A trust is a relationship of three parties: (1) the Grantor, also known as the “Trust Maker,” who designs, implements, and funds the trust; (2) the Trustee, also known as the “Trust Manager,” who manages the assets of the trust for the benefit of the Beneficiary in accordance with the terms of the trust; and (3) the Beneficiary who benefits from the assets of the trust.
In a Revocable Living Trust where all three parties are the same person or the same married couple, there is no concern as to whether the Trustee is properly managing the assets for the benefit of the Beneficiary in accordance with the Grantor’s instructions. However, when the Trustee is different from the Grantor and the Beneficiary, it is of paramount importance that there is full disclosure as to how the Trustee is managing the assets to make sure that the Trustee is acting in accordance with the terms of the trust and that the Beneficiary’s rights to the trust’s assets are being enforced.
The California Probate Code imposes three key duties of disclosure on a Trustee who is managing a trust for a third-party Beneficiary: (1) the duty to account; (2) the duty to provide reports; and (3) the duty to keep beneficiaries informed.
(1) Duty to Account (California Probate Code § 16062)
The Trustee has an affirmative duty to account to the current Beneficiaries of a trust at least annually and upon the occurrence of specified events. The accounting under this Code Section must contain specific elements as outlined under California Probate Code § 16063. The Trustee is responsible for providing the Beneficiary with this specific accounting even if the Beneficiary does not request it. As such, the Trustee should either provide the accounting automatically or request that the Beneficiary sign a Waiver of Accounting.
The Trustee under this Code Section is not required to provide an accounting to “remainder” Beneficiaries, i.e., Beneficiaries who have a future interest in the trust’s assets after the “current” Beneficiaries pass away.
However, the other two duties of disclosure described below often apply to remainder Beneficiaries as well as current Beneficiaries and the Trustee might be required to provide essentially the same information to remainder Beneficiaries under those other duties.
Furthermore, if the current Beneficiary of a trust is incapacitated, it is often recommended that the trustee provide an accounting to the remainder Beneficiaries as well in order to guard against a later accusation of mismanagement of trust funds.
(2) Duty to Report (California Probate Code § 16061)
A Beneficiary may make a “reasonable request” for information “relating to the administration of the trust relevant to the beneficiary’s interest.” Under this Code Section, the Trustee’s duty of disclosure is not limited to current Beneficiaries and thus even future remainder Beneficiaries can require the disclosure of certain information. Exactly what kind of information the Beneficiary is entitled to under this Code Section is an open question. However, courts have indicated that in some circumstances, the information required to be disclosed under this Code Section could be identical to, or even broader than, the information required to be disclosed under the Duty to Account.
It is important to note that unlike the Duty to Account, the Duty to Report is not an affirmative duty and the Trustee is only required to Report upon a “reasonable request” by a Beneficiary.
(3) Duty to Keep Beneficiaries Reasonably Informed (California Probate Code § 16060)
The Trustee has an affirmative duty to keep Beneficiaries “reasonably informed of the trust and its administration.” Trustees must communicate “information that is reasonably necessary to enable the beneficiary to enforce the beneficiary’s rights under the trust or to prevent or redress a breach of trust.”
This Code Section applies to both current and remainder Beneficiaries. Once again, it is an open question as to exactly what information is required to be disclosed under this Code Section, but it is widely accepted that providing an accounting in accordance with the Duty to Account will satisfy this responsibility.
Conclusion
Trustees should be mindful of the fact that their actions in managing the assets of a trust might be held under a microscope. They should operate imagining that a judge is looking over their shoulders reviewing every investment, expense, and distribution. Every action should be addressed in a reasonable and fair manner and should be well documented.
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Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before taking action on any of the information presented in this article, you should consult a qualified attorney who is licensed to practice law in your community.