Question: My father passed away a couple of years ago, and my mother died recently. They had a living trust, and my brother is the successor trustee. My brother’s management of the trust seems to be going well, and for the most part, I trust him. But we recently clashed over how he treated an investment in the estate. I told him to dump the investment as soon as possible, but he was adamant about hanging on to it. Now, it has lost money, and we have argued about the loss. Since it was he who wanted to hang onto it and not me, I thought he should take greater responsibility for the loss. Even though I didn’t want to, I said that I would go to a lawyer at one point. My brother told me that he had “proof on tape” that I approved of what he was doing. What should I do about the situation? I didn’t approve of what he did with the investment, but I do recall some conversations in which he tried to convince me what he was doing made sense. Can he use those recorded conversations? If he has that on tape, how will that affect my case?
Answer: Your questions raise legal issues regarding the power of a trustee to invest trust property and the recording of private telephone calls. It appears that your brother has exercised poor judgment on both fronts, but it is his recording of phone calls that violates the law. Unless he starts every phone call with a recorded message that says, “This call may be recorded to protect the trustee from a lawsuit,” he may face one of his own.
As to the first issue regarding the poor investment, your brother is a trustee and owes a fiduciary duty to you as a beneficiary. A trustee has a duty to prudently invest trust property, unless the trust instrument limits that power. Without reviewing the particular trust instrument in your case, it is hard to know if there are limits on the trust’s investments. Most trusts will allow the trustee discretion to make investment choices for the benefit of the trust.
California law imposes on a trustee a duty to diversify investments. Many trustees rely on financial advisors to select the appropriate investments for the trust.
Assuming your parents did not limit the trust’s investments, your brother is required to comply with the prudent investor standard. Under this standard, he must make investments like a reasonably prudent investor would in the same or similar circumstances. If he falls below that standard, he may be liable for a breach of fiduciary duty. But it will take a really bad decision to get the court’s attention. For example, if your brother invested all the trust assets in a single startup company that lost value, he might face exposure to a lawsuit.
Even assuming that your brother made a patently bad decision in hanging onto this investment when all signs pointed to dumping it, there may still be a problem with suing him. A trustee’s investment decisions will be viewed in the context of the trust’s entire portfolio. When you mention that his management of the trust is going well, it suggests that this bad investment decision is a one-time occurrence that only partially affects the rate of return. If that is the case, the court may agree with you but ultimately find that he has not breached his fiduciary duty.
As to your brother’s decision to secretly record your conversation without your consent, this is troublesome. Although recording a conversation can be done so easily these days (the upside down iPhone in a shirt pocket), it is still not legal. California requires that any recording of a conversation be done with the consent of both parties.
Recording a confidential communication in California is illegal and can subject the perpetrator to civil fines up to $5,000 and even criminal action. In addition, the evidence that you brother gathered from the recording will be inadmissible in court. There are exceptions on the admissibility of recorded evidence, but those exceptions usually apply in criminal cases.
Your brother’s bad investment decision sounds like it was not completely out of bounds, and the court will likely not impose liability on him for this. But you have a valid claim against him for his unlawful recording. You will have to consider whether the time and the expense of a lawsuit on the recording alone is worth it. The price of a win may exceed the benefits and blow up your familial relations. It may be best to just remind him prior to any future conversations that you do not consent to his recording. He’ll get the picture.
Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at https://kopperlaw.com.
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