Duty of Impartiality

Probate Code §16003 provides that "[i]f a trust has two or more beneficiaries, the trustee has a duty to deal impartially with them and shall act impartially in investing and managing the trust property, taking into account any differing interests of the beneficiaries." This is commonly called the duty of impartiality. In the vast majority of trust administration cases, there will be multiple beneficiaries that the trustee has to treat impartiality. That is, the trustee cannot exhibit bias towards one beneficiary over another. However, this can be challenging because a successor trustee is typically a family member that often has a positive or negative relationship with the beneficiaries. 

In a recent published appellate opinion, a trustee was surcharged for attorney fees that were expended, $201,164.15, for the defense of a disputed third trust amendment. Zahnleuter v. Mueller __ Cal.App.5th __ (2023). The trial court found that the trustee "breached his duty to deal impartially with all beneficiaries, as he did not take a neutral position in the dispute over the validity of the third amendment. Instead, he represented the interests of one side (Amy and others) over the other side (Katherine)."

Footnote #6 from the appellate opinion was quite illuminating:

"We are unpersuaded by Thomas's assertion that he did not "litigate a single issue, motivated by bias against . . . Katherine." During his deposition, Thomas referred to Katherine as a "greedy, manipulative, deceiving individual," and claimed that, after Richard's death, Amy took "precedence" over Katherine. Thomas admitted that his defense of the third amendment, if successful, would benefit Amy and harm Katherine, and that he was more concerned about Amy than Katherine. Thomas also conceded that he did not treat the beneficiaries equally. He explained that he distributed $135,000 from the trust estate to Amy as well as $10,000 each to Julie and his two daughters, but he refused to distribute the $100,000 he was "supposed to give Kate" because of the "golden rule"—"[h]e who has the gold rules."

Duty to Follow the Terms of the Trust

A fundamental rule of trust administration is to follow the terms of the trust. The applicable law states "on acceptance of the trust, the trustee has a duty to administer the trust according to the trust instrument and, except to the extent the trust instrument provides otherwise, according to this division." Probate Code §16000. For example, if the trust says to sell the family home, the trustee is obligated to sell the family home. Or if the trust says to distribute a classic car to a nephew, the trustee is obligated to not sell the classic car and give the nephew cash instead. 

A recent unpublished appellate decision discussed a trustee acting in contravention of the trust.

Following the passing of the surviving settlor, the successor trustee filed a petition for approval of her accounting. A beneficiary objected to the accounting regarding the surviving settlor's jewelry. In particular, the accounting failed to list or account for any of the surviving settlor's jewelry. Furthermore, the beneficiary objected to a disbursement for a jewelry appraisal when the successor trustee admitted that the surviving settlor's jewelry had been buried with her.

The trial court's statement of decision, effectively an order or judgment, found that "as Jaime's counsel admitted, the jewelry valued at nearly $30,000 was buried with Ruby. Furthermore, Jaime failed to show that the Trust required the jewelry's burial. The court also accepted Jaime's acknowledgment that the jewelry appraisal was not a proper charge to the Trust. Consequently, the court surcharged Jaime for the value of the jewelry and the cost of the appraisal."

The appellate court did not reverse the foregoing ruling by the trial court. "Jaime fails to demonstrate the trial court abused its discretion. As successor trustee, Jaime had a duty to take reasonable steps to preserve Trust property. (§ 16006.) She violated this duty when she spent Trust assets to appraise jewelry already buried underground. Failing to provide any cogent argument showing the trial court abused its discretion and having admitted to the trial court that the charge for the appraisal was improper, we find this point unsupported."

In short, the trust did not say that the successor trustee should bury the surviving settlor's jewelry with her. For reasons unknown, the successor trustee nevertheless buried the surviving settlor's jewelry with her. The trial court determined this to be a breach of trust and the successor trustee was financially penalized for this, a surcharge.

Jaime v. Lopez, Kern County Superior Court case # BPB-16-002416.

Fiduciary Duties of a Trustee

A trustee is required to discharge a number of fiduciary duties for the benefit of the beneficiaries. The California Probate Code spells out these duties, e.g. the duty of loyalty, the duty of impartiality, etc. If a trustee breaches a fiduciary duty, the trustee becomes liable for damages which can take the form of many different remedies. Typically, money damages are the most common remedy awarded for a breach of a trust.

A recent unpublished appellate decision upheld a trial court's ruling that a trustee had breached her fiduciary duties. The factual summary is quite easy to follow.

"In January 2009, Eddie Copeland Neighbors (the Settlor) created the Trust for the benefit of her two daughters, Jackson and Marsha Josiah (Josiah), who were to share equally in her estate. The principal asset of the Trust was the Settlor's residential home in Sacramento (the home), which was transferred to the Trust. 

