Family Office Disputes After Death or Incapacity

Key Takeaways

• Family offices are increasing in popularity as a tool to support families with high-net-worth estates in managing financial and administrative affairs.
• Family offices may follow a single-family model, multi-family model, or virtual model, and may be intertwined with several estate management tools, including trusts, LLCs, LPAs, and more. 
• Avoid family office disputes by building a strong infrastructure that provides clear definitions of incapacity and clear terms that identify how the family office or estate should be managed following incapacity. 

Introduction

After death or incapacity, family office disputes often raise questions about who should make decisions regarding the management of estate assets. The use of family offices is a growing trend among ultra-high-net-worth individuals and their families, with consistent year-over-year growth worldwide. Family offices play an important role in protecting a family’s wealth and ensuring operational consistency, but their complex organization can also pose challenges.

After a founder or principal dies or reaches a state of incapacity, disagreements can arise over who has authority over the subsidiary trusts, entities, and accounts related to the family office. Unfortunately, these disputes are rarely simple, typically requiring several layers of litigation and negotiations across multiple legal agreements to resolve them and ensure proper estate management.

Whether it is an ultra-high-net-worth trust dispute or a breach of fiduciary duty claim, family office succession disputes can become incredibly nuanced and difficult to navigate when there are no clear safeguards in place to prevent them. Knowing what to expect can help alleviate the stress of these disputes, and understanding how to develop a proper infrastructure to avoid them can go a long way toward protecting your family’s interests. 

The attorneys at RMO LLP are prepared to help you with your legal matter by providing clear legal guidance through family office disputes, offering a practical legal strategy personalized to your case, and remaining dedicated to achieving your best possible outcome. 

What a Family Office Is and Why Its Structure Invites Disputes

A family office is a private wealth management organization established to coordinate the financial, investment, and administrative affairs of a high-net-worth or ultra-high-net-worth family, often involving multiple trusts, business entities, and advisors. Family offices provide support for investment management, wealth management, accounting, legal compliance, bill payments, charitable contributions, and more. 

The structure of having multiple decision-makers can be beneficial by allowing multiple perspectives on an issue, but it can also lead to disputes when conflicting interests influence decisions. A family office is an operational arm rather than a governance body, which means that assets are held by trusts and entities rather than the office itself.

A family office can take different forms, including a single family office, multi-family office, and virtual family office:

• Single family office – A privately owned and managed organization that manages only one family’s financial and administrative affairs.
• Multi-family office – An organization that delivers similar services as a single-family office that supports multiple families through a shared infrastructure.
• Virtual office – A family office managed by a professional that may involve several organizations or virtual tools to handle logistics. 

In a family office, the founder is an integral aspect. The founder often maintains the casting vote across trusts, entities, and investment decisions and does not necessarily maintain a designated backup. The lack of a backup decision-maker and the risk of losing the founder’s insight can lead to disputes if there are no clear avenues for decision-making.

What Changes the Moment a Principal Dies or Loses Capacity

After a principal dies or loses capacity, it often creates a power and decision-making vacuum. The resulting scenario ultimately depends on the infrastructure of the family office’s governing documents and other estate plans. 

The First 30 Days: Records, Systems, and Signature Authority

The first 30 days after a principal or founder dies or loses capacity are often the most difficult and uncertain, creating a potential scramble to identify who obtains authority, especially when governance documents and structures do not provide a clear roadmap. If not clear, there can be potential disputes over who controls the general ledger, portfolio, estate accounting, appraisals, and more.

When disputes arise, this initial period is also critical to preserving evidence of the cause of action for the dispute and ensuring that the sequence of events leading to the dispute is carefully clarified.

If the trust and family office have properly anticipated the risk of the principal passing away or losing capacity, with clear processes for transferring authority and asset or office management, this period will typically involve managing administrative tasks to ensure the proper party has the necessary authority.

Without clear governing rules established, this period may result in multiple parties within the family office arrangement attempting to exercise authority over assets or limiting others’ access to financial records and digital accounts.

