November 16, 2011

Trustee of a Living Trust

Central Trust Company
Altoona, PA

The term "trustee" is used in many different legal fields. For example, in bankruptcy a trustee is appointed for administering the bankruptcy estate, in the case of a foreclosure the trustee is responsible for handling the property's foreclosure and in the case of a trust, a trustee is required in order to administer the trust. The following are some questions that delve into the topic of a trustee of a trust, whether irrevocable or revocable. 

1. What is a trustee?

A trustee is the legal owner of trust property who administers the trust estate in accordance with the trust's directions. Prob C § 16000. For example, if a trust owns a home and the trustee is John Smith, title to the property would be held, loosely stated, as "John Smith, trustee of the Smith Trust."

2. Who can be a trustee?

A trustee can be a person or natural person. 

In regards to a natural person, such an individual needs to be an adult because minors cannot enter into contracts to sell property.  Wallace v Riley (1937) 23 CA2d 654. 

In terms of a person, a corporation can serve as trustee. Prob C § 300. However, before you list some large financial institution as the trustee, please be aware that corporate trustees require large estates, typically in the millions of dollars, before it undertakes representation as trustee.
3. Can I pick myself as trustee?

Yes and this is quite common. Many couples appoint themselves as trustees and name their children as successor trustees.

4. What duties does a trustee?

To list all the duties of a trustee would be a bit much for this post. Please click on this link for a full explanation. Suffice to say there are plenty. 

5. How is a trustee compensated?

Trustee compensation is not a matter of right for the trustee. Thus, the trustee may be entitled to no compensation if so provided by the trust document.

However, a trustee is almost always compensated in reality. Few people are willing to assume a position with all the risks without a reward. The following are various methods used to calculate a trustee's compensation if allowed:

  • The trustee is compensated in accordance with a set formula. For example, it is common for a trustee to be compensated 1% of the value of the trust estate annually;
  • In the case of a corporate trustee, it has a published fee schedule;
  • The trustee is paid a fixed amount per year;
  • The trustee is entitled to "reasonable compensation." Probate Code §15681
6. Is trustee compensation considered taxable income?

Yes, income received from acting as a trustee is considered taxable income. Pay your taxes!

7. Can a person refuse the selection as trustee?

Yes, and a person has the right to decline trusteeship even after assuming the position. Prob C § 15640.

8. Can a trustee be removed?

Yes, a trustee can be removed (1) in accordance with the trust instrument (2) by the court on its own motion, or  (3) on petition of a settlor, cotrustee, or beneficiary under Probate Code Section 17200.  Prob C § 15642(a).

9.  Can there be more than one trustee?

Yes, California law permits a trust to have more than one trustee administer it.

10. Does a trustee have to be bonded (see insured)?

No, a trustee need not be bonded unless the trust document requires a bond or a court orders a bond on a finding that the beneficiaries' interests must be protected. Prob C §15602(a)(2). 

11. What are some examples of what not to do as a trustee?

As taken from a prior post:

The trust drafter instructed the trustee, Bank of America, to not allow the trust bank account to exceed the maximum Federal Deposit Insurance Corporation amount. For whatever reason, Bank of America permitted the account to exceed the threshold amount. In particular, the FDIC amount was $10,000 (think 1960s) but the account balance at one time was $49,000. Consequently, Bank of America was held to have breached its fiduciary duty to follow the terms of the trust. Prob C §16000; Estate of Gilmaker (1962) 57 C2d 627.

The trustee was engaged in a real estate dispute with one of the beneficiaries. Since the beneficiary had a combative litigation style, the costs were substantial. In order to cushion the blow of litigation, the trustee decided to sue the beneficiary for elder abuse (the trustee represented an elderly couple), which permitted the recovery of attorney fees. Ultimately, the trustee obtained a judgment against the beneficiary for roughly $700,000 in civil court. The problem was that the trustee incurred fees totaling roughly $1.3 million in the process of obtaining that judgment. Furthermore, the beneficiary filed for bankruptcy subsequent to the judgment. Whoops. The court held that the trustee breached his duty to prudently enforce claims against the trust, since no prudent person would spend $1.3 million to try to collect $700,000. Prob C § 16010; Schwartz v. Labow (2008) 164 CA4th 417.     

12. Can a trustee seek judicial guidance when administering the trust?

Yes, a trustee can petition to appropriate court to seek assistance for the following. Prob C §17200.

  • Determining questions of construction of a trust instrument;
  • Determining the existence or nonexistence of any immunity, power, privilege, duty, or right;
  • Determining the validity of a trust provision;
  • Ascertaining beneficiaries and determining to whom property shall pass on termination of the trust, to the extent not specified in the instrument;
  • Settling accounts and passing on the trustee's acts, including the exercise of discretionary powers;
  • Instructing the trustee;
  • Compelling the trustee to submit a report or account to the beneficiary under specified circumstances;
  • Granting powers to the trustee;
  • Fixing or allowing payment of the trustee's compensation or reviewing its reasonableness;
  • Appointing or removing a trustee;
  • Accepting the resignation of a trustee;
  • Compelling redress of a breach of the trust;
  • Modifying or terminating the trust;
  • Combining or dividing trusts;
  • Amending the trust to qualify a decedent's estate for the federal estate tax charitable deduction;
  • Transferring a trust or trust property between jurisdictions;
  • Transferring a supervised testamentary trust between counties;
  • Removing a testamentary trust from court supervision;
13. Can a trustee terminate a trust?

Yes, a trustee can terminate a trust in certain instances. For example, if the trust's principal dips below $40,000, the trustee has the power to terminate the trust. Prob C § 15408(b).

14. Can a trustee be sued?


Just like any other entity, the trustee can be sued. Moreover, the trustee is the appropriate party to sue, rather than the trust itself. Prob C §16249(a).

15. Can the trustee act as the trust's attorney?

No, a trustee may not represent the trust in court, or propria persona for those Latin-inclined. Ziegler v Nickel (1998) 64 CA4th 545. This means that a trustee would need to hire an attorney to represent the trust in a court case.