When a Business Is Held in a Trust: Disputes, Rights, and Remedies Under California Law

When a California trust owns a business, the trustee controls it as a fiduciary for the beneficiaries, not as a personal owner. The trustee must not self-deal, must keep beneficiaries reasonably informed and must answer reasonable requests for information. If those duties are breached, a beneficiary can ask the Superior Court to compel accounts, remove the trustee or order repayment.

Most people facing a dispute over a family business inside a trust did not expect to be reading about fiduciary law. Often a parent built the company, the parent died or became unable to manage it, and now a sibling, a stepparent or a longtime business partner serving as trustee runs it. That person may draw a salary and make the calls while the other beneficiaries see no profit statements, no distributions and no straight answers. Sometimes the person reading this page is that trustee, now accused of mismanaging a company they believe they kept afloat. Either way, the question is what California law lets each side demand, and what a court can actually order.

This page explains how these disputes arise, which duties a trustee owes when a trust holds a business, the petitions available to beneficiaries, the remedies a court may order, the deadlines that apply and the presumptions that can shift a case.

How a Business Ends Up Inside a California Trust — and Why Disputes Arise

A business interest can be held in a trust just as a house can. That includes a membership interest in an LLC, shares in a corporation or a partnership interest. The trust, acting through its trustee, holds legal title, meaning formal ownership and control. The beneficiaries hold equitable interests, meaning the right to benefit from the asset under the trust's terms. This page does not cover how such a trust is set up. It starts where the dispute starts.

These disputes usually follow a handful of patterns:

• The trustee keeps business income inside the company or the trust and refuses to distribute it.
• The trustee operates, refinances or sells the business without telling the beneficiaries, or over their objection.
• Co-beneficiaries disagree about whether to keep the business running, sell it or wind it down.
• A beneficiary suspects the trustee is self-dealing, for example by paying themselves an inflated salary, steering contracts to their own companies or buying the business cheaply.

What sets these cases apart from an ordinary business quarrel is the trustee's role. Corporate and LLC law still governs the company itself. The trustee's handling of the trust's ownership stake, however, is measured by the Probate Code. Under Probate Code section 17200(a), a trustee or beneficiary may petition the court concerning the internal affairs of the trust or to determine whether a trust exists, except as section 15800 provides. That petition is heard by the Superior Court of California for the relevant county, in its probate department. A full overview of the field is on this site's page on California trust litigation.

Trustee Duties When the Trust Holds a Business Interest

A trustee owes the same core duties whether the trust holds a brokerage account or an operating company. A business makes those duties harder to meet and easier to breach.

Loyalty. Under Probate Code section 16002(a), the trustee must administer the trust solely in the interest of the beneficiaries. Probate Code section 16004(a) makes this concrete. The trustee may not use or deal with trust property for the trustee's own profit or for any purpose unconnected with the trust. The trustee also may not take part in any transaction in which the trustee has an interest adverse to the beneficiary.

The advantage presumption. Under section 16004(c), a transaction between the trustee and a beneficiary during the trust's existence, or while the trustee's influence over the beneficiary remains, is presumed to violate the trustee's fiduciary duties if the trustee obtains an advantage from it. This is a presumption affecting the burden of proof, which means the trustee, not the beneficiary, must justify the transaction. The presumption does not apply to the parts of an agreement between a trustee and a beneficiary about hiring or paying the trustee.

Care. Under Probate Code section 16040(a), the trustee must administer the trust with the reasonable care, skill and caution a prudent person acting in a similar capacity would use. The settlor (the person who created the trust) may expand or restrict that standard in the trust instrument. Investment and management functions governed by the Uniform Prudent Investor Act are handled separately.

Information. Probate Code section 16060 requires the trustee to keep beneficiaries reasonably informed of the trust and its administration. Under section 16061, except as section 16069 provides, the trustee must also give a beneficiary requested information about the administration that is relevant to that beneficiary's interest, on reasonable request. For a business, that information can include financial statements, tax returns, payroll paid to the trustee and records of major transactions.

Accounting. Under Probate Code section 16062(a), the trustee must account at least annually, at the termination of the trust and upon a change of trustee. That duty runs to each beneficiary to whom income or principal is required, or authorized in the trustee's discretion, to be currently distributed. It does not run to every beneficiary, and the section has exceptions, including for certain trusts created before July 1, 1987. A trust instrument or a beneficiary's writing may waive the account. Even then, the court may compel the trustee to account if it is shown that a material breach of the trust has reasonably likely occurred.

