Breach of Trust, Remedies, and Will Substitutes (Totten, POD, Revocable Trusts)

Breach of Trust, Remedies, and Will Substitutes (Totten, POD, Revocable Trusts)

A breach of trust is any act or omission by the trustee that violates a duty the trustee owes to the beneficiaries — whether a violation of loyalty, prudence, impartiality, the duty to account, the duty to earmark, the duty to make property productive, or any other fiduciary obligation. When a breach occurs or is threatened, equity offers a broad and flexible array of remedies, and the beneficiary may pursue whichever combination best protects the trust. A beneficiary may sue to compel the trustee to perform the trustee's duties, to enjoin the trustee from committing a threatened breach, or to compel the trustee to redress a completed breach.

The signature monetary remedy is the surcharge: the trustee is held personally liable to restore to the trust the loss in value resulting from the breach, together with any lost income or interest the trust would have earned but for the breach. Where the trustee profited from the breach, the beneficiary may instead require the trustee to disgorge that profit, so the trustee never keeps a gain made through misconduct. The measure of recovery is generally the greater of the loss caused or the profit realized, and — as noted in the loyalty discussion — gains on one breaching transaction cannot be netted against losses on a separate one.

Equity also offers proprietary remedies: where the trustee has wrongfully disposed of trust property or used it to acquire other property, the beneficiary may impose a constructive trust on the property in the trustee's hands or trace the trust's value into substitute assets, recovering the property itself or its product rather than a mere money judgment, which matters greatly if the trustee is insolvent. Finally, the court may remove the trustee for cause and may reduce or wholly deny the trustee's compensation as a sanction for the breach.

A trustee is personally liable for breaches, but several rules refine that liability. A trustee is not an insurer and is not liable for a decline in trust value that occurs without any breach of duty — liability attaches to fault, not to market misfortune, so a prudent investor who suffers losses in a downturn is not surcharged. A trustee who reasonably relies on the terms of the trust, or who acts under court instruction obtained after full disclosure, is protected. Settlors sometimes insert exculpatory clauses purporting to relieve the trustee of liability; California enforces such clauses only to a point.

Under Probate Code §16461, the trust instrument may relieve the trustee of liability for breach, but a provision is invalid to the extent it purports to relieve the trustee of liability for a breach committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the beneficiaries' interests, and an exculpatory clause inserted through the trustee's abuse of a confidential relationship with the settlor is unenforceable. A trustee who participates with a co-trustee in a breach, or who fails to use reasonable care to prevent a co-trustee's breach or to compel the co-trustee to redress it, is liable as well.

Liability also runs to and from third parties: a third party who knowingly participates in a breach of trust, or who receives trust property with notice of the breach and is not a bona fide purchaser, can be held liable or made a constructive trustee, while a bona fide purchaser who takes trust property for value and without notice cuts off the beneficiaries' ability to follow the property and leaves them to their remedies against the trustee. Beneficiaries may lose remedies through consent, ratification, or laches where, with full knowledge, they approved or unreasonably delayed in challenging the trustee's conduct.

The most important modern will substitute is the revocable living (inter vivos) trust. The settlor creates a trust during life, typically naming himself as both trustee and primary beneficiary, transfers his assets into the trust, and provides that on his death the successor trustee distributes the trust property to named beneficiaries. Three advantages drive its popularity. First, probate avoidance: because the trust already holds legal title, the property does not pass through the decedent's probate estate, sparing the beneficiaries the cost, delay, and publicity of probate administration.

Second, incapacity planning: if the settlor becomes incapacitated, the successor trustee steps in to manage the assets without the need for a conservatorship. Third, privacy: a trust is not filed as a public record the way a probated will is. The trust is and remains fully revocable during the settlor's life, which has important consequences the examiners test.

Under Probate Code §15800, while the settlor of a revocable trust is alive and competent, the trustee's duties run to the settlor rather than to the remainder beneficiaries, whose interests are contingent on the settlor not revoking; they generally have no right to information or accountings until the trust becomes irrevocable. Under Probate Code §18200, the property of a revocable trust is subject to the claims of the settlor's creditors to the extent of the settlor's power of revocation, so the device offers no asset protection during life.

Despite resembling a will in function, the revocable trust is a present transfer that need not satisfy the Statute of Wills, and California upholds it even though the settlor retains broad lifetime control, rejecting the argument that such retained control makes it an invalid testamentary act.

Several other will substitutes pass property at death outside probate without satisfying the Statute of Wills. A Totten trust is a bank-account device in which a depositor opens an account 'in trust for' a named beneficiary; during life the depositor retains complete control, may withdraw the funds, and may revoke the arrangement, and on the depositor's death whatever remains passes to the named beneficiary.

It is in substance a revocable, tentative trust — really a pay-on-death account dressed in trust language — and California treats such accounts under the multiple-party-accounts provisions of the Probate Code (§5000 et seq.), validating the death transfer as nontestamentary. A pay-on-death (POD) or transfer-on-death (TOD) designation operates the same way for bank accounts and securities: the owner names a beneficiary who takes whatever remains at the owner's death, with no lifetime interest in the beneficiary, and Probate Code §5000 confirms that such nonprobate transfers are valid and not invalidated by the Statute of Wills.

California also now permits a revocable transfer-on-death deed for real property within statutory limits. A pour-over will is the connective tissue of a modern estate plan: it is a will that devises some or all of the testator's probate assets to the trustee of a trust the testator established, 'pouring' those assets into the trust to be administered and distributed under the trust's terms.

At common law this raised incorporation-by-reference and independent-significance problems, but the Uniform Testamentary Additions to Trusts Act, codified in California at Probate Code §6300, validates the pour-over even if the trust is amendable and was amended after the will was executed, and even if the trust was unfunded during the testator's lifetime, so long as the trust is identified in the will and its terms are set out in a written instrument executed before or concurrently with the will.

The pour-over will captures assets the settlor forgot or was unable to transfer into the trust during life and routes them into the unified dispositive plan, complementing rather than replacing the revocable living trust.

Key Rules Recap

• A breach of trust is any violation of a trustee's duties; remedies include compelling performance, enjoining a breach, surcharge for losses, disgorgement of profits, tracing into a constructive trust, removal, and reduction or denial of compensation.
• Damages for breach are the greater of the loss in value caused by the breach or the profit the trustee made, plus lost income; the trustee cannot offset gains on one breach against losses on another.
• A revocable living trust is a will substitute that avoids probate, provides incapacity management, and remains fully revocable and reachable by the settlor's creditors during life (Prob. Code §15800, §18200).
• A Totten trust (a 'pay-on-death' bank account in trust form) and a POD/TOD designation are valid nontestamentary transfers that pass to the named beneficiary at death without satisfying the Statute of Wills (Prob. Code §5000 et seq.).
• A pour-over will devises probate assets into an existing trust; under the Uniform Testamentary Additions to Trusts Act (Prob. Code §6300), the trust may be amended after the will's execution and may even be unfunded during the testator's life.