If a dispute is anticipated, parties may implement a litigation hold to preserve relevant evidence. In some circumstances, a court may also issue injunctions or other orders restricting the transfer or disposition of assets while the dispute is being resolved.

A New Set of Clients: Beneficiaries, Trusts, and Entities

After a principal’s death or incapacity, the family office may need to work with a broader group of stakeholders, including beneficiaries, legal heirs, trustees, trusts, LLPs, and other related entities. It is important to consider the varying interests of these parties while ensuring that trust assets and other property are managed in accordance with applicable governing documents and legal obligations. This may include making prudent investment decisions, managing property consistent with trust instructions, and helping protect assets for designated beneficiaries.

Conflicting Incapacity Triggers Across the Document Stack

Conflicting incapacity occurs when at least two of the legal mechanisms arranged to support the administration of the estate have different definitions of incapacity, resulting in uncertainty or disputes over whether the principal maintains mental capacity. Conflicting guidance around incapacity across a family office’s various legal mechanisms is a common trigger for potential disputes. 

Trust Incapacity Clauses Versus Springing Powers of Attorney

A clear definition of incapacity between a springing power of attorney (POA) arrangement and a trust document is important for avoiding conflicts. A springing POA is an arrangement in which the agent’s authority remains inactive until the occurrence of an event demonstrating incapacity activates their authority to manage select assets or make important decisions. If there are differing definitions of incapacity across these two legal mechanisms, a springing POA may argue that they have authority to take action while the trustee maintains control over the fate of assets held in trust.

Trusts often establish clear criteria for incapacity, which may include: 

• Physician Certification – This rule requires that an appropriately certified physician perform an examination to determine whether an individual is medically incapacitated.
• The “Two-Doctor Rule” – This requires that two separate medical doctors examine the principal and provide written proof that the principal is of unsound mind. 
• Court Ruling – A judge can deem an individual legally incapacitated or unfit to manage their own affairs if given enough evidence.

It is important to note that the terms for incapacity established in a trust are not the same, in fact, as the overarching legal definition, allowing for a mismatch between documents. Triggers for a springing power of attorney arrangement are often similar, but they may sometimes involve less strict guidelines to allow for important daily affairs to be quickly addressed during sudden instances of incapacity. As an example, a springing POA may be set to become active upon a surgical procedure or a medical emergency that results in an individual being unconscious. 

Meanwhile, managing a trust involves more complex, long-term decisions about assets, often requiring more substantial triggers that allow more time to understand and assess capacity. If there are contradictions in definitions of incapacity between the trust and the power of attorney arrangement, there may be conflicts over who should be involved in making key decisions about assets. It is important to have as much consistency as possible surrounding terms identifying incapacity across various estate plans.

Entity-Level Definitions: Operating Agreements, Buy-Sells, and Key-Man Clauses

LLC operating agreements, buy-sell agreements, private trust company bylaws, and other key documents may all define incapacity or disability differently. Having a clear and consistent estate plan is important for protecting the interests of the principal or founder, but it is only one piece in the overall picture. It is possible that an estate plan that is clear in itself can still contradict the tools and documents actually managing the assets, such as LLCs, trusts, or LPAs.

When the Founder Is Incapacitated for One Purpose and Capacitated for Another

Some cases may result in the founder being incapacitated for one purpose and capacitated for another. For example, if a trust document considers the trust creator incapacitated according to the written report of two doctors, but the individual is still the manager of record for an LLC that did not specify terms for incapacity, this may grant multiple parties joint authority over the same assets on the same day. Again, the criteria defining incapacity in a trust are not the same as legal incapacity generally, creating the potential for a gap.

While this may often be an innocent overlap, it can create conflicts if the founder or other individuals attempt to take action on the day when there is a conflict of authority. Consider the following hypothetical case scenario where a principal may be incapacitated according to the trust: 

A trust creator is deemed incapacitated by the trust document, so the trustee may take control of assets held in trust and the interests in an LLC to ensure they are protected and managed for distribution, but the incapacitated principal may attempt to sell a property that belongs to the LLC as the manager or signatory of the LLC. Such a scenario would create a legal gray area and create grounds for a dispute on how the asset should have been managed.

