Probate administration, or administration of an estate, begins after death. There is no administration required of a will during life, however even with a will-based estate plan it is a good idea to review the plan on a regular basis to make sure it is up to date and not skewed by changes in law, family, or assets.
Trust administration, on the other hand, begins as soon as the instrument is signed. The trust needs to be properly funded with assets in order to function, and like any estate plan will need to be reviewed on a regular basis. While probate is a court process, trust administration is largely private and a court is rarely involved unless a trustee or beneficiary petitions for resolution of a dispute or clarification of some uncertainty.
Clients will often ask their attorney to serve as trustee. The drafting attorney is generally disqualified from doing so under various probate code sections aimed at preventing unscrupulous lawyers from unjustly enriching themselves. There are a few exceptions allowing an attorney to serve as trustee, but it is generally not recommended. The attorney may not have the time or ability to do the job. The law strictly bars dual compensation as both attorney and trustee, unless court approval is received. Prob C §15687(a). There is a high potential for conflict of interest, not so much with the settlor but with a beneficiary that may become a client or may have been a client in the past.
The trustee owes duties as a fiduciary to the beneficiary, and in carrying out these duties must meet the applicable standard of care or will be liable for breach of trust. The standard of care is higher for an expert than a nonexpert trustee.
The trustee owes a duty to administer the trust according to its terms. Prob C §16000. Only when the trust instrument is unclear or ambiguous may extrinsic evidence of the settlor’s intent be used. (A settlor may leave a separate written letter of instructions which may be inconsistent in some way with the trust instrument, putting the trustee in peril perhaps unless the trustee petitions a court for instructions.) If the trust is revocable, the trustee must follow instructions from the person able to revoke. Prob C §16001(a).
The trustee has duties to account and to inform. The trustee has a duty to account to each beneficiary at least annually, at termination of trust, and on change of trustee. Prob C §16062. The beneficiary may waive in writing the right to an accounting. Under Prob C §16061, the trustee must respond to a beneficiary’s request for information. Under Prob C §16060, the trustee is under a separate duty to keep the beneficiaries reasonably informed; this duty is nonwaivable by the settlor. The trust instrument may relieve the trustee from liability if the beneficiary fails to object to an account or report within a specified period of time, but the period must not be less than 180 days. Prob C §16461. There is generally no duty under Prob C §16060 or Prob C §16061 or Prob C §16062 to account or provide information while the trust is revocable. Within 60 days of when the trust becomes irrevocable, the trustee must notify the beneficiaries, in addition to each heir, of their right to request a complete copy of the trust. Prob C §16061.7. A recipient of the notice is barred from contesting the trust upon the expiration of the later of 120 days after service of the notice, or 60 days from the day on which a copy of the trust instrument is served within that 120 day period. To avoid prolongation of the limitations period beyond the 120 day period, typically the trust copy will be served along with the notice, or at least 60 days prior to expiry of the 120 day period.
The trustee has a duty of confidentiality and must not disclose any information to a third party which may be detrimental to a beneficiary. This duty is not codified in California, except as to corporate trustees, and there are some exceptions, for example, having to do with litigation or government compliance.
The trustee has a duty not to delegate to others the performance of acts that the trustee can reasonably be required to perform personally, unless the trust instrument provides otherwise. Prob C §16012. An exception is made under Prob C §16052, which specifically allows delegation of investment and management functions if prudent under the circumstances.
The trustee has a duty of loyalty derived from both statute and common law. The trustee must administer the trust solely in the interest of the trust beneficiaries. Prob C §16002(a). The trustee must avoid any self-dealing.
The trustee owes a common law duty of impartiality and must treat all beneficiaries fairly in relation to each other, individually and as a class, except as the trust instrument may set forth in either mandatory or merely precatory terms (for example, asking the trustee to consider first the needs of a particular beneficiary). This duty can be an issue in balancing the needs of income and remainder beneficiaries.
Under California’s basic standard of care (Prob C §16040(a)), except as otherwise provided in the trust instrument, a trustee is required to administer the trust with reasonable care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument. A trustee is held to a higher expert standard if the settlor relied on a representation of superior skill. Prob C §16014.
