California Trust Exclusions

When it comes to estate planning, one option that individuals often consider is creating a trust. A trust offers numerous benefits, such as avoiding probate and providing for the seamless transfer of assets upon the creator’s passing. However, it is essential to understand that not all assets should be included in a trust. In California, certain assets are ineligible for inclusion in a trust. This blog post aims to shed light on the assets that should not be in a trust in California.

What assets should not be in a trust? 

Certain types of assets in California are generally not recommended to be placed in a trust. These include:

1. Retirement Accounts: Retirement accounts such as 401(k)s, IRAs and 403(b)s should not be put in a living trust. That is because these accounts already have designated beneficiaries and are not subject to probate. Additionally, transferring these accounts into a trust could lead to immediate taxation. 
2. Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs): The accounts are intended to be owned by an individual, not a trust. Transferring them into a trust could trigger tax consequences. 
3. Life Insurance Policies: Life insurance policies should not be put in a living trust as they already have named beneficiaries. However, in some instances, particularly for wealthy individuals, an irrevocable life insurance trust may be created. This is to keep life insurance death benefits outside their taxable estate. 
4. UTMA or UGMA Accounts: Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts are custodial accounts owned by the minor and thus cannot be transferred into a trust. 
5. Motor Vehicles: Regular vehicles are typically not recommended to be put in a trust due to the complexity of transferring the title and potential tax implications. However, high-value collectible cars expected to be appreciated may be an exception.
6. Specific Business Interests: Depending on the operating agreement, transferring interests in Limited Liability Companies (LLCs) may require approval from most owners. Once transferred, the voting ability remains with you, but your ownership share will fall to the trust. 

It’s essential to consult with a professional in estate planning to understand the best way to manage your assets. The above guidelines are general, and individual circumstances may warrant different approaches. 

Fiduciary Duties of the Trust 

In California, when assets are placed in a trust, the trustee has a fiduciary duty to the trust’s beneficiaries. This fiduciary duty is a legal obligation to act in the best interest of the beneficiaries. The trustee must manage the trust property responsibly, make unbiased decisions about distributions, and balance the interests of all beneficiaries when making decisions about the trust. 

The fundamental duties of a trustee include:

1. Duty of Good Faith and Loyalty: The trustee must act in the best interest of the beneficiaries and avoid conflicts of interest. That includes not using the trust’s property for the trustee’s profit or benefit. 
2. Duty of Reasonable Skill and Diligence: The trustee is expected to manage the trust assets with the same degree of skill and care that a reasonably prudent person would use. Suppose the trustee has exceptional skills, such as managing money. Then, they are expected to fully utilize those skills in executing their duties. 
3. Duty to Give Personal Attention: The trustee must personally attend to the administration of the trust and cannot delegate this responsibility to others. 
4. Duty to Keep and Render Accounts: The trustee must keep accurate records of the trust’s assets, income, and expenses and provide this information to the beneficiaries. 

Division 9, Part 4 of the state’s Probate Code outlines the trustee’s fiduciary duties in California. 

These duties include administering the trust following the trust instrument, following written instructions given to the trustee, handling multiple beneficiaries with impartiality, and taking reasonable steps to maintain control of and preserve the trust’s property. 

Breaching Fiduciary Duty 

A breach of fiduciary duty occurs when a trustee fails to fulfill these responsibilities. That can result in legal consequences, including the trustee being required to pay back lost money and potentially facing fines or jail time. In California, remedies for breach of fiduciary duty encompass monetary damages, attorney fees, and court costs. Additionally, if the fiduciary acted with malice, oppression, or fraud, punitive damages may be awarded to penalize further and deter such conduct. 

Consequences of Breaching a Fiduciary or Trustee Duty

Further, when trustees breach their duties, they may face various consequences. This includes:

1. Personal Liability: The trustee may be liable for any losses the trust beneficiaries suffer due to the breach. 
2. Removal from Position: Beneficiaries may be able to have the trustee removed from their position and replaced with another trustee. 
3. Monetary and Non-Monetary Damages: A breach of trust can lead to financial or non-monetary damages for the beneficiaries. 
4. Legal Action: The trustee could face legal action, court expenses, and attorney fees. 

Some common examples of trustee breaches of duty include self-dealing, negligence, imprudent investments, and failure to distribute trust income. Trustees need to fulfill their responsibilities and act in the best interests of the beneficiaries to avoid these consequences. 

More on your Trustee Breaching their Trustee Duties 

Need more information on Trust Litigation? Or, to ensure they are following their trustee’s duties or even removing a trustee, check out our complete overview of California Trust Litigation, available on our website. If you have more questions about your rights as a Beneficiary and what you should know moving forward. 

If you are still having some trouble, have any more questions, or want to talk to someone about your case, please give us a call or fill out our Get Help Now form below.

It’s best to reach out as soon as possible. The longer you take, the more damage your trust could take. Please call us at (888) 443-6590, and we would be more than happy to see if we can assist you.