A trust is any arrangement in which property (the trust estate) is transferred by someone (the settlor) for the benefit of a third person (the beneficiary). A revocable living trust is usually created by the settlor for his or her own benefit during his or her lifetime. Upon death of the settlor, the trust becomes irrevocable, that is, its terms and conditions of administration and distribution cannot be changed. It also becomes a new taxpayer, separate from the settlor.
If you are acting as a trustee, read the duties in this newsletter and see if you are doing your job well. If you are a settlor of a trust, think about the person you chose as trustee. Is this person able to do the things required of such a fiduciary?
Basic duties as trustee involve the collection, management, and investment of trust assets and the accumulation and distribution of income and principal according to the terms of the trust agreement. Another important set of duties relates to tax matters; see the discussion below.
It is a fundamental rule of trust law that a trustee must be faithful to the interests of the trust and its beneficiaries. The trustee must also keep proper accounts and records of all the financial transactions of the trust.
BOOKS AND RECORDS
Fiduciary record keeping differs substantially from normal bookkeeping or even personal income tax record keeping. A fiduciary is responsible for every penny which passes through his or her fingers and must therefore account to the penny. Thus, the trustee is required to keep a precise record of every receipt and disbursement, every gain and loss, every distribution to a beneficiary, and every change in the nature of an asset of the trust. I recommend that all disbursements made on behalf of the trust be made by check, and the purpose of the payment. Such a record could be kept on a photocopy of each check or in a list of cash disbursements.
TAXPAYER ACCOUNT NUMBER
The trustee will need an employer identification number. I am available to all the trustees for my clients to assist them in obtaining such a number for the trust. The number becomes the trust’s tax identification number and should be used for all trust transactions. The trustee should NOT use the settlor’s personal social security number.
SPECIFIC DUTIES UNDER CALIFORNIA LAW
I list below a brief synopsis of the relevant statutes you need to understand regarding your specific duties as it relates to trust beneficiaries:
Probate Code Section 16000: Duty to administer the trust. This statute requires the trustee to administer a trust according to law and in accordance with the trust instrument. No matter how good the trustee’s intentions, the trustee is not free to administer the trust in some other manner.
Probate Code Section 16002: Duty of loyalty. This statute states that the trustee has a duty to administer the trust solely in the interest of the beneficiaries. The trustee cannot use the trust for his or her own benefit.
Probate Code Section 16003: Duty to deal impartially with beneficiaries. A trustee cannot favor one beneficiary over another. This is particularly critical when the trustee is also one of the beneficiaries. In such cases, it is a clear violation of the law for the trustee to favor himself or herself over another beneficiary. It is also a violation when the trustee “helps” one beneficiary more than another unless instructed by the trust instrument.
Probate Code Section 16004: Duty to avoid conflict of interest. This prohibits the trustee from entering into transactions with trust property which will result in a profit to the trustee, or in which the trustee’s interests adverse to the interests of the trust or its beneficiaries. For example, the trustee must avoid loaning personal funds to the trust because it would result in the trustee having a conflict between duty to the trust and duty to himself or herself.
Probate Code Section 16006: Duty to take control and preserve trust property. The trustee must take affirmative action to take and keep control of trust property and to preserve it.
Probate Code Section 16007: Duty to make trust property productive. This requires a trustee to make sure the property is wisely invested and is earning interest when possible. It may also mean that some assets should be sold and income producing assets purchased.
Probate Code Section 16009: Duty to keep trust property separate and identified. This statute prohibits the trustee from commingling personal property with trust property. Unless the trustee is making a distribution to himself or herself as a named beneficiary under the trust (assuming such a distribution is directed), the trustee must keep trust assets separate from the trustee’s personal assets.
Probate Code Section 16060-1606.1: Duty to report to beneficiaries. The trustee must keep the beneficiaries of the trust informed with respect to matters involving the trust. This is especially important when the beneficiaries are not close family members. In such a case, the trustee should be sure there is a free flow of essential information to each beneficiary so that the beneficiary’s interest in the trust assets are made known. It also provides an opportunity for checks and balances between the trustee in the performance of trust powers, and the rights of the beneficiary to receive information relating to his or her interest. The beneficiary may also wish to contest a provision of the trust and in fairness must have an opportunity to do so.
Probate Code Section 16062: Duty to account to beneficiaries. Accounts are detailed statements regarding the financial transactions of the trust. They are similar to bank account statements in which a bank reports a beginning balance, an ending balance, and all transactions that occurred during the reporting period. A trustee must keep careful records in order to comply with this requirement.
Probate Code Section 16080: Discretionary powers to be exercised reasonably. When a trustee is given discretion, the trustee must act reasonably and is not free to act in whatever way the trustee wants. This is true even if the document states that the trustee’s discretion is absolute.
Probate Code Section 16200: General powers of trustee. A trustee’s power to take actions pertaining to the trust is not unlimited, and may be restricted. The trustee should look to both the statute and the trust instrument to be certain that only authorized actions are taken when acting as trustee.