Basic Trust Law

A trust is an arrangement by which a person, known as the settlor or the trustor, delivers money or property to a person, known as the trustee, for the benefit of other persons, known as beneficiaries. A trust is usually established by a formal written declaration, and it can be revocable or irrevocable.

Upon the death of a settlor, often a trust will become irrevocable, and, if that is the case, then the trustee must give written notice to all persons named as beneficiaries of the trust and the heirs of the settlor. (Probate Code §16061.5) A trustee may be personally liable for damages to any person who does not receive the required notice.

Disputes often arise concerning the administration of a trust. A court has general power to supervise the administration of a trust and may order an accounting of the financial affairs of a trust. Christie vs. Kimball (2012).

In general an action may not be brought to contest a trust by a person who received notification of the trust becoming irrevocable more than 120 days after the date of notification, but the 120 days can be extended by 60 days if a copy of the trust is requested during the 120 day period. (Probate Code §16061.8)

If a person other that the original settlor is acting as trustee, the trustee usually provides an annual accounting to the beneficiaries of the trust, and the beneficiaries may have as long as 3 years to object to the accounting report. The time period to object can be shortened to as little as 180 days if the trust and the notice so provide. (Probate Code §16460, 16461)

A current income and principal beneficiary of the trust has standing to pursue an accounting, to petition the court regarding administration of the trust, and to seek redress for breach of trust. (Probate Code §§16061, 17200, and 16420)

The importance of providing an accounting report to the beneficiaries is that the 3-year statute of limitations for breach of fiduciary duty does not start to run until the beneficiary was on notice of his claim for breach of trust or knows the trustee has violated his/her fiduciary duties. (Probate Code §16460; Quick vs. Pearson (2010)) Hence, a trustee will usually provide annual accountings to the beneficiaries.

A trustee owes a fiduciary duty of honesty and loyalty in administering a trust and must be careful not to favor one beneficiary over another, or to gain any unfair advantage by reason of acting as a trustee. Probate Code §16004(a) provides that a trustee has a duty not take part in any transaction in which the trustee has an interest adverse to the beneficiary. Probate Code §16004(c) provides that a transaction between a trustee and a beneficiary during the existence of the trust, while the trustee’s influence with the beneficiary remains, and by which the trustee obtains an advantage from the beneficiary, is presumed to be a violation of the trustee’s fiduciary duties. The court in Toedter vs. Bradshaw (1958) 164 CA 2d 200 held that:

“This rule is unyielding and a trustee may not, under any circumstances, be allowed to have any dealings in the trust property with himself or acquire any interest therein. Courts will not permit an investigation into the fairness or unfairness of such a transaction or allow the trustee to show the dealing was for the best interest of the beneficiaries.”

The court continued by stating “The great purpose of the law is to secure fidelity in the agent. When one undertakes to deal with himself in different capacities – individual and representative – there is a manifest hostility in the position he occupies.”

The court in Estate of Pitzer (1984) 155 CA 3d 979 held that good faith is not a defense to a claim for breach resulting from such a conflict.

As early as 1901, the Supreme Court of California held in Stiles vs. Cain (1901) 134 Cal 170 that then Civil Code §2235, the predecessor of the current Probate Code §16004, established the rule that all transactions between a trustee and a beneficiary during the existence of the trust by which the trustee obtains any advantage from the beneficiary is presumed to be entered into without sufficient consideration and under undue influence.

In Alan vs. Myers (1936) 5 Cal 2d 311, the Supreme Court of California held that beneficiaries had not waived or released their rights to trust property where, at the time of the execution of the releases, the trustee did not advise them as to the full nature and value of the property that was left to the beneficiaries. The court in Alan held that the burden was upon the trustee to overcome the presumption that transactions by which a trustee obtains an interest in property from a beneficiary are presumed to have been acquired under undue influence and for an insufficient consideration. The court further held that, where a trustee enters a transaction with a beneficiary, and the trustee seeks to have the beneficiary release a claim, it is the duty of the trustee to inform the beneficiary of the nature, character, and value of the property held by the trust. In the absence of evidence that such information was given, the trustee could not sustain his burden of showing that there was a sufficient consideration given to the beneficiary for the release of his claims, and the trustee was unable to show his actions were not the result of undue influence. The court held that receipts standing alone are not evidence of a waiver of release of rights in trust property.

If a trustee is found to have breached his fiduciary duty to a beneficiary, regardless of the amount of monetary damages that might be awarded, a beneficiary is entitled to recover her attorney fees and costs from the trustee if the court determines the trustee’s position was without reasonable cause and in bad faith. (Probate Code §17211(b)

The court has very broad powers under Probate Code §16420 to remedy a breach of trust by the trustee and may require the trustee to return property to the trust, remove the trustee, impose an equitable lien or a constructive trust upon property, and trace trust property that has wrongfully been disposed of, and recover the property or its proceeds.

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