Table of Contents
Key Takeaways
- A trustee may not knowingly serve two trusts with conflicting interests.
- This issue commonly arises when trustees fail to properly fund A-B trusts after a spouse’s death.
- Once a conflict exists, the trustee must eliminate it or resign.
- Beneficiaries often must seek court intervention to recover misallocated assets.
- Delays often increase financial damage and make asset tracing more complex.
What Does “Adverse Trust” Mean Under California Law?
An adverse trust situation occurs when a trustee’s duties to one trust conflict with their responsibilities to another. In practical terms, this means the trustee cannot act in the best interests of both trusts simultaneously.
California law does not require fraud or bad intent. A conflict alone is enough.
When a trustee serves two trusts where one should assert claims against the other, the trustee creates an impossible situation—because one trust’s gain necessarily causes the other trust’s loss.
Trustee Duty Not to Undertake an Adverse Trust in California
California trust law draws a firm line on conflicts of interest. A trustee may not knowingly serve another trust if doing so places the trustee in opposition to the beneficiaries of the first trust. When a conflict arises, the trustee must either resolve it immediately or step down.
In practice, this means:
- A trustee cannot accept or continue a role that pits one trust against another.
- Once a conflict becomes apparent, inaction is not an option.
- Continuing to control both trusts exposes the trustee to personal liability for breaching fiduciary duties.
This rule exists for a reason. Beneficiaries typically lack access to records, control over assets, or insight into how trust decisions are being made. When a trustee quietly favors one trust over another, the financial harm often goes unnoticed until years later.
At The Grossman Law Firm, we help beneficiaries uncover these hidden conflicts, force accountability, and take legal action when trustees refuse to eliminate adverse interests. When a trustee chooses self-protection or convenience over their legal duties, California law gives beneficiaries powerful tools to step in and protect their inheritance.
Why This Commonly Arises in A-B Trusts
This issue most often arises after the first spouse dies and the trust splits into Trust A and Trust B.
- Trust B typically holds the deceased spouse’s share and becomes irrevocable.
- Trust A remains revocable and under the surviving spouse’s control.
Problems arise when:
- The trusts are never properly funded.
- Assets are commingled or transferred without documentation.
- The surviving spouse later creates a new trust that competes with Trust B.
At that point, the trustee may be administering two trusts with competing claims to the same property.
The Most Common Way This Goes Wrong
The single most common failure is failing to fund the subtrusts at all.
Instead of dividing assets as required:
- Property remains titled in the original trust.
- Assets are sold, refinanced, or transferred.
- Records are never corrected.
Over time, it becomes unclear which trust owns what, until beneficiaries start asking questions
Real-World Examples of Adverse Trust Conflicts
Example 1: Second Marriage, New Trust, Same Assets
A surviving spouse fails to fund Trust B after their spouse’s death. Years later, they create a new trust with a new spouse and transfer assets that should have belonged to Trust B.
Now the trustee is:
- Trustee of Trust B (owed to the first spouse’s children), and
- Trustee or co-trustee of a new trust holding the same assets.
At that point, Trust B’s trustee should be suing the new trust. Serving both roles is a direct conflict.
Example 2: First Marriage, Unequal Amendments
After the first spouse dies, the surviving spouse removes assets from the trust and later amends Trust A to favor one child. When that child becomes trustee of both Trust A and Trust B, the conflict is immediate.
Trust B may be missing:
- Real estate interests
- Sale proceeds
- Loan or mortgage funds
Failing to pursue recovery on behalf of Trust B breaches fiduciary duty.
Example 3: Mismanagement After Funding
Even when Trust B is initially funded, problems arise when assets are later moved:
- Direct transfers
- Below-market “sales”
- Sham transactions
These actions often require forensic tracing to unwind, and trustees who allowed or participated in them face potential personal liability.
Why Delay Makes These Cases Worse
The longer an adverse trust situation continues:
- Records disappear
- Assets are sold or refinanced
- Third parties become involved
By the time beneficiaries act, recovering assets often requires court-ordered accountings, tracing, and litigation.
At The Grossman Law Firm, we routinely step in when beneficiaries suspect something is wrong but lack access to information. Early legal action can preserve evidence and prevent further damage.
What Beneficiaries Can Do
If you believe a trustee is serving conflicting trusts:
- Request trust and financial records in writing
- Identify whether subtrusts were properly funded
- Look for transfers between trusts
- Consult a California trust litigation attorney before confronting the trustee
These cases are highly fact-specific and require careful legal strategy.
Related Resources
FAQ
Can a trustee manage two trusts at the same time?
Yes, but not if the trusts have competing interests.
Yes, but not if the trusts have competing interests.
Does the trustee need bad intent to breach this duty?
No. A conflict alone can constitute a breach.
No. A conflict alone can constitute a breach.
What if the trustee refuses to resign?
Beneficiaries may petition the court for removal and other remedies.
Beneficiaries may petition the court for removal and other remedies.
Can assets be recovered years later?
Sometimes, but the delay increases cost and complexity. It is best to act as soon as possible.
Sometimes, but the delay increases cost and complexity. It is best to act as soon as possible.
How The Grossman Law Firm Help
At The Grossman Law Firm, we help beneficiaries and heirs throughout California enforce their rights in probate and trust litigation. We regularly handle cases involving adverse trusts, improper funding, and trustee conflicts of interest.
Call (888) 443-6590 or fill out our Get Help Now form to take the next step.
Our Intake Specialists can evaluate your situation at no cost. Qualifying cases will be scheduled for a Free Phone Consultation with Attorney Scott Grossman.
Originally Published July 25, 2022