Course 2 — Lessons 1 to 3: Trustee Duties — The Top 3

The basics of Trustee’s duties:

These are the beginning ground rules for Trustee Duties:

  • The Trustee must follow the Trust terms;
  • The Trustee must administer the Trust solely for the beneficiaries; and
  • The Trustee must not enter into any transaction where he personally obtains an advantage over the Trust or Trust beneficiaries.

Hypothetical

Let’s consider a hypothetical situation to demonstrate the problems that can arise and the options you may have to hold your Trustee accountable. After the hypothetical, we will discuss the rules of Trustee duties in more detail.

The Facts

You recently received a letter informing you that you are a beneficiary of your mother’s Trust. Your mother passed away a month ago, and her named successor Trustee is a long-time financial advisor, Mr. Smith. The financial advisor had helped your mother with her financial investments over the past five years. Under the terms of the Trust, your share is held in Trust for five years and then will be distributed to you outright, or to your children if you do not survive for the next five years.

The Trust for you provides that the Trustee must pay all of your medical expenses, and as much of the income and principal of the Trust that is required for your care and support. You recently lost your job and could use money to pay your mortgage payment of $2,500 per month. You also lost your healthcare coverage and could us $750 per month to pay for medical insurance coverage. The principal of your Trust consists of $1 million in cash, plus a rental home with a market value of $600,000 that generates $3,000 per month in rent.

After your Trustee sent you the initial letter, you have not heard anything more from him, so you give him a call. He does not answer your calls and does not call you back. After a month of attempting to contact your Trustee, you learn that the rental house has been sold. The listed buyer of the home is West Coast Realty, Inc., but the corporate records at the California Secretary of State’s office show the company is actually owned by Mr. Smith, your Trustee.

A week later you receive a spreadsheet showing your Trust assets consist of the $1 million cash and a promissory note from Mr. Smith to the Trust in the amount of $400,000. But you still cannot contact the Trustee and have not talked to him.

Finally, you receive a letter from the Trustee that he has loaned $500,000 to a real estate company by the name of West Coast Realty, Inc. It is an interest only loan, but the loan payments are not going to start until a year from now. The Trustee does not disclose to you that he is the owner of West Coast Realty, Inc.

You still have not received any distributions from the Trust, the Trust is no longer receiving rental income, or any other type of income, and the Trustee still refuses to speak with you.

The Options for you to hold the Trustee accountable

You believe that the Trustee has violated his duties to properly administer the Trust by (1) failing to follow the Trust terms to provide you with distributions, (2) failing to put your interests first, and (3) entering into transactions with the Trust that benefit the Trustee. How are you going to hold your Trustee accountable? Here are your options:

  1. Contact the Trustee.

Keep trying to call the Trustee to find out what’s going on with your Trust administration, and attempt to get further distributions from the Trust according to the Trust terms.

  1. Write a Letter.

Send a strongly worded letter to the Trustee letting him know that you are not pleased with his actions as Trustee, and that you want an immediate distribution.

  1. Hire an inexpensive lawyer.

Hire the least expensive attorney you can find to start a letter writing campaign to scare the Trustee into making a Trust distribution to you.

  1. Hire an expensive lawyer.

Hire the most expensive attorney you can find to start a letter writing campaign to scare the Trustee into making a Trust distribution to you.

  1. Hire an attorney who can take court action.

Hire an attorney who focuses on Trust and Estate Litigation to review the facts of your matter and provide you with his/her opinion on how best to handle the Trustee.

Our Opinion

Listen to the approach that Stewart Albertson would take to hold your Trustee accountable.

 

 

Roundhouse

Listen to Stewart Albertson and Keith A. Davidson discuss the options and their recommended approach to this difficult problem.

 

Duties of Trustee

There are quite a few duties every Trustee must know and follow. In our previous posts we have discussed the California Prudent Investor Act, and the duties that Act imposes on a Trustee when investing Trust assets. In this post we will focus on the Trustee’s other administrative duties outside of investments. Trust investing is just one aspect of properly administering a Trust estate.

