As discussed in our article on Wills and Trusts, trusts have become a common method of estate planning for most citizens of the United States. They provide tremendous flexibility in estate structure, allow changes to be made in the plan to adjust to new circumstances even after a death, and save probate fees and at times certain taxes. As seen in our article on the Executor Duties, a fiduciary duty applies to the actions of the Trustees who must carry out the instructions imposed in the trust instrument or face personal liability.
This article shall briefly outline the duties a Trustee normally encounters when assuming the office of Trustee.
The Trust Instrument:
A Trust is merely one form of contract in which the Settlor (also sometimes called the “Trustor” or “Grantor”) creates a document (“Trust”) which appoints a person to take care of another person. The person appointed is the Trustee and the person for who the benefit is created is the “beneficiary.” Unlike most contracts, however, the law and the courts impose upon the Trustee a fiduciary duty, the highest duty known to law, and the Trustee can find him or herself subject to such liabilities even decades after the alleged wrongdoing. The reader should read our companion article on fiduciary duty.
The Settlor can limit the obligations and to some extent even the liability faced by the Trustee by appropriate wording in the Trust. The key is to balance some reasonable limit on the Trustee’s liability with adequate protection to the beneficiaries. It is to be remembered that the beneficiaries may be children or incompetents and not capable of protecting themselves and the limitations of liability may increase their exposure. It is also to be remembered that quite often Trustees die or become unwilling to act and successor Trustees are appointed and those full liabilities may be necessary to protect the beneficiaries from the new Trustees. .
The Grantor of the trust can determine the extent of the Trustee's powers in the trust agreement or in the will. The Trustee must thoroughly understand what his or her duties are and obtain such legal and tax advice as necessary to carry out the duty appropriately. The Courts make it clear that not only is the Trust to compensate the Trustee for obtaining such advice, but that failure of the Trustee to obtain appropriate expert advice can be grounds for claims of breach of fiduciary duty.
As one Trustee put it, “My job is to follow directions but what that means is not always simple. Thus my job is to find the right people to make sure I follow the directions correctly.”
The duties of a Trustee may vary from state to state, but in general, a Trustee's duties include the following:
1. The Trustee has a duty to carry out the trust in accordance with the terms of the trust or will.
2. He or she has a duty not to delegate the Trustee's duties to another person-any duty which calls on him to exercise skill and judgment can not be delegated, such as investment responsibilities. This duty does not prohibit him or her from hiring professional experts to evaluate the investments for their suitability to the trust.
3. He or she has the duty to exercise a reasonable degree of skill and care when managing the trust assets.
4. He or she owes the highest duty of loyalty to the beneficiaries to administer the trust solely in their best interests, and put aside his or her own self-interests. No “conflicts of interest” are allowed at any time and full disclosure of any potential conflicts of interest must be made.
5. He or she has a duty to possess, protect, and preserve the trust property. He or she must also defend the trust and the beneficiaries against anyone who would challenge the validity of the trust or seek to claim trust assets.
6. He or she has a duty to separate and set aside the trust property and is required to keep the trust property separate from his own property. If the Trustee should co-mingle his property with the trust's property, he or she is liable for any losses that could result from the co-mingling.
7. He or she has a duty to make the trust property productive. He or she must act in a prudent, or sensible manner when it comes to investing, acquiring, selling, and managing the trust property. Appropriate tax planning for both the Trust and the beneficiaries is part of this duty.
8. Depending on the terms of the Trust instrument, the Trustee normally must file with the Court an accounting, often every year, indicating income and outgo and status of all assets. The relevant Code section follows:
Cal Prob Code § 16062. Duty to account to beneficiaries
- Except as otherwise provided in this section and in Section 16064, the trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee's discretion to be currently distributed.
- A trustee of a living trust created by an instrument executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a).
- A trustee of a trust created by a will executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a), except that if the trust is removed from continuing court jurisdiction pursuant to Article 2 (commencing with Section 17350) of Chapter 4 of Part 5, the duty to account provided by subdivision (a) applies to the trustee.
- Except as provided in Section 16064, the duty of a trustee to account pursuant to former Section 1120.1a of the Probate Code (as repealed by Chapter 820 of the Statutes of 1986), under a trust created by a will executed before July 1, 1977, which has been removed from continuing court jurisdiction pursuant to former Section 1120.1a, continues to apply after July 1, 1987. The duty to account under former Section 1120.1a may be satisfied by furnishing an account that satisfies the requirements of Section 16063.
- Any limitation or waiver in a trust instrument of the obligation to account is against public policy and shall be void as to any sole trustee who is either of the following:
- A disqualified person as defined in Section 21350.5.
- Described in subdivision (a) of Section 21380, but not described in Section 21382.
Cal Prob Code § 16063. Contents of account; Presentation
- An account furnished pursuant to Section 16062 shall contain the following information:
- A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.
- A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.
- The trustee's compensation for the last complete fiscal year of the trust or since the last account.
- The agents hired by the trustee, their relationship to the trustee, if any, and their compensation, for the last complete fiscal year of the trust or since the last account.
- A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.
- A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.
- All accounts filed to be approved by a court shall be presented in the manner provided in Chapter 4 (commencing with Section 1060) of Part 1 of Division 3.
Cal Prob Code § 16069. Exceptions to duty to account, provide terms of the trust or requested information
The trustee is not required to account to the beneficiary, provide the terms of the trust to a beneficiary, or provide requested information to the beneficiary pursuant to Section 16061, in any of the following circumstances:
- In the case of a beneficiary of a revocable trust, as provided in Section 15800, for the period when the trust may be revoked.
- If the beneficiary and the trustee are the same person.
9. Finally, the Trustee has the duty to treat all of the beneficiaries impartially. He or she must not favor one beneficiary over another. If he or she is unable to remain impartial, and exercise his or her Trustee duties in good faith, he or she may be liable for any harm against the beneficiary.
The above is merely a brief outline of the most general duties imposed upon a Trustee. Any responsible person will take the time to carefully investigate the obligations and assets proposed to be placed at her or her disposal prior to assuming this significant responsibility. While it is a great compliment to be nominated a Trustee by a Grantor, it is also a potential liability and requires the same degree of care in deciding whether to assume it as will be required to carry the duties successfully.
It may very well be the most important task one is asked to carry out in one’s life-a degree of trust is demonstrated that eloquently indicates that someone considers the potential trustee a trust worthy person. Whether that means one accepts the obligation depends on one’s own ability to devote the attention and time to carry out the duties appropriately. A good first step is to read the proposed trust and discuss the responsibilities with experienced professionals.