It is strongly advised that individuals and families perform a detailed audit of all governing documents related to a founder’s trust and their assets before the risk of incapacity occurs. If there is a dispute regarding who maintains control over decision-making for select assets, consult an attorney immediately to discuss your case and how to navigate a potential remedy.

Who Controls the Family Office Now? Contests Over Fiduciary Authority

The most significant dispute after an individual’s death is often the question of fiduciary authority, determining who maintains control of the family office and which operational responsibilities fall under its jurisdiction. This dilemma emphasizes the necessity for a clear governance structure and a contingency plan for incapacity.

Successor Trustee Disputes and Trustee Removal

Often, a readily addressable concern regarding fiduciary authority is that the death of a principal converts a trust from revocable to irrevocable, triggering the administration of a trust by a designated trustee. Ideally, the designation of a trustee and any successor trustees should be clearly identified in the trust instructions to avoid confusion or potential family office trustee disputes.

If a trustee is managing the trust irresponsibly or is legally incapacitated following a court providing a trustee incapacity determination, they may also be subject to removal. California Probate Code Section 15642 states that interested parties in a trust, including trustees, beneficiaries, co-trustees, and other persons authorized under applicable law, may file a petition to remove a trustee. Trustee removal is common in cases of breach of fiduciary duty, such as asset theft, mismanagement, self-dealing, or bias.

It is important to note that trustee removal is a disruptive process that can cause significant delays in the administration of the trust because it removes the acting fiduciary. As a result, it is generally considered a significant remedy that courts do not grant lightly. However, courts may order removal when a trustee’s continued service would put the trust or its assets at risk.

Private Trust Company Deadlock and Directed Trust Gaps

In both cases of private trust companies and directed trusts, if the primary creator of the trust becomes incapacitated, the remaining committee members may face a deadlock once a founder seat is vacant. With decision-making responsibilities left to the remaining committee members, split votes or authority overreach can become more common.

Private trust companies are commonly established by family offices to allow multiple stakeholders to serve as trustees, rather than a single trustee. Directed trusts operate similarly, but instead split trustee functions across multiple parties, such as having one trustee handle administrative functions while another manages investments or serves in an advisory capacity.

When an individual becomes incapacitated, it can create a vacuum or throw decision-making into flux, again reinforcing the need for clear terms on how these assets and decisions related to them should be managed following incapacity. Precise terms for successor trustees and asset management should be clarified in the trust instrument as well as any related governance documents, such as LLC operating agreements.

Conservatorship and Guardianship Petitions as Control Tools

In cases of incapacity, a conservatorship or guardianship can be a valuable mechanism for ensuring that the trust and the individual’s estate can be properly and effectively managed. These arrangements involve the court-ordered appointment of a conservator or guardian to manage the affairs of an incapacitated individual.

Conservatorships can be valuable tools to prevent the mismanagement of assets by an individual who is not fit to make their own decisions responsibly. However, on the other side of the coin, these arrangements can also be manipulated and used to exert control over the incapacitated individual and obtain access to their assets.

It is recommended to have the support of an attorney who can help you enforce your rights in all the following areas: 

• Obtaining or seeking a conservatorship
• Objecting to a conservatorship 
• Contesting an established conservatorship and removing a bad actor 
• Replacing a conservator or guardian
• Terminating a no-longer-needed conservatorship

The Claims That Define Family Office Litigation

Family office litigation can take many forms, but the most common disputes often fall within a few categories, ranging from concerns over fiduciary mismanagement of responsibilities to actions taken by the founder or principal with questionable capacity.

Some common claims that occur during family office litigation include: 

• Breach of fiduciary duty, self-dealing, and prudence – These disputes include breaches of loyalty, breaches of impartiality, self-dealing, asset theft, inadequate oversight of investment or asset management, or failing to make prudent and responsible decisions with estate assets.
• Undue influence, capacity challenges, and power of attorney abuse – When an individual loses mental capacity, they are vulnerable to pressure, coercion, or manipulation by undue influence. 
• Minority oppression, deadlock, and entity-level warfare – When ambiguity exists about how to manage a trust after an individual passes away, it can create conflict over access to information or distribution of property.
• Claims against the family office and its executives – Legal claims that the family office is mismanaging resources or failing to uphold key responsibilities in protecting them can lead to potential disputes. 

