A Primer to Trustees and Beneficiaries in California (Prob. Code § 16000.)

underwood-trustees-beneficiaries-300x300A trust is a legal device that is commonly used in estate planning. A trust represents “a collection of assets and liabilities” that can be held and transferred by an individual to another individual, the “beneficiary.” (Portico Mgmt. Grp., LLC v. Harrison (2011) 202 Cal.App.4th 464, 473.) When the trustee, the person responsible for managing and distributing the trust’s assets, has a personal interest in those assets, certain problems can arise. This is because the trustee is bound by several legal duties designed to safeguard the interests of the beneficiaries. Therefore, if a trustee is also a beneficiary, they must make sure that they do not unduly favor themselves at the expense of the other beneficiaries. 

What is a trustee?

A person who creates a trust, the “settlor,” names a “trustee” who holds legal title to the property held in the trust for the benefit of one or more persons, the “beneficiaries.” (Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 521.) The settlor can create a voluntary or express trust through a formal agreement where the settlor details his intentions regarding the trustee and beneficiaries. A property owner can designate himself as a trustee, creating an express trust holding his property. (Probate Code § 15200(a).) The owner can also designate a third party as a trustee. A trust can be created during the settlor’s life, or, it can be created by a will where it becomes effective upon the settlor’s death.  

But the settlor is not necessarily required to name a trustee for the trust to be valid. If the settlor does not name a trustee, or, if the trustee named by the settlor doesn’t perform their duties, a court can appoint one. (Prob. Code § 15660.) Furthermore, a trustee can be a natural person or a corporation or other business entity. 

Trustees are entitled to receive “reasonable compensation under the circumstances” if the trust instrument does not state what the trustee should be paid. (Prob. Code § 15681.) Because the trustee owes a duty to fulfill the wishes of the settlor, beneficiaries can ask the court to review or deny the trustee’s compensation if the beneficiary senses that the trustee is acting out of self-interest. (See Butler v. LeBouef (2016) 248 Cal.App.4th 198, 202, 214.)

What are a trustee’s responsibilities?

After a trustee accepts the trust, they take on the responsibility of overseeing the trust “according to the trust instrument.” (Prob. Code § 16000.) The duty to administer the trust assets according to the settlor’s wishes is an essential part of the trustee’s role. Additionally, by accepting this role, the trustee assumes several other legal duties aimed at protecting the rights of the trust’s beneficiaries. (Prob. Code §§ 16002(a), 16003, and 16004(a).) If they breach any of these duties, they may be liable to the trust’s beneficiaries for damages. 

First, the trustee has a general duty of loyalty to the trust’s beneficiaries. (Prob. Code § 16002(a).) This means that the trustee must act in the beneficiaries’ interest when administering the trust. The trustee can’t use the knowledge and status of their position to take advantage of the beneficiaries. For example, a trustee that sells shares of stock held in a trust “solely to raise cash for his own use” will be liable to the beneficiaries for breach of loyalty. (Uzyel v. Kadisha (2010) 188 Cal.App.4th 866, 904-905.) In this situation, the beneficiaries can sue for “profits that the trust would have made if not for the breach of trust.” (Id. at 906.)

Next, the trustee has a duty to be impartial when the trust designates more than one beneficiary. (Prob. Code § 16003.) The trustee cannot favor one beneficiary at the expense of another. For example, a trustee who defends a legal challenge to a trust amendment to protect his daughters’ interest as beneficiaries while acting against the benefit of the trust’s other beneficiaries has breached his duty of impartiality. (Zahnleuter v. Mueller (2023) 88 Cal.App.5th 1294, 1307.) 

Furthermore, a trustee cannot engage in any deal or transaction that he knows will be a conflict with the interests of the beneficiaries. (Prob. Code § 16004.) If a trustee acts in a way that conflicts with his role as a trustee, he is subject to removal. The trustee doesn’t have to act in bad faith to be subject to removal for a conflict of interest, but they do have to take some action adverse to the interests of the beneficiaries to be removed. (Claypool v. Wilson (1992) 4 Cal.App.4th 646, 676-677.)

Can a trustee also be a beneficiary?

Not only can a settlor be a beneficiary to their own trust, but one or more beneficiaries to the trust can also be a trustee. If there is only one trustee, however, that trustee cannot be the only beneficiary to the trust. If only one beneficiary is named and that beneficiary is also the only trustee, the trustee cannot distribute the trust’s assets to himself. (Ammco Ornamental Iron, Inc. v. Wing (1994) 26 Cal.App.4th 409, 419-420.) 

The reason for this rule is to prevent trustees from acting in ways that contradict the settlor’s desires regarding the trust. If there are no other trustees or beneficiaries to oversee the trust’s administration, and, for example, the settlor is dead, the trustee is free to manage the trust without any checks on their behavior. Consider the duties of a trustee discussed above. A trustee not only has a duty of loyalty to the beneficiaries, they also have a duty to distribute the trust according to the settlor’s intent. Without oversight from a co-trustee or other beneficiaries, it can be difficult or impossible to hold the sole trustee-beneficiary accountable. 

But if there are more than one beneficiary, and the trustee happens to be one of them, the trustee is allowed to assume the dual role as trustee and beneficiary. This situation, though, might raise more conflict of interest or impartiality issues than would arise when the trustee has no stake in the trust assets. If the trustee does not uphold his duties of loyalty and impartiality, other beneficiaries may sue the trustee claiming that the trustee is favoring himself at their expense. Therefore, it may be wise for a trustee who is also a beneficiary to seek appointment of a co-trustee or to ask a court to replace him as trustee in order to avoid any future allegations of impropriety. 

Consider the following example. Shawn and Julie are named as beneficiaries to a trust, and Shawn is also named as the trustee. The trust contains several assets, one being a valuable piece of oceanfront property. The trust instrument states that the assets should be distributed equally between the beneficiaries, but it is silent whether the property should be sold upon distribution or if the trustee can wait for the property to appreciate in value before selling. 

Appraisers have concluded that given the current real estate market, the property will likely see a significant increase in value in the next five years. Julie, therefore, wants to let the property appreciate before selling and collecting her half of the proceeds. But Shawn, who has been experiencing financial difficulties, wants to sell the property immediately. If Shawn goes against Julie’s wishes and sells the property solely to benefit himself, especially when waiting would have resulted in a greater benefit to both beneficiaries, Shawn may be liable to Julie for breaching his duties of loyalty and impartiality.  

How can the attorneys at Underwood Law Firm, P.C. help?

Understanding the intricacies of a trustee’s role is essential to ensure the proper administration and protection of beneficiaries’ interests. Because trustees assume significant fiduciary and legal responsibilities, conflicts of interest are likely to arise when trustees are also beneficiaries. Although technically, a beneficiary can also serve as the trustee, proactive measures – like seeking appointment of another trustee or judicial intervention – might be necessary to mitigate potential conflicts and uphold the trust’s objectives. The knowledgeable and experienced attorneys at Underwood Law Firm, P.C. can help guide you through these issues if you are appointed as a trustee and a beneficiary. Contact us today

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