Self-dealing risk is highest when the trustee is also an officer, manager, member or co-owner of the business the trust holds. That person sits on both sides of decisions about compensation, retained earnings, related-party contracts and buyout prices. Holding both roles is not a breach in itself. It does mean those decisions get examined closely. A beneficiary who has been shut out of the company's numbers is usually looking first at these duties, because they set the baseline for every request that follows.

What Beneficiaries Can Do: Petitions, Compelled Accounts, and Court Orders

The main procedural tool is a petition under Probate Code section 17200. Section 17200(b) lists proceedings that count as internal affairs of a trust. The list "include[s], but [is] not limited to" the following:

• interpreting the trust instrument
• determining whether a power, duty or right exists
• deciding the validity of a trust provision
• settling the trustee's accounts and passing on the trustee's acts, including discretionary acts
• instructing the trustee
• compelling the trustee to act, including to provide a copy of the trust's terms

Compelling information. A beneficiary may petition to compel the information described in section 16061 if two conditions are met. The trustee must have failed to provide the requested information within 60 days after the beneficiary's reasonable written request. And the beneficiary must not have received that information from the trustee within the six months before the request. Put plainly, the request needs to be in writing, and the 60 days need to pass first.

Compelling an account. A parallel rule applies to accounts. A beneficiary may petition to compel an account if the trustee failed to submit a requested account within 60 days after a written request, and no account was made within the six months before the request.

Broad court power. Under Probate Code section 17206, the court in its discretion may make any orders and take any action necessary or proper to dispose of the matters raised by the petition. That includes appointing a temporary trustee to administer the trust in whole or in part. Where a business is involved, a temporary trustee may be considered while the dispute over who should control the company is resolved. Whether the court does so depends on the record before it. More on this procedure is on this site's page on the Probate Code 17200 petition.

Remedies for Breach of Trust Involving a Business Asset

Probate Code section 16420(a) lists what a beneficiary or cotrustee may seek when a trustee commits a breach of trust, or threatens to commit one. The proceeding may be brought for any of the following purposes that is appropriate:

1. compel the trustee to perform the trustee's duties
2. enjoin the trustee from committing a breach
3. compel the trustee to redress a breach by payment of money or otherwise
4. appoint a receiver or temporary trustee to take possession of the trust property and administer the trust
5. remove the trustee
6. subject to section 18100, set aside acts of the trustee
7. reduce or deny the trustee's compensation
8. subject to section 18100, impose an equitable lien or a constructive trust on trust property
9. subject to section 18100, trace trust property that was wrongfully disposed of and recover the property or its proceeds

A constructive trust is a court order treating property held by someone else as held for the trust's benefit. Under section 16420(b), these remedies do not prevent resort to any other appropriate remedy under statute or the common law. The "threatens to commit" language matters in business cases. A beneficiary does not always have to wait until a company has been sold before asking the court to step in.

Surcharge. Under Probate Code section 16440(a), a trustee who commits a breach is chargeable with whichever of the following is appropriate:

• any loss or depreciation in value resulting from the breach, with interest
• any profit the trustee made through the breach, with interest
• any profit that would have accrued to the trust estate if the loss of profit resulted from the breach

This liability is not automatic. Under section 16440(b), if the trustee acted reasonably and in good faith under the circumstances as known to the trustee, the court may excuse the trustee from liability in whole or in part when that would be equitable. Running a business involves judgment calls, and a decision that turned out badly is not the same as a breach.

Removal. Under Probate Code section 15642(a), a trustee may be removed in accordance with the trust instrument, by the court on its own motion, or on petition of a settlor, cotrustee or beneficiary under section 17200. The grounds in section 15642(b) include:

• a breach of trust
• insolvency or unfitness to administer the trust
• hostility or lack of cooperation among cotrustees that impairs administration
• failing or declining to act
• excessive compensation under the circumstances
• certain situations where the sole trustee falls within the categories of section 21380(a)

Removal is a court decision made on a showing of grounds. It is not triggered by a beneficiary's dissatisfaction.

Section 859 recovery. Probate Code section 859 applies when a court finds that a person did one of the following with property belonging to a trust or a decedent's estate:

• in bad faith wrongfully took, concealed or disposed of it
• took, concealed or disposed of it by undue influence in bad faith
• took, concealed or disposed of it through elder or dependent adult financial abuse

That person is liable for twice the value of the property recovered in an action under that part of the Code. In the court's discretion, and except as otherwise required by law, the person may also be liable for reasonable attorney's fees and costs. Neither the doubled amount nor the fees follow from proving that property was taken. The court must make one of those findings first. For a trustee facing these allegations, the same provisions frame the defense: what the trustee knew, what the trust instrument authorized and why each decision was made.

