Whether you are a beneficiary of a trust or a trustee of a trust, you NEED to read this post. There are 15 essential duties of a trustee. If you are a beneficiary, this post will help you understand your rights. If you are a trustee, this post will help you do your job correctly, so you don’t get sued.
There are 15 essential duties of a trustee:
- Work with Co-Trustees.
- Special Skills.
- Control & Protect Trust Property.
- Enforce Claims
- Defend Actions.
- Collect & Preserve Trust Property.
- Make Trust Property Productive.
- Inform & Report to Beneficiaries.
In the sections that follow, this article will explain each of these duties of a trustee.
Both the California Probate Code and the Uniform Trust Code inform the content of this article. As of January 1, 2020, 34-states have adopted the Uniform Trust Code.
The states that do not apply the Uniform Trust Code are Alaska, California, Georgia, Hawaii, Idaho, Indiana, Iowa, Louisiana, Nevada, New York, Oklahoma, South Dakota, Texas, and Washington. Since I practice law in California, I compared California’s Trust Law in the Calfornia Probate Code to the Unifrom Trust Code, and the duties are virtually identical.
Therefore, the content of this article applies to at least 35 states (since I include California’s Probate Code).
Additionally, sometimes people may refer to a trustee as an executor. This is technically incorrect. Both a trustee and an executor are personal representatives of an estate. Personal representatives are the ones responsible for managing the estate before distribution to the beneficiaries.
A trustee is the personal representative of a trust. By contrast, an executor is a personal representative of a will.
But, even though how they are appointed is different, executors and trustees owe the same kind of duties to heirs and beneficiaries.
2. Duties of a Trustee: Administration
A common complaint of beneficiaries is that the trustee is “not doing anything.” If a trustee is truly “no doing anything,” then he or she can be sued for violating the duty of administration.
Trustees have an affirmative duty to administer the trust estate. This means that the trustee must act in good faith, follow the terms of the trust, and act in the best interest of the beneficiaries.[i]
3. Duties of a Trustee: Loyalty
A trustee owes a duty of loyalty to all of the trust beneficiaries.[ii] If there is one duty that most trustees screwup, it is the duty of loyalty. This duty requires the trustee to take or refrain from taking specific actions.
For example, every action the trustee does must be done solely for the benefit of the beneficiaries. Of course, this can be a problem if the trustee is also a beneficiary of the trust. The duty of loyalty requires this kind of trustee to not act in self-interest. Instead, the duty of loyalty requires the trustee to conform to his/her actions so that they benefit each beneficiary.
So, if you are a trustee and beneficiary of a trust, and your siblings are also beneficiaries, you cannot let any personal vendetta or grudge deter you from your duty of loyalty.
The duty of loyalty includes the following things:
A. You must avoid conflicts of interest.
It may seem like no big deal to use your power as trustee to benefit both the beneficiaries and yourself or someone you love. But, it is illegal and a massive violation of your duty of loyalty. You have an affirmative duty to avoid any transaction with the trust that will personally benefit you or a close relative.[iii]
Therefore, sales, loans, or contracts involving the investment or management of trust property entered into with your spouse, your relatives, your agents or attorneys, or your business are all conflicts of interest.[iv]
For example, suppose you own a construction company, and the trust owns a home that needs major renovations. It is a conflict of interest to use your construction company to renovate the trust property.
Here’s another typical example: suppose you need to sell a home owned by the trust. Your spouse, a real estate agent, wants the commission. It is a conflict of interest to use your spouse as the real estate agent to sell the trust property.
Now, there are some exceptions.
First, if the beneficiaries explicitly approve and ratify the trustee’s proposed.[v]
Second, if the trust expressly authorizes the proposed transaction.[vi]
Third, if the court approves of the proposed action.[vii]
Fourth, if the person acting as the trustee entered into the proposed action before he/she became the trustee.[viii]
B. You cannot be the trustee for a competing trust.
It is a conflict of interest to become the trustee for another trust if that trust is in direct competition with the trust for which you are currently the trustee.[ix] For example, if your parents’ trust owns a business, and they appoint you to act as trustee. It is a conflict of interest to become the trustee for another trust if that trust owns a business in competition with the company owned by your parents’ trust.
Here are some more examples to help you understand this principle.
Scenario 1. Your parents own a McDonald’s Franchise empire. They create a trust and place all of their ownership interest of their McDonald’s Franchises into the trust. When they die, you become the trustee. Thus, your duty as trustee is to manage the McDonald’s Franchises for the benefit of the beneficiaries.
Later, your brother dies. He names you trustee of his trust. Your brother, who was the black sheep of the family, owned a several Burger Kings, which he put into the trust for his children. It would violate your duty of loyalty as trustee of your parents’ trust also to be the trustee of your brother’s trust.
