April 12, 2012
An elementary trust law is the duty of loyalty owed by the trustee to the beneficiary. Prob C § 16002(a). Essentially the trustee must prioritize the interests of the beneficiary over theirs. He, she or it cannot pursue an action that would further their own interests at the expense of a beneficiary. A corollary to this law is the ban on trustees requiring exculpation in exchange for a trust distribution. Prob C § 16004.5.
For example, assume the trust owns rental property. The trustee has mismanaged the property for years but still has received rent from the tenants, albeit not market value because of his mismanagement. In particular, the trustee failed to repair the roof, maintain adequate plumbing and failed to tend the landscape properly. The trustee informs the beneficiary that he will make a required distribution of $25,000 but conditions distribution on the beneficiary absolving him of any liability for his mismanagement. On one hand, the beneficiary would like to pursue legal action against the trustee for breaching his fiduciary duty of care. Prob C § 16040. Conversely, the beneficiary is aware that if they sue the trustee, litigation will stall the $25,000 distribution for the foreseeable future. In a sense, the beneficiary is stuck between a rock and a hard place. Fortunately, the California Probate Code does not allow for a trustee to engage in such shenanigans. The relevant statute says "a trustee may not require a beneficiary to relieve the trustee of liability as a condition for making a distribution or payment to, or for the benefit of, the beneficiary, if the distribution or payment is required by the trust instrument." Thus, the trustee is prohibited from orchestrating such an arrangement. Thereby, the beneficiary would be entitled to receipt of the $25,000 and would retain the right to sue the trustee for breach of fiduciary duty, i.e. the duty of care.
Although the Probate Code does allow for the beneficiary to voluntarily release the trustee of liability. Prob C § 16004.5(b)(2). It is difficult to imagine why a beneficiary would exculpate a trustee. A trustee cannot threaten to withhold a required distribution in a dispute, which deprives them of the strongest bargaining chip. On the other hand, a beneficiary's trump card is their ability to enforce fiduciary duties. Since the trustee cannot play their trump card, withholding of a required distribution, the beneficiary has superior leverage and thus should be very hesitant to release the trustee of liability.
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