Trustee for Whom?

When you create a revocable living trust, you designate trustees to handle the assets contained within the trust.  In the majority of cases, you will name yourself (or yourself and your spouse) as the initial trustee.  When doing so, your financial affairs suffer minimal obstruction since you will be the settlor, beneficiary, and trustee with the ability to revoke the entire arrangement if you choose to do so.  However, there are occasionally reasons why you might appoint a third party  as trustee of your revocable living trust or why a third party may succeed to the position while you are still alive (e.g. due to incapacity).  In these circumstances, to whom does the trustee owe his allegiance?

Well, the answer may have just become more complicated!  In your trust, you are typically the beneficiary during your life.  This is what allows you to spend the assets within the trust or otherwise control the assets at will.  Furthermore, your beneficiaries cannot tell you what you may or may not spend nor direct your investments even though, eventually, they will inherit what is left.  Since you could disinherit any of them at any time through an amendment or revocation of the trust, they have no rights to your estate until after your death.  In cases where a third party is the trustee, that person must generally use your assets as you instruct them during your life as well.  Normally, no one can challenge the trustee’s actions but you, because no one else has any rights to the assets.

The California Supreme Court may have introduced a very significant change to the common way of thinking about the trustee’s duties.  Recently, the Court released its opinion in Estate of Giraldin, which noted some important aspects of the trustee’s position.  Firstly, it is important to read the entire document, understand it, and comply with its provisions.  In every trust there is a section or sections that outline what the trustee may or may not do.  In this case, the settlor had to make all requests for funds in writing.  The trustee did not insist upon written instructions and did not have the power to make distributions without them. Due in part to the apparent lack of written requests, the trustee’s actions are now being challenged by the trust beneficiaries as a breach of his fiduciary duties, which caused a dissipation of the trust assets.

In Estate of Giraldin, the Court is careful to explain that the trustee still owes his duties to the settlor/beneficiary.  However, later beneficiaries may sue the trustee for breaching these duties after the settlor/beneficiary’s death if it caused their inheritance to be lower.  For this reason, it is important to make sure that, as trustee, you comply with the terms of the trust and keep appropriate documentation even though the settlor/beneficiary can direct or consent to your various actions.  By the time a lawsuit from the beneficiaries arises, the settlor/beneficiary will not be available to testify on your behalf!

Estate Planning: The Price of Organization, Rewards, Gifts, and Wondrous Tax Things… FREE REPORT: This complimentary report, focused on Estate Planning, is comprised of many of Mr. Miller’s articles from his long running column for the largest regional newspaper in San Diego County. This report will guide you through the questions surrounding getting your estate planning in order.