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By: Scott Grossman on July 11th, 2023

Trustee Duties: When a Trustee has a Conflict of Interest

Dealing with a trustee who has not been keeping up their obligations might make you feel frustrated and confused. You may feel they are keeping something from you or are acting suspiciously. It is only natural to feel this way, especially when dealing with your inheritance or trust. 

A trustee not keeping up with their duties could mean many things, from not having a beneficiary’s best interest in mind to the trustee profiting off a transaction. 

Here at The Grossman Law Firm, we specialize in removing trustees in California for over twenty years, dealing with suspicious trustees, protecting beneficiary’s rights, and educating our clients on the duties and obligations of a trustee. 

In this video and article, you will learn :

  • Why is it the trustee’s duty to avoid a conflict of interest?
  • How do you recognize a breach of a trustee’s duties?
  • What can you do when a Trustee has a conflict of interest?

Why is it the Trustee’s duty to avoid a conflict of interest?

California’s Trust Law has a rule that prohibits the trustee from creating a conflict of interest with the trust. There are three provisions of California’s Trust Law that are something a trustee must follow to adhere to their duties. 

The three provisions of California’s trust law

Overviewing the three provisions of the law stated below showcases the importance of having transparency with trustee duties.

  • Provision Law #1 
    • A trustee has a duty not to use or deal with trust property for the trustee’s profit
    • The trustee also can not use trust property for a purpose unconnected with the trust 
    • A trustee can not take part in any transaction in which they have an adverse interest in the trust beneficiary 
  • Provision Law #2
    • The trustee has a duty not to use the trust for their gain
    • The trustee cannot enforce a claim against trust property that the trustee purchased after they became the trustee 
  • Provision Law #3
    • If the trustee is involved in a transaction with the trust beneficiary and the trustee gains an advantage 
    • Or if there is a presumption a trustee violated their fiduciary duty to the beneficiary 

The three provisions of California’s Trust Law are a safeguard for both the beneficiary and the trust. A trustee has a duty not to use or deal with trust property for the trustee’s profit. Or any other purpose unconnected with the trust. Nor to take part in any transaction in poor interest to the beneficiary.

How do you recognize a breach of a trustee’s duties?

Anytime the trustee takes an action that appears to be for their benefit rather than the beneficiary’s benefit is a red flag. 

An example of this can be anything that does not have the trust property’s best interest. For example, a trustee who loans trust money to themselves. Particularly for no interest or below market rate, that trustee is using the trust’s property for personal gain. They are not keeping up with their duties since the trustee is acting in an adverse interest to the trust beneficiary.

Or for instance, a trustee is selling a vacation home, and the beneficiary is interested in buying said vacation home. In this transaction, the trustee has leverage over the beneficiary since the trustee has the power to tank investment or not distribute funds, making any transaction between the two suspicious. That can mean not giving out money to the beneficiary or knowingly making poor investments on the trust’s behalf. 

If the transaction is not for full or fair market value, then there is a chance that the trustee preyed on the situation. That is why the three provisions of California’s probate section 16440 are in place to protect the beneficiary.

If the trustee commits a breach of trust, they can be charged in any way appropriate to the mishandling:

  • Loss or depreciation of the trust estate resulting from the breach of trust, with interest
  • Profit made by the trustee through the breach of trust, with interest
  • Any profit that would have accumulated to the trust estate if the loss of profit is the result of the trustee’s conflict of interest

These can all be grounds for a breach of the trustee’s duties. 

If the trustee has acted in good faith, the court, in its control, may dismiss the trustee. In whole or in part from the penalty under subdivision (a) of California’s probate section 16440 if it would be appropriate.

What can you do when a Trustee has a conflict of interest? 

There are a few options you have moving forward when a trustee is in a conflict of interest. 

You can file a surcharge or “damages order.” As a beneficiary, you have the right to request the court to issue a “surcharge” or “damages order” against the trustee. And all that means is you want the court to order the trustee to pay the money they mishandled back into the trust.

Or you also have the option to seek out the suspension of the trustee’s power and the removal of the said trustee. This option is different from the first one because it stops the trustee’s control for a bit or completely removes them from controlling the trust. When it is evident your trustee does not have the best interest of you or the trust in mind, it is time to consider removing them as a trustee. 

To do this, you may want to hire an attorney. 

We recognize and empathize with our clients and the distress of dealing with an untrustworthy trustee, especially while dealing with the death of a loved one. 

Are you aware of a conflict of interest in your own trust situation?

If you would still like some more information, check out our complete Overview of California Probate Litigation, available on our website. And if you have more questions about your rights as a beneficiary and what you should know moving forward. Please review our article on the Beneficiary’s Rights in California for more information on your rights. 

If you are still having some trouble or have any more questions, or want to talk to someone about your case, please give us a call or fill out our Get Help Now form.