Deadlines That Apply to Trust Disputes in California

Contesting the trust itself. Some disputes challenge the trust document rather than the trustee's conduct, for example a late amendment that handed control of the business to one child. Under Probate Code section 16061.8, a person served with the trustee's notification cannot bring an action to contest the trust after the later of two dates:

• 120 days from the date the notification is served on that person, or
• 60 days from the date a copy of the trust's terms is delivered to that person, if the copy is delivered during that 120-day period.

The period runs from service of the notification, not from the settlor's death and not from the date the trust became irrevocable. The trustee must serve that notification in several situations. These include when a revocable trust becomes irrevocable because of a settlor's death and whenever the trustee of an irrevocable trust changes. Those two are not the only events that require it. This site's page on how to contest a trust covers that proceeding.

Breach-of-trust claims. Probate Code section 16460(a) has two branches:

• If a beneficiary received an interim or final written account, or another written report, that adequately disclosed the claim, the claim is barred unless a proceeding is started within three years after receiving it. An account or report adequately discloses a claim if it gives enough information that the beneficiary knows of the claim or reasonably should have inquired into it.
• If no account or report adequately disclosed the claim, or the beneficiary received none, the three years run from when the beneficiary discovered, or reasonably should have discovered, the subject of the claim.

For a business, an account showing large payments to a company the trustee owns may start the first branch running, even if the beneficiary did not read it closely.

Trustee fee increases. Under Probate Code section 15686(b), a trustee may not charge an increased trustee's fee without first giving at least 60 days' written notice to the following beneficiaries:

• each beneficiary entitled to an account under section 16062
• each beneficiary who was given the last preceding account
• each beneficiary who asked in writing for such notice and gave an address for it

Under section 15686(c), if a beneficiary files a section 17200 petition to review the increase or to remove the trustee, and serves it on the trustee before the 60 days run out, the increase does not take effect until the court orders otherwise or the petition is dismissed.

Presumptions That Affect Business Transfers Into or Out of a Trust

Many of these disputes turn on who received the business, and how. Under Probate Code section 21380(a), a provision of an instrument making a donative transfer (a gift) is presumed to be the product of fraud or undue influence when it goes to certain people, including:

• the person who drafted the instrument
• a person in a fiduciary relationship with the transferor who transcribed the instrument or had it transcribed
• a care custodian of a dependent adult, if the instrument was signed while the care custodian provided services or within 90 days before or after that period
• certain relatives, cohabitants and employees of those people

This presumption shifts the burden of proof. The person receiving the gift can generally rebut it with clear and convincing evidence. For a transfer to the drafter and certain people associated with the drafter, the presumption is conclusive and cannot be rebutted. A beneficiary who fails to rebut the presumption bears all costs of the proceeding, including reasonable attorney's fees. The presumption does not cover every gift to a caregiver, relative or helper. It applies only to the categories the statute names.

No contest clauses. A no contest clause penalizes a beneficiary who challenges the instrument. Under Probate Code section 21311(a), such a clause may be enforced only against:

• a direct contest brought without probable cause
• a pleading challenging a transfer on the ground that the property was not the transferor's at the time, but only if the clause expressly says so
• a creditor's claim or an action based on it, but only if the clause expressly says so

Under section 21311(b), probable cause exists if, when the contest is filed, the facts known to the contestant would cause a reasonable person to believe there is a reasonable likelihood the relief will be granted after further investigation or discovery. A no contest clause does not automatically disinherit anyone who files something.

What This Site Does — and Does Not — Do

California Trust Litigation is a website that provides information and facilitates inquiries about California trust, probate and fiduciary litigation. It is not a law firm and does not represent anyone. A consultation request sent through this site may be passed to attorneys, who decide for themselves whether to respond. This site cannot promise a response, a timeframe, a free consultation, confidentiality, or that anyone will review a situation or take a case.

This site covers disputes only. It does not explain how to create, fund or amend a trust, or how to administer one when nobody disagrees. Not every disagreement with a trustee who runs a family company is a breach of trust. Some are honest differences over business judgment. Everything here concerns California law only.

Discussing a Dispute Over a Trust-Held Business

A business inside a trust raises questions that a single document rarely answers. Who controlled the company's books, what the trustee was paid, which transactions benefited the trustee and what the beneficiaries were told, and when, all bear on the outcome. A consultation about this kind of dispute typically looks at the trust instrument and any amendments, the company's operating agreement or bylaws, the accounts and reports received, written requests and their dates, and the record of distributions and sales. For readers who only want to understand how a trust holding a business works when nobody disagrees, this page is not the resource.

To discuss a dispute like this with an attorney, request a consultation about your dispute through California Trust Litigation Lawyers.