Where the Fight Happens Between Probate Court, Civil Court, or Arbitration

The legal avenues for resolving family office disputes depend on the type of dispute and the appropriate court for hearing the matter. Some matters will be resolved in the probate court, others are handled in business court, while others are better resolved in arbitration. 

It is important to note that the jurisdiction in which legal matters are heard may vary significantly by the state where the dispute takes place. Not all states allocate matters in the same way. 

Probate Courts 

Matters involving trust accounting, will or trust contests, or removal petitions are most often navigated through the probate court. The probate court is responsible for ensuring that assets are properly managed and protected for an estate’s beneficiaries. These matters are most likely to be settled in probate courts:

• Will or trust contests
• Trust administration disputes
• Estate administration disputes
• Guardianship and conservatorship proceedings
• Matters of fraud or undue influence relating specifically to wills or trusts

The probate court can order resolution of such matters by deciding the validity of an estate planning document, compelling a trustee to act, or ordering an offending party to pay restitution or pay a surcharge for losses they have caused to the family’s trust or estate.

Civil Courts 

Civil courts may handle matters that involve not only procedural questions related to probate, but matters of civil procedure, such as disputes relating to other legal arrangements such as family office governance documents, LLC operating agreements, a contest for control of a family business after death, or disputes over business interests in high-value estates.

Matters that are likely to be handled in civil courts include: 

• LLC operation disputes
• Breach of fiduciary duty claims 
• Contract disputes related to transactions made during questionable capacity
• Matters of fraud or undue influence relating to other legal agreements, not specifically trusts or estates

Arbitration, Mediation, or Negotiation

Handling family office and estate disputes through arbitration or other alternative dispute resolution methods offers several important benefits, including privacy, as matters are handled off the public record, and often a more efficient and cost-effective resolution. Utilizing these approaches allows involved parties to avoid the public record, lengthy timelines, and extensive court fees associated with litigating family trust disputes in high-value estates in court.

In ultra-high-net-worth estates involving high-profile individuals, privacy is especially important, as families want to avoid financial information, business terms, and internal disputes becoming public. Private arbitration proceedings and other methods, such as mediation and negotiation, allow families to navigate disputes without making their matters public and accessible via court records.

The enforceability of arbitration clauses varies by state and by the specific language used in the governing documents. When properly drafted, arbitration provisions can help family offices and estate planning structures resolve certain disputes privately and potentially avoid lengthy litigation. 

Parties should also note that trust arbitration provisions are substantially more complex than general contract arbitration provisions. In some jurisdictions, trust beneficiaries may challenge the enforceability of these clauses. However, it is always important to discuss this approach with a skilled local attorney who can provide more insight into your legal options based on the unique facts of your case and your legal jurisdiction.

The First 90 Days: Emergency Relief and Preserving Claims

Acting quickly during a family office dispute, or upon the suspicion of one, is imperative, as there are strict legal deadlines for filing disputes, and it is important to make swift decisions about how assets should be handled. Consulting an attorney as soon as possible is beneficial for ensuring that you can act within the set statutory deadlines for your case.

Accountings, Injunctions, and Temporary Fiduciaries 

Filing petitions for estate accountings can help hold the estate’s managers accountable and ensure that assets are handled responsibly without discrepancies. During a dispute, it is important to act quickly to ensure the responsible management of the family office and related assets and to avoid potential mismanagement.

If there are concerns about who should manage the estate or what steps to take next, it could lead to damaging actions that jeopardize the principal or founder’s initial interests. Parties may seek an injunction to freeze entity or custodial accounts so that assets cannot be transferred during a period of confusion or ambiguity, thereby preventing the wrong party from mismanaging them.

