Three words no Trustee wants to hear: Breach of Trust. A breach of trust is a violation by a Trustee of a duty that the Trustee owes to a beneficiary. A breach occurs when the Trustee acts in bad faith (e.g., commits an intentional wrong-doing); when the Trustee acts negligently (e.g., does not behave according to the appropriate standard of care); or when the Trustee knowingly breaches a duty even though done in good faith (e.g., deliberately disregards the standard of care, although he/she has good intentions). Now let’s examine the Trustee’s duties.
Be sure to read the trust document most carefully. A Trustee’s primary duty is to administer the trust strictly according to its terms, unless the terms are inconsistent with an overriding provision of law; and the trust document usually includes general and specific powers and duties. The trust may even alter the statutory duties provided under the Probate Code. Even a reasonable misunderstanding of the trust that leads the Trustee to act outside the scope of the powers granted is a breach of trust. A Trustee, therefore, must diligently review and understand the trust document. They also must seek appropriate court guidance if the terms of the trust are unclear.
Next, California Probate Code is another primary source of powers and duties. The Probate Code governs when the trust document is silent; that is, it provides the default rules. The Probate Code also supersedes the Trust document on certain specific duties and powers, and controls even if the trust document provides a rule that is on point. The most important “fiduciary duties” that a Trustee owes to the beneficiaries are the duty of loyalty; the duty of care; the duty of impartiality; and the duty not to delegate. Let’s examine them.
The duty of loyalty requires the Trustee to consider and act in the best interests of the beneficiaries. A breach of trust occurs when the Trustee places his interest above those of the beneficiaries. This can occur when the Trustee takes advantage of business or investment opportunities that belong to the trust; or deals with the Trust on a personal level for the Trustee’s own personal benefit (e.g., borrowing from the trust); or competes on a personal level against the trust’s business interests.
The duty of care requires the Trustee to perform his/her duties in good faith and with reasonable prudence, discretion and intelligence; whether or not the Trustee is compensated. Practically speaking, this means, for example, that the Trustee must oversee and manage the trust assets and hire the necessary expertise to do so. This requirement can be altered by the terms of the trust itself.
The duty of impartiality requires the Trustee to treat the beneficiaries fairly by respecting their rights as beneficiaries under the trust. The Trustee cannot give one beneficiary better treatment than another beneficiary due to personal favoritism.
The duty not to delegate requires the Trustee to be actively involved in the administration of the Trust. A Trustee should not delegate acts that a prudent person would consider so important and so much within his capacity as Trustee that he/she must perform them personally.
In sum, Trustees owe numerous fiduciary duties to the trust beneficiaries based on the trust itself and the California Probate Code. Failure by the Trustee to perform any one of those duties will result in breach of trust.
Editor’s Note: Attorney Dennis A. Fordham is a Board Certified Specialist in Estate Planning, Trust and Probate Law. Dennis concentrates his practice in the areas of estate planning and various aspects of elder law, including Medi-Cal benefits. Mr. Fordham was qualified as a Certified Specialist in 2009 by the State Bar of California Board of Legal Specialization, and is licensed to practice law in California and New York. He earned his BA at Columbia University, his JD at the State University of New York at Buffalo, and his LLM in Taxation at New York University. His office is located on the 2nd Floor at 55 First Street, Lakeport, California and he can be reached by calling 707-263-3235 or e-mail at Dennis@DennisFordhamLaw.com.
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