August 1, 2014
The default California trust law is that no bond is required of the trustee unless "(1) a bond is required by the trust instrument, (2) notwithstanding a waiver of a bond in the trust instrument, a bond is found by the court to be necessary to protect the interests of beneficiaries or other persons having an interest in the trust or (3) an individual who is not named as a trustee in the trust instrument is appointed as a trustee by the court." Probate Code § 15602.
Typically most trusts do not require the acquisition of a bond, principally because bond procurement can be expensive. The bond premium is dependent upon the value of the trust estate and the creditworthiness of the trustee. Thus, many people opt to avoid the requirement of bond to spare the successor trustee the time and expense of obtaining it. However, occasionally the settlor will require the posting of bond for a non-familial trustee because of the lack of blood connection. I have seen this in a few trusts.
The purpose of the bond is to offer protection for the beneficiaries in case the trustee makes a mistake, i.e. a breach of trust. If the trustee does commit a breach of trust, the aggrieved beneficiary can seek recovery from the bond company. A breach of trust can entail a host of circumstances such as failure to abide by the California probate code or frivolous spending by the trustee. The bond company will then turn around and seek recovery from the trustee for the same amount that was paid to the beneficiary.
Many people erroneously assume that a bond is identical to insurance. Though a bond offers financial protection, it does not operate exactly like insurance. If the trustee commits a breach of trust and damages ensue, the trustee is personally liable for the amount the bond company pays the beneficiary for redress of injury. Whereas with insurance, the trustee would not be personally liable for payments made to cover their damages. Instead, the insurer generally covers the entire damages cost, provided all premiums have been paid, and does not seek reimbursement from the trustee.
In the probate context, the requirement of a bond is more common. For example, many courts have local rules which essentially require the posting of a bond for an out-of-state personal representative. The local probate court rule of Santa Clara County Superior Court on the issue reads "the Court will ordinarily require a non-resident personal representative to post bond, even if the will waives bond, unless waivers of bond from all heirs or beneficiaries are filed, in which case the Court, in its sole discretion, may not require a bond."