When Good Trustees Make Mistakes, Courts Can Excuse Liability

Typically a trustee is liable to the beneficiaries when he or she commits a breach of trust harming the trust or its beneficiaries.  California Probate Code §16440(a) provides that a trustee is chargeable for a breach of trust that results in a loss in value of the trust estate, a profit made by the trustee, or a loss of profit to the trust.  The law expects that trustees comply with various duties when administering a trust, and imposes liability on the trustee if the trustee commits a breach.

So what about a well-meaning, honest trustee who commits a breach of trust despite trying to do his best in good faith?  The legislature and case law have provided a path to redemption for good trustees that make honest, good faith mistakes.  Probate Code §16440(b) gives the probate court discretion to excuse a trustee from liability for a breach of trust if the trustee acted reasonably and in good faith under the circumstances as known to the trustee, and also if the court determines that it would be “equitable” to excuse the trustee.

To excuse liability under this section, a court must first make a threshold determination of whether the trustee acted reasonably and in good faith under the circumstances known to the trustee. The court in Leach v. Kleveland (Mar. 24, 2010, D054532) [nonpub. opn., 2010 WL 12076221], an unpublished opinion from the California Court of Appeal, Fourth Appellate District, applied that test

In Leach a beneficiary sued the trustee for breach of trust because the trustee used trust assets for his own benefit, buying a new car and a condominium for himself.  The facts ultimately showed that the trustee (Kendell, who was also a one-half beneficiary) and his sister (Janis, the other one-half beneficiary) made an agreement that Janis would receive distribution of their parents’ home (which was more than one-half of the value of the trust).   In exchange for this distribution, Janis would make an equalizing payment back to Kendell to make the distribution equal.  In reliance of this agreement, Janis moved into the home, but the distribution of the house to Janis, and the equalizing payment to Kendell, were not made before Janis died.  Meanwhile, Kendell, who honestly believed that the remaining portion of the trust (other than the house) was going to be his, purchased the new car and a condominium for himself with trust assets.

After Janis died, the executor of her estate sued Kendell, as trustee, for breach of trust, and asked the court to order the trustee to distribute the house to the estate without the equalizing payment.  The trial court excused Kendell’s breach because (1) he was not a professional and made an innocent mistake, (2) the distributions to himself were done at a time when he believed the house was going to be distributed to Janis, and (3) the value of the distributions to himself were less than the value of the house.  The court also found that it would not be equitable to allow the executor of Janis’ estate to leverage Kendell’s innocent mistake into an unequal distribution of the assets.

The key to a trustee receiving equitable relief in a case like this is that a trustee must act reasonably and in good faith, and there must be an underlying tone of fairness in his or her actions.  An “innocent mistake” based only on ignorance of the law or carelessness probably does not qualify for relief under this doctrine, but if a trustee can show reasonableness and good faith based on the circumstances, a court may exercise discretion and let him or her off the hook.

Good faith must be shown by demonstrating that the trustee acted with an honest belief and the absence of malice or intent to defraud.  One of the best ways for a trustee to demonstrate that he or she has acted in good faith is to show disclosure of actions to the beneficiaries throughout the process.  It can be difficult to argue that a trustee acted in bad faith when he or she was completely transparent to the beneficiaries throughout the process of trust administration.

Predictably, there are not many reported cases on the concept of “equitable excuse” for a breaching trustee, who acted reasonably and in good faith, because probate courts have discretion in awarding this equitable relief.  Trial courts award this type of relief based on specific facts of a case before them, and based on whether the court believes that the trustee’s actions were fair, reasonable and in good faith.  The lesson for trustees is that relief may be available for the honest, well-meaning, but mistaken trustee, but only if the court is convinced that the “honest mistake” was justified under all of the circumstances.

Mark Flory

Mark Flory is Special Counsel with Brown White & Osborn LLP. His practice focuses in the areas of probate and trust administration and litigation, estate planning, conservatorships, and protecting elders and individuals with disabilities.
Mark Flory