October 17, 2012
A trustee is a fiduciary of a beneficiary. As such, the fiduciary owes the beneficiary various duties. Initially, when a trustee initially undertakes their role to administer a trust, they owe the beneficiaries a duty to review the trust terms. Estate of Gilmaker (1964) 226 CA2d 658. As stated in Gilmaker, "one in whom trust is placed is duty bound to exercise reasonable diligence for the purpose of ascertaining the nature and extent of his obligations and to be faithful in the performance thereof." Thereby the duty to review the trust terms has 2 arguably components. First, the trustee must read the trust document. Second, the trustee must understand what the trust document says. The focus of this post is on the second aspect, i.e. the duty to understand the trust terms.
Many terms used in a trust have specific legal meaning, e.g. "trustee", "fiduciary duty", "reasonable compensation" "community property", "separate property", "life estate", etc. It is crucial that a trustee understand these terms or retain counsel to assist them in understanding it. The trust will often utilize these legal terms in key provisions of the trust. A trustee risks significant exposure to liability, i.e. a lawsuit, if they fail to correctly comprehend these legal terms.
Assume John Doe and Jane Doe create a revocable trust and both name themselves as trustees. During the marriage, John inherits a small farm in Hollister, CA from his rich late uncle, Daniele de Medici. The revocable trust says that upon John's death, his share of the community property is to be allocated to Jane and all of his separate property is to be donated to the local conservation group. John then predeceases Jane because of cancer. Jane is not a lawyer and has no idea what distinguishes John's community property from his separate property, despite watching the People's Court many times. She decides to allocate all of the marital assets to herself because she believes that since everything he owned was acquired during marriage, such constitutes community property. While Jane's presumption is understandable, the presumption in California is that assets acquired during marriage are presumed community property, she is in fact wrong because property acquired via inheritance is considered a person's separate property, regardless if acquired during marriage. This small farm is thus correctly characterized as John's separate property.
When the local conservation group hears of John's passing, they inquire with Jane if any devise is coming its way. Jane tells them that all of John's property is community and in turn it is entitled to nothing. Undeterred, the local conservation group hires an attorney to investigate Jane's findings given her lack of legal acumen. The attorney tells them that the farm is actually John's separate property because he acquired it via inheritance which trumps the fact that it was acquired during marriage. The local conservation group then sues Jane for breach of fiduciary duty as she failed to follow the terms of the trust, i.e. she did not distribute the farm to the local animal shelter. Jane loses her case because her legal knowledge was derived from watching the People's Court, so naturally she was mystified when characterizing John's property and erroneously characterized it.