Scenario 2. Your parents own a financial planning business. You are also a financial planner. So when they created a trust, they put their financial planning business into the trust and named you as the trustee. Later, they died and you become trustee of your parents’ trust.
Then, years later, your brother dies. At the time of his death, his trust owned several Airbnb properties at the beach. Your brother named you trustee of his trust. Since the two businesses are not in direct competition with each other, it is NOT a conflict of interest to be the trustee for both your parents’ trust and your brother’s trust in this case.
C. You cannot require a beneficiary to waive their rights.
Sometimes a trustee wants to be sure they will not get sued. So typically, a trustee will ask the beneficiaries to execute a release of the trustee’s liability. As long as this request is voluntary, it is perfectly legal.[x] But, if you condition or withhold distribution of assets from the trust until the beneficiaries agree to release you, then it is illegal and a violation of your duty of loyalty.[xi]
All that said, here is what you CAN do:
- You CAN withhold a portion of the trust estate in reserve to pay reasonably anticipated expenses.[xii]
- You CAN require indemnification against a claim by a person other than a beneficiary.[xiii]
- Additionally, you CAN withhold any portion of a distribution that is honestly in dispute.[xiv]
- Finally, you CAN seek court or beneficiary approval of the trust accounting.[xv]
4. Duties of a Trustee: Impartiality
The duty of loyalty and impartiality are intertwined. Often, a trust has multiple beneficiaries. It is also very common to have at least one of those beneficiaries act as the trustee.
It is part of the human condition to have favorites. We have our favorite foods, football teams, friends, and even relatives. But when you are a trustee, you CANNOT have favorites, especially between the other beneficiaries.[xvi]
5. Duties of a Trustee: Prudence.
A trustee is obligated to administer a trust as a prudent person would.[xvii] This means that you must consider the purposes, terms, distribution requirements, and other circumstances of the trust. Additionally, you need to exercise reasonable care, skill, and caution when administering the trust.
The duty of prudence typically comes into play when dealing with investments. California has an entire section of the probate code dedicated exclusively to how to invest estate assets prudently.[xviii]
There are two types of beneficiaries in a trust: income beneficiaries and principal beneficiaries. Sometimes they are the same people, but sometimes they are not.
Income beneficiaries want the trustee to invest the trust assets in ways that will generate the most dividends, rents, and royalties. By contrast, principal beneficiaries want the trustee to invest the trust property safely in ways that will increase the overall value of the trust assets.
Frequently, the investment goals of the income beneficiaries and the principal beneficiaries conflict.
Since a trustee is not allowed to be partial, and must also be prudent, how can a trustee resolve this conflict?
California Uniform Prudent Investor Act
California Uniform Prudent Investor Act directs the trustee to make investments “not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”[xix]
Thus, you cannot isolate your investment choices and narrow your focus in ways aimed to solely increase the beneficial share of the income or principal beneficiaries. Instead, you need to develop a complete investment strategy. This means (at a minimum) proper diversification of trust assets.
In order to prudently develop an investment strategy for trust assets, you need to consider the following:[xx]
- The general economic conditions;
- The rate of inflation and deflation;
- The tax consequences of the investment options;
- The role each investment play in the context of the overall trust portfolio;
- The expected return from income and the appreciation of capital investment;
- The information provided to you and to the beneficiaries;
- The trust’s need for liquidity (cash), regular income, and preservation of capital; and
- An asset’s special relationship to the trust or beneficiary (e.g. a family home may have a more special relationship with a beneficiary than an investment property).
The California Prudent Investor Act protects trustees if they treat one asset in a trust differently than other assets.[xxi] For example, it may be a wise investment decision to sell the family farm. When viewed on an individual level, refusing to sell the family farm may be imprudent and a bad investment decision.
But, the Prudent Investor Act allows trustees to consider factors other than investment value. If the family farm has been in the family for generations, then the Act enables the trustee to consider that special relationship when deciding not to sell.
5. Duty to Work with Co-Trustees
Sometimes a trust will appoint more than one successor trustee at a time. These kinds of trustees are known as “co-trustees.” You will know if the trust you are dealing with has co-trustees because the section appointing successor trustees will correctly say that the successors are “co-trustees.”
If a trust appoints more than one trustee to act jointly, then each trustee has a duty to participate in the administration of the trust and to prevent the other co-trustees from committing a breach of the trust.[xxii]
The law allows the trustee to charge the costs of administration directly to the trust. Thus, the trustee can use the trust funds to pay bills and other costs as they arise. But, this power to charge the trust is checked by the duty of frugality.
A trustee can only incur reasonably necessary costs.[xxiii] To decide if a cost is necessary, you must consider the type of property in the trust, the purposes of the trust, and your own skill.
