Chapter 5: Defining Trustee’s Duties
Every trustee has duties to all the trust’s beneficiaries. Below is a list of the most commonly breached duties that become the subject of trust litigation. A breach of one or more of these duties can get you equitable relief and/or damages.
Trustee’s Duty to Administer Trust According to Its Terms
The trustee has a duty to administer the trust according to the terms of the trust. This means the trustee does not get to make up his or her own rules. Rather, the trustee must carry out the terms of the trust as they are written in the trust.
Common examples of trustees departing from the trust’s terms include trustees who want to keep trust property in the trust instead of distributing it, trustees claiming they received verbal instructions from the settlor before their death, and trustees who have a wild idea about how they’re going to increase the value of trust assets before they distribute them.
If your trustee is failing to administer the trust according to its terms then he or she has breached their fiduciary duties.
Trustee’s Duty of Loyalty
Your trustee has a duty to administer the trust solely in the interest of the trust beneficiaries. If your trustee uses other considerations to administer the trust than the trustee is breaching his or her fiduciary duty to you.
Common examples of the trustee breaching their duty of loyalty includes the trustee who wants to extend trust administration in order to increase their fees, trustees who attempt to take some portion of the trust for themselves that they are not entitled to, and trustees who make gifts of trust assets to people who are not trust beneficiaries.
Trustees who breach their duty of loyalty often attempt to claim that their actions are justified by some kind of verbal instruction they received either from the settlor before they died or from one of the beneficiaries. This is almost always utter nonsense. Even if it were true, that doesn’t relieve the trustee of their duty of loyalty to the beneficiaries.
Let’s say, for example, the trustee truthfully claims that before the settlor died they said that they wanted to make a gift of some amount of cash to somebody who’s not listed as a beneficiary of the trust. Even if it’s completely true, when the settler died the trust terms became irrevocable. For that reason, the trustee is obligated to follow the terms of the trust as those terms appear in writing. The trustee does not get to make a gift simply because there was some kind of verbal instruction. To make that gift is a breach of the trust terms and the duty of loyalty to the trust beneficiaries.
If your trustee is not acting in the best interest of the trust beneficiaries, then he or she has breached their fiduciary duty.
Trustee’s Duty to Deal Impartially with Multiple Beneficiaries
If a trust has two or more beneficiaries, then the trustee has a duty to deal impartially with them. The trustee must act impartially when investing and managing the trust property. The trustee is required to take into account the differing interest of the trust beneficiaries.
A shorthand way of thinking of this is to say if the trustee shows favoritism to one beneficiary over another, then they have breached their fiduciary duty. There are any number of ways this can play out depending upon the terms of the trust. The real question you should be asking yourself is whether the trustee has taken your best interest into account when deciding what to do.
A common example of beneficiaries being treated differently is where the trust calls for outright distributions and one beneficiary receives a distribution while the trustee retains property in trust that would otherwise go to the other beneficiaries. Another example is when trust assets are going to be managed for some extended period of time and the beneficiaries are different ages, have different investment goals, and have different risk tolerances. The trustee’s failure to either segregate the assets into different shares for the different beneficiaries or in some other manner invest the trust property to meet the goals of each beneficiary is a breach of their fiduciary duty.
Trustee’s Duty to Avoid Conflicts of Interest
The trustee has a duty not to use or deal with trust property for their own profit or for any other purpose unconnected with the trust. The trustee may not take part in any transaction in which the trustee has an interest that’s against the best interests of the trust beneficiaries.
This means that in practice the trustee cannot use trust property to benefit themself. For example, the trustee may not loan trust cash to herself in order to purchase real estate. Clearly that’s a use of trust property for the purpose of the trustee’s own profit.
Occasionally, a trustee will use trust property for what they consider a charitable purpose. Though in truth that charitable purpose usually involves helping one of their family members. So, for example, if a trustee wanted to allow their child to live in a trust owned house without paying rent, then the trustee allowed their personal relationship to override their fiduciary duty. That is a conflict of interest they are obligated to avoid.