Deadlines That Can Quietly End a Claim

Statutory deadlines may cause a claim to become time-barred and pose the risk of losing the opportunity to challenge entirely. Some claims, such as trust contests, may carry deadlines as short as four months, while others may last several years. 

Some common, important deadlines to keep in mind include:

• California trust contests are often subject to a 120-day deadline following service of a trustee’s notification under Probate Code 16061.7.
• According to California Code of Civil Procedure Section 343, some fiduciary misconduct claims may be subject to a four-year limitations period, although the applicable deadline depends on the nature of the claim and the specific facts involved.
• In California, some fraud-based claims may be subject to a three-year limitations period,, according to the California Code of Civil Procedure Section 338, though the applicable deadline may vary depending on the cause of action and when the misconduct was discovered.

These deadlines vary by legal matter as well as by state statutes. In any case, it is important to act quickly to gather evidence of your claim and file a petition with the court to ensure that you do not lose your legal right to challenge. 

However, the timelines that may affect your case can vary widely, so it is important to consult a skilled and experienced attorney who can provide further guidance on what statutory deadlines may impact your claim. 

Reducing Dispute Risk Before the Crisis

Building a strong, proactive infrastructure for your family office is valuable for defending against disputes before and after incapacity and its potential risks. 

Aligning Governance Documents Across Trusts and Entities

Ensure that governance documents and procedures align on definitions of incapacity and on the steps to take following incapacity to avoid power struggles across matters involving trust, estate, and family office administration. 

It is advisable to review the following documents:

• Power of attorney arrangements
• Operating agreements
• Buy-sell agreements
• Private trust company (PTC) bylaws
• Transfer-on-death provisions

Having a consistent, designated authority for each agreement and an all-encompassing succession plan can help ensure alignment and protect the interests of the estate as a whole, even if there is variation across governance structures.

Independent Fiduciaries, Trust Protectors, and ADR Provisions

Choosing independent fiduciaries and trust protectors, separate from the family office, can help mitigate the risk of conflicts of interest by supporting the unbiased, impartial administration of the trust.

Independent fiduciary

An independent fiduciary, such as a trust company or a professional fiduciary not associated with the family, is impartial and objective, as they are not entitled to an inheritance. The lack of a stake in an inheritance allows the fiduciary to make responsible decisions without clouded judgment or bias, with minimal risk of mismanagement. 

Trust Protector

A trust protector is an individual or entity appointed under the terms of a trust to exercise specific oversight or protective powers. While a trust protector is generally not involved in the trust’s day-to-day administration, the role can provide an additional layer of oversight and help address issues before they develop into larger disputes.  Identifying a trust protector in a high-value estate may help promote continuity and stability when questions arise regarding trust administration.

For example, if concerns arise about whether a trustee is acting appropriately, a trust protector may have authority under the trust instrument to review the situation and exercise any powers granted to them, such as replacing a trustee, resolving certain governance issues, or providing direction on trust administration.

ADR Provisions

Alternative dispute resolution (ADR) clauses can help minimize the risks of lengthy disputes by encouraging parties to use methods such as mediation or negotiation to reach a mutually agreeable resolution rather than navigate disputes through courtroom litigation. These methods are often preferable to courtroom litigation, which is often lengthy, costly, and public, and a “winner-take-all” solution rather than a potential compromise.

The final key to this entire process is transparency. Being clear and direct with beneficiaries about what decisions are being made and why can minimize the risk of disputes later down the road. While it is not the ultimate solution, it is a proactive safeguard that can make a difference.

Navigate Family Office Disputes With RMO

Family office disputes are especially complex with several stakeholders involved. Navigating these disputes with an understanding of the unique family dynamics involved requires the support of a skilled attorney with experience in these matters.

At RMO LLP, our attorneys are prepared to offer strategic legal guidance in challenging family office disputes. Our trust litigation attorneys have decades of experience navigating ultra-high-net-worth trust and estate disputes, providing critical legal guidance and practical legal strategy to protect our clients’ interests and achieve a more favorable outcome sooner. 

Schedule a consultation with the attorneys at RMO to discuss your family office dispute and begin discussing a path forward.

Frequently Asked Questions