In exercising investment powers, the trustee must comply with the requirements set forth in the Uniform Prudent Investor Act (UPIA) (Prob C §§16045-16054) unless the instrument otherwise provides. Prob C §16046(b). Probate Code §16047(a) provides that the “trustee shall invest and manage trust assets as a prudent investor would,” and that, “[i]n satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” Probate Code §16047(b) requires the trustee to be proactive in adopting an overall investment strategy for the trust, and Probate Code §16047(c) provides a list of circumstances that the trustee must consider. A proper delegation of investment powers under Prob C §16052 will generally insulate the trustee from liability, due to a statutory bar on actions.
The Trust Law gives a very broad range of very detailed powers to trustees, granted automatically to ensure trustees have the ability to perform their duties. Prob C §§16220-16249. The Code leaves it to the settlor to restrict any unwanted powers via the trust instrument. Although the powers need not be spelled out in the trust instrument, or even incorporated by reference, to be effective, it is recommended that they be set forth in order to inform all parties concerned. In case of any conflict with the statute, the instrument will control.
Except in emergencies (Probate Code §15622), all cotrustees must act unanimously to bind the trust unless the trust provides otherwise. Prob C §15620. The trust instrument may allocate powers unequally between trustees (or even among beneficiaries and third parties such as special trustees or trust protectors, who may or may not be fiduciaries), and may authorize a trustee to appoint a cotrustee. Some powers (for example, directing investments) may be retained by the settlor. A cotrustee is technically not liable for breach of trust by another cotrustee, but significant exceptions make liability a concern and exculpatory planning may be necessary.
A named trustee may reject the trust, resign, or be removed, according to procedures specified in the trust instrument or by statute. Upon resignation or removal, a trustee must turn over all assets, books and records, within a reasonable time, and should prepare an accounting. The new trustee has a duty to investigate acts of the prior trustee and may be held liable if reasonable steps are not taken to remedy any breach of trust.
Trustee compensation is determined by the trust instrument; however, a court may be petitioned to grant extraordinary compensation for extraordinary services.
Under CCP §§366.2 and 366.3, creditors are generally barred one year after death (absent tolling) from filing claims against a decedent. Under an optional trust claims procedure (Prob C §§19000-19403), the claims period may be shortened to the later of four months after publication of a notice to creditors, or sixty days after actual notice by mailing or personal service. In practice, the optional trust claims procedure is rarely used because it imposes additional duties on the trustee, basically facilitates the filing of claims by creditors, and the trustee should only use the option if it is in the interest of the beneficiaries. The trustee generally has no duty to creditors until a judgment has been rendered. Although distribute liability is a concern for the beneficiaries, if there are more than a couple of beneficiaries in California it may be impractical for the creditor since each beneficiary is liable only for a pro rata share and all must be sued for a full recovery. If the trust instrument imposes upon the trustee a duty to creditors, there may be good reason for the trustee to opt for the trust claims procedure. On the other hand, compared to the claims procedure in probate (Prob C §§9000-9399), the trust claims procedure is easier on the trustee in that aside from publication and actual notice to known creditors, there is no duty to search for reasonably ascertainable creditors. (Note that certain entities must always be given notice—for example tax authorities, or where there is reason to believe the deceased settlor (or the deceased settlor’s spouse) received Med-Cal benefits, notice must be given to the Director of Health Care Services within 90 days of death.) If using the optional trust procedure, a notice must be filed and filing fee paid (same amount as probate petition). Although it is generally best to avoid probate court and that is one of the main objectives of trust planning, a trustee should reassess whether in the particular case probate administration may lead to a better result.
A creditor of the settlor may reach the assets of a revocable trust to the extent of a settlor’s power of revocation, and may also reach the assets of a “self-settled” inter vivos irrevocable trust if the settlor is a beneficiary. Prob C §15304(a). On the other hand, asset protection is quite possible, with some exceptions, through the use of spendthrift clauses restricting the use of trust assets by beneficiaries, so that creditors will not be able to “step in their shoes” to reach trust assets. Prob C §§15300-15309.