In July 2010, around the time that the Settlor was placed in a long-term care facility, Jackson and her husband began living in the home. 

In June 2015, the Settlor passed away and Jackson and Josiah became the successor cotrustees of the Trust. Shortly thereafter, in August 2015, Jackson recorded a grant deed transferring title of the home from the Trust to herself and her husband. 

In September 2017, Josiah filed a petition alleging that Jackson engaged in self-dealing and breached her fiduciary duties by transferring title to the home and by residing in it without paying rent to the Trust. Josiah sought, among other relief, an accounting of the Trust's assets, an order removing Jackson as a successor cotrustee, an order requiring that the home's title be returned to the Trust, an order requiring Jackson and her husband to pay rent for the period during which they resided in the home after the Settlor's death, and an order allowing Josiah to sell the home. Jackson opposed the petition."

Probate Code 16002(a) provides that a "trustee has a duty to administer the trust solely in the interest of the beneficiaries." This duty is breached if a trustee engages in "self-dealing." Self-dealing can be described as a trustee using trust property for their own personal benefit instead of for the beneficiary's benefit. From this case, the trustee engaged in self-dealing by conveying the settlor's home to herself instead of herself and her sister, which the trust required. That is, the trustee used trust property to benefit herself instead of the beneficiary.

Due to the trustee's misconduct, the trial court made a number of orders. "The court's order provides that (1) the home is an asset of the Trust; (2) Jackson owes $79,650 for the fair rental value of the home for the period from July 1, 2015, through March 31, 2019; (3) Jackson is entitled to a credit (offset) of $73,921.43 toward the fair rental value for mortgage payments, taxes, and other expenses she paid with her personal funds; and (4) as long as Jackson continues to occupy the home, fair market rent (less any offsetting credits) shall continue to accrue. The court ordered Jackson removed as a successor cotrustee, but denied Josiah's request to require Jackson to vacate the home so that it could be sold."

Josiah v. Jackson, Sacramento County Superior Court case # 34-2017-00219410.

Breach of Trust and the Statute of Limitations

Probate Code § 16460(a)(2) provides that if "an interim or final account in writing or other written report does not adequately disclose the existence of a claim against the trustee for breach of trust or if a beneficiary does not receive any written account or report, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after the beneficiary discovered, or reasonably should have discovered, the subject of the claim."

So you better file your petition on time.............

A recent unpublished appellate opinion touched upon this issue. Kathleen, a trust beneficiary, was a party to a trustee removal petition filed by another beneficiary, her sister Kelly Sue. The petition was filed in 1987. 

The 1987 petition stated that the trust was established for educational purposes to benefit the settlor's children, which included Kathleen and Kelly Sue.

The 1987 petition stated that "the entire trust is to be distributed in equal shares to all living beneficiaries on December 5, 1998, when the youngest beneficiary turned 25 years old." 

In 2015, Kathleen filed "an amended petition for redress for breach of trust, for fraud and punitive damages, conversion, constructive trust, injunctive relief, and declaratory relief." The petition alleged that Kathleen never received any distributions from the trust.

Kelly Sue was the respondent in the 2015 petition.

Kelly Sue's demurrer was sustained without leave to amend (a coup de grace in litigation) because Kathleen had failed to timely file suit, i.e. the statute of limitation had run. See Probate Code § 16460(a)(2). The reason being is that Kathleen's claim accrued on December 5, 1998. She did not file suit until 2015, more than 3  years after her claim had accrued. 

Kathleen argued that she lacked actual knowledge of wrongdoing by Kelly Sue. The California Court of Appeal was unmoved. "Kathleen cannot toll the statute of limitations by claiming she was unable to discover the claim by the distribution date. Her own allegations in the amended petition demonstrate she had actual knowledge of the existence of the trust; her status as a beneficiary of the trust; and the contents of the removal petition, which attached to it was the trust as an exhibit. In addition to her actual knowledge, Kathleen had constructive knowledge of the trust and its terms because she admits she was a trust beneficiary. As a beneficiary, she was entitled to request a copy of the trust and related information, through which she should have reasonably discovered the distribution date. Kathleen was also on inquiry notice as a trust beneficiary, and could have obtained information about the trust, as she eventually did in 2013 through public records. Unlike the situation in Quick, where the existence of the trust and the petitioner's status as a beneficiary were hidden from the plaintiff, thereby tolling the statute of limitations, here, Kathleen had actual and constructive knowledge of the trust and its terms."

Dunphy v. Wilken, Orange County Superior Court Case # 30-2015-00779480