Sometimes bad things happen to well-intentioned trustees. The courts and the code do not expect trustees to be perfect, but they do expect trustees to act prudently and in good faith. The Restatement 3rd says, "If the trustee has acted reasonably and in good faith under the circumstances as known to the trustee, the court, in its discretion, may excuse the trustee in whole or in part from liability...” (Cal Probate Code §16440 and duplicated in 44 other states that have adopted the model language).
A thoughtful trustee will anticipate that the day may come when the documents of the office of trustee will be closely examined by attorneys representing a disgruntled beneficiary. How does a trustee PROVE they have acted reasonably and in good faith? It will be helpful if the trustee has a few key documents in the file to serve as evidence of their prudent administration.
A quick summary of topics these documents need to address follows:
1. Duty to Have a Plan
2. Duty to Consider Prevailing Factors
3. Duty to Diversify (or not diversify, as the case may be)
4. Duty to Pay Only Reasonable Costs
5. Duty to Prudently Delegate and Monitor Agent’s Activities
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