneficiary with all of the material facts relevant to the release that the trustee knew or reasonably should have known. 31 The Probate Code imposes strict duties on the trustee to fully report and account to the beneficiary. 32 Because the beneficiary is generally entitled to rely on the disclosures of the trustee, the trustee is responsible for prudently investigating and disclosing material facts that could make the release unfair to the beneficiary. Any negligent concealment or misrepresentation of material facts by the fiduciary is itself extrinsic/constructive fraud. 33 Of greater concern is that in some jurisdictions, where the trustee’s concealment of material facts is found to be intentional, the crime-fraud exception has been applied to waive the attorney-client privilege. 34 Since, under Probate Code section 16464, the trustee is charged not only with information that he or she actually knows, but also with information that he or she should know, a trustee cannot consciously fail to investigate or account in order to avoid detection of wrongdoing. The trustee’s duty to account may mean that the trustee will be charged with constructive knowledge of facts he would otherwise discover on preparation of a full accounting. The trustee is obligated to disclose his or her own breach of fiduciary duty. 35 The absence of an accounting squarely places the risk of non-disclosure on the trustee. 36 In the absence of a formal accounting, the authors recommend that the trustee provide the beneficiary and his or her legal counsel (well in advance of any scheduled mediation) with access to (ideally copies of) all of the non-privileged trust records (financial institution account statements, cancelled checks, escrow closing statements, leases, general ledgers, balance sheets, statements of income and expense and the like) that would be needed to construct a formal accounting or detect wrongdoing. This disclosure at least gives the trustee the argument that the beneficiary was on inquiry notice of possible problems, and should help to reduce the chances of a claim of constructive fraud or active concealment. The authors also recommend that the specifics of the pre-settlement delivery of the underlying financial transaction information be recited in the written settlement agreement. [Page 41] VI. FULL UNDERSTANDING OF LEGAL RIGHTS For a general release in favor of a trustee to be upheld, a trustee must show that the beneficiary is on "equal footing" with the trustee, meaning that the beneficiary understands his or her legal rights, and the rights that he or is she giving up by signing a release. 37 This is no easy feat. In some rare cases, where the beneficiary is an attorney, certified public accountant, Fortune 500 CEO, or other professional with considerable experience reviewing contracts, the beneficiary’s sophistication can be used to establish that the beneficiary understood the import of the release. 38 For the most part, it is the authors’ experience that even the savvy professional or business-owner client has little, if any, practical experience in dealing with general releases of unknown claims—hence the need for the retention of legal counsel. 39 If the beneficiary is not represented by legal counsel, the trustee may be in the unenviable position of having to carefully explain to the beneficiary, in person, what his or her present rights are and how the settlement agreement impacts those rights. 40 Some cases have held that providing a written explanation to the beneficiary of his or her legal rights may be inadequate since the trustee has no way of telling if the beneficiary understands the explanation provided.  41 The trustee needs proof that the unrepresented beneficiary had a conscious understanding that unknown claims were being waived, including claims that could later result in the beneficiary being entitled to more money.  42 The best way to ensure that the beneficiary was fully aware of his or her legal rights is for the beneficiary to be advised by separate legal counsel. The absence of separate counsel for trustees and beneficiaries is frequently cited by the court as the primary basis for invalidating releases in settlement agreements. 43 It is the authors’ opinion that if a beneficiary cannot afford separate legal counsel, then the trustee should consider providing the beneficiary with funds to retain separate counsel. 44 If a beneficiary simply refuses to retain representation, a clause in the settlement agreement should be included that the beneficiary was given the opportunity to retain separate counsel and that the beneficiary voluntarily elected to forego retaining separate counsel. In terms of releasing the trustee from liability for future claims, the mere recital in the settlement agreement of a waiver of the protection of Civil Code section 1542 is not necessarily controlling, even if the beneficiary has counsel.  45 In a subsequent action by the beneficiary against the trustee arising from a future claim, the court will still inquire into whether the beneficiary intended to discharge the trustee from liability for unknown claims. 46 This inquiry is a question of fact for the trier-of-fact to determine. 47 But the presence of legal counsel should change the dynamic of the court’s inquiry, given the beneficiary’s legal counsel (and not the trustee) is charged with ensuring that the beneficiary-client understood the entirety of the settlement agreement before signing it. 48 The more clear and specific the language in the settlement agreement evidencing the intent to end both the current dispute and any future disputes, the more likely the release will be found to insulate the trustee from future liability for unknown claims. 49 VII. IMPROPER CONDUCT A release induced by improper conduct from the trustee is invalid. 50 "Improper conduct" is broadly defined, but generally consists of any form of coercion or adverse pressure. The predecessor statute to Probate Code section 16464, Civil Code section 2228 (repealed), defined "improper conduct" as the "slightest misrepresentation, concealment, threat or adverse pressure of any kind." 51 Releases by beneficiaries in favor of trustees are subject to the strictest scrutiny. Even the slightest exaggeration made by a trustee to a beneficiary to persuade a beneficiary to sign a release may be problematic. 52 In practice, a trustee typically seeks a contractual release from the beneficiaries in exchange for agreeing to forego judicial approval of the accounting. The trustee is giving up the judicial release from liability for actions disclosed in the accounting in exchange for a broader contractual release.

