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As you may or may not know, when a person is charged with making decisions for other people or managing other people's assets (such as a trustee or agent under a power of attorney) that person owes a "fiduciary" duty to the person or persons on behalf of whom they are acting.
A "fiduciary" means a personal representative, trustee, guardian, conservator, attorney-in-fact under a power of attorney. Generally, a fiduciary has a duty to comply with the terms of the trust, will, powers of attorney, and/or advance health care directives, as well as other duties set forth by California law. However, beyond that, a fiduciary also owes a duty of utmost good faith when dealing with the property of another. In other words, a fiduciary is answerable to those persons of whom they are acting on behalf and may not otherwise make decisions that benefit the fiduciary over the person. A complete discussion on the various duties of a fiduciary and breach of duties would take up volumes, but it is important to know that anyone acting on behalf of another has both duties and limitations in their capacity as a fiduciary.
What is a Violation of Duty?
This article will focus primarily on breaches of duty by a trustee. A trustee is a fiduciary of the highest character whose duty demands the strictest integrity. A trustee "is bound to act in the highest good faith towards his beneficiary and may not obtain any advantage by the slightest misrepresentation. Concealment, threat, or adverse pressure of any kind is unlawful as long as the confidential relation exists," and any violation of these duties constitutes a fraud against the beneficiaries.
A breach of trust is a violation by the trustee of any duty that the trustee owes a beneficiary. A breach of trust can take place intentionally (in bad faith), knowingly but in good faith, or negligently.
Typical Duties
General duties of a trustee include, but are not limited to:
- Duty of Loyalty. A trustee has a duty to always consider and act in the best interests of the trust and may not, by the slightest impropriety, seek an advantage from a beneficiary; place his/her own interests above those of the beneficiaries; use the office of trustee to unduly pressure beneficiaries to approve trustee acts; or make secret profits from the trust.
- No Self-Dealing. A trustee may not deal with themself in any transaction in their individual capacity. The fairness of the transaction and the trustee's good faith are irrelevant. Self-dealing includes commingling trust assets with the trustee's own, taking a loan from the trust, and/or personally dealing with unrelated third parties that compete with the trustee's fiduciary duties to the beneficiary.
- Conflicting Personal Interests. A trustee must take caution to not put themselves in a position where their personal interest conflicts with the best interests of the trust. A trustee may be removed when there are irreconcilable conflicts between the trustee's personal interests and those of the trust, or when there are conflicting duties, such as when a trustee is also an officer or director of a company owned by the trust.
- Duty of Impartiality. A trustee has a duty to deal impartially with all beneficiaries of a trust and must act impartially in investing and managing trust property, while at the same time considering the differing interests of the beneficiaries.
- Duty of Disclosure. It is a trustee's duty to provide the beneficiaries with a complete copy of the trust and any amendments to the trust and to otherwise keep the beneficiaries reasonably informed of the trust and its administration. This duty includes a duty to fully disclose all material facts, as well as a full accounting of trustee activities, and to provide all documents in support of the trustee's activities.
- Duty to Enforce or Defend Claims. A trustee has a general duty to take reasonable steps to enforce claims of the trust and to defend actions that may result in a loss to the trust, as well as a general duty to enforce claims against a predecessor trustee or a co-trustee.
- Duty to Complete Administration in a Reasonable Time. While a reasonable amount of time is expected before a trust is in a position to close and the trustee to make distributions to the beneficiaries, a trustee must complete the administration and make the distributions in a reasonable amount of time depending on the particular nature and complexity of the trust.
Remedies for Breach of Duties
If a trustee commits, or threatens to commit, a breach of trust, a beneficiary or co-trustee may commence a proceeding to:
- Compel or enjoin the trustee from breaching the trust
- Compel the trustee to compensate for a breach
- Remove the trustee
- Reduce or deny compensation to the trustee
- Disgorge profit of the trustee
- Surcharge the trustee
Be Informed
If you are a trustee/fiduciary, it may be your obligation to seek professional legal advice on matters related to your duties. If you are a beneficiary who suspects that a trustee/fiduciary is not doing their job, you may want to talk to someone to advise you of your rights. Mortensen & Reinheimer, PC is available to advise you no matter the circumstances.