Most Trusts have various assets that must be managed. For example, a Trust may own real property, some of which is rented, oil and gas mineral rights that are contracted out to oil producers, royalty rights that generate a stream of income, annuities, retirement assets, unique antiques and artwork, the list goes on. Each of these asset types must be properly managed to ensure that the Trust receives the benefits to which it is entitled.

Further, the Trust may have legal claims and debts to either collect from debtors, or pay to creditors of the Trust. Assets may have to be sold or contract negotiated, claims compromised, etc. And then there are beneficiary related issues. Trustee’s must communicate with the beneficiaries, determine any distribution needs, inquire as to health and support issues (where the Trust authorizes distributions for health and support), and consider any other beneficiary related issues.

These are just a few examples of the complicated oversight many Trust’s require to be properly managed. So what duties does a California Trustee have in all this mess?

First: look at the Trust documents.

When addressing Trustee duties, the starting point for determining the duties of your Trustee is always the Trust document. Under Probate Code section 16000, the Trustee has the duties listed in the Trust document—basically the Trustee is expected to do what he is told. And yet, quite a few individual Trustees seem to mess up this simple mandate.

The Trustee must also administer the Trust according to Trust law, but the Trust document comes first. For example, if the Trust document provides a specific gift of real property to a named beneficiary, then the Trustee needs to give that real property to the named person. Simple enough. And if the Trust document requires the creation of a Trust for grandchildren, then a Trust for grandchildren must be created and assets transferred to that grandchildren’s Trust as specific in the Trust document. Couldn’t be easier.

Where a Trust document requires the payment of income and/or principal to a beneficiary for that beneficiary’s health, education, maintenance, and support, then the Trustee needs to first determine what needs that beneficiary has (by asking them and obtaining relevant information from them), and then make the appropriate distribution.

It really is just as easy as reading the Trust document, and then the Trustee does what he is told. The problem is that quite a few individual Trustees either don’t read the Trust document, or they don’t do what they are told. Many times, Trustees operate under the mistaken belief that they can do whatever they want—or whatever they think is right—not so! To better understand the Trustee’s duites, let’s discuss some of the specific requirements a Trustee has:

The Duty of Loyalty

Under the duty of loyalty, a Trustee must administer a Trust “solely in the interest of the beneficiaries.” (See Probate Code section 16002.) The California Supreme Court may have said it best when it described the duty of loyalty by stating: “in dealing with the beneficiaries the trustee must show the utmost good faith.” (Allen v. Myers (1936) 5 Cal. 2d. 311.) Granted, the Supreme Court said that in 1936—over 81 years ago—but the truth of the statement still stands.

To further illustrate the duty of loyalty, consider these statement of the law from various Califonria appellate cases:

“In all matters connected with his trust, a trustee is bound to act in the highest good faith towards his beneficiary and may not obtain any advantage by the slightest misrepresentation.” (Estate of Vokal (1953) 121 Cal. App. 2d. 252, 257.)

“The trustee may not receive any personal advantage without full disclosure to the beneficiary.” (Van de Kamp v. Bank of America (1988) 204 Cal. App. 3d 819, 834.)

“It does not matter that a trustee may have acted in good faith; self-dealing in violation of the duty of loyalty cannot be justified by the good faith of the trustee.” (Id. at 835)

“The trustee may not wield its power for its own ‘aggrandizement, preference, or advantage’ to the exclusion or detriment of the beneficiary. (id.)

Clearly, the duty of loyalty is a big deal. And any action the Trustee takes to benefit himself is a violation of the duty of loyalty. For example, if the Trustee chooses to buy real property from a Trust that is violation of the duty of loyalty regardless of how fair the transaction may be. That means the Trustee will either have to disclose the transaction to the beneficiaries and obtain their prior consent, or ask the court to allow the transaction on a noticed petition for instructions. Otherwise, the violation is complete as soon as the transaction is done, and no amount of justification for the fairness of the transaction will benefit the Trustee.

