The California Trustee Survival Guide: Duties, Dangers And Defense

Being named a trustee in California is an honor that carries serious legal responsibilities because your actions determine whether families experience smooth trust administration or costly litigation. Understanding your fiduciary duties under California's Probate Code isn't optional: failure to comply can result in personal liability, removal from your position, and an obligation to reimburse the trust for losses you caused.

Here is a guideline of the essential trustee duties every California fiduciary must know to understand trustee responsibilities, administer an estate with confidence, and avoid the mistakes that lead to costly beneficiary disputes and legal action.

What are a Trustee's Duties?

Trustee Administration Duty: Manage Trust, Follow Terms (Probate Code § 16000)

Trustees must administer the trust. Trustees must follow California law and the trust instrument's specific provisions. Trustees can't rely on what they want to do, but what the law and the settlors' intentions instruct trustees to do.

For example, if a Settlor instructed the trustee to distribute equal distributions to the Settlor's five children, the trustee can't use their power to slow down administration to one of the beneficiaries. A trustee is not allowed to create spending restrictions and delays to "protect" the beneficiary or the trust.

If the trust terms seem confusing, consult with a California trust attorney about proper administration, legal remedies, and modifications.

The Loyalty Rule: Trustees Must Serve Beneficiaries Only (Probate Code § 16002)

Trustees must be loyal. Trustees must administer the trust solely in the beneficiaries' interest, not for the trustee's personal benefit.

Beneficiary loyalty is the foundation of trust law. It prohibits self-dealing and requires trustees to place beneficiary interests above all other considerations, including their own.

Duty of Impartiality: Trustees Must Treat Beneficiaries Equally (Probate Code § 16003)

Trustees must act fairly. When a trust has multiple beneficiaries, trustees must treat all beneficiaries equally and cannot favor one over another.

This duty becomes particularly complex when the trustee is also a beneficiary. Trustees need to carefully administer the trust and decide if their decisions could potentially favor the trustee-beneficiary. Trustees need to carefully think about financial distributions, timing, communication and information sharing, access to trust property, distribution of personal property, and beneficiaries' requests.

We have seen courts scrutinize trustee-beneficiary relationships carefully, and the burden to prove impartiality often rests with the trustees.

Duty to Avoid Conflicts of Interest (Probate Code § 16004)

Trustees can't self-deal. Trustees cannot use trust assets for personal gain or engage in transactions that conflict with beneficiaries' interests.

Trustees should not use trust assets for personal purchases, personal loans, entering into business relationships, and other self-serving acts. Even when exceptions apply, trustees should avoid conflict transactions entirely. The legal costs of defending such transactions often exceed any benefit, and the damage to trustee-beneficiary relationships can be irreparable. Trustees must follow the California Probate Code and the trust.

Duty to Secure and Protect All Trust Assets (Probate Code § 16006)

Trustees must protect trust property. The law states that: "the trustee has a duty to take reasonable steps under the circumstances to take and keep control of and to preserve the trust property."

Trustees need to immediately think about things like securing possessions of tangible trust assets, changing locks and access codes on trust real property, keep real property insured, upkeep security measures for trust property, inventory all trust assets, and potentially deal with real property tenants after the Settlor dies. Courts expect trustees to keep their actions well-documented.

Duty to Make Trust Property Productive (Probate Code § 16007)

Trustees must invest trust assets; the goal is asset growth. Trustees must make trust property productive and ensure that assets generate appropriate returns consistent with the trust's purposes. For long-term trusts, trustees need to review investments, actively diversify, and reinvest weak-performing investments to avoid losses or poor performance.

Developing and implementing an appropriate investment strategy, minimizing financial risk, compliance with the Prudent Investor Rule, guidance for real property management, and timely distribution are all critical steps.

Trustees must carefully follow California law, the trust instrument, and beneficiaries' opinions to avoid costly litigation. At times, trust attorneys need to file petitions with California courts to avoid costly mistakes for the trust, trustees, and beneficiaries.

Duty to Keep Trust Property Separate and Recognizable (Probate Code § 16009)

Trustees shouldn't comingle. Trustees must keep trust property separate from personal property and properly identify assets as trust property.

Just like in marriage and divorce, mixing trust assets and personal funds is one of the most common and most serious trustee errors we encounter in our practice. Once funds are commingled, it becomes extremely difficult to trace trust property, and trustees face accounting nightmares with potential monetary liability.

We have spent countless hours reviewing estates where a trustee deposited trust funds into their personal account. In some cases, we have seen trustees comingle over $500,000 worth of trust funds with personal funds. Trustees who forget or don't have receipts to trace the funds, may be subject to reimbursements and surcharges. Courts may require meticulous records because of this serious breach of fiduciary duties. No matter how complex the trust is, accounting should allow any third party to verify that trust assets have remained separate and identified.

Duty to Disclose and Account (Probate Code §§ 16060-16062)

Trustees need to keep beneficiaries informed and account trust administration. Trustees must keep beneficiaries reasonably informed about trust administration and respond promptly to beneficiary requests for information. Trustees must also account for trust administration by providing beneficiaries with financial reports showing all transactions, asset values, and trust activities.

The trustee role requires careful administration. Trustees need to notify beneficiaries of trusteeship acceptance, provide a complete trust document upon request, inform beneficiaries about trust assets and liabilities, and provide an accounting with information related to trust income, trust expenses, distributions, and other trust administration events.

Beneficiaries have rights to information. Beneficiaries may also have a right to demand information. Upon a reasonable request, trustees must carefully follow the California Probate Code and trust instrument to provide beneficiaries with the accounting and disclosures they are entitled to. Failure to provide requested trust information may lead to significant liability such as surcharge damages and removal of trustee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.