For example, it is often necessary to trust the administration to hire professional services like an attorney or accountant. But, if the trustee is already an attorney or accountant, then these professional services are unnecessary. So you have to consider your skill and the purpose and property of the trust.
7. Duties of a Trustee: Special Skills.
One of the more confusing duties of a trustee is the duty to use your special skills or expertise.[xxiv] Generally, you only need to ordinary business ability. But if you have special skills then you will be held to a higher standard of care.
For example, if you have a business degree, your business decision as trustee may be reviewed under a higher scrutiny than if you did not have a business degree.
Similarly, if you are an attorney, then your work as trustee is held to a higher standard.
This is particularly true if you are appointed trustee specifically because of your special skills. It does not matter if you do not actually have special skills. If you represent to someone that you have special skills and they appoint you trustee, you are held to a higher standard.
8. Duties of a Trustee: Delegation.
In exercising your duties as trustee, you need to be careful if you delegate any of your duties. Generally, you should not delegate any of your duties.[xxv] But, you can delegate some of your responsibilities if you exercise reasonable care in selecting an agent, and exercise general supervision over the agent you choose.[xxvi]
For example, you must account and report to the beneficiaries. You can delegate the accounting to a proper CPA or public accountant. But you will be held responsible for the accountant’s work.
If you decide to delegate some of your duties, then you should establish the scope and terms of the agent’s work. Additionally, plan on periodically reviewing the agent’s work and performance.
Remember that you have to avoid conflicts of interest. You should not delegate your duties to someone related to you. Especially if you intended to pay them for their service.
9. Duties of a Trustee: Control & Protect Trust Property.
Every trustee must take reasonable steps to locate, control, and protect trust property.[xxvii] Some states, like California, call this “marshaling the assets.” A corollary to this duty is the duty of a trustee to no commingle assets.[xxviii] This means that a trust cannot keep the trust assets mixed with his or her assets.
For instance, if you have a personal checking account, it is improper to put any cash or money received for the trust into your checking account even if you transfer it back to the trust right away. You must maintain separate bank accounts for the assets of the trust. And you must NOT put any proceeds or income from other assets of the trust into your personal bank account.
10. Duties of a Trustee: Recordkeeping.
Every trustee must keep accurate records of everything they do for a trust.[xxix] At a minimum, this means:
- Keeping an accurate ledger of all income and receipts. Noting for each entry the date, the person to whom or from whom the payment was made or received, and nature of the payment, and the amount of the payment.
- You should make all payments from trust accounts by check. DO NOT take cash out of the accounts and make any payments, even if you intend on making a receipt.
- Keep all receipts, bank statements, bills, canceled checks, copies of tax returns, and all correspondence relating to the trust.
You can also use accounting software on your computer to help you keep track of all of the trust assets, income, and expenditures. Programs like QuickBooks and Quicken can really help you.
11. Duties of a Trustee: Enforce Claims
Sometimes someone dies with a debt owed to them. Or as the trust administration goes on, debts become owed to the trust. A trustee must enforce all claims that the trust may have to collect on debts owed to the trust.[xxx] But sometimes a trustee must make a judgment call.
For example, if someone owed a debt to the trust for $500, but it will cost $1,000 to enforce the debt, then the duty of prudence may require that the trustee not pursue this debt. The best practice is to inform the beneficiaries of your proposal and get their consent.
12. Duties of a Trustee: Defend Actions.
When a trust is sued, the law treats the trust just like any other defendant. If it does not defend itself, then the plaintiff may file a request for a default judgment against the trust. This is a bad thing. Since a trust can only act through a trustee, the unhappy burden of defending lawsuits falls on him/her.[xxxi]
This is a scenario where the trustee may delegate his duty to defend the trust by hiring an attorney.
13. Duties of a Trustee: Collect & Preserve Trust Property.
This duty may seem a repeat of #9, above. But it is not. This duty requires a trustee to compel a prior trustee to hand over any trust property.[xxxii] You could probably lump thus duty together with the duty to enforce claims and the duty to marshall assets, but the uniform Trust Code explicitly lists this as a separate duty of a trustee.
I kept this as a separate duty because I believe that by isolating it, the Uniform Trust Code is highlighting this duty to make sure that successor trustees do not give their predecessors a “pass” when it comes to collecting and gathering the assets.
14. Duties of a Trustee: Make Trust Property Productive.
The California Probate Code imposes a duty upon trustees to make the trust property productive.[xxxiii] Like the duty above, you could probably lump this with another duty, i.e., the duty of prudence. But, California likely wants to underscore the importance of keeping trust property productive.
