Creating a “living trust,” as opposed to a will, allows an individual to take a more active role in the preparation of their estate. In a will, the testator designates someone to act as executor, but that person is not authorized to act until after the testator’s death. The executor must submit the will to a probate court, which can take time. A living will allows the process of distributing assets to begin while the testator—known as the “grantor” of the trust—is still alive. The trustee can bypass the probate process when the time comes. California real estate investors may benefit from living trusts. They should understand the various legal pitfalls that they can produce.
Fiduciary Duties of a Trustee
When the grantor of a living trust is still alive, they often serve as the trustee. The trust instrument should designate a successor trustee to take over upon the grantor’s death. The trustee owes fiduciary duties to the beneficiaries, and could be held liable for breaching those duties. Beneficiaries are only entitled to equitable remedies under California law, such as compelling certain actions or removing the trustee.
If the trust is a “revocable living trust,” the grantor may change the terms of the trust, or revoke it entirely. The successor trustee likely will not have that authority. The legal pitfalls for a trustee of a living trust derive from their fiduciary and statutory duties to the beneficiaries.
The Trust Instrument
Perhaps the most important duty of a trustee under California law is “to administer the trust according to the trust instrument.” This means that the trustee must always adhere to the directives and intent of the grantor, as expressed in the document creating the trust.
The trust instrument has greater authority than the beneficiaries. This could mean that a trustee must go against the wishes of the beneficiaries if they conflict with the trust. It could even mean going against wishes expressed by the grantor that were not included in the trust instrument. A trustee who does not abide by the terms of the trust could be liable for breach of the trust, even if the trustee was acting at the beneficiaries’ direction.
Management of Trust Assets in the Best Interest of the Beneficiaries
A trustee owes a duty to manage the trust and its assets with the beneficiaries’ best interests in mind. This means using ordinary prudent business judgment. It also means avoiding acting in anyone else’s interest, particularly the trustee’s own interest.
A conflict of interest occurs when a trustee makes a decision that benefits someone else at the beneficiaries’ expense. For the trustee to be liable, the beneficiaries usually must be able to show that the trustee acted with knowledge of the conflict of interest. That said, a trustee could also be liable for breach of fiduciary duty if they were reckless about who would benefit from the decision.
Separation of Trust Property
One easy way for a trustee to breach their fiduciary duties to the beneficiaries is to commingle trust assets with other assets. Commingling trust assets with the trustee’s own assets is the most obvious way for a trustee to breach this duty. A trustee could potentially be liable to the beneficiaries for this whether or not they acted intentionally.
Records and Accounting
The California Probate Code establishes specific reporting and accounting duties for trustees, beginning with the “duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.” Failure to meet these requirements breaches the trustee’s duties.
More Blog Posts:
Sale of Real Property by a Trustee in California, Part 1: Fiduciary Duties and Best Practices, Titles and Deeds, March 15, 2019
Remedies for Breach of Fiduciary Duty by a California Real Estate Syndicator or Other Real Estate Professional, Titles and Deeds, September 16, 2018
California Real Estate Agents’ and Sellers’ Duty of Disclosure to Prospective Buyers, Titles and Deeds, September 18, 2017