It is shocking to me how many Trustees violate their fiduciary duties.  Under California Probate Code Section 16000 et seq. there are voluminous sections on all the duties, responsibilities, and liabilities Trustees must comply with to property administrate a Trust.  There are rules on just about every action a Trustee must take, and on actions the Trustee must NOT take, from proper investing (under the Uniform Prudent Investor Act ), to allocation of items between income and principal, to every other action or inaction required of a Trustee.  Yet, so often these many duties and responsibilities are simply ignored, or worse, not known by the individual trustees. 

And when a Trustee violates his duty, and if that violation is challenged in Court, it is the Trustee’s burden to prove that he met the standards required of him under the California Probate Code.  This is why being a Trustee is a thankless job.

But why do so many Trustees get it wrong?  The biggest problem is lack of knowledge. Many individuals acting as Trustees have no idea that they have a boat-load of requirements to follow under the Probate Code, and likely under the Trust document.  They have never been educated, advised, or inquired about their duties at all.  It seems shocking just how many people willingly assume the many duties as Trustee, but have no idea what those duties are. 

A common misconception is that the person acting as Trustee is in control and can do whatever he likes, even continuing to own and invest the way the Trust creator (called a Settlor) did prior to his death.  Not so.  A Trustee cannot do whatever he likes and he cannot continue to invest or even hold assets that the Settlor acquired during life.  This is because the duties of investing for a Trustee are vastly different from those allowed by individual Settlors who created the Trust in the first place.

As a Settlor, the person is entitled to invest however they like (this assumes we are discussing a typical revocable living trust used in estate planning).  The only duties a Settlor has is to herself.  She does not hold assets for anyone other than herself and the Probate Code says she only is responsible to herself.  But once the Trustee passes and a successor Trustee takes over, the ground rules change substantially. 

For example, an individual Settlor has no duty to diversify assets.  She can hold 100% of the Trust assets in a single asset class (such as real estate), or even in a single stock (i.e. Enron) if she likes.  But when a successor Trustee takes over, a duty to diversify the Trust assets comes into effect.  That means the new Trustee must take immediate action to sell a portion of the Trust assets and diversify those investments as required by the Probate Code—there is no leeway here.  Assets MUST be diversified by Trustees!

If I had to guess how many private, individual Trustees are in breach of trust (this does not include professional fiduciaries or corporate fiduciaries), I would say from 80% to 90% of them.  Sounds extreme?  Maybe, but my experience with individual Trustees would suggest that 100% of them are in breach of trust as to at least some aspect of their duties. 

So when you are asked to act as Trustee of a California Trust, the first thing you should do is find out what duties and responsibilities you have.  You’ll be glad you did because it will be up to you alone to prove you complied with those duties.  And it’s much easier to comply with duties you know about than duties you don’t.

  • Lori S

    In reading your article on Trustee breaches I have a question. What if the Settlor is still alive but is completely incapacitated and a private Trustee is manging the family revocable Trust and will not provide any beneficiaries with an annual accounting of the Trust after requesting this several times?

    The Trust was originated in California, the Trustee lives in Washington State and the Settlor is in a home for Alzheimer in Minnestoa.

  • That’s a tough issue. Technically, the Trustee’s only duty is to the settlor so long as the trust remains revocable. However, there is an exception where the settlor does not have capacity. But Courts are reluctant to proceed where the settlor is living. The safest route is to file for a conservator of the estate, the conservator, once appointed, can exercise the rights of the settlor–including the right to account. Not an easy problem to resolve though.

  • Julie

    So right on the money!! I wish more attorneys would advise their clients of the duties of a trustee when the client suggests an individual be named successor trustee, and discuss those duties with prospective trustees before simply naming Joe Anyone as successor trustee.

  • Debbie Fischer

    The trustee has allowed 1 of 2 beneficiaries to live in trust property rent free for over a year. Estimated rent $3200. per month. Now that property is sold, this beneficiary refuses to vacate, costing the trust over 10 k in legal fees.
    Can trustee allow this beneficiary to continue? My husband as 2nd beneficiary is not getting fair and equal treatment. Aren’t we entitled to the rent proceeds that should have been being collected?

    • davidsonkeitha

      Generally, a Trustee cannot allow a beneficiary to live in property rent free. But there are times when a trustee has to take action to evict a beneficiary from trust property. When that happens, the trustee will often allocate the legal fees and cots to that beneficiary’s share of the trust estate. But this all depends on what the trusts documents say about the beneficiary rights of each beneficiary. For example, if a trust allows someone to live in property, or if the property is gifted to the occupying beneficiary, then an eviction would not be appropriate.

  • Debbie Fischer

    Can a trustee cash bonds in trust name, and help a beneficiary out ($30,000),
    prior to liquidation of trust? Just because
    beneficiary claims he needs money?

    • davidsonkeitha

      In most cases, yes. This is referred to as a preliminary distribution. And a Trustee has the right to make distributions before the trust is fully liquidated. Of course, that money would have to be allocated to the beneficiary’s share, so the other beneficiaries receive an equal amount. And the other beneficiaries should also receive a preliminary distribution as soon as the trust is able to do so.

  • Debbie Fischer

    One last question: can trustee write off a
    $ 37,000 Investment that trustee believes that a beneficiary defrauded the deceased mother out of? Investment scam.

    • davidsonkeitha

      A Trustee has the right to write-off a bad investment if that investment will not be collected. Under the Probate Code it is referred to as “abandoning assets”. If the asset is worthless, or if it would cost the trust more to recoup than the value of the investment, then the Trustee can walk away from the asset. If there was fraud involved and the trustee does not want to sue, then you as a beneficiary may have the right to sue. But you would have to pay for that lawsuit out of your own pocket, which could be expensive. It all depends on the amounts involved and the evidence you have to support liability.