Challenging Bad Trustee Investments

Bruce lost $180,000 of his inheritance because his trustee made a risky, unauthorized investment in cryptocurrency. Now, he’s facing a mountain of legal fees just to try and recover those funds – money his elderly mother intended for his children’s education.

As an estate planning attorney and CPA with over 35 years of experience, I often see situations like Bruce’s unfold. It’s heartbreaking when a trustee breaches their fiduciary duty, and beneficiaries are left scrambling to protect their inheritance. The good news is that California law provides several avenues for challenging a trustee’s bad investment decisions, but timing and documentation are absolutely critical.

What Constitutes a Breach of Fiduciary Duty in Investing?

A trustee has a legal obligation to manage trust assets with the same care, skill, and caution that a prudent person would use when managing their own property. This doesn’t mean avoiding all risk; reasonable investments are permitted. However, a trustee crosses the line when they make reckless, speculative investments, or fail to diversify the portfolio adequately. Specific examples include:

Unsuitable Investments: Investing in high-risk ventures that don’t align with the trust’s stated goals or the beneficiary’s risk tolerance. Bruce’s trustee investing in cryptocurrency—without any prior approval or discussion—is a prime example.
Self-Dealing: A trustee using trust funds for personal gain, such as investing in a business they own. This is a clear conflict of interest and almost always a breach.
Failure to Diversify: Putting all the trust’s eggs in one basket, increasing the risk of significant loss. Diversification spreads the risk across different asset classes.
Ignoring Beneficiary Requests: While a trustee doesn’t have to follow every whim, consistently ignoring reasonable and well-documented requests from beneficiaries regarding investment strategy can be grounds for a challenge.

How Can I Challenge a Trustee’s Investment Decisions?

The first step is to gather documentation. This includes the trust document itself, account statements showing the problematic investments, and any communication you’ve had with the trustee regarding these issues. Then, you have several options:

Demand a Formal Accounting: Under Probate Code § 16060 & § 16062, you can demand a detailed accounting of the trust’s assets and transactions. This will help you identify any questionable activity. If the trustee refuses, you can petition the court to compel an accounting, and the trustee may be liable for your legal fees.
Petition for Trustee Removal: If the trustee’s actions are egregious or ongoing, you can petition the court for their removal under Probate Code § 15642. You don’t necessarily need to prove financial loss, but demonstrating ‘hostility or lack of cooperation’ that is damaging the trust administration is often sufficient.
File a Surcharge Claim: A ‘surcharge’ is a legal action to recover funds lost due to the trustee’s mismanagement. You’ll need to prove the trustee breached their duty and that this breach directly resulted in financial harm to the trust.

What About No-Contest Clauses? Can They Stop Me?

Many trusts contain “No-Contest” clauses, which attempt to prevent beneficiaries from challenging the trust’s terms. However, under Probate Code § 21310, these clauses are not absolute. You won’t be penalized for challenging the trust if you have “probable cause” to believe it was forged, revoked, or created under undue influence. Challenging a bad investment generally doesn’t trigger a no-contest clause, but it’s a complex area, and you should consult with counsel.

The CPA Advantage: Understanding Step-Up in Basis and Capital Gains

As a CPA as well as an attorney, I bring a unique perspective to these cases. One critical issue is often the ‘step-up in basis’ for inherited assets. When assets are held in a trust and distributed to beneficiaries, those assets receive a new cost basis equal to their fair market value at the date of the original owner’s death. This can significantly reduce capital gains taxes when the beneficiaries eventually sell those assets. However, mismanagement by the trustee can jeopardize that step-up in basis, increasing the tax burden for the beneficiaries. Accurately valuing assets, maintaining proper records, and ensuring proper titling are all crucial—and areas where a CPA-attorney can provide invaluable assistance.

What If an Asset Was Never Properly Transferred to the Trust?

Sometimes, a beneficiary discovers an asset was listed on the trust schedule but never formally retitled into the trust’s name. This is surprisingly common. In these situations, you can petition the court under the Heggstad Petition (Probate Code § 850) to confirm it as a trust asset, avoiding a separate probate proceeding.

Don’t Delay: The 120-Day Clock is Ticking!

It’s crucial to act quickly. Beneficiaries have a strict 120-day window to contest the trust terms after receiving the formal ‘Notification by Trustee.’ Probate Code § 16061.7 dictates that once this deadline passes, you are typically barred from challenging the trust’s validity, even if fraud is discovered later. Remember, 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.

Legal & Tax Disclosure: Steve Bliss is an Attorney and CPA licensed in California. The information provided in this article is for general informational purposes only and does not constitute legal or tax advice. Every legal situation is unique, and the application of law depends on specific facts. You should consult with a qualified attorney and CPA before making any decisions about your legal or financial matters. Past results do not guarantee future outcomes. The CPA license is inactive.

What determines whether a California probate estate closes smoothly or turns into litigation?

Success in probate court depends less on the size of the estate and more on the accuracy of the petition and the behavior of the fiduciary. Whether the issue is a forgotten asset, a contested creditor claim, or a disagreement among siblings, understanding the procedural triggers for court intervention is the best defense against prolonged administration.

• Choices: Explore ways to avoid probate.
• Nuance: Check specific considerations.
• Daily Tasks: Manage administering a probate 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 Probate Alternatives

• Personal Property Affidavit ($208,850 Limit): California Probate Code § 13100 (Small Estate Affidavit)
  For deaths on or after April 1, 2025, the gross value threshold for using a Small Estate Affidavit has increased to $208,850. This procedure allows successors to collect cash, stocks, and personal items without court involvement. Warning: This total MUST NOT include assets held in joint tenancy, trust, or named beneficiaries (POD/TOD), but MUST generally include the value of all real property in the estate.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  You must distinguish between the Affidavit for Real Property of Small Value (strictly for property <$69,625) and AB 2016. Under AB 2016, a primary residence valued up to $750,000 qualifies for a ‘Petition for Succession’ rather than full probate. This is a court-filed Petition requiring a Judge’s Order, though it is significantly faster than full administration.
• Spousal Property Petition (Unlimited): California Probate Code § 13650 (Spousal Transfers)
  This powerful alternative allows for the transfer of unlimited assets to a surviving spouse or domestic partner without full probate administration. It applies to any asset passing to the spouse, whether characterized as community property, quasi-community property, or separate property (via Will).
• Trust Assets & The “Heggstad” Petition: California Probate Code § 850 (Heggstad Petition)
  If a decedent intended an asset to be in their trust (e.g., listed on Schedule A) but failed to retitle it (the “Oops” factor), a Section 850 Petition can obtain a court order confirming the asset as trust property. This “cures” the title defect and avoids opening a full probate estate for that single asset.
• Vacant Land & Timeshares: California Probate Code § 13200 (Real Property of Small Value)
  For real property interests valued at less than $69,625 (the 2025/2026 adjusted limit), successors can file an Affidavit for Real Property of Small Value with the Court Clerk and record a certified copy with the County Recorder. This completely bypasses the need for a hearing or judge’s order.
• Vehicle & Vessel Transfers (DMV): DMV Form REG 5 (Affidavit for Transfer Without Probate)
  Vehicles and vessels may be transferred outside of probate using the Affidavit for Transfer Without Probate (REG 5). Critically, the value of the vehicle is excluded from the $208,850 small estate calculation, meaning a high-value car does not disqualify an estate from using summary procedures.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Even in summary administration, digital assets can be locked. Without specific RUFADAA language (Probate Code § 870) in your Will or Trust, service providers like Coinbase and Google can legally deny successors access to digital wallets and accounts, forcing a full probate just to retrieve them.