Trustee Requiring Beneficiary to Relieve Trustee of Liability as Condition for Making a Distribution
The trustee may not require a trust beneficiary to relieve the trustee of liability as a condition for making a distribution to the beneficiary if the distribution is required by the trust’s terms. In other words, you can’t be made to give up your right to sue the trustee as a condition of the trustee distributing your share of the trust to you. There is a big difference between a trustee who requests a waiver of liability and one who demands a waiver of liability before making a distribution. A waiver of liability means you are giving up your right to sue. A trustee can request a waiver of liability so that they don’t have to go to the time and expense of filing an account with the probate court.
Trustees acting in good faith provide a copy of their account to the trust beneficiary and allow the beneficiaries an adequate period of time to review the account and ask any questions they may have about what’s been reported in the account. If this sounds like your situation then your trustee is most likely not doing anything wrong by requesting a waiver of liability.
This is very different from a trustee who insists they will not distribute any trust property to you without you signing a waiver of liability. This is entirely improper. You might think of this as a shakedown and you’re right for thinking so. A trustee who does not share financial information with you and does not give you the opportunity to ask the questions you might have about what has been reported might as well wave a red flag as a warning to you.
If your trustee is requiring a waiver of liability before making your trust distribution then your trustee has breached their fiduciary duty to you.
Trustee’s Duty to Not Knowingly Become a Trustee of Another Trust with an Adverse Interest
The trustee of one trust has a duty not to knowingly become a trustee of another trust with an adverse interest to the beneficiaries of the first trust. If the trustee takes on an adverse interest then the trustee has a duty to eliminate the conflict of interest or resign as trustee when the conflict is discovered.
This rarely comes into play except in one particular situation. Let’s say a couple has created what’s commonly known as an A-B trust, usually the surviving member of the couple becomes the successor trustee when their spouse dies. The surviving spouse has a duty under the terms of the trust to allocate trust property to the two trusts. This doesn’t always happen.
Worse it’s not uncommon for the surviving spouse to put all the property into the A trust (the trust that should hold only the surviving spouse’s share of the property) and nothing in the B trust (the trust that should hold the deceased spouse’s share of the property.) When the beneficiaries of these two trusts are not identical, the beneficiaries of Trust B have an adverse interest to the beneficiaries of Trust A. If the same person is the trustee of both trusts then they are acting as trustee of a trust with an adverse interest.
This is an uncommon scenario but not an unknown scenario. When it does arise it almost always happens in blended families. If this is your situation it’s important you discuss it with the trust litigation attorney.
Trustee’s Duty to Control and Preserve Trust Property
The trustee has a duty to take reasonable steps under the circumstances to take and keep control of and to preserve the trust property. This fiduciary duty is just as straightforward as it sounds. Yet, any number of trustees failed to carry it out.
Reasonableness, of course, depends on the circumstances a trustee encounters when they take over administration of the trust. Very commonly a trustee simply needs to go through administrative steps to take control over trust property. For example, a trustee either needs to record an affidavit of succession of trustee or record a new deed in order to show that they are the trustee who holds title to a parcel of real estate. Similarly, a trustee will need to go to a bank to sign new account documents in order to take control of an existing bank account owned by the trust.
In most situations it requires only a small amount of work for a trustee to actually take control over trust property.
Unfortunately, not every trustee exercises even the minimal effort required to take control of trust property. A trustee who fails to take control over a bank account may find that it has been transferred to the state because the account has been dormant too long. A trustee who fails to exercise control over real estate may find that the property is occupied by squatters, has been vandalized, or is even the subject of an adverse possession lawsuit.
Once the trustee has taken control over the trust property they have to act reasonably to preserve that property. Common sense will tell you what a trustee should be doing. For assets, like bank accounts, almost no work is required. The trustee simply has to receive the monthly statements to ensure that the funds are still actually in the account.
If the trust contains stocks, bonds, or mutual funds then the trustee will have to make some decisions about whether the current investment should remain in place or should be sold because of the risk inherent in the asset and the proper way to reinvest those assets. For trust owned real estate, the trustee has to take more active measures. Real estate needs to be insured, real estate taxes need to be paid, and the real estate itself has to be managed.
