07/04/2013

Can A Trustee Be Removed?

California Probate Code § 17200(b)(10) allows a trustee’s removal if the trustee breaches his or her fiduciary duties. A recent case involving the founder of Herbalife illustrates the circumstances in which a trustee was removed by the court. Mark Hughes, the founder of Herbalife died in 2000, from an overdose of alcohol and antidepressants. At the time of his death, his estate was worth 350 million dollars which he left to his only son.

Mr. Hughes named three co-trustees of his estate. All three individuals were close to the decedent either by a professional or familial relationship. The trustees agreed to sell a piece of decedent’s real property in Santa Monica, California. They sold this property for 23.7 million dollars, but they did not require a down-payment. The transaction was completely financed. The business who purchased the property later filed for bankruptcy protection shortly thereafter. An action was brought under Probate Code 17200(b)(10) demanding removal. The Judge ruled that the trustees did not act with the “prudence, skill and diligence” needed to perform their duties. The trustees were removed.

The lesson learned is that a trustee is not expected to "act as an expert" - unless he or she has special skills; however, a trustee must act with reasonable skill and work to make the trust property as productive as possible.