Trustees often fail to meet their obligations, engaging in a variety of breaches that undermine the integrity of trust and estate administration. These infractions include violations of trust, misappropriation of funds, inadequate management, fraudulent activities, failure to act, and conflicts of interest within business endeavors.
California Trustees Duties During Trust and Estate Administration
Trustees play a crucial role as guardians of assets within a trust, whether they are individuals or entities such as banks or corporations. Tasked with fiduciary responsibilities, trustees adhere to the trust’s regulations, working towards the welfare of its designated beneficiaries.
Responsibilities and Duties of Trustees in California
Assuming the role of a trustee carries significant responsibilities, necessitating a serious commitment to fulfilling the duties outlined in the trust’s terms. A trustee also is acting in a fiduciary capacity and owes certain legal duties to the beneficiaries, as explained in more detail below. In managing the trust property, a trustee must use at least ordinary business ability. However, if a trustee has special skills, under California law they will be held to a higher standard of care. In any event, a trustee’s management will be judged in light of the circumstances existing at the time transactions occur, rather than with the benefit of hindsight. If a trustee exceeds his or her trustee powers, they may be held liable for loss or damage to the trust estate.
It is important that a California trustee understand the rules under which they must operate. These rules are derived from three sources: (1) the Trust itself; (2) statutory law under the California Probate Code; and (3) decisional law created by the courts.
The principal source of a trustee’s powers is the Trust itself. A trustee should therefore read the Trust carefully. In doing so, they will see that the Trust contains two types of provisions: (1) dispositive provisions that govern the distribution of property; and (2) administrative provisions that govern the powers of the trustee, payment of taxes and expenses, rules for interpreting the Trust instrument, and other procedural issues. The bulk of the Trust is made up of these administrative provisions.
The basic duties as a trustee involve the collection, management, and investment of Trust assets and the accumulation and distribution of income and principal under the Trust. It is a fundamental principle of trust law that a trustee must be faithful to the interests of the Trust and its beneficiaries. A trustee occupies a position of trust and confidence and owe a duty of care to the beneficiaries. They have a duty to administer the Trust solely in the interest of the beneficiaries and to deal impartially with them. A trustee cannot use Trust property for their own profit or for any nontrust purpose and must also not engage in any transaction that will result in a conflict of interest between the trustee and the Trust or a beneficiary.
Some of the basic administration duties of a trustee include, but are not limited to the following:
Asset and Property Management
Trusts encompass diverse assets, from liquid funds to real property. Trustees are tasked with safeguarding and preserving these assets and making the assets productive, which may involve debt collection, obtaining necessary insurance, and overall prudent management. Trustees must also not commingle Trust property with their own property under any circumstances.
In taking these actions, a trustee must carry out all these activities personally. In other words, a trustee may not delegate their responsibilities to others. However, a trustee may hire attorneys, accountants, investment advisors, and others to consult with them concerning the administration of the Trust. Nevertheless, the trustee will ultimately be held responsible for their acts or omissions.
Providing Information to Beneficiaries
Trustees owe a duty to the beneficiaries to make them aware of the existence of the Trust and to keep them reasonably informed of the Trust and its administration.
Accounting
Under California law, trustees are obligated to provide a comprehensive account and report of all Trust transactions annually, upon the Trust’s termination, or in the event of a change of trustee, as outlined in Probate Code Section 16062. This duty persists unless the Trust instrument or a beneficiary explicitly waives it in writing. Trustees bear the responsibility of meticulously documenting all income and expenses, crucial not only for tax compliance but also for shielding the trustee in the event of scrutiny.
Even when a formal account is not mandatory, trustees are strongly advised to prepare and present such accounts to beneficiaries. Internal accounts serve as a permanent record of Trust transactions, distinguishing between principal and income transactions, and acting as a singular data source for income tax return preparation. Given that this information must be compiled regardless, it is prudent to share it with beneficiaries for several reasons.