Trustee’s Duty to Make Trust Property Productive
The trustee has a duty to make the trust property productive under the circumstances and in furtherance of the purposes of the trust. In simple terms, this means a trustee has to examine why the trust was created. For example, if the trust calls for outright distribution upon the settlers death, then the trustee may do very little in the way of making trust property productive because their primary responsibility is to transfer the property out of the trust to the beneficiaries.
Contrast that situation with one where the trustee knows trust property will have to be managed for years. If the trust contains an unoccupied single-family residence, then the trustee must make a decision about how to make that property productive. The trustee could rent the property and collect rent. The trustee could sell the property and reinvest the net proceeds of sale. What the trustee can’t do is simply allow the house to remain unoccupied.
Trustee’s Duty to Keep Separate and Identified Trust Property
The trustee has a duty to keep the trust property separate from other property not owned by the trust and to see that the trust property is designated as property of the trust. This means that a trustee has to be diligent in keeping trust property titled in the name of the trust and ensuring the trust property does not become co-mingled with any other property.
Suppose the trust owns an apartment building. The trustee collects rent every month from the tenants and pays expenses related to the apartment building. The trustee should be depositing the rent in a trust-owned bank account and paying the expenses from that trust-owned bank account. If instead the trustee collects rent and deposits the rent in his or her own personal bank account, then they have breached their fiduciary duty by failing to keep trust property separate from their personal property.
Trustee’s Duty Not to Delegate Trustee’s Duties
The trustee has a duty not to delegate the performance of actions that the trustee can reasonably perform and may not transfer the office of trustee to another person nor delegate the entire administration of the trust to a co-trustee or other person. The trustee has a fiduciary duty to trust beneficiaries. This does not require the trustee to perform every action for the benefit of the trust on their own. For example, if the trust owns a house that needs to be painted then the trustee is not required to paint the house themself. The trustee is responsible for obtaining a reasonable price for the painter, ensuring the work is actually done, and ensuring the work is of a suitable quality.
The one notable exception to this rule is that for investment and management of trust assets, the trustee may delegate investment and management as is prudent under the circumstances. The trustee will still remain responsible for being prudent in selecting who will perform the investment and management of trust assets, establishing the scope and terms of the duties they’ve delegated, and periodically reviewing the performance of the investment and management of trust assets.
Trustee’s Duty to Use Special Skills
The trustee has a duty to apply the full extent of the trustee’s skills. If the settlor, in selecting the trustee, has relied on the trustee’s representation of having special skills, the trustee is held to the standards of the skills represented. What this means is that a trustee who claims to have substantial training, experience, and/or education is held to a higher standard than the average person serving as trustee. For example if the trustee is a certified public accountant, then there is a reasonable expectation they have a heightened degree of sophistication for tax sensitive matters. If during their tenure as a trustee there is a problem concerning tax sensitive transactions, then the trustee is held to a higher standard than the average person. This can result in being able to prove a breach of fiduciary duty due to the higher standard.
Trustee’s Duty to Comply with the Prudent Investor Rule
The trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
This is commonly referred to as the prudent investor rule. It requires a trustee to make investments in a way that is appropriate for the trust beneficiaries. It prohibits the trustee from investing trust assets using their own standards.
The prudent investor rule is particularly important where trust assets are held in the trust for an extended period of time. This can happen because the trust requires the assets be held or because the trustee has failed to be diligent in carrying out the terms of the trust. Trust beneficiaries who have had their share of the trust held in trust for an extended period of time should examine whether the trustee has appropriately invested and managed trust assets.
Trustee’s Duty to Account to Trust Beneficiaries
The trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed. Each of these events triggers the duty of the trustee to accounts to the beneficiaries. It’s the trust account that allows a beneficiary to understand what has occurred with trust assets and income during the period of the account. Reviewing the account is how you as a beneficiary will decide the trustee has acted appropriately or inappropriately.