Can a California Successor Trustee Be Personally Liable?

Your mom has died, and you're the successor trustee of her living trust. Your brother and sister are the other beneficiaries. The trust owns the family home, a couple of investment accounts, and some cash. Your job is to deal with the assets, pay the bills, and distribute what's left.

But what if you make a mistake? What if you sell the house for less than your brother thinks it's worth? Or you distribute the money and then discover a tax bill you didn't know about?

Can your brother and sister come after you personally?

Perhaps, but not likely if you acted reasonably. A California successor trustee can be personally liable for a breach of trust. But the question is whether you handled the job the way a careful, reasonable trustee would have under the circumstances, not whether everything turned out well or your brother is happy with the result. No one expects you to be a CPA or an estate planning attorney, but there is a standard you must meet.

When Can a Trustee Be Held Personally Liable?

When you take over as trustee, you have duties to all the beneficiaries, including yourself if you're one of them. We explain those duties in What Is Fiduciary Duty in California?. You have to follow the trust, put the beneficiaries' interests ahead of your own, treat them fairly, protect the assets, and keep them informed.

Under California Probate Code section 16400, violating a duty owed to a beneficiary is a breach of trust. Section 16040 tells us how carefully the trustee is expected to act: with the care, skill, and caution a prudent person would use in the same circumstances.

That doesn't mean you must always make the right decision. Suppose you sell Mom's house after consulting a realtor, reviewing comparable sales, and getting a reasonable offer. If home prices jump six months later, your brother can't automatically make you pay the difference. The decision will be judged by what was reasonable when you made it, not by what happened afterward.

Also, keep in mind there is no less scrutiny if you don't take a trustee fee. Under Probate Code section 16041, an unpaid trustee is held to the same standard of care as a trustee receiving compensation. (BTW - we encourage our trustee clients to take a fee if the trust allows it because the job is a lot of work).

What Could You Actually Have to Pay?

Under Probate Code section 16440, a trustee who breaches the trust may have to reimburse a loss caused by the breach, return any profit the trustee made from it, or account for any profit the trust lost because of the breach. Lawyers call this a surcharge.

And yes, it can come out of your own pocket. A trustee who improperly takes $50,000 from the trust, intending to replace it when the house sells, may have to return that money with interest.

A beneficiary may file a petition in the probate court to ask the court to stop a threatened breach or order the trustee to do something the trust requires. Probate Code section 16420 provides those remedies, including the removal of the trustee.

There's also a statute of limitations. Under section 16460, a beneficiary generally has three years to bring a breach-of-trust claim after receiving an account or report that adequately discloses it. If the problem wasn't adequately disclosed, the three years generally runs from when the beneficiary discovered, or reasonably should have discovered, it. That's one reason a complete trust accounting helps protect the trustee as well as inform the beneficiaries.

What Gets a Trustee Into Trouble?

In most of our trust administrations, the successor trustee is an adult child of the person who died and is also one of the beneficiaries. Most are trying to do a good job, and most haven't done this before. The problems tend to come from a handful of familiar situations.

Distributing Money Too Soon

The house has sold. The investment accounts have been liquidated. There's $800,000 in the trust checking account, and your brother and sister want their money. So you distribute everything.

Three months later, the accountant tells you the trust owes $40,000 in income taxes, and there's no money left to pay it. Now what?

You may be able to get money back from the beneficiaries. But if you made distributions without leaving a reasonable reserve and the trust suffers a loss, you may end up paying some of that loss yourself. That's why we discuss reserves in Can a Trustee Make Partial Distributions?.

The goal isn't to hold the money as long as possible. It's to distribute when the time is right and keep enough in the trust to finish the job.

Failing to Protect the Property

Mom's house sits vacant for eight months while you get around to selling it. Nobody checks whether the homeowner's policy covers a vacant house. And what if it doesn't, and pipe bursts and causes $60,000 in damage.

That could create a problem for the trustee. A reasonable trustee would have checked the insurance and made arrangements for someone to look after the house.

Now suppose you did those things, and the pipe burst anyway. You're not liable merely because the house was damaged. Our article on locating, protecting, and valuing trust assets covers this.

Mixing Trust Money With Your Own

You deposit a trust refund check into your personal account because it's easier. You plan to move it to the trust account later.

Don't do that. Probate Code section 16009 requires trust property to be kept separate and identified as trust property. Even if you didn't spend a dollar, you've made the accounting harder and invited questions about where the money went.

Open a trust account, run trust transactions through it, and keep the records. Our guide to opening a trust bank account after death explains how.

Favoring Yourself

You're one of three equal beneficiaries, and you want Mom's car. You decide it's worth $5,000 and take it at that value. A dealer would have paid $14,000.

You don't get to set a bargain price for yourself just because you're the trustee. You have an obligation to deal fairly with your brother and sister. Get an independent value and be open about the proposed distribution before you make it.

