1. Follow Trust Terms
The Trustee has a duty to follow the Trust terms. In other words, do as they’re told. May sound obvious, but it’s remarkable how often Trustees seem to get that one wrong. It is a basic Trustee duty that can be found at California Probate Code section 16000.
Too often individual Trustees will refuse to follow the Trust terms. Or you may hear a bad Trustee say they don’t agree with the Trust terms and they want to do something different. Maybe the Trustee is also a beneficiary. And they don’t like their sibling who is set to receive a fair share of the estate. If the Trust requires the Trustee to give an equal share to their sibling, that’s what the Trustee must do. The Trustee does not typically have the right to change the distribution scheme just because they don’t agree with it.
The same is true for distribution standards. If a Trust requires the Trustee to make distributions for the beneficiary’s health, support, maintenance, and education, then those distributions must be made. In fact, the Trustee has a duty to talk to the beneficiary to find out what their needs are and then make distributions for those purposes.
2. Duty of Loyalty
A Trustee must be loyal to the Trust beneficiaries. What does it mean to be loyal? They must treat the beneficiaries fairly. In other words, act in the best interests of the beneficiaries. Not that hard really. But then again, not that easy all the time.
Much depends on the type of person acting as Trustee. It may be true that some beneficiaries are difficult to deal with. But that does not excuse the Trustee from being loyal. The Trustee owes the beneficiaries fiduciary duties (the legal duties of every Trustee) no matter how difficult the beneficiaries may be. Beneficiaries, on the other hand, owe no duties to the Trustee.
That doesn’t mean the beneficiaries can be abusive. At some point, the Trustee has the right to protect themselves from abuse. But it does mean that the Trustee should be fair and reasonable to all beneficiaries at all times. It is important for the Trustee to be loyal because otherwise, the Trustee could take actions that hurt the beneficiaries. That does happen at times, when a bad Trustee is in charge. But it shouldn’t happen. And California Trust law mandates that the Trustee must remain loyal—fair and reasonable—in their treatment of the Trust and the Trust beneficiaries.
3. Report Information and Accounting
Every Trustee has a duty to keep the Trust beneficiaries reasonably informed of all Trust business. That’s something that should occur without the beneficiaries asking for information. Additionally, every Trustee has a duty to provide reasonable information to Trust beneficiaries when requested to do so. And most Trustees also have a duty to account to the beneficiaries.
If you don’t like accounting and providing financial information upon request, then don’t be a Trustee. It comes with the job and there are no exceptions. Besides, keeping beneficiaries reasonably informed is a good strategy for every Trustee because it will head off problems in the future. The more the beneficiaries know, the less they can complain about being kept in the dark. Plus, once information is disclosed to a Trust beneficiary, the statute of limitations for a lawsuit against the Trustee starts. A beneficiary has three years after disclosure of information to file a lawsuit against a Trustee for any claims disclosed in the information provided. If the Trustee never shares any information, then the clock never starts for the statute of limitations. That’s a bad thing for Trustees.
On the beneficiary side, its important to remember that you don’t always need a Trust accounting. Accountings are good, but sometimes just obtaining a copy of the relevant financial statements is enough. Bank statements, brokerage statements, statements from property managers can provide much of the information you are looking for in the first place. And you can ask for these financial documents much sooner than you can ask for an accounting.
4. Make Required Trust Distributions
When the Trust requires assets to be distributed outright and free of Trust, that means the Trust is over. The assets must be gathered together, any last debts must be paid, and then the remaining Trust property must pass out to the named beneficiaries.
Sounds like common sense, but there are many individual Trustees who don’t seem to understand this important point. Trusts have an end point. That usually occurs when the Trust states an outright distribution is required. Outright means what is say: the assets pass out of the Trust and are transferred to the named beneficiaries. And this outright distribution must occur within a reasonable time. Reasonable times can be anywhere from a few months to a year depending on the complexity of the assets.
We have seen cases, however, where assets are retained in a Trust for multiple years. This is unacceptable and a clear violation of the Trustee’s duties. Even the most complex of cases should take more than eighteen to twenty-four months. If you were given an outright distribution of Trust assets and you haven’t received your share for over two years, then something is wrong. Your Trustee is failing to abide by their fiduciary duties. It may be time to take action in court.
5. Duty to Invest Prudently
Finally, for those Trusts that require assets be held for some period of time, the Trustee has a duty to invest prudently. There is an entire section of the Probate Code called the Uniform Prudent Investor Act (Probate Code sections 16045 to 16054). The Prudent Investor Act sets out the rules by which a Trustee must invest Trust assets. The entire Act is based on modern portfolio theory, where assets are diversified and invested based on risk factors. For most Trusts, the investments should be conservative, but also take into account the needs of the Trust.
For example, if a beneficiary is entitled to receive all Trust income outright, then the investments should be skewed to produce income. A Trust investment plans that produces no income would harm the income beneficiary. That’s just one example of the consideration Trustees must make when investing Trust assets.
One thing every Trustee should have is a written investor policy statement. This is a written document that describes the Trustee’s investment objectives and strategy. The Probate Code doesn’t require a written investment policy statement, but every good Trustee has one. Why? Because it protects the Trustee from future lawsuits. A sound investment plan that is documented in writing is much harder for a beneficiary to attack in court than having no play or an unwritten plan.
What If Your Trustee is Not Fulfilling These Duties?
So there you have it. The top five Trustee duties. If you have a Trustee who is falling short on one of these important duties, you need to start asking questions. It could be a sign of bigger problems to come in your Trust administration. In this case, we strongly recommend discussing your situation with an experienced attorney. To do so, call Albertson & Davidson now, or fill out our online contact form. Either way, we offer free case evaluations. (All meetings are virtual during the pandemic). Let us fight for your inheritance.