General Powers of Trustee

Probate Code Section 16200 lists most of a trustee’s powers over a trust. A trustee’s power is limited, and in some cases a trustee is forbidden from taking an action entirely. These limitations are found both in the Probate Code and in the terms of the trust being administered. For instance, a trust instrument may limit the kinds of investments that the trustee can make with trust property or expand these powers beyond those granted by the Probate Code. Section 16200 provides that the trustee powers are those conferred by the statute and the trust instrument. Trustees must therefore refer to both the Probate Code and the trust to determine how far their powers extend.

Most non-professional trustees hire an experienced attorney to review their actions before they take them to avoid exceeding their powers. An attorney who has administered hundreds or thousands of trusts simply has more experience with the issues trusts present and can therefore offer a level of protection against breaching a trustee’s duty with a simple “yes, you can,” or “no, you can’t.”

Duty to Report Information to Beneficiaries

Probate Code Section 16060 requires a trustee to keep the trust beneficiaries reasonably informed of the trust and its administration. Probate Code Section 16061 requires a trustee to respond to a beneficiaries reasonable requests for information about the trust in general and their interest in the trust in particular.

Chief among the actions this duty requires is the requirement to provide beneficiaries with a copy of the trust instrument in certain circumstances. This is commonly done through a 16061.7 notice after the death of the settlor (AKA, the person who established the trust).

Additionally, these code sections require a trustee to report information about the assets, liabilities, receipts, and disbursements from the trust when requested by a beneficiary.

And lastly, these sections combine to limit the period in which a trust can be contested or challenged, if the trustee complies with their requirements.

Duty to Keep Trust Property Separate

Probate Code Section 16009 requires a trustee to keep their property (and anyone else’s property) separate from the property of the trust. It sounds simple, but comingling trust funds in a personal bank account or a non-trust account owned by the settlor of the trust can quickly land a trustee in hot water.

A trustee should never keep personal funds in the same bank account as trust funds. Doing so can result in personal liability for the trustee wherein they are responsible for paying back the trust any money that can’t be accounted for from their own funds.

Even if a trustee has insurance to cover this situation, comingling personal and trust funds is often not covered by such an insurance policy.

Courts do not take this duty lightly. If a trustee is found to have comingled funds it can lead to charges of embezzlement or even financial elder abuse with severe penalties.

Duty to Account

Probate Code Section 16062 requires a trustee to “account” to trust beneficiaries, or, in other words, report on their financial management of the trust assets.

This duty can also be limited by the terms of the trust by requiring less frequent or even no accounts. But trustees need to be careful because beneficiaries can still compel a trustee to account in many situations regardless of what the trust instrument states. 

An account, also known as an accounting, is a detailed report of the trust finances. While these are similar to bank account statements, California requires accounts to be in a specific format in most, but not all, cases.

A trust accounting must balance; meaning the money in and money out must equal the ending balance of a trust’s assets. Detailed recordkeeping from the beginning of a trust’s administration is crucial to balancing an accounting.

Duty of Loyalty

Probate Code Section 16002 states that a trustee has the duty to administer a trust solely in the interest of the beneficiaries. The trustee cannot use the trust for their own benefit.

A trustee cannot employ their business to perform services for a trust; with some exceptions. This means a trustee cannot generally enter enter into transactions with the trust where they are a party to both sides of the transaction; ie. trustee of the trust and CEO of the business.

Most importantly, a trustee may never act adversely to the trust beneficiaries. 

For example, if a trustee sold a home owned by the trust to themselves for less than the home’s value on the open market they have almost certainly violated their duty of loyalty to the beneficiaries.

Conversely, a trustee does not breach this duty by abandoning a worthless asset, such as a house with a mortgage that is under water.

Duty to Avoid Conflicts of Interest

Probate Code Section 16004 imposes a duty to avoid conflicts of interest. This duty overlaps with the duty of loyalty and again prohibits a trustee from entering a transaction with the trust that results in a profit to the trustee.

For example, a trustee must generally void taking personal loans from the trust, because the trustee’s personal financial interests conflict with the financial interests of the trust and its beneficiaries.

More broadly, a trustee cannot engage in self-dealing where the trustee makes a deal with themselves in their personal or individual capacities.

However, there are many exceptions to this general rule. In some cases a trustee can perform actions that result in a conflict of interest if all of the trust beneficiaries consent, or, if a court approves the action.

Sometimes a transaction really can be good for everyone, but its important to know the limits before entangling oneself in such a transaction.

Duty to Preserve Trust Property

Probate Code Section 16006 require a trustee to take affirmative action to control and preserve trust property. For example, a trustee may need to spend trust funds to repair a leaky roof before it causes more damage to the whole structure, or evict a tenant who fails to pay rent.

This duty overlaps with other duties imposed on trustees. And perhaps the easiest way to conceptualize this concept is that a trustee should never hold all trust assets in cash and uninvested unless they are preparing to distribute the bulk of the assets to the beneficiaries.

This runs into other standards for investments that aren’t specifically trustee duties like the prudent investor rule. A trustee cannot gamble that the price of bitcoin will rise rapidly and produce a windfall for the trust just as a trustee cannot bet trust money at the roulette table.

Duty to Make Trust Property Productive

Probate Code Section 16007 requires the trustee to make trust property productive. For example, the trustee cannot let their children live in a home owned by the trust rent free. In this context, keeping the property productive means collecting rent which in all likelihood will eventually be distributed to all beneficiaries of the trust.

More generally, a trustee needs to invest trust property wisely. Poorly performing investments should be sold and reinvested more profitably.

But there is a lot of leeway built into this duty. No one, not even professionals, can predict the ups and downs of the stock market or real estate. So trustees don’t have to be financial wizards, they just need to take reasonable steps to keep the property of the trust productive and producing income when possible.

Duty of Impartiality

Probate Code Section 16003 imposes a duty to deal impartially with all trust beneficiaries. “If a trust has two or more beneficiaries, the trustee has a duty to deal impartially with them.” In other words, a trustee cannot favor their son over their daughter (or any other beneficiary) in choosing to whether or not to make discretionary distributions to each of them.

This duty is all the more important when the trustee is a beneficiary themselves. It would be a clear violation of this duty for the trustee to make distributions only to themselves while making none to the other beneficiaries.

This situation commonly comes up when one child is named successor trustee after their parents pass away and that child doesn’t get along with their siblings. The child serving as trustee can’t favor some siblings over others by making more distributions to some or providing some with more information than others.