Trustee Powers and Trust Administration

Trustee Powers and Trust Administration

A trustee can do only what the trustee is authorized to do, and authority comes from three sources. First are the express powers — those the settlor wrote into the trust instrument, which the trustee should always consult first because the settlor's directions control unless they conflict with law or public policy. Second are implied powers, those that, though unstated, are necessary or appropriate to carry out the trust's purposes.

Courts have long implied the powers to sell, lease, or mortgage trust property, to invest and reinvest the corpus, to incur and pay reasonable expenses of administration, to vote stock, to settle claims, and to employ agents and advisers, because a trustee charged with managing property must have the ordinary tools of an owner to do so. Third, and decisive in California, are the statutory powers.

Probate Code §16200 provides that a trustee has, in addition to the powers conferred by the trust instrument, the powers conferred by statute, and §16220 through §16249 enumerate a long, detailed list — to collect and hold property, to operate a business, to manage real property, to borrow, to insure, to make distributions, and much more. The practical upshot is that a California trustee enjoys broad default authority unless the instrument restricts it.

On an essay, identify the act in question, then ask in order: did the instrument expressly authorize it, is it impliedly necessary to the trust purpose, and is it among the statutory powers — and separately ask whether exercising the power in this way breached a fiduciary duty, because having the power and properly using it are two different questions.

Possessing a power is not the same as being free to exercise it however the trustee likes. Every power a trustee holds is held in a fiduciary capacity and is cabined by the trustee's duties — most importantly loyalty, prudence, and impartiality, which the next sections treat in detail. A trustee may have the power to sell trust real property, but selling it to himself at a bargain price violates the duty of loyalty and is voidable regardless of the existence of the power; a trustee may have the power to invest, but investing the entire corpus in a single speculative venture violates the prudent-investor standard.

This power-versus-duty distinction is one of the most testable themes in the subject, and strong answers separate the two analyses cleanly: first establish that the trustee had authority to take the act at all, then evaluate whether the exercise breached a duty. The trust instrument can also expand or contract the default rules.

A settlor may grant a trustee 'sole and absolute discretion,' which broadens the trustee's latitude but does not eliminate the core fiduciary obligations — even an absolute-discretion trustee must act in good faith and in accordance with the purposes of the trust, and California courts will intervene where discretion is exercised dishonestly, arbitrarily, or in bad faith. Conversely, a settlor may forbid acts the statute would otherwise allow, such as barring the sale of a cherished family business; the trustee must honor that restriction unless changed circumstances justify equitable deviation.

The examiners reward candidates who recognize that 'absolute discretion' is never truly absolute and that the floor of good-faith, purpose-serving conduct can never be waived.

The common law historically forbade a trustee from delegating discretionary functions on the maxim delegatus non potest delegare — the trustee was chosen for personal confidence and had to perform the core duties personally, delegating only ministerial acts. The modern law, reflected in the Uniform Prudent Investor Act and codified in California Probate Code §16012, has reversed this for investment and management functions.

Today a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances, provided the trustee exercises reasonable care, skill, and caution in three respects: selecting the agent, establishing the scope and terms of the delegation consistent with the trust's purposes, and periodically reviewing the agent's actions to monitor performance and compliance.

When the trustee satisfies these requirements, the trustee is not liable for the agent's decisions; the agent, in turn, owes a duty to the trust to exercise reasonable care and submits to the jurisdiction of California courts. This is a sharp doctrinal evolution that the examiners test directly: a fact pattern in which a trustee hands the entire portfolio to an investment adviser is no longer an automatic breach — the question becomes whether the trustee prudently selected, instructed, and monitored that adviser.

The trustee still may not delegate the entire administration or abdicate the office, and certain core decisions remain with the trustee, but the wholesale prohibition on delegating investment judgment is gone. Note too that a trustee must keep trust property separate from the trustee's own and earmark it as trust property; failure to do so is a distinct breach even if no loss results.

When a settlor names two or more co-trustees, the default rule in California is that they must act unanimously. Probate Code §15620 provides that, unless the trust instrument provides otherwise, a power vested in two or more trustees may be exercised only by their unanimous action. This differs from the Uniform Trust Code's majority rule and from the special rule for charitable trusts, where a majority of trustees may act.

Two safety valves exist: a co-trustee who is unavailable to participate because of absence, illness, or other temporary incapacity may be bypassed if prompt action is necessary, and any co-trustee may act unilaterally to prevent serious loss to the trust. Co-trustees also have duties to one another: each must participate in administration and use reasonable care to prevent a co-trustee from committing a breach, and a passive co-trustee who simply rubber-stamps another's misconduct can be held liable.

As to entering and leaving office, a person nominated as trustee accepts the trusteeship by signing the trust or a separate written acceptance, or by knowingly exercising powers or performing duties of the trustee (Prob. Code §15600). Importantly, a person who acts merely to preserve trust property, or who accepts delivery of property, does not thereby accept the office, provided he promptly declines.

A trustee who has accepted may resign only as the instrument permits, with the consent of the persons holding the power to revoke, or by court approval (Prob. Code §15640), and resignation does not discharge the trustee from liability for prior acts. A trustee may be removed by the court for cause — including breach of trust, unfitness, hostility that impairs administration, or persistent failure to administer effectively — under Probate Code §15642.

Key Rules Recap

• A trustee has the powers expressly granted in the trust instrument plus those implied by law as necessary or appropriate to carry out the trust purpose; California Probate Code §16200 grants the trustee all powers conferred by the Code (§16220 et seq.) in addition to those in the instrument.
• Implied powers commonly include the power to sell, lease, or mortgage trust property, to invest and reinvest, to incur reasonable administrative expenses, and to contract on behalf of the trust.
• A trustee must personally perform the duties of administration but, under modern law and Probate Code §16012, may delegate investment and management functions to a prudent agent while exercising care in selecting and monitoring the agent.
• When two or more co-trustees serve, California (Prob. Code §15620) requires unanimous action unless the instrument provides otherwise, though a majority rule applies to charitable-trust trustees and an excluded co-trustee may act to prevent loss.
• Acceptance of the trusteeship may be by signing the instrument or by knowingly exercising trust powers; a person who has not accepted may still act to preserve trust property without thereby accepting the office (Prob. Code §15600, §15601).