The Responsibilities of a Trustee Under California Law

By Teo Spengler - Updated August 08, 2018
Meeting with financial advisor

Think of the verb "trust." If you trust people in real life terms, you have confidence in their good character. You feel you can rely on a trustworthy person not to take advantage of you, cheat you, steal from you or lie to you. Unlike love, trust implies a respect for someone's good sense.

Although the term "trustee" comes from the legal vehicle called a trust, the responsibilities of a trustee involve pretty much acting like someone worthy of trust. When a trustee violates his duties under the trust, the repercussions can be addressed in a court of law. Trustee fiduciary duties in California include the duty to put the beneficiaries' interests above one's own and to avoid self-dealing.

Trusts in California

A trustee in California is an essential part of a trust arrangement, and it is impossible to comprehend a trustee's responsibilities if you don't have basic understanding of trust law. What is a trust in California? It's a type of legal "entity" that can own assets, incur debts and transfer property. But a trust looks more like a last will and testament than a business or a corporation. It starts with a piece of paper.

A person sets up a trust in California by preparing a trust document. The person often does this in contemplation of death, and, like a will, a trust document includes instructions to a trustee about what to do with the trust assets. The trustee is a person, bank or other legal entity the grantor puts in charge of managing the trust. The person or persons who will get benefits from the trust are called the beneficiary or beneficiaries.

Why would anyone create a trust? There are lots of potential reasons. First and foremost, a person can put some of their assets in a trust for wills and estate planning. Trusts often appear in wills. For example, if someone leaves property in equal shares to her minor children when they turn 21 years old, someone will have to manage the property for minor children until they get old enough to inherit. Often a trust is set up for the kids' assets. A grantor can also specify in a trust document that it goes into effect if he becomes incapacitated. In that case, the grantor would be the beneficiary of the trust until he died.

Spendthrift trusts are also used to protect children or anyone who, even though legally an adult and over the age of majority, has trouble handling finances. If someone is a spendthrift, his parents may leave him money in a spendthrift trust to prevent him from spending it all quickly and ending up destitute. Or discretionary trusts can be set up to protect assets from creditors, so that the beneficiary can benefit from the trust without owning them, and thus, theoretically protect the assets from creditors. This doesn't always work out if it is taken to court by a creditor, however.

Trusts can also be used to keep the terms of a will private. While wills are generally public documents in the United States, open to review by anyone wishing to view them, trusts are not. They can be private documents that the public cannot view.

Another reason people set up trusts is for employee pension plans. The employees and their dependents are trust beneficiaries. Trusts can also be put together because the tax consequences are better. This is a legal way to avoid tax.

How Trusts Work

For any type of a trust to work, the person making it (called grantor or maker) has to decide on the trust terms, have the document prepared by an attorney and sign it. Then the grantor has to transfer assets into it. The title to each asset has to be altered so that it is not owned by the individual but by the trust. If the grantor becomes incapacitated or dies, the trust is already in place so there is no need to go to court. The trustee steps in and manages the business and financial affairs.

Types of Trusts in California

You can find a variety of different kinds of trusts in California. For example, a trust created by a will that goes into effect when the person making the trust dies is a testamentary trust. An irrevocable trust is a trust that cannot be altered. That is, the terms of the trust cannot be changed until they have been completed. Contrast this with living trusts that people set up during their lifetime and that can usually be revoked. Many people use a revocable living trust instead of a will in order to avoid probate. It's a flexible legal vehicle since you can change it, take out assets or cancel it as long as you are alive and competent.

While all of these are express trusts, deliberately created by the maker, some trusts are not express. For example, a constructive trust is not created deliberately but rather imposed by law as a remedy for some wrongdoing. Usually, the wrongdoer has acquired title to property by doing improper or illegal acts. The court imposes a constructive trust on the property, so that the wrongdoer is not the owner, but holds the property for the rightful owner. Alternatively, a constructive trust can be imposed if someone tries to transfer title but the transfer is flawed.

California Trustee Powers and Responsibilities

A trustee in California steps in to manage the assets of the trust and distribute them to beneficiaries as the trust document directs. The very most important thing a trustee must keep in mind is that the property doesn't belong to him. He is only a caretaker and owes a fiduciary duty – the highest form of duty in the law – to the beneficiaries of the trust.

