What is a fiduciary?
In a nutshell, a fiduciary is a person or business standing in a position of trust in relation to someone else. Among others, any of the following persons may be a fiduciary depending on the circumstances:
- Accountants — for their clients
- Agents or attorneys-in-fact (under an operative power of attorney, or otherwise) — for their principals
- Attorneys — for their clients, or possibly for third party (intended) beneficiaries
- Conservators — for conservatees
- Executors — for estate beneficiaries
- Family members — for each other, where a relationship of trust and confidence exists
- Financial advisors — for their clients
- Real estate brokers and agents — for their clients
- Stock brokers — for their clients
- Trustees — for trust beneficiaries
Anyone can fall victim to the misconduct of an unscrupulous fiduciary. We frequently are retained to pursue claims against fiduciaries for having abused their positions of trust and confidence in order to further their own agendas or self-interests. Likewise, we often defend fiduciaries who are wrongfully accused of such claims.
What duties does a trustee actually owe?
Most disputes come down to three duties, each set out in the Probate Code:
- Loyalty. Section 16002 requires a trustee to administer the trust solely in the interest of the beneficiaries. Where one person serves as trustee of two trusts, transactions between them are permitted only if fair and reasonable to the beneficiaries of both, and only on notice of all material facts to both.
- Impartiality. Section 16003 requires a trustee with two or more beneficiaries to deal impartially among them, accounting for their differing interests. This is frequently the operative duty where the trustee is also a beneficiary, or is aligned with one branch of a family against another.
- No self-dealing. Section 16004 bars a trustee from using trust property for their own profit or taking part in any transaction in which their interest is adverse to a beneficiary.
Who has to prove what?
On an accounting, the burden does not fall where most beneficiaries might assume. Once a trustee’s account is put in issue, it is the trustee who must justify it. The California Supreme Court held more than a century ago that it is error to assume “the burden is upon the beneficiary to disprove the correctness of items in the account, whereas, in fact, the burden is upon the trustees to prove that charges made by them are proper.” A trustee claiming extraordinary compensation must likewise show in detail the nature and extent of the services rendered, rather than simply asserting that they were reasonable.
That principle is a practical one. The fiduciary prepared the account, holds the records, and owes an affirmative statutory duty to account in the first place. Where records are inadequate, the resulting uncertainty is the fiduciary’s problem rather than the beneficiary’s.
Cost exposure also runs in both directions. Under Probate Code section 17211, a beneficiary who contests an account without reasonable cause and in bad faith can be charged the trustee’s litigation costs out of their share — but a trustee whose opposition to a contest is itself without reasonable cause and in bad faith can be charged those costs personally, rather than paying them from the trust.
Trustee removal and surcharge (and the risk of getting it wrong!)
We regularly pursue removal and surcharge actions against trustees and other fiduciaries who have mismanaged — or, in the most grievous cases, stolen — trust, estate or elder assets. Where property has been taken in bad faith, through undue influence in bad faith, or through the commission of financial elder abuse, Probate Code section 859 can impose liability for twice its value, together with attorney’s fees and costs in the court’s discretion.
But a trustee removal petition also can carry risks:
- A beneficiary who petitions in bad faith can be liable personally, well beyond their share. Probate Code section 15642(d) gives the probate court express statutory authority to charge the costs of the proceeding, including reasonable attorney’s fees, against a person who sought removal in bad faith. In one published case a beneficiary due to receive $200,000 was ordered to pay more than $900,000 in fees and costs.
- The court’s general equitable power is narrower. Outside that statute, a court’s equitable authority to shift a trustee’s fees onto a bad-faith litigant reaches only that person’s interest in the trust — not their personal assets. Which authority is invoked can determine whether a client’s home is at risk, and it is among the first things to establish.
The mirror image matters just as much when we defend. A trust instrument that directs the trustee to defend a contest at the trust’s expense will generally be enforced, without the court first having to decide whether the challenge had merit. But a trustee who abandons neutrality and litigates for their own benefit, or for one faction of beneficiaries against another, can be denied fees from the trust altogether — and a contestant who can show a sufficient likelihood of success may ask the court to enjoin further use of trust assets for the defense.
Powers of attorney
An agent acting under a power of attorney is a fiduciary, and the Probate Code sets the agent’s duties out expressly at sections 4230 through 4238. The ones that matter most in practice:
- Loyalty. Section 4232 requires an attorney-in-fact to act solely in the interest of the principal and to avoid conflicts of interest — the direct analogue of a trustee’s duty of loyalty.
- Standard of care. Section 4231 requires the care a prudent person would observe in dealing with the property of another, and a higher standard where the agent holds or was chosen for special skills or expertise.
- Keeping the property separate. Section 4233 requires the principal’s property to be kept separate and distinct, in a manner adequate to identify it clearly as the principal’s. Commingling is frequently the clearest documentary evidence in these cases.
- Records and accounting. Section 4236 requires records of every transaction, and an account on request by the principal, by a conservator of the principal’s estate, or — after death — by the personal representative or successor in interest. Note subdivision (d): this duty cannot be limited by the power of attorney itself.
- Contact and instructions. Section 4234 requires the agent to keep in regular contact with the principal, to communicate, and to follow the principal’s instructions, so far as reasonably practicable.
Where those duties are breached, Probate Code section 4231.5 makes an attorney-in-fact chargeable with losses to the principal’s property, with profits made through the breach, and with profits the principal would otherwise have realized. In cases of bad faith, undue influence, or financial elder abuse, the same double damages and fee provisions that apply to trustees apply here. (Note that serving without pay no longer is a shield: Until 2011, an uncompensated agent was not liable for loss to the principal’s property unless the loss resulted from bad faith, intentional wrongdoing or gross negligence; that protection was repealed, and an unpaid agent — typically an adult child — is now held to the same prudent person standard as a paid professional.)
Talk with us about your situationWe act for beneficiaries pursuing fiduciaries who have abused a position of trust, and for trustees, conservators and agents defending against claims that are unfounded. We are also retained as associate or litigation counsel by other attorneys in this highly specialized area. Contact us or call 888-404-0111 for a confidential discussion.
The law behind this practiceWe do our best to maintain the governing authority on our site, current and annotated: the fiduciary duty statutes and the remedies that attach to a breach, together with the California appellate decisions that define them — including Bruno v. Hopkins and Pizarro v. Reynoso on personal fee exposure, Williamson v. Brooks on the measure of damages, and Terry v. Conlan and Doolittle v. Exchange Bank on who pays for a trustee’s defense. On the burden of proof for an account, see Purdy v. Johnson (1917) 174 Cal. 521, 527 and Probate Code section 17211.