California Legal Implications: Trustee Accountability and Attorney Fees
A significant ruling by the California Court of Appeal has reinforced the strict financial liabilities trustees face when they mismanage trust assets. As detailed in the appellate decision regarding *People ex rel. Becerra v. Shine*, a trustee found guilty of gross negligence and breach of fiduciary duty may be personally liable for the Attorney General’s legal fees, without the court applying a strict “effectiveness test” regarding how many specific allegations were proven. This decision highlights the critical importance of proper trust administration and the severe consequences of failing to uphold fiduciary duties..
The High Standard of Fiduciary Duty
In California, a trustee is a fiduciary, meaning they are held to the highest standard of care under the law. When an individual accepts the role of trustee, they agree to manage the trust’s assets solely in the best interest of the beneficiaries and in strict accordance with the trust document., meaning they are held to the highest standard of care under the law. When an individual accepts the role of trustee, they agree to manage the trust’s assets solely in the best interest of the beneficiaries and in strict accordance with the trust document.
In the *Shine* case, the trustee was found to have committed multiple breaches, including:
– Failing to create and fund a charitable foundation as required by the trust.
– allowing improper tax returns to be filed.
– Allowing a corporation wholly owned by the trust to lose its Subchapter S status.
– Using trust funds to issue loans to personal friends.
These actions constitute a violation of the Duty of Loyalty and the duty to administer the trust with reasonable care and skill. For anyone serving as a trustee in California, this serves as a stark warning: personal relationships and lack of administrative diligence can lead to removal and personal financial liability. and the duty to administer the trust with reasonable care and skill. For anyone serving as a trustee in California, this serves as a stark warning: personal relationships and lack of administrative diligence can lead to removal and personal financial liability.
Financial Consequences of Breach of Trust
When a trustee breaches their duties, the court has the power to “surcharge” them. A surcharge is a court order requiring the trustee to personally repay the trust for losses caused by their mismanagement or misconduct. In the *Shine* case, the trustee was surcharged over one million dollars. is a court order requiring the trustee to personally repay the trust for losses caused by their mismanagement or misconduct. In the *Shine* case, the trustee was surcharged over one million dollars.
However, the financial pain did not end there. The court also ordered the trustee to pay over $1.6 million in attorney fees and costs incurred by the Attorney General. The trustee attempted to argue that because the Attorney General did not win on every single allegation (prevailing on 7 out of 19), the fee award should be reduced. The Court of Appeal rejected this, affirming that an “effectiveness test” is not required. Because the trustee’s conduct was grossly negligent and necessitated his removal, he was liable for the full scope of reasonable legal fees.
Oversight of Charitable Trusts
While private trusts are accountable to specific beneficiaries, Charitable Trusts are a unique area of estate planning. Because the ultimate beneficiaries are the public or a charitable cause, the California Attorney General acts as the overseer to ensure the funds are used correctly. are a unique area of estate planning. Because the ultimate beneficiaries are the public or a charitable cause, the California Attorney General acts as the overseer to ensure the funds are used correctly.
Families establishing charitable foundations or trusts must ensure they appoint competent trustees who understand the complexities of tax filings, corporate status maintenance, and the absolute prohibition against self-dealing or favoring friends.
Importance of Professional Guidance
To avoid the severe penalties seen in this case, trustees should seek professional legal counsel immediately upon assuming office. An experienced estate planning attorney can guide trustees through:
– Proper asset management and record-keeping.
– Understanding the specific terms of the trust.
– Compliance with California Probate Code.
– Defense against allegations of misconduct. can guide trustees through:
– Proper asset management and record-keeping.
– Understanding the specific terms of the trust.
– Compliance with California Probate Code.
– Defense against allegations of misconduct.
About This Case
Source: People ex rel. Becerra v. Shine
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Legal Disclaimer
This article is for informational purposes only. Consult with a qualified California estate planning attorney for advice specific to your situation.