Being the trustee doesn't prevent you from receiving your inheritance. But it does mean you have to avoid a conflict of interest.

Letting the Administration Stall

Sometimes a trustee gets overwhelmed and stops doing the work. The statements keep arriving, but the trustee clams up with no communication to the beneficiaries

Delay by itself doesn't create liability. But if your inaction causes a loss, such as an avoidable tax penalty or a house that deteriorates while nobody looks after it, or, as can happen in California, a squatter takes up residence, you may have a problem. 

We covered the beneficiary's options in Can a Beneficiary Force a Trustee to Make a Distribution?.

Investment Losses

Trustees often worry they'll be blamed if the stock market goes down. They won't be liable just because an investment account lost value. The question is whether they handled the investments prudently, given the trust's purpose and the need to distribute the assets.

In most of our trust administrations, we recommend the trustee liquidate the decedent's brokerage accounts as soon as the trustee has access to the accounts, provided there's no good reason to keep the investments.

Sometimes, especially when the beneficiaries, usually the children, already have a good relationship with their deceased parent's financial advisor, they agree to keep the investments intact instead of liquidating, and divide the account.

But the trustee's job is to preserve the value of the assets until they can be distributed, not to speculate in the stock market and make the beneficiaries richer.

What About Financial Elder Abuse?

A breach of trust and financial elder abuse aren't the same thing. 

Suppose your sister was managing Mom's finances under a power of attorney while Mom had dementia. After Mom dies, you discover $120,000 in checks your sister wrote to herself, labeled "gifts" and "caregiving." Depending on the facts, the conduct could support a financial elder abuse claim as well as a claim for breach of duty.

California Welfare and Institutions Code section 15610.30 deals with taking or keeping an elder's property for a wrongful use, by fraud, or through undue influence. That's different from an ordinary mistake made while administering a trust after the parent's death. Distributing money too soon or failing to maintain a house doesn't become elder abuse just because the trustee was careless.

Are You Personally Responsible for the Trust's Debts?

Not simply because you're the trustee. Mom's legitimate debts and the costs of administering the trust should be paid from trust assets, not from your personal checking account.

Under Probate Code section 18000, a trustee generally isn't personally liable on a contract properly entered into as trustee, as long as the contract makes the trustee's representative capacity clear and identifies the trust. So if you hire a contractor to repair Mom's house, sign in your capacity as trustee and identify the trust. And pay attention to any contract provision that would make you personally responsible.

Sections 18001 and 18002 deal with obligations arising from trust property and with civil wrongs committed during administration. In those situations, a trustee is personally liable only if personally at fault.

How Do You Protect Yourself?

Most of the protection comes from doing ordinary things according to the terms of the trust and the probate code.

Read the trust before you act. If you're new to the job, start with What Is a Successor Trustee in California?. Secure the assets, keep trust money separate, maintain an appropriate reserve, and keep a record of important decisions and why you made them. Tell the beneficiaries what's happening instead of leaving them to guess.

And get help when you need it. Hiring an attorney, CPA, or financial advisor doesn't transfer your duties to that person, but getting competent help is crucial. 

What About Beneficiary Approvals and Releases?

Near the end of the administration, we generally send the beneficiaries a trust accounting and an agreement addressing approval of the accounting and the proposed final distributions. This provides the transparency and disclosure the beneficiaries need while assuring the trustee that everyone is in agreement.

You Don't Have to Do This Perfectly

Most successor trustees aren't professional fiduciaries. They're sons, daughters, spouses, and friends who agreed to help when the time came.

Probate Code section 16440 gives a court discretion to excuse a trustee from all or part of a surcharge when the trustee acted reasonably and in good faith and excusing the trustee would be fair.

A California case illustrates the point. In Orange Catholic Foundation v. Arvizu (2018) 28 Cal.App.5th 283, a niece serving as successor trustee allowed an elderly family friend to remain in a trust-owned house even though he wasn't paying expenses the trust required him to pay. She also delayed selling the house after he died, partly because of her own health problems. The charitable remainder beneficiary sued her.

The court excused her from liability, and the Court of Appeal affirmed. She hadn't used the trust to benefit herself. She had acted in good faith under difficult circumstances, and the house had actually appreciated in value during the delay. The rruling doesn't mean trustees can ignore the terms of the trust, but it means the courts can consider the facts and circumstances of the situation.

Don't confuse being responsible with being on the hook for everything that goes wrong. But don't confuse being Mom's chosen trustee with having a free hand, either.

You're handling property that belongs to the trust for the benefit of other people. Understand the job, keep good records, make sensible decisions, communicate with the beneficiaries and keep the administration moving toward the finish line.

Questions About Serving as Successor Trustee?

If you've been named successor trustee and want help handling the administration, Contact us for a free, 15-minute initial call with one of our attorneys.