Some people look at the duty of prudence and say: “I’m just not going to do anything so that I do not lose any trust assets.” This is not what California wants from its trustees.
Instead, California wants trustees to act prudently, but also incorporate the circumstances and purposes of the trust. For example, if the trust’s purpose is to provide income for a surviving spouse, then the trustee has to find ways to use the trust assets to produce income.
I most often see these kinds of conflicts with real property and vacant homes.
On the one hand, the trustee does not want to rent the home because he or she is worried that the tenants will damage the property. On the other hand, if the home sits empty, it could invite theft and may be prone to waste.
Therefore, trustees in these situations may want to consider renting empty properties so that they can produce income, preserve the property, and make the property productive.
By contrast, consider the following example. Someone creates a trust to give his property to his children as quickly and efficiently as possible. When that person dies, the trustee needs to decide what to do with the property. Renting the property makes no sense. In this case, the circumstances of the trust suggest that renting the property is contrary to the terms of the test. Therefore, the trustee should not rent the home, even though the property may not be as productive.
15. Duties of a Trustee: Inform & Report to Beneficiaries.
Next to the duty of loyalty, the duty to inform and report to beneficiaries is one of the most important. One of the most common lawsuits against trustees is a lawsuit to compel the trustee to provide an accounting or some kind of information about the trust. These types of lawsuits are often unnecessary and avoidable if the trustee understands the duty to inform and report.
A trustee is obligated to provide certain information and reports to the beneficiaries.[xxxiv]
Here are some of the basic requirements of the trustee’s duty to inform and report:
- A trustee must provide the terms of the trust to a beneficiary upon request.
- A trustee must report to the beneficiary by providing requested information to the beneficiary regarding the administration of the trust.
- When a trust becomes irrevocable, a trustee must give each beneficiary a complete copy of the trust.
- A trustee must provide all legally required notices to the beneficiaries.
- The trustee must provide an account to the beneficiaries at least annually unless the trust or beneficiaries waive the accounting.
The trustee can avoid a lot of conflicts if he or she simply responds to reasonable requests from the beneficiaries.
Becoming a trustee of a trust is not easy work. It is tough. It is often thankless. The duties of a trustee exposes you to significant liability. But if you use common sense, are a decent human being, and do not hold grudges, you can succeed as a trustee.
If you are a beneficiary of a trust, each of these duties owed to you are independent ground for suing the trustee. You can file a petition to remove the trustee for violating these duties and obligations to you. Hopefully, if your trustee reads this, a lawsuit will not be necessary.
If you want to learn more about trusts, check out our other articles:
Per Stirpes vs Pro Rata: What’s the Difference?
[i] Uniform Trust Code § 801 & California Probate Code § 16000.
[ii] Unifrom Trust Code § 802 & California Probate Code § 16002.
[iii] See Uniform Trust Code § 802(b)&(c); California Porbate Code § 16004.
[iv] Uniform Trust Code § 802(c).
[v] UTC § 802(b)(4).
[vi] UTC § 802(b)(1).
[vii] Uniform Trust Code § 802(b)(2).
[viii] Uniform Trust Code § 802(b)(5).
[ix] California Probate Code § 16005.
[x] California Probate Code § 16004.5(b)(2).
[xi] See California Probate Code § 16004.5(a).
[xii] Caliornia Probate Code § 16004.5(b)(1).
[xiii] Caliornia Probate Code § 16004.5(b)(3).
[xiv] See Caliornia Probate Code § 16004.5(b)(4).
[xv] Caliornia Probate Code § 16004.5(b)(5).
[xvi] Uniform Trust Code § 803; Caliofrnia Probate Code § 16003.
[xvii] Uniform Trust Code § 804.
[xviii] California Probate Code §§ 16002(a), 16003, 16045-16054, 16320-16375
[xix] Probate Code § 16047(b).
[xx] Probate Code § 16047(c).
[xxi] California Probate Code § 16047(b).
[xxii] California Probate Code § 16013.
[xxiii] Uniform Trust Code § 805.
[xxiv] Uniform Trust Code § 806; California Probate Code § 16014.
[xxv] California Probate Code § 16012.
[xxvi] Uniform Trust Code § 807; Probtae Code § 16012.
[xxvii] Uniform Trust Code § 809; California Probate Code § 16006.
[xxviii] California Probate Code § 16009; Unifrom Trust Code § 810(b).
[xxix] Uniform Trust Code § 810.
[xxx] California Probate Code § 16010; Uniform Trust Code § 811.
[xxxi] California Probate Code § 16011; Uniform Trust Code § 811.
[xxxii] Uniform Trust Code § 812.
[xxxiii] California Probate Code § 16007.
[xxxiv] Uniform Trust Code § 813; California Probate Code §§ 16060-16069.