The beneficiary, on the other hand, is usually agreeing to the contractual release in order to avoid court expense and delay and to expedite distributions. In entering into such a settlement agreement, which often also contains a section 1542 waiver relating to unknown claims, the beneficiary may be relying on the trustee’s representation of the costs and time-delay that would otherwise be involved in obtaining court approval of the accounting. If, for example, the trustee exaggerates the delay associated with court approval of the accounting or the associated costs, or suggests that no preliminary distributions can be made until the final accounting is approved by the court, the authors believe that trustee may have crossed the line—especially in the case of an unrepresented beneficiary. Similarly, a representation by the trustee to the beneficiary that the contractual release and 1542 waiver given by the settlement agreement is substantially similar to the release that would be granted to the trustee upon the court’s approval of the accounting also appears actionable. Unlike the 1542 waiver, the court’s approval of accounting only releases the trustee from liability for matters covered by the accounting. Judicial approval of the accounting does not typically release the trustee from liability for unknown claims. [Page 42] In order to limit a trustee’s exposure for claims of impropriety during settlement negotiations, the authors recommend that the written settlement agreement between the parties include express language that the beneficiary is relying on his or her own independent investigation of the facts, or that of his or her counsel, that the beneficiary is not relying on any representations, oral or written, made by the trustee or the trustee’s counsel that are not expressly set forth in the settlement agreement, and that the beneficiary is relying on his or her own separate counsel to explain his or her legal rights and not any explanation provided by the trustee. This is especially relevant in some states where the mere absence of independent counsel for a beneficiary is considered a circumstance of "undue influence." 53 For even greater protection, when the beneficiary is represented by counsel, the authors also recommend including an attorney’s certification, similar to the type used in premarital agreements, whereby the attorney for the beneficiary certifies that he or she has explained to the beneficiary the meaning of the settlement agreement, including, but not limited to, the release of unknown claims and the section 1542 waiver, its impact on the beneficiary’s rights, and that the beneficiary is knowingly and voluntarily entering into the settlement agreement. VIII. FAIR AND REASONABLE CONSIDERATION Unlike other contracts, written releases standing alone are generally enforceable without consideration. 54 A release is "the abandonment, relinquishment or giving up of a right or claim to the person against whom it might have been demanded or enforced [citations] and its effect is to extinguish the cause of action. . ." 55 However, when the release favors the trustee, there are additional requirements. 56 In such cases, the consideration provided by the trustee must be fair and reasonable. 57 When the release favoring the trustee is contained in a comprehensive settlement agreement, the consideration provided by the trustee for the release from liability and other benefits being received by the trustee under the agreement must be fair and reasonable in light of all of the circumstances.

Fair and reasonable consideration typically requires more than the minimum consideration needed to make other contracts enforceable. 58 Consideration can never consist of performing a duty that a person is already obligated under the law to perform. 59 A release received by the trustee in exchange for the trustee’s promise to distribute the estate fails for lack of fair and reasonable consideration. The trustee already has a fiduciary duty to distribute the estate and cannot demand the release as a condition of distribution. 60 Probate Code section 16004, subdivision (c), creates a rebuttable presumption that in transactions between a trustee and a beneficiary where the trustee gains an advantage, the trustee has breached a fiduciary duty. 61 Case law has defined "advantage" to mean any time where the fiduciary improves its position, obtains a favorable opportunity, or otherwise gains, benefits, or profits. 62 Generally, an "advantage" is an economic benefit that the trustee receives other than its standard compensation. Once the presumption is triggered, the burden rests on the trustee to show, among other things, that fair and reasonable consideration was provided by the trustee for the benefit received. 63 Fair and reasonable consideration does not require an exact relation between the value and the price but only what is just and fair under all of the circumstances. 64 Fair and reasonable consideration in any particular transaction is measured on a sliding scale, dependent in part on the beneficiary’s bargaining power. A beneficiary with substantial bargaining power (i.e., financial resources, all relevant information, and access to experienced legal counsel) needs less in terms of economic benefit from the settlement containing the release to make the consideration fair and reasonable than a less sophisticated, unrepresented beneficiary dependent on the settlement for financial survival. 65 Since a trustee owes fiduciary duties to a beneficiary but not the reverse, a mutual release will generally provide more benefit (i.e., an advantage) to the trustee as opposed to the beneficiary. Under subdivision (c) of section 16004 of the Probate Code, this "advantage" given to the trustee is enough to raise the presumption that the trustee breached his or her fiduciary duties in securing the release. The burden of proof shifts to the trustee without any showing of unfairness, but simply that an advantage was obtained. 66 The trustee must then prove that the "advantage" obtained was not unfair or unreasonable. To rebut the "unfairness" presumption, especially where the beneficiary lacks substantial bargaining power, the trustee may need to establish that the beneficiary received an important economic benefit in addition to the beneficiary’s release from liability. As one example, this additional benefit could include the trustee reducing some portion of the trustee’s compensation so that more money flows through to the beneficiary. Under Probate Code section 17200, subdivision (b)(5), a trustee has a right to petition the court for approval of his or her accounting. Once the order approving the accounting becomes final, the res judicata effect of the order provides the trustee with a release from liability on the matters upon which the Court has ruled. 67 Absent court review and approval of an accounting, the trustee remains liable for three years following the service of the accounting on the beneficiaries. 68 The trustee is ordinarily permitted to retain a reserve to defend his or her accounting. 69 Depending on the circumstances, to the extent that the trustee waives the right to seek the judicial release from liability in order to expedite final distribution to the beneficiaries, the trustee may be providing sufficient consideration to the beneficiaries to make the release. 70 [Page 43] IX. CONCLUSION While California has a strong public policy favoring the settlement of disputes, Civil Code section 1542 is designed to prevent the inadvertent waiver of unknown claims through the simple signing of a general release. 71 Where a fiduciary relationship exists, it is very important for the fiduciary to employ extra caution and careful drafting to ensure that releases in the fiduciary’s favor are fair and reasonable and adequately reflect measures taken by the trustee to ensure that the beneficiary has been placed on "equal footing." If a future dispute were to arise, a broadly drafted release in favor of a trustee may be set aside by the court if the trustee.