First, under California law, a trustee has a duty to safeguard trust property. The trustee must gather and guard trust property, managing it prudently and carefully to protect it for the beneficiaries. If the trustee doesn't safeguard it and, instead, acts recklessly with it, he can be sued by the beneficiaries for breach of duty. Many trustees lower and limit potential exposure to civil liability by buying insurance. Note that trustee insurance doesn't cover claims against the trustee for deliberate actions like theft, but only for inadvertent errors.

It is always improper for a trustee to run any part of the trust for his own benefit or to bring himself advantages. This is called the duty of loyalty. If the trustee puts his interest above those of the beneficiaries, he violates his fiduciary duty to them. As a trustee, he cannot do business with the trust, even if the transaction is fair. A trustee must avoid self-dealing as well as conflicts of interest. He can be removed as trustee if he has irreconcilable conflicts between his interests and the trust's. Examples of trustee self-dealing might be if a trustees puts a piece of trust real estate up for sale, then buys it himself, or if he gives an old car that was trust property to his son rather than donating it to charity.

Trustees in California don't just have to avoid a conflict of interest with the beneficiaries, they have to avoid even the appearance of a conflict of interest. This rule is based on the idea that a trustee is more likely to breach the duty of loyalty if he finds himself in situations that provide opportunities to cheat. The duty of loyalty means he cannot ever profit from the use of trust assets. If he obtains any advantage, it is presumed to be a violation of the trustee's fiduciary duty. The trustee cannot mingle trust assets with personal assets. Combining trust money into your personal account certainly creates the appearance of self-dealing.

Just like the duty to avoid self-dealing, a trustee in California cannot favor one beneficiary over the others. A trustee must be impartial and fair, treating all beneficiaries equally. He also has a duty to keep all beneficiaries informed about what is happening with the trust. He has to disclose to beneficiaries all material facts and all information necessary to protect their interests. Beneficiary rights in California include notice of all important trust happenings.

Can a trustee delegate important duties to someone else? No, that's a breach of the duty to render personal service. A trustee can't transfer authority to someone else and, if he does, he is liable for any losses. This is true even if there is no evidence that the transfer of control caused the losses.

Finally, a trustee must enforce trust claims and defend claims against the trust. He doesn't have to go for every penny, but if a prudent trustee doesn't take steps to enforce a claim, he fails to do so at his own peril. A trustee also has to take steps to defend against actions that may result in a loss to the trust. He doesn't have to appear in court and present arguments, however. He can hire an attorney if necessary.

Beneficiary Rights in California

If you are the beneficiary of a trust in California, you can take active steps to protect your rights. Some of these assist you in keeping the trustee in line and making sure he lives up to his fiduciary duties.

You need to read the fine print, literally. If you don't sit down and read the trust document, you don't stand a chance of understanding your rights and protecting them. Find out whether you are one of many beneficiaries with equal rights, or if some beneficiaries under this trust have more rights than others. Know when you are entitled to a distribution.

How do you get that information? Ask for it. Start by asking the trustee for information, and always ask for it in writing. You can get copies of bank and investment statements, bills the trustee has paid and costs he has incurred. If you don't understand the information you get, ask for an explanation and, at some point, run your questions by an attorney.

As part of your request for information, be sure to ask for an accounting if you are entitled to one. Only beneficiaries getting current income or those who will be getting principal can demand an accounting. Sometimes trust documents expand this right, so read them carefully. If you qualify to seek an accounting, you will have to wait at least six months. Put your demand in writing.

How about the dreaded no-contest clause that says you lose your inheritance if you question the terms? Don't worry about it, the trustee cannot disinherit you. Ask all the questions you want, demand an accounting and even go to court to enforce your rights. Many trustees are given "discretion" to make distributions, but that is not absolute. The discretion must be used reasonably under the circumstances, and the trustee must make distributions when they are needed.

Are you up on the tax consequences of the trust? Happily for you as a beneficiary, most assets you inherit are not subject to income tax, but some are (like rental income), and beneficiaries can be liable.

About the Author

Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.

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