April 4, 2014

Fiduciary Duty of a California Trustee - Impartiality

A trustee of a trust, whether revocable or irrevocable, owes various fiduciary duties to all beneficiaries. Hearst v. Ganzi (2006) 145 Cal.App.4th 1195, 1208. A fiduciary duty can basically be described as the trustee putting the best interests of the beneficiary ahead of themselves. In other words, the trustee is obligated to act in the best interests of the beneficiary as opposed to the best interests of themselves.  For instance, if the trustee is required to sell real estate, it would be in the best interest of the beneficiaries if competitive bidding is involved in order to sell it. Conversely, it would not be in the best interests of the beneficiaries if the trustee merely told a handful of friends about the real estate to see if any of them are interested or purchased the property themselves below market price (known as self-dealing).

For reference, numerous professions entail fiduciary obligations, e.g. lawyers, doctors, clergy members, etc. So I personally owe various fiduciary duties to clients. 

If the trustee breaches a fiduciary duty, this is considered a breach of trust and the trustee can be removed, amongst other penalties. Probate Code § 16400.

One fiduciary duty is to impartially deal with beneficiaries. Probate Code § 16003. The issue of impartiality commonly arises when children are the beneficiaries of their parents' trust. For example, parents almost universally name their children as beneficiaries of their trust. They also overwhelmingly select a child or children, if they are of suitable age, as the successor trustee, i.e. the person who assume trusteeship when both parents have passed away. 

A common result is where you have multiple beneficiaries but only 1 trustee. This 1 trustee must not favor one sibling over the other as they have a fiduciary duty of impartiality. Thus, California law obligates them to treat everybody the same essentially.

The obvious problem is that occasionally there can be family discord. One sibling may harbor resentment, jealously or anger at another sibling for any number of reasons. These can range from the reasonable, e.g. poor lifestyle choices, profligacy or shoddy work ethic, to the unreasonable, e.g. the decision to leave home for college, affinity for a particular sports team or manner of dress (see Hammer pants). These negatives feelings can easily spill over when administering the trust. Hence, when given the opportunity to administer the trust, an embittered sibling trustee has an accessible avenue to exact revenge on their despised sibling. While California law does not permit this, i.e. impartiality must be observed when administering a trust, many siblings choose to forgo judicial redress against the malevolent trustee to maintain a semblance of familial harmony. Also, the cost of litigation is typically prohibitive.    

Still, any beneficiary should be aware of the fact that the trustee cannot favor one beneficiary over another. Or in this case, one sibling over the other. California law, fortunately, does not take into account petty differences or squabbles between siblings that jeopardize the administration of a trust.