Rights if a Trustee Steals Money

It happened to Emily. Her mother recently passed away, and her brother, Mac, was named trustee of the family trust. Everything seemed fine at first, but Emily started noticing irregularities – large withdrawals she couldn’t account for, delayed responses to her requests for information, and a general sense of evasiveness. Then she discovered Mac had transferred a significant amount of trust funds to his personal account. The cost? Not just the stolen money, but also the emotional toll of betrayal and a protracted legal battle that could easily exceed $50,000 in attorney’s fees.

As an estate planning attorney and CPA with over 35 years of experience here in Moreno Valley, California, I’ve seen this scenario play out far too often. The trust document places a huge amount of faith – and a significant amount of money – in the hands of a single individual. Unfortunately, that trust can be misplaced. While most trustees act with integrity, there are instances where a trustee breaches their fiduciary duty, often involving outright theft. Understanding your rights and how to respond is critical to protecting your inheritance.

What Does “Breach of Fiduciary Duty” Mean?

The term ‘fiduciary duty’ is central to this issue. A trustee has a legal obligation to act in the best interests of the beneficiaries – that’s you. This means managing the trust assets prudently, avoiding self-dealing, keeping accurate records, and providing transparent communication. When a trustee prioritizes their own needs over yours, they’ve breached that duty. Stealing funds is the most blatant example, but it can also include:

• Conflicts of Interest: Using trust assets for personal gain or favoring one beneficiary over others without justification.
• Poor Investment Choices: Making reckless or ill-advised investments that lose value.
• Failure to Distribute Assets: Unreasonably delaying or refusing to distribute trust assets as outlined in the trust document.
• Lack of Transparency: Failing to provide beneficiaries with accurate information about trust holdings and activity.

What Legal Options Do I Have if I Suspect a Trustee is Stealing?

The first step is documentation. Gather any evidence you can find that supports your suspicions – bank statements, trust documents, emails, and any other communication that might be relevant. Do not confront the trustee directly without first consulting with an attorney. You could unintentionally jeopardize your case. Then, consider these options:

• Demand an Accounting: Under Probate Code § 16060 & § 16062, trustees have an affirmative duty to keep beneficiaries ‘reasonably informed’ and, in most cases, provide a formal accounting at least annually. If a trustee refuses, beneficiaries can file a petition to compel the accounting and potentially surcharge the trustee for legal fees.
• Petition for Trustee Removal: Under Probate Code § 15642, beneficiaries can petition the court to remove a trustee not just for theft, but for ‘hostility or lack of cooperation’ that impairs the administration of the trust. You do not always need to prove a financial loss to remove a bad trustee.
• File a Petition for Surcharge: If you can prove the trustee mismanaged or stole trust assets, you can file a petition with the court to “surcharge” them – meaning they will be personally liable for the losses.

The Importance of a CPA’s Perspective

As a CPA as well as an attorney, I bring a unique perspective to these cases. Often, theft is masked by complex transactions or improper valuation of assets. My background allows me to trace funds, identify discrepancies, and calculate the true extent of the loss. More importantly, understanding the tax implications is crucial. Recovered funds may be subject to capital gains taxes, and proper documentation is essential to minimize your tax liability and maximize your step-up in basis.

What if the Trust Has a “No-Contest” Clause?

Many trusts include a “No-Contest” clause, designed to discourage beneficiaries from challenging the trust’s validity. However, Probate Code § 21310 states that under current California law, “No-Contest” clauses are strictly construed. A beneficiary will not be disinherited for challenging a trust if they have ‘probable cause’ to believe the trust was forged, revoked, or created under undue influence. Accusations of theft certainly constitute probable cause.

What if an Asset is Missing from the Trust Schedule?

Sometimes, the problem isn’t theft, but simple oversight. A beneficiary may discover an asset (like a house or account) was listed on the trust schedule but never formally retitled. In these situations, the Heggstad Petition (Probate Code § 850) allows you to petition the court to confirm it as a trust asset, avoiding a separate probate proceeding for that item.

What About the 120-Day Clock?

This is a common source of confusion. When beneficiaries receive a “Notification by Trustee” regarding the trust administration, they have a strict 120-day window to contest the trust terms under Probate Code § 16061.7. Once this deadline passes, they are typically barred from challenging the trust’s validity, even if fraud is discovered later. It’s crucial to understand that a “copy of the trust” is not the same as the formal “statutory notice.” The 120-day clock only starts ticking when the formal notification is served.

What separates an efficient California probate process from a drawn-out conflict over authority and assets?

The path through California probate is rarely a straight line; it requires precise adherence to statutory deadlines, accurate asset characterization, and strict fiduciary compliance. Without a clear roadmap, what begins as a standard administrative proceeding can quickly dissolve into a costly battle over interpretation, valuation, and beneficiary rights.

To manage the estate’s value, separate property types by learning probate assets, confirm exclusions through non-probate assets, and support valuation steps with inventory and appraisal to reduce disagreements about what is in the estate.

Ultimately, the difference between a routine distribution and a protracted legal battle often comes down to preparation. By anticipating the demands of the Probate Code and addressing potential friction points with beneficiaries and creditors upfront, fiduciaries can navigate the system with greater confidence and lower liability.

Verified Authority on California Beneficiary Rights

• Statutory Notification Window (The “120-Day Rule”): California Probate Code § 16061.7
  This is the most critical statute for beneficiaries. Once a trustee serves this formal notice, you have exactly 120 days to file a contest. If you miss this deadline, you are generally forever barred from challenging the validity of the trust, regardless of the evidence you have.
• Right to Accounting & Information: California Probate Code § 16060 (Duty to Inform)
  Trustees have a mandatory legal duty to keep beneficiaries “reasonably informed” about the trust and its administration. Under Probate Code § 16062, most trustees must provide a formal financial accounting at least once a year. If they refuse, the court can compel them to do so.
• Inheriting Real Estate (Prop 19): California State Board of Equalization (Prop 19)
  Beneficiaries must understand that inheriting a home no longer guarantees low property taxes. Under Prop 19, to avoid reassessment to current market value, the child must make the home their primary residence within one year of the parent’s death.
• No-Contest Clause Enforceability: California Probate Code § 21311
  Fear of disinheritance often stops beneficiaries from fighting for their rights. However, this statute clarifies that a No-Contest clause is only enforceable if the contest is brought without “probable cause.” If you have a reasonable basis for your claim, your inheritance is likely safe.
• Recovering Trust Assets (Heggstad): California Probate Code § 850 (Heggstad Petition)
  If a beneficiary finds that a parent intended an asset to be in the trust but failed to sign the deed or change the account title, a Section 850 Petition allows the court to “transfer” that asset into the trust without a full probate proceeding.
• Removal of a Bad Trustee: California Probate Code § 15642
  Beneficiaries have the right to petition for the removal of a trustee who is unfit. Grounds for removal include excessive compensation, inability to manage finances, or “excessive hostility” toward beneficiaries that interferes with the trust’s administration.