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Truth or consequences: how much does a California Trustee have to pay back?

If a Trustee breaches a duty, what is the amount for which they are liable? The answer may surprise you. Basically, the Trustee is chargeable with three things: (1) any loss or depreciation in value incurred by the Trust, (2) any profit made by the Trustee, and (3) any profit that would have been made by the Trust were it not for the breach of Trust. (See Probate Code section 16440(a).) Add to that interest for whichever loss applies and you have the full measure of damages for the Trustee.

In other words, it’s all about the damage to the Trust. Notice that there’s nothing mentioned about pain and suffering. That is definitely NOT one of the types of damages you can collect from a Trustee. You also cannot collect any damages from a Trustee if there is a breach of duty without a loss. A breach without a loss is a non-event as far as Trustee damages are concerned.

That means that all lawsuits against a Trustee will only result in money damages if you have proof of loss. There are no independent damages against a Trustee without a loss, there are no pain and suffering type damages. There also are no punitive damages against a Trustee just for breaching a duty. Either a loss was incurred by the Trust, or it wasn’t—end of story.

Considering how much pain (and suffering) a beneficiary endures from a bad Trustee, why does the law only allow damages for loss? Well in the eyes of the law the Trust money does not legally belong to the beneficiaries. The beneficiaries are the “beneficial owners”, but not the legal owners of the property.

In reality, the Trust was funded by the Settlor’s assets, and the settlor has the right to design the Trust any way he likes, to put whatever limitations on the gift he wants, and to put whomever in charge that he chooses. A Trust, afterall, is really just a limited gift of assets.

The court, therefore, attempts to implement the Settlor’s intent as much as possible. And the only legal consequence to the beneficiaries from a breach of trust is loss of the trust assets. Notice I did not say the “only consequence”, but rather said “only legal consequence.” The difference is that in reality there are quite a few non-legal consequences a beneficiary suffers at the hands of a bad Trustee—pain and suffering chief among them. At times, a beneficiary may be counting on a fair Trust distribution to survive, or provide further care and support. When a bad Trustee refuses to comply with the Trust terms, the harms can be far more than simply the financial loss to the Trust.

For now, unfortunately, Trust law does not take other types of harms into account. Either you have a financial loss to the Trust (which is collectable against a Trustee), or you do not. Welcome to California Trust law.