Firstly, it offers beneficiaries a deeper understanding and appreciation of the intricacies involved in the trustee’s tasks and duties. Secondly, it helps prevent misunderstandings by transparently disclosing all relevant transactions. Thirdly, presenting an account triggers the commencement of a 3-year statute of limitations for all matters disclosed by the trustee. In the absence of an account, no statute of limitations applies, leaving a trustee’s potential liability exposure open-ended.
Document Management (Record Keeping)
Regardless of whether a trustee intends to make a formal account to beneficiaries, they must keep careful records of all Trust transactions. In fact, if a trustee does not prepare a formal account, they should probably keep these records forever, because there is no statute of limitations and their liability exposure will continue indefinitely.
In particular, a trustee must keep an accurate bookkeeping ledger, with descriptive notations of all income and receipts, noting for each entry the date, the person to or from whom payment was made or received, the nature of the payment, and the amount. All disbursements for Trust expenses should be made by check. A trustee should not pay cash for any Trust expenditure. A trustee should also keep a file or set of files in which they keep a copy of the Trust instrument and the financial records for the Trust, including bank statements, statements of income received, bills for expenses, bank deposit receipts, canceled checks, copies of tax returns, and copies of correspondence relating to the Trust.
File and Pay Taxes
Trustees are required to handle tax obligations for the Trust estate and usually the settlor as well. A trustee should retain a tax professional or tax preparer to ensure this duty is efficiently and accurately done.
Asset Distribution
Trustees are accountable for distributing Trust assets in alignment with the Trust’s terms. This may involve exercising discretion to determine distribution among multiple beneficiaries or strictly adhering to predetermined guidelines.
Frequent Breaches of Trustee Duties in California
Explore common breaches that trustees may inadvertently or deliberately commit, uncovering the repercussions of actions like breach of Trust, misappropriation of Trust funds, inadequate management, fraud, failure to act, and involvement in conflicting business activities. Understanding these pitfalls is crucial, as California trustees could be held accountable for losses occurring during Trust administration, potentially facing claims for restitution from beneficiaries due to improperly distributed assets. A detailed exploration of each breach reveals that maneuvering through the complexities of trustee obligations requires precision and legal expertise.
Breach of Trust
Trustees have the fiduciary duty to act solely in the beneficiaries’ best interests which is known as the duty of loyalty. Any action contrary to this duty constitutes a breach of trust, undermining the fundamental principles of trust administration. In addition to the duty of loyalty, a trustee also has numerous additional duties during the administration of the Trust which include but are not limited to the following: (1) duty to deal impartially; (2) duty to avoid conflicts of interest; (3) duty to enforce and defend actions; (4) duty to account and report; and (5) duty to redress co-trustee’s breach.
Further, the overarching duty of a trustee is the duty to administer the Trust which is an affirmative duty; failure to act or delay in acting can constitute a breach of trust. Trustees are obligated to perform specific tasks:
- Gathering and Reviewing Estate Planning Documents: The trustee is obligated to collect and scrutinize all estate planning documents connected to the trust. This ensures a comprehensive understanding of the settlor’s intentions and directives.
- Reviewing the Trust Agreement: Thoroughly examining the trust agreement is imperative for trustees. This step ensures a clear understanding of the terms, conditions, and responsibilities outlined in the trust, guiding proper administration.
- Consulting with Legal or Financial Professionals: Trustees must seek guidance from attorneys or financial advisors when uncertainties arise. Consulting professionals ensures informed decision-making aligned with legal requirements and best practices.
- Transferring Assets into the Trust: Trustees are responsible for the accurate transfer of assets into the trust, either as required by the trust agreement or upon the settlor’s demise. This task involves title transfers and adherence to specified protocols.
- Creating an Inventory of Assets: Trustees are mandated to establish a comprehensive inventory, identifying the location and value of all trust assets. This inventory serves as a vital reference for proper management and distribution.
