A Trustee has a so-called “fiduciary” duty — i.e., a duty that involves legal responsibility and accountability to the trust beneficiary — to manage the assets of a trust strictly according to the terms of the trust for the sole benefit of the beneficiaries.
A Trustee cannot favor the interests of one beneficiary over another beneficiary (i.e., the “duty of impartiality”) unless the trust instrument so allows. In California, a trustee must execute his or her fiduciary duties using the authority granted in the trust instrument and in the Probate Code, as further defined by case law.
Some provisions in the trust are mandatory – i.e., must be implemented – and often involve “objective” (measurable) standards to be carried out. Other provisions, however, are permissive and/or are mandatory but still involve subjective standards for implementation. Anything that is permissive or subjective involves discretion and usually gives the trustee some flexibility as to whether, how and when to act.
Whether a decision is mandatory or discretionary and how much flexibility the trustee has is primarily determined by the trust instrument, but secondarily determined by the Probate Code and any relevant case law decisions.
Mandatory provisions involve no trustee discretion. For example, “the trustee shall distribute principal for the beneficiary’s health, education, maintenance and support.” The use of the word “shall” requires the trustee to meet the beneficiary’s needs.
However, other provisions involve trustee discretion. That is, a trustee must use his or her best judgment in a fiduciary capacity. For example, “the trustee may distribute principal for the beneficiary’s maintenance and support as the trustee sees appropriate.” The use of the word “may” requires the trustee to exercise his or her best judgment under the prevailing circumstances, in good faith, and in furtherance of the purpose of the trust.
As a general rule, section 16040(a) of the Probate Code provides that, “[t]he trustee shall administer the trust with reasonable care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument.” California case law has further defined the foregoing “prudent person” standard to mean that a trustee must act in good faith and with reasonable prudence, discretion and intelligence.
Next, the general rule regarding a trustee’s investment decisions in particular is section 16047(a) of the Probate Code which provides that, “[a] trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”
However, a trust can expressly remove the prudent person and prudent investor standards and provide the trustee with “absolute” discretion”. Even then section 16081 (a) of the Probate Code provides that, “… if a trust instrument confers ‘absolute,’ ‘sole,’ or ‘uncontrolled’ discretion on a trustee, the trustee shall [still] act in accordance with fiduciary principles and shall not act in bad faith or in disregard of the purposes of the trust.”
Thus, a trustee as a fiduciary still must always act appropriately given all relevant considerations and the purposes of the trust. A trustee with absolute discretion still cannot simply disregard the trust’s purpose or act in bad faith. To do so would defeat the purpose(s) of the trust which would violate the trustee’s fiduciary duty of loyalty to the trust.
When a trustee breaches a fiduciary duty or fails to act (i.e., a non performing trustee), a beneficiary can petition the court for instructions regarding the administration of the trust and/or for removal of the trustee. Doing so is litigation and leads to a trial or a negotiated settlement. Selecting a competent and capable trustee and having a well drafted trust can minimize these risks.
The foregoing is not legal advice. Consult an attorney if confronting these issues. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.