CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2000 No.19 October 8, 2004

Vol 2004 No.19 October 8, 2004

New Law Clarifies Trustee Liability

A new California law, AB 1990, establishes the enforceability of provisions in trust documents that relieve a trustee of liability for breach of trust. Many trusts drafted in California contain clauses that purport to release a trustee from liability if the trustee submits an account or report to the beneficiaries, and no objection to the account or report is received within a stated period, usually from 30 days to one year. These provisions are included in reliance on existing Section 16461(a) of the Probate Code.1

1) Section 16461(a) states: "Except as provided in subdivision (b), the trustee can be relieved of liability for breach of trust by provisions in the trust instrument." All citations in this Bulletin are to the California Probate Code.

However, there is no clear judicial authority in California construing the effectiveness of these clauses, particularly as to how long a period must be afforded a beneficiary to make a claim. This law makes such a provision effective as long as the beneficiary is given a specified notice and has at least 180 days to object in writing to an item in a disclosed account or report.

Under existing Probate Code Section 16461, a trust provision is not effective to relieve the trustee of liability for a breach of trust committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary. Nor could a trustee be relieved of liability for any profit derived from a breach. These provisions are unchanged.

AB 1990 attempts to create certainty for trustees without compromising beneficiary rights. Under new Sections 16461(c) - (j), a provision in a trust limiting trustee liability is effective only as to a claim against a trustee that is adequately disclosed in a written interim or final account.2 An account or report adequately discloses the existence of a claim if it provides sufficient information so that the beneficiary knows of the claim or reasonably should have inquired into the existence of the claim. 3

2) Section 16461(c)(1).
3) The standards are set forth in existing Section 16460(a)(1).

The period specified in the trust instrument for the beneficiary to object is enforceable to the extent that the period is not less than 180 days. A provision setting forth a shorter period is not enforceable. However, a trustee may still avail itself of the benefits of AB 1990 by complying with the added provisions. That is, the trustee must adequately disclose the item, permit the 180-day period to object (notwithstanding the shorter trust provision), and provides the mandatory notice indicating the availability of the 180 days to make a claim.

The text of the mandatory notice must be in 12-point boldface type provided to a beneficiary with the account or report as follows:

NOTICE TO BENEFICIARIES

YOU HAVE (insert "180 days" or the period specified in the trust instrument, whichever is longer) FROM YOUR RECEIPT OF THIS ACCOUNT OR REPORT TO MAKE AN OBJECTION TO ANY ITEM SET FORTH IN THIS ACCOUNT OR REPORT. ANY OBJECTION YOU MAKE MUST BE IN WRITING; IT MUST BE DELIVERED TO THE TRUSTEE WITHIN THE PERIOD STATED ABOVE; AND IT MUST STATE YOUR OBJECTION. YOUR FAILURE TO DELIVER A WRITTEN OBJECTION TO THE TRUSTEE WITHIN THE PERIOD STATED ABOVE WILL PERMANENTLY PREVENT YOU FROM LATER ASSERTING THIS OBJECTION AGAINST THE TRUSTEE. IF YOU DO MAKE AN OBJECTION TO THE TRUSTEE, THE THREE-YEAR PERIOD PROVIDED IN SECTION 16460 OF THE PROBATE CODE FOR COMMENCEMENT OF LITIGATION WILL APPLY TO CLAIMS BASED ON YOUR OBJECTION AND WILL BEGIN TO RUN ON THE DATE THAT YOU RECEIVE THIS ACCOUNT OR REPORT.

A beneficiary who fails to object in a timely fashion in writing to an account or report that complies with these requirements is barred from asserting any claim against the trustee arising from the item.4 The operation of AB 1990 overrides the three-year limitation period under Section 16460(a)(1) that would normally apply in the absence of a trust provision limiting a claim.

4) Section 16461(e).

If a beneficiary makes a timely claim, any other affected beneficiary of the trust may join the claim during the specified period or while the resolution of the objection is pending, whichever is later.5 A beneficiary may follow a properly submitted objection with a supplemental written objection within the permitted period (i.e., within the later of 180 days after the receipt of the account or report, or the period specified in the trust).6

5) Section 16461(f).
6) Section 16461(g).

The new sections to Probate Code Section 16461 added by AB 1990 apply to accounts and reports submitted to beneficiaries after January 1, 2005, regardless of when the trust document was created. If you have any questions, you may direct them to Kevin Gould, CBA Legislative Advocate at kgould@calbankers.com.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.