What Is a Fiduciary Duty?

A fiduciary duty is the highest standard of care recognized by law. When you serve as a trustee, you hold legal title to the trust's assets, but those assets do not belong to you. You manage them for the benefit of the trust's beneficiaries, and every decision you make must serve their interests rather than your own.

California's Probate Code, primarily sections 16000 through 16015 and sections 16040 through 16069, sets out the specific duties that apply to every trustee. The trust instrument may modify some of these duties, but it cannot eliminate the duty of good faith or the obligation to act in the beneficiaries' interest. (Prob. Code, sec. 16000.) [Cited but not quoted; needs verification.]

Core Trustee Duties Under California Law

1. Duty to administer the trust (Prob. Code, sec. 16000)

The trustee must administer the trust according to the trust instrument and applicable law. This means following the settlor's instructions as written, not substituting your own judgment about what the settlor "would have wanted." If the trust says to distribute income quarterly, you distribute income quarterly.

2. Duty of loyalty (Prob. Code, sec. 16002)

The trustee must administer the trust solely in the interest of the beneficiaries. This is one of the most fundamental obligations. You may not use your position to benefit yourself, your family members, or your business associates at the expense of the trust or its beneficiaries.

3. Duty of impartiality (Prob. Code, sec. 16003)

When a trust has multiple beneficiaries, the trustee must treat them fairly and impartially. This does not necessarily mean treating them identically; the trust instrument may direct different treatment for different beneficiaries. But where the trust is silent, the trustee must balance the interests of current income beneficiaries against those of remainder beneficiaries without favoring one group over the other.

4. Duty to avoid conflicts of interest (Prob. Code, sec. 16004)

The trustee may not use trust assets for personal gain or engage in transactions where the trustee's personal interests conflict with those of the trust. Self-dealing transactions are presumptively invalid. Even if you believe a transaction is fair, the burden falls on you to prove it if challenged. The safest course is to avoid conflicted transactions entirely.

5. Duty to protect and preserve trust property (Prob. Code, sec. 16006)

The trustee must take control of trust assets, keep them safe, and maintain appropriate insurance coverage. This begins immediately upon accepting the trusteeship. Practical steps include securing real property, inventorying personal property, and ensuring that valuable assets are properly stored and insured.

6. Duty to make trust property productive (Prob. Code, sec. 16007)

Trust assets should not sit idle. The trustee has a duty to invest and manage trust property so that it generates a reasonable return. This duty works alongside the Prudent Investor Rule.

7. Duty to keep trust property separate (Prob. Code, sec. 16009)

Never commingle trust funds with your personal funds. Trust property must be held in the name of the trust, in separate accounts, and clearly identifiable as trust assets. Commingling is one of the most common grounds for removal and personal liability.

8. Duty of prudent investment (Prob. Code, sec. 16045 et seq.)

Under the California Uniform Prudent Investor Act, the trustee must invest trust assets as a prudent investor would, considering the purposes, terms, distribution requirements, and other circumstances of the trust. Relevant factors include economic conditions, inflation, tax consequences, the role of each investment in the overall portfolio, expected total return, liquidity needs, and any special value an asset has to the beneficiaries.

Diversification is generally required unless the trustee reasonably determines that the trust's purposes are better served without it. The standard is applied to the portfolio as a whole, not to individual investments.

9. Duty to inform and account (Prob. Code, secs. 16060 through 16062)

Transparency is a central obligation. The trustee must:

• Notify beneficiaries that the trust exists and that the trustee has accepted the role.
• Provide a copy of the trust instrument to any beneficiary who requests it.
• Keep beneficiaries reasonably informed about the administration of the trust and its material developments.
• Provide an accounting to each beneficiary at least annually, at the termination of the trust, and upon a change of trustee. (Prob. Code, sec. 16062.)

An accounting should show the trust's assets at the beginning of the period, all receipts and disbursements during the period, and the assets on hand at the end. Failure to provide accountings is one of the most frequent triggers for beneficiary disputes and removal petitions.

What Happens When a Trustee Breaches These Duties

A trustee who breaches fiduciary duties faces serious consequences:

• Personal liability: The trustee can be held personally liable for any losses the trust suffered because of the breach, plus any profits the trustee gained from the breach.
• Surcharge: A court can order the trustee to repay the trust for the amount of loss caused, which is called a surcharge.
• Removal: Under Probate Code section 15642, the court can remove a trustee for breach of trust, unfitness to administer the trust, hostility among co-trustees that impairs administration, failure to act, or other good cause.
• Denial of compensation: A trustee who breaches duties may lose the right to compensation for the period of the breach.
• Attorney fees: In some cases, the trustee may be ordered to pay the beneficiary's attorney fees and litigation costs.

Common Mistakes New Trustees Make

• Commingling funds. Depositing trust money into a personal checking account, even temporarily, creates legal risk and accounting problems.
• Delaying distributions. If the trust directs a distribution, the trustee should make it promptly unless there is a legitimate reason for delay (such as pending tax filings or unresolved claims).
• Failing to communicate. Even when nothing significant is happening, periodic updates to beneficiaries prevent suspicion and disputes.
• Not getting professional help. Complex trusts with real property, business interests, or tax issues often require the involvement of attorneys, accountants, or financial advisors. The cost of professional guidance is a legitimate trust expense.
• Self-dealing. Buying trust property, lending trust funds to yourself, or hiring your own business to provide services to the trust are all self-dealing transactions that can result in removal and personal liability.

When a Trustee Should Consult an Attorney

Trusteeship is a legal responsibility, and some situations require professional legal guidance. Consider consulting a trust attorney when:

• You are named as trustee for the first time and want to understand your obligations.
• A beneficiary disputes your decisions or threatens litigation.
• The trust holds complex assets such as real property, business interests, or significant investment portfolios.
• You need to interpret ambiguous language in the trust instrument.
• You are considering resigning as trustee.
• The trust requires a formal accounting or court petition.

Frequently Asked Questions

Legal Disclaimer: This article is for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Consult a licensed California attorney for advice specific to your situation. McLellan Law Group, LLP · 20665 4th Street, Ste. 202, Saratoga, CA 95070 · (408) 963-7533