In California, trustees play a vital role in managing trust assets and ensuring that beneficiaries receive their designated benefits. However, serving as a trustee comes with significant responsibilities, including the proper management and spending of trust funds. Mismanagement or improper use of trust assets can lead to disputes, legal liability, and even removal from the trustee role.
This blog post will provide an overview of trustee spending guidelines in California, covering the fiduciary duties trustees must uphold, what constitutes appropriate trust expenditures, and how trustees can avoid common pitfalls.
The Fiduciary Duty of Trustees in California
California trustees are held to a high legal standard known as a fiduciary duty, which requires them to act in the best interest of the trust and its beneficiaries. This fiduciary duty encompasses several responsibilities, including:
1. Duty of Loyalty: Trustees must prioritize the interests of the trust and beneficiaries over their own. This means trustees cannot use trust assets for personal gain or engage in transactions that benefit them at the expense of the beneficiaries.
2. Duty of Prudence: Trustees are expected to manage trust assets with care and diligence. They must make informed decisions about investments, distributions, and expenses, always aiming to preserve and grow the trust’s value.
3. Duty to Follow the Trust Terms: Trustees must adhere to the specific terms of the trust document. If the trust specifies guidelines for how assets should be managed or distributed, the trustee must follow those instructions precisely.
Violating these fiduciary duties can lead to personal liability for the trustee, including lawsuits from beneficiaries or removal from the trustee position.
What Are Appropriate Trust Expenditures?
When managing trust assets, trustees are responsible for making sure that expenditures align with the trust’s terms and the beneficiaries’ best interests. The types of expenses a trustee may authorize typically fall into two categories:
1. Trust Administration Costs:
These are the expenses necessary to manage and maintain the trust itself. Some common trust administration costs include:
Trustee compensation: Trustees are entitled to reasonable compensation for their services. If the trust document does not specify how much the trustee should be paid, California law provides guidelines for reasonable trustee fees based on the size and complexity of the trust.
Legal and accounting fees: Trustees may need to hire attorneys, accountants, or financial advisors to assist with trust management. These professional services are considered appropriate trust expenses.
Investment management fees: If the trust assets include investment portfolios, the trustee may need to pay fees to professional investment managers.
Taxes: Trustees are responsible for filing tax returns on behalf of the trust and paying any taxes owed from the trust’s assets.
2. Beneficiary-Related Expenses:
Trusts are typically set up to provide financial support to beneficiaries, and trustees are responsible for making distributions in line with the trust’s terms. Common beneficiary-related expenses include:
Living expenses: Some trusts are designed to cover the daily living costs of beneficiaries, including housing, food, healthcare, and education.
Medical care: Trusts may specify that trustees use funds to pay for the medical needs of beneficiaries, particularly in special needs trusts.
Educational expenses: Trusts that aim to support the educational goals of beneficiaries may allow trustees to cover tuition, books, and other educational costs.
The key to appropriate spending is ensuring that each expenditure is consistent with the trust’s instructions and serves the best interest of the beneficiaries.
The Duty of Impartiality
When making decisions about trust expenditures, trustees must adhere to the duty of impartiality. This means that trustees cannot favor one beneficiary over another unless the trust document explicitly provides for unequal treatment. For example, if a trust is intended to benefit multiple beneficiaries, the trustee must make distributions in a way that fairly considers the needs of each beneficiary.
Trustees should also avoid spending trust funds on personal expenses or making loans or gifts to beneficiaries unless such actions are clearly authorized by the trust.
Best Practices for Trustees to Ensure Compliance
To avoid disputes and ensure that trust expenditures are appropriate, trustees should follow these best practices:
1. Keep Detailed Records: Trustees must keep meticulous records of all trust expenditures. This includes retaining receipts, invoices, and contracts related to any payments made from the trust. Keeping clear financial records will not only help the trustee manage the trust more effectively but will also protect the trustee if a dispute arises over the use of trust funds.
2. Follow the Trust’s Terms: The trust document is the primary guide for the trustee’s decisions. Before authorizing any expenditure, the trustee should review the trust’s provisions to ensure that the expense aligns with the settlor’s (trust creator’s) instructions. If the trust document is unclear, trustees should seek legal advice rather than making assumptions.
3. Consult with Professionals: Trust administration can involve complex legal, financial, and tax issues. Trustees should not hesitate to consult with attorneys, accountants, or financial advisors when needed. Trusts can pay for the cost of these professional services, provided they are necessary for managing the trust.
4. Communicate with Beneficiaries: Clear and transparent communication with beneficiaries is crucial to maintaining trust and preventing disputes. Trustees should keep beneficiaries informed about the status of the trust, including major expenditures, distributions, and the overall financial health of the trust.
5. Stay Informed About California Law: Trust law is complex, and trustees must stay informed about their legal obligations. California Probate Code outlines the duties and responsibilities of trustees, and it is essential to comply with these requirements. If there are questions about how to interpret the law, trustees should seek legal counsel to avoid mistakes.
Common Pitfalls Trustees Should Avoid
Trustees in California must be vigilant in avoiding the following common pitfalls:
1. Commingling Assets: Trustees should never mix trust assets with their personal funds. This is a serious breach of fiduciary duty and can lead to legal liability. Trust funds should be kept in separate accounts clearly identified as belonging to the trust.
2. Conflicts of Interest: Trustees must avoid any conflicts of interest that could undermine their ability to act in the best interest of the beneficiaries. This includes engaging in self-dealing or using trust assets for personal gain.
3. Improper Distributions: Distributing funds to beneficiaries in a way that contradicts the trust’s terms can lead to disputes and legal challenges. Trustees should always refer back to the trust document before making distributions.
4. Failure to Properly Account: Trustees are required to provide regular accountings to the beneficiaries, detailing the trust’s income, expenses, and distributions. Failing to provide accurate and timely accounting can lead to mistrust and legal consequences.
Conclusion
Serving as a trustee in California is a significant responsibility, and managing trust spending is one of the most critical aspects of that role. By adhering to fiduciary duties, following the trust’s terms, keeping clear records, and seeking professional guidance when necessary, trustees can ensure that trust assets are used appropriately and in the best interest of the beneficiaries.
If you are a trustee or are considering serving as one, it is advisable to consult with an experienced California estate planning attorney who can help guide you through the legal obligations and best practices for managing trust expenditures.
This blog post offers a guide to trustee spending in California, emphasizing the importance of adhering to fiduciary duties and following trust terms to avoid conflicts or legal liabilities. It also provides practical tips for trustees to manage trust funds responsibly.
Contact Us for Legal Help
If you have questions about estate planning and estate taxes, a California probate, your responsibilities as a Trustee, or how to properly administer a California trust, contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney – today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.
Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.
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