The Duty of a California Trustee to the Account Beneficiaries

By John Stevens J.D.

Trustees owe a great responsibility not only to the person who created the trust, but also to the beneficiaries of the trust. In the legal context, this responsibility is referred to as a “duty.” There are several different duties owed by the trustee to the beneficiaries. If the trustee breaches one or more of these duties, the trust beneficiaries may sue the trustee for any damage caused by the breach.

The Duty of Loyalty

A trustee owes the beneficiaries a duty of absolute loyalty. The duty of loyalty includes the duty to avoid self-dealing and the duty of avoid conflicts of interest. Self-dealing occurs where the trustee uses trust property for a purpose that benefits the trustee rather than the beneficiaries. California does allow a trustee to engage in self-dealing, however, if the person who created the trust or all of the beneficiaries agree to the transaction after the details of the proposed transaction are fully disclosed. A conflict of interest arises if the trustee is considering dealing with another party in a transaction that may affect the trustee’s ability to properly assess the transaction. For example, if the trustee is allowed to sell trust property and hold the property for the beneficiaries, the trustee would have a conflict of interest if the potential buyer was the trustee’s friend. The main difference between self-dealing and a conflict of interest is that self-dealing benefits the trustee, and a conflict of interest is something that could potentially cloud the trustee’s judgment with respect to the trust.

The Duty of Prudence

In California, a trustee is obligated to administer the trust property with a level of skill and care that a person of ordinary prudence would exercise if dealing with her own property. This is an objective standard, meaning that it is of no significance as to whether the trustee thought she was acting prudently. For example, if the trust directs the trustee to invest some or all of the trust property, the duty of prudence would require the trustee to investigate investment opportunities such as by conducting research and perhaps consulting with investment experts. The duty of prudence also requires the trustee to spread the risk of loss by diversifying the trust investment, unless it would not be prudent to do so.

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The Duty of Impartiality

The duty of impartiality is designed to prevent the trustee from favoring some beneficiaries over other beneficiaries. The duty commonly arises where the trust directs the trustee to distribute income from trust property to some beneficiaries, and to then distribute the actual trust property after some period of time. In this situation, the beneficiaries entitled to income want the trustee to invest the trust property in risky investments to maximize the accrued interest. Conversely, the property beneficiaries want the trustee to invest the property in safe investments to protect the principal but produce little income. In this situation, the duty of loyalty may require the trustee to invest the trust property so that it produces a reasonable income while preserving the property for the final beneficiaries.

The Duty to Collect Trust Property

A trustee is required to collect trust property without unreasonable delay to protect that property. This duty may also require the trustee to examine the trust property to ensure that the collected property is the property specified in the trust document. Collecting and identifying the trust property is also necessary to avoid the risk that the trustee could mistake trust property for his own.

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The Responsibilities of a Trustee Under California Law
 

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Roles of a Trustee

A trustee manages property for beneficiaries according to the terms of a trust. Generally, a trustee is appointed by a person, called a grantor or settlor, who establishes and funds the trust. The settlor transfers legal title of assets to the trustee so she may manage and distribute them for named beneficiaries. A trustee's role includes responsibly and honestly handling trust assets and ensuring the purpose of the trust is carried out.

A Trustee's Responsibilities for a QTIP Trust

A Qualified Terminable Interest Property Trust (QTIP) is a legal device used to minimize gift and estate taxes. A QTIP is also used to ensure the surviving spouse is cared for but the decedent's property does not go to the spouse's children from a prior marriage. The trust grants the surviving spouse use of a decedent’s property for the rest of her life. After the surviving spouse dies, the trust property goes to the beneficiaries as chosen by the first decedent. The beneficiaries generally are the first decedent's children. A trustee of a QTIP has the same general responsibilities as the trustee of a normal trust, with a few exceptions.

What if You Violated an Irrevocable Trust?

The person appointed to oversee an irrevocable trust must act according to the terms of the trust and in the best interest of those who benefit under the trust. While all states recognize this duty, the type of recourse available in cases of breach can vary. Knowing when you may petition the court for removal of a trustee and when he may be personally liable for financial losses will help ensure that your trust operates according to the wishes of its creator.

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