The Big Five Trustee Duties: What every California Trustee must know…and do!

In this video, partner Keith A. Davidson discusses the top five Trustee duties for every California Trustee.

The following is a transcript of this video:

In this video, I want to talk about the top five duties that every trustee has in California. The number one duty is to follow the trust terms. And you may think that that sounds like common sense, and, in fact, it is common sense, but it’s also one of the tenets of the Probate Code. It says every trustee has to follow the trust. And, so, if someone is supposed to receive a certain asset, you have to give it to them. If the beneficiaries are supposed to receive their distributions outright, versus being held in trust for some period of time, then the trustee has to give the beneficiaries their assets outright. You have to follow whatever it is the trust says.

The second important duty of a trustee is the duty of loyalty. And that means the trustee has to treat the beneficiaries fairly. The trustee should be acting in the best interest of the beneficiaries and that means making decisions that are good for the beneficiaries. Not good just for the trustee. And where this one really goes wrong is when the trustee is also a beneficiary and then that trustee starts trying to benefit themselves. That’s really a problem and that’s where the duty of loyalty says a trustee can’t do that. A trustee has to treat all the beneficiaries fairly and equally and that’s the duty of loyalty.

The third most important duty of a trustee is to report information and account. If a beneficiary asks you for financial information pertaining to the trust. You, as a trustee, have a duty to give it to them within a reasonable amount of time. It doesn’t mean you have to do it the same day, but you certainly should be doing within a matter of days or perhaps a week or two, depending on how complicated the request is. If you’re the type of person who does not like having to prepare financial records or keep track of an accounting or produce financial records when you’re requested to, then don’t be a trustee, because those are all duties that a trustee has. They’re basic trustee duties and you must comply with them. They’re not optional, they’re mandatory.

The fourth important duty of a trustee is to make distributions. You have to give the money out or the assets out when the trust tells you to. And a lot of trusts will say that after the last parent dies, the assets are going to be distributed outright and free of trust. That means you actually give the property to the beneficiaries. You can’t just hold on to it indefinitely. And a lot of private people who are acting as trustees, they think that the trust is just going to continue on as if it were a corporation or an LLC or something like that. It’s not. When the trust requires outright distribution, the trust is coming to an end. The trust is over. At least, for that beneficiary, or that group of beneficiaries. And the trustee has to take the assets and hang them out. It’s kind of the end of the ballgame and end of story. But, so often, a private trustee either refuses to make distribution or the trustee may require that the beneficiaries sign something like a release or indemnification before making distributions. None of that really is allowed. You cannot force a beneficiary to sign a release of your liability as trustee before getting a proper trust distribution. You have to get the assets out. Now the trustee is allowed to keep a reasonable reserve. That’s an amount of money that the trustee thinks might be required to do a final accounting, to do final tax returns, that sort of thing. But, reserves should be relatively small compared to the overall size of the estate.

And, finally for those trustees who are required to keep assets in a trust for an extended period of time, you really have to look into your duty to invest prudently. There’s a requirement that every trustee invest prudently. And there’s a whole set of rules. In fact, there’s a whole section of the California Probate Code that talks about the prudent investor rule. You really need to understand that. And if you don’t understand it, and maybe you don’t, and that’s fine. Then you have to hire a financial professional who can help you make a determination of what’s reasonable and what’s not. And that is so critically important. Because you, as trustee, ultimately, will be liable if you invest either imprudently and lose a bunch of money, or if you don’t invest in and you never make any money. Over an extended period of time, that could be a substantial harm to the beneficiaries. So, know your investment duties and make sure you follow them and make sure you document them in writing so you can prove that you made good prudent investment choices.