If a Trustee commits a breach of Trust, or threatens to do so, California law allows a beneficiary or a co-Trustee to take action. What action can you take? That depends on the type of breach committed. Under Probate Code section 16420, the court is authorized to take the following actions:
Compel the Trustee to perform his duties.
This is typically brought in the form of a Petition for Instruction, where a Trustee is ordered to take some action to comply with the Trust terms, or Trust law. For example, a Trustee who refuses to make a distribution of a cash gift can be ordered to do so. Some Trust’s require that assets be funded into various sub-Trusts upon the death of one spouse. If the Trustee fails to follow the Trust terms and create the required sub-Trusts, then the court can order the Trustee to take that action.
Petitions for Instructions are particularly useful to beneficiaries because they allow for flexibility in requesting the action you think best serves the Trust.
Enjoin the Trustee from committing a breach of trust.
Rather than asking the Trustee to take action, this allows the court to order the Trustee NOT to do something. Perhaps the Trustee has threatened to give all Trust assets to one beneficiary when the Trust requires an equal division between two beneficiaries. The beneficiary being harmed can ask the court to order the Trustee not to take this action.
Another common example involves specific gifts of real property. If you are left a house, but the Trustee refuses to give the house to you, then you can force a distribution of the home under option 1, above. But if the Trustee threatens to sell the house, rather than distribute the property to you, you can also ask the court to stop the Trustee from selling the property.
The court has the power to stop the Trustee’s actions, and to force the Trustee to act. Whatever is required to meet the terms of the Trust and the mandates of Trust law.
Compel the trustee to pay-back the Trust for any harms or losses caused.
Legally speaking, requiring the Trustee to pay money to the Trust is referred to as “redress for breach of Trust,” also referred to as “surcharging” the Trustee. The terms all mean the same thing: the Trustee pays money (or transfers property) back to the Trust from his or her own pocket.
Trustees are expected to follow the Trust terms and Trust law in administering a Trust estate. However, Trustees are not guarantors of the Trust assets—meaning there could be losses to the Trust for which Trustees are not liable. For example, if a Trustee invests prudently as required by the California Prudent Investor Act, but the Trust investments decrease in value, the Trustee is not liable for that decrease.
Trustees are liable, however, when they breach their duties. Thus, if a Trustee invests recklessly, and does not follow prudent investing rules, then the Trustee is liable for any decrease in value. Similarly, if a Trustee sells a house at below-market value to a friend, then the Trustee will be liable for that loss as well. The court has the power to order the Trustee to pay the Trust money when the court deems it appropriate to do so.
Appoint a receiver or temporary trustee to take possession of trust property and administer the trust.
The court has the power to temporarily appointment a neutral person or company to act as Trustee until the time when permanent removal of the original Trustee can be decided. The hope is that the temporary Trustee will maintain the status quo, and ensure no radical problems, until all the Trust legal issues are fully resolved.
We often will ask for suspension of a bad Trustee and the appointment of a temporary or interim Trustee. The court may be reluctant to suspend right away, but if you have sufficient facts to show a risk of loss to the Trust, then you are more likely to obtain suspension.
Remove the trustee.
This follows up the last item, allowing the court to permanently remove a Trustee. To do so, the court usually must have an evidentiary trial to hear the evidence that forms the basis for permanent removal. At times, a Trustee may voluntarily agree to resign in lieu of being removed by the court. But in those cases where a Trustee stubbornly clings to office, the court has the power to permanently remove the Trustee.
To remove the Trustee, however, there must be a showing that the Trustee breach his or her duty of Trust. You must look at the grounds for breach and provide the court with evidence to prove a breach of Trust has occurred.
Set aside acts of the trustee (subject to Probate Code section 18100—third-party transactions for value).
The court has the power to set aside transactions the Trustee has entered into if that is required to make the Trust whole. In other words, if the Trustee were to gift Trust property to an unrelated third-party, the court could undue that type of transfer and give the property back to the Trust.
The only exception is where the Trustee sold an asset to a third-party for full value. The idea being that an unsuspecting third-party who pays full price for a Trust asset should not be forced to give the property back because they did not know there was a problem. For example, if the Trustee sells a house on the open market, and the purchasers are unrelated to the Trust or the Trustee and they pay full fair-market value for the house, then that transaction cannot be undone by the court.
Reduce or deny compensation to the trustee.
This may be the easiest way to punish a bad Trustee—stop them from being paid. This is easier than forcing the Trustee to pay money to the Trust, especially where the Trustee has no money to pay back to the Trust. The court has the power to deny some or all of a Trustee’s compensation for the work they did (or in many cases, didn’t do) in administering the Trust.
Impose an equitable lien or constructive trust on trust property (subject to Probate Code section 18100).
An equitable lien or constructive trust is a legalese way of saying that any Trust property that is wrongly in the possession of the Trustee will be transferred to the Trust beneficiaries. Thus, if the Trustee transferred a house into his individual name, then the court would order that the property be transferred by the Trustee to the rightful Trust beneficiaries.
The bottom line: the court has wide power to make things right. When a bad Trustee runs amok in a Trust administration, the court can take action to return as much value as is possible to the Trust estate.