- Establishing a Bank Account for Tax and Expenses: Trustees must set up a dedicated bank account for tax-related purposes and to cover any expenses associated with the trust. This ensures financial transparency and compliance.
- Locating and Communicating with Beneficiaries: Trustees are required to actively locate and communicate with beneficiaries. This engagement is essential for executing the trustee’s duties effectively and keeping beneficiaries informed.
Any failure to perform the aforementioned tasks, as mandated by law or the trust, can result in severe consequences for the trustee, the settlor’s estate, and the beneficiaries. It is crucial for trustees to diligently fulfill these obligations to avoid legal complications and ensure the proper administration of the trust.
Misappropriation of Trust Funds
Using trust funds for purposes other than their designated intent exposes trustees to potential liability for misappropriation. Such actions compromise the financial integrity of the trust.
Inadequate Management
Trustees are tasked with critical responsibilities, including proper asset distribution. Trustees should fulfill or execute these duties properly to avoid liability for inadequate management.
Fraud
Engaging in intentional acts that benefit the trustee at the expense of beneficiaries constitutes fraud. For instance, embezzling funds from the trust clearly violates the trustee’s fiduciary duty.
Conflicting Business Activities
When a trust includes business holdings, trustees must act in the business’s best interest, avoiding engagements with competing enterprises. Any action benefiting a competing business may breach the trustee’s duty to the trust and its beneficiaries.
Trustee Liability in California
In redressing a trustee’s breach of trust, some of the statutory remedies a beneficiary may be entitled to include but are not limited to the following:
- Compelling the trustee to perform his or her duties;
- Enjoining the trustee from committing a breach of trust;
- Compelling the trustee to redress a breach of trust by payment of money or otherwise;
- Appointing a receiver or temporary trustee to take possession of the trust property and administer the trust;
- Removing the trustee; and
- Reducing or denying compensation to the trustee.
Beneficiaries also have the right to seek recovery of improperly distributed trust assets, although challenges may arise if assets were acquired by an innocent purchaser.
Choosing OC Trial Group: Your Premier Legal Partner for Trust and Estate Matters
Navigating the complexities of trust and estate administration requires a legal partner with expertise, dedication, and a commitment to securing your interests. OC Trial Group stands out as the preeminent choice for individuals and entities seeking unparalleled legal support in these matters. With a team of seasoned professionals vastly experienced in trust and estate matters throughout the State of California, OC Trial Group brings a wealth of experience to the table. Whether you are dealing with breaches of trustee duties or disputes or require proactive legal counsel in trust administration, OC Trial Group’s adept attorneys are equipped to guide you through every step. Trust in OC Trial Group for comprehensive legal solutions tailored to safeguarding your trust assets and fulfilling fiduciary obligations.
Being a trustee demands legal acumen and a commitment to the meticulous execution of duties. Whether upholding transparency through record-keeping or navigating complex financial transactions, trustees in California play a vital role in ensuring the trust’s integrity and the well-being of its beneficiaries.
If you are a trustee being accused of causing losses to a trust due to breaches of duty, promptly consult with OC Trial Group. They have seasoned legal professionals who can defend you as a trustee being accused of breach, or they can guide you through available legal avenues to recover losses and uphold the integrity of trust and estate administration.
Securing reliable legal support is paramount when facing the intricate landscape of trust and estate administration in California. OC Trial Group emerges as your trusted partner, offering a team of seasoned professionals dedicated to navigating the complexities of trustee duties.
Whether you are grappling with breaches of trust, misappropriation of funds, or other legal challenges, OC Trial Group stands ready to provide comprehensive legal solutions tailored to your specific needs. Don’t let trust matters become uncertain – empower yourself with OC Trial Group’s expertise and experience. Contact us today at (949) 270-3424 to protect your trust assets and uphold the principles of fiduciary responsibility.
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About the Author
Blaine M. Brown is a co-founder of the OC Trial Group and acts as one of their primary trial attorneys. Mr. Brown is a highly awarded and reviewed trial attorney.