When a person undertakes the role of a trustee, he, she or it is agreeing to perform a role that is rife with potential liability. There are countless stories of disgruntled beneficiaries suing the trustee for breach of fiduciary duty, or in non-legal speak, the trustee made a mistake and the beneficiary filed a lawsuit against them. The following are some helpful reminders that should aid just about any trustee.
1. Provide an accounting
The trustee is required to 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. Prob C §16062. One notable exception to this rule is that no annual accounting is required if the trust instrument waives it. Prob C § 16064(a). However, the norm is for the trust to require an accounting to be rendered annually.
For reasons unknown, trustees often fail to provide an accounting to the beneficiary. First, this seems largely silly because almost any irrevocable trust will have to file a federal and state tax returns. The threshold to file a tax return is quite low. During the process of completing a trust tax return, the trustee will invariably have all the necessary information to render an accounting. Prob C § 16063. Hence, it is not as if the trustee has to labor through hours of tedious bookkeeping just to formulate an accounting. Rather, much of the necessary information will already be included in the tax return. Second, the trustee can be compelled to give an accounting to the beneficiary when the trustee has not rendered a report or account within 60 days after a beneficiary's written request or in the 6 months preceding that request. Prob C §17200(b)(7)(C). Ultimately, if the trustee is required to give an annual accounting, he, she or it will give one whether done freely or coerced by court action. Clearly, a trustee who voluntarily renders an accounting will avoid the troubles that are the by-product of judicial involvement.
2. Seek outside help when needed
Many trustees refrain from the assistance of counsel, a tax preparer or a property manager when administering the trust. This is acceptable as a trustee is not compelled to retain outside help. They may execute their duties as they see fit.
However, many tasks we do in life are delegated to another party. For example, I do not cut my own hair, I have a barber; I do not prepare my taxes, I have an accountant; I do not tinker with my car, I have a mechanic; I did not purchase a home by myself, I hired a real estate agent; I did not try to heal my knee, I went to a doctor, etc. In light of this, it is difficult to assert that a trustee, who is often a family member that is not a lawyer, can competently undertake all the responsibilities of the trustee by themselves. In particular, many attorneys refrain from being a trustee because of the liability and responsibility involved. This indicates that being a trustee is no simple task. When a person is confronted with a difficult task, the prudent person enlists outside help to assist them. A trustee is no different than the person who wants to sell their home. Each person can do it themselves or they can seek the advice and assistance of a professional.
By no means am I advocating that a trustee must have legal counsel, an accountant, etc. in order to perform their duties competently. Conversely, I am stressing that the trustee should at the outset talk to a professional in order to appreciate the full scope of their duties. This provides the trustee with an informed viewpoint that is necessary to make a reasoned decision about what needs to be done. Most non-lawyer trustees do not seek assistance of a professional at the beginning and subsequently botch the trust's administration. At that point, the trustee is basically compelled to seek counsel to avoid further troubles. The saying "an ounce of prevention is worth a pound of cure" is very apropos for non-lawyer trustees.
3. Read the trust document in its entirety
The most elementary rule for a trustee is to follow the terms of the trust. Prob C § 16000. The only way a trustee can truly follow the terms of the trust is to read the trust document from start to finish. While this sounds basic, it is often overlooked. Regardless, in order to fully appreciate the responsibility a trustee has, the trustee needs to know what they are instructed to perform. The trustee cannot act in a cavalier fashion and deviate from what the trust dictates. The following case is an example of a trustee that did not follow the terms of the trust and the consequences.
Joseph Gilmaker wrote a testamentary trust, that is a trust that arises at death, in which the trustee was instructed to maintain a bank account that did not exceed the amount insured by Federal Deposit Insurance Corporation. During the 1960s, the amount insured by the FDIC was up to $10,000. Still, Bank of America, the trustee, allowed the bank account to grow in value to $49,000. The petitioner then had the trustee removed because it had failed to follow the terms of the trust. Estate of Gilmaker (1962) 57 C2d 627.
A key aspect for a trustee when reading a trust is to not substitute their own judgment for the settlor, the person who wrote the trust. The trustee is to execute what the settlor has written down, rather than what the trustee unilaterally decides. If the trustee is confused as to how to follow the trust or a particular interpretation of a trust term, the trustee may petition a competent probate court for approval or instructions. Prob C § 17200.
4. Timely provide copies of the trust document upon appropriate request
No person likes to be kept waiting regardless of the reason. In today's world, where information can be exchanged so expediently from one side of the globe to the other, the notion of patiently waiting has steadily eroded. People now, in this case beneficiaries, often demand the receipt of a trust or trust-related document very quickly.
The California Probate Code spells when a beneficiary is entitled to a copy of the trust document. The applicable law states "the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust to each of the following, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it, when a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust." Prob C § 16061.5(a)(1). Furthermore, a trustee needs to provide a copy of the trust document to a beneficiary when there has been a change of trustee of an irrevocable trust. Prob C § 16061.5(a)(2).
I have heard of countless stories of trustees remaining idle in the face of a beneficiary's request for a copy of the trust. Instead of providing a copy of the trust or supplying the legal justification for not providing a copy of the trust, the trustee will simply ignore the beneficiary's request. This is not a prudent move to put it mildly. By giving the silent treatment to a beneficiary, the trustee is most likely stoking their frustration because it indicates an insensitivity or hostility to their request. It is quite simple to respond to a request with a simple "yes" or "no" while concurrently providing a justification for either answer.
Regardless, even if the beneficiary cannot cite valid legal grounds to request a copy of the trust, California law says that the duty of a trustee to provide information cannot be waived. Prob C §16068; Salter v Lerner (2009) 176 CA4th 1184. Thus, even if the beneficiary could not obtain a copy of the trust document, they could still request information relating to the trust's administration. A beneficiary could then piece together how the trust is set up or at the very least understands its inner-working.