The law does allow for a Trustee, who administers two separate Trusts, to engage in transactions between the two Trusts, provide that:

  1. The transaction is fair and reasonable to beneficiaries of BOTH trusts, and
  2. The Trustee gives both trust beneficiaries full disclosure of all material facts regarding the transaction.

And this is just for a transaction between Trust, not a transaction with the Trustee personally—the Probate Code does not allow for a procedure with the Trustee.

It makes sense that a Trustee’s duty of loyalty should be so strongly stated because the Trustee is in a position of power over the beneficiaries. The Trustee controls all the money and assets, the Trustee makes and implements all the decisions, and it can be very difficult for a beneficiary to fight against a Trustee. As such, the Trustee is the one who is given the burden of acting solely in the interest of the beneficiary—meaning acing with the “utmost good faith” towards the beneficiary.

Duty to Avoid Conflicts of Interest

The Trustee has a duty NOT to use or deal with trust property for the trustee’s own benefit, or for any purpose not connected with the Trust. The Trustee also cannot take part in any transaction where the Trustee has an interest that is adverse to the Trust beneficiary. (Probate Code section 16004.)

Here is a further interesting rule: a Trustee may not enforce any claim against the trust property that the Trustee purchased after or in contemplation of appointment as trustee, but the court may allow the trustee compensation equal to the amount paid for the claims. Who the heck would even do such a thing? Someone must have or there would be no rule like this.

Here’s the meat of the issue: Any transaction between the trustee and a beneficiary which occurs during the existence of the trust or while the trustee’s influence with the beneficiary remains, and by which the trustee obtains a advantage from the beneficiary, is presumed to be a violation of the trustee’s fiduciary duties. This rule does not apply to a contract hiring or compensation of the trustee. This is a broadly worded rule; notice the wording of “any transaction” where the Trustee obtains an advantage is a violation of the duty to avoid conflicts of interest.

Some of the California appellate court cases further illustrate the extent of this rule. For example, Trustees cannot directly or indirectly deal with the trust estate to trustee’s benefit and beneficiaries’ detriment.  (Municipal Bond Co. v. City of Riverside (1934) 138 Cal.App. 267.) What does it mean for a Trustee to obtain a benefit? Consider this: “[w]hen a fiduciary enters into a transaction with a beneficiary whereby the fiduciary’s position is improved or he obtains a favorable opportunity or where he otherwise gained benefits or profits, an advantage has been obtained.”  (Ferrara v. La Sala (1960) 186 Cal.App.2d 263.)  That seems pretty clear—where the Trustee obtains something good, it’s a conflict of interest.

To understand just how strong the duty of conflict can be consider this quote: “[t]he law will not allow private profits from a trust irrespective of proof of honest intent or proof that dealing was for beneficiary’s best interest, but will set transaction aside at mere option of beneficiary.” (Blum v. Fleishhacker, N.D.Cal.1937, 21 F.Supp. 527, modified 109 F.2d 543.) Therefore, it does not matter if the transaction is fair, it only matters that the transaction was completed and the Trustee obtained a benefit.

Furthermore, a Trustee may not obtain any advantage by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.  Weiner v. Mullaney (1943) 59 Cal.App.2d 620. Ever feel you were put under adverse pressure by the Trustee…could be a violation of this rule.

Generally, trustee may not buy trust property for his own benefit.  Landis v. First Nat. Bank (1937) 20 Cal.App.2d 198. This means that ANY transaction between the Trustee and his Trust is likely a breach of trust.

The bottom line: the duties of loyalty and to avoid conflicts of interest are important rules that are all too easy to violate by any Trustee. Simply put, the Trustee MUST put the interests of the beneficiary first. And putting the beneficiary first further requires that the Trustee take no advantage, and gains no benefit, from transactions with the Trust or the Trust beneficiaries.