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May a trustee follow a living settlor's bad instruction?


When an individual or a couple, as settlors, establishes a revocable living trust they are usually the initial trustees and beneficiaries. This gives them complete control to do as they please with their trust assets.  
Does this freedom change, however, if someone other than the settlor is trustee while the settlor is alive? Let us examine.
If the settlor’s trust appoints someone other than a settlor as the initial trustee then that trustee may obey the settlor so long as the settlor has the power to revoke the trust.
The trust usually requires the trustee to obey certain instructions by the settlor, such as distribution instructions.
The settlor’s power to revoke the trust is the power to amend and/or to end the trust and return the trust assets to the settlors. Thus, provided the settlors retains the power to revoke the trust, the settlor can do entirely as she pleases with the trust assets the same as if they were not held in trust.
For example, consider a father who appoints his daughter as initial sole trustee while he is still alive. He has not been adjudicated incompetent, but this fact does not mean that he is actually competent.
Father appoints daughter in order to let her direct his investments of trust assets on his behalf. Father tells daughter to invest in certain stocks which his other children – who are named in the trust as future beneficiaries to inherit upon father’s death – consider for good reason to be high risk.
They object and request the trustee/daughter not to follow father’s instructions. May the trustee/daughter nonetheless follow father’s instructions?
More than likely the answer is “yes.”
While father retains his ability as settlor to revoke his living trust, the trust assets are his to do with as he pleases.  
The trustee owes no duty to the future death beneficiaries (the children) while the settlor is alive and can revoke the trust.
Furthermore, after father dies, the death beneficiaries (the children) cannot sue the trustee for following these instructions.  
Notwithstanding the major strains on their relationship, the trustee/daughter may try to protect the settlor/father by establishing his incompetence.
The trust may say that the settlor is incompetent if an examining physician provides a certificate of incapacity. In other cases, it may be necessary to petition a court to adjudicate the settlor’s incompetence.  
Once it is determined that the settlor is incompetent to revoke the trust, then the trustee/daughter may no longer follow his instructions.
This begs the question, “does the trustee owe the settlor a duty to determine whether he is still competent to revoke the trust?”
In Estate of Giraldin, the California Court of Appeals held that the trustee owed no duty to the settlor to inquire whether or not the settlor was competent.
The court said that the determining mental capacity was too complex and uncertain an inquiry to require of the trustee.
Thus, unless and until the settlor was ever determined to be incompetent by a court, the trustee could follow the lawful instructions of the settlor.
This decision is on appeal with the California Supreme Court. A decision is expected next year.