Breach of Fiduciary Duty*
Fiduciaries – such as trustees, personal representatives, executors, administrators, guardians, conservators, and attorneys-in-fact acting under a power of attorney – owe their respective beneficiaries and charges a “fiduciary duty,” which is the highest duty imposed by the civil law. Persons subject to a fiduciary duty must act for the sole benefit of their beneficiaries, regardless of the fiduciary’s personal interests. The fact that fiduciaries may also be beneficiaries (as is often the case where a family member is both a fiduciary and one of the beneficiaries) does not change their duties to act on behalf of all the beneficiaries equitably and certainly does not permit them to favor themselves.
California’s Probate Code defines some of the general and specific duties that a particular kind of fiduciary might have, and these specific duties may be supplemented by case law and by the operative documents in a particular case. The statutes also provide for specific remedies against specific fiduciaries, which remedies are in addition to those otherwise provided by case law.
For example, under the Probate Code, “The personal representative has the management and control of the estate.” The Probate Code, and case law, go on to require a personal representative to perform specific duties in connection with such management. As for remedies, and in addition to those provided by case law, the Probate Code provides that personal representatives who breach their fiduciary duty may be held liable for any loss or decrease in value of the estate resulting from the breach, any profit made by the personal representative as a result of the breach, and any profit the estate would have received if the breach caused a loss of profit.
As another example, the Probate Code provides that “the trustee has a duty to administer the trust according to the trust instrument” and applicable law. In carrying out his or her responsibilities, “The trustee has a duty to administer the trust solely in the interest of the beneficiaries.” When there are multiple beneficiaries, “the trustee has a duty to deal impartially with them.” A trustee’s duties also include the statutory obligation to “keep the beneficiaries of the trust reasonably informed of the trust and its administration.” The Probate Code and case law set forth a number of specific obligations that trustees have when carrying out these general duties. Family members who agree to act as trustee and to do so without being paid should be aware that the Probate Code states, “A trustee’s standard of care and performance in administering the trust is not affected by whether or not the trustee receives any compensation.”
Where a trustee has breached, or threatens to breach, a duty, and in addition to all other remedies the law may provide, the Probate Code authorizes any beneficiary as well as any co-trustee to file a court proceeding in which, among other things, orders may be sought to force the trustee to perform the trustee’s duties or to prohibit the trustee from committing a breach of trust, to remedy the breach by “payment of money or otherwise,” to remove the trustee or appoint a temporary replacement, and to limit or deny the trustee’s compensation.
One of the important obligations fiduciaries have is to account to their beneficiaries or charges. For example, once a trust becomes irrevocable, and subject to certain exceptions, the trustee usually is to account to any beneficiary “to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed”: (1) At least annually; (2) at the termination of the trust; (3) upon a change of trustee; and (4) as may otherwise be ordered by a court. As for personal representatives, and subject to some exceptions. they usually must account at least once a year (beginning one year after their letters of appointment issue), as otherwise ordered by a court, and upon the conclusion of their estate administration.
Accountings often are at the heart of trust litigation and estate litigation. A full accounting allows the court, beneficiaries, and interested parties to review the actions of the fiduciary that otherwise may have proceeded without supervision, and the absence of an accounting or the attempt to make an incomplete or suspicious accounting may help those parties know where to focus their attention on the fiduciary’s management. Fiduciaries who have properly performed their duties also may want to make an accounting and, perhaps, seek court approval of it to minimize later claims questioning their performance.
Whether the fiduciary is a family member or a professional, performance of the applicable fiduciary duty may be complex and fraught with peril for breaches. As a trusts and estates litigator, Jim has represented both fiduciaries and those challenging a fiduciary’s performance. His experience includes litigating accounting issues as well as a variety of other claims of a breach of fiduciary duty, and he has been involved in cases with requested remedies seeking a change of fiduciary, restitution from the fiduciary, and orders for the fiduciary to act or not act in a particular way. If you are a fiduciary, a beneficiary, or an interested party with questions about someone else’s performance of fiduciary duties, please contact Jim by phone or e-mail to set up a no-charge conference.
*The law in this area frequently evolves. This discussion is meant only to set out current general principles, which are subject to exceptions as well as to change by statute and by case law. You should not rely on this discussion in addressing your legal obligations and rights or your legal questions but should instead consult an attorney.