The term “fiduciary” is from Latin and means “something inspiring trust” or “credentials.” In law, a fiduciary duty is a particular duty owed by one person to another. This duty is set by state law. Under state law, an individual who is the trustee has a fiduciary duty to beneficiaries of a trust.
Fiduciary Duty of Trustees
What Are the Trustee’s Duties Toward Trust Beneficiaries?
A trustee is a person that holds legal title to trust property. A trust is a legal means through which an individual, known as a settlor, gives property or assets to expressly named recipients, called beneficiaries. By holding legal title, the trustee has the authority to transfer the trust property to the beneficiaries, per the settlor’s instructions in the trust. The trustee is liable for administering the trust before the property is transferred.
Trust administration consists of many activities. These activities include the trustee’s managing, investing, protecting, and safeguarding the assets the settlor placed in the trust.
The law regards these actions as essential obligations. Therefore, a trustee is instructed by law to exercise particular fiduciary duties. Exercising these duties ensures that when the time comes for the transfer of property or assets to beneficiaries, the parcel will be available for the beneficiaries’ use, as the settlor intended.
A trustee’s fiduciary duties include:
- The Duty of Loyalty: Trustees must assure that beneficiaries’ interests in trust property are protected. To ensure this, trustees may not take any actions in favor of themselves that would damage those interests. For instance, a trustee may not take or borrow funds from the trust and use those funds for the trustee’s benefit.
- The Duty of Care: Even when a trustee acts with utmost loyalty, the trustee’s decisions to protect the beneficiaries must be made with care and diligence. Settlors generally place money in trust to be invested. Under the duty of care, trustees are accountable for deciding when, how, and what to invest.
- Trustees must make reasonable investment decisions. This means these determinations must be prudently undertaken after the trustee investigates the pros and cons of a particular investment.
- The Duty to Segregate Funds: The duty to segregate funds is similar to the duty of loyalty. The duty to segregate funds demands that the trustee not mix or “commingle” their funds with assets in the trust. If a trustee fails to keep their funds separate from the trust’s funds, issues may emerge when the trust assets must be transferred to the beneficiaries.
- The Duty to Safeguard: A trustee is liable for preserving the funds and assets in a trust. The duty to safeguard requires trustees to keep trust monies secure to avoid theft.
- The Duty to Invest: A trustee must ensure that the trust’s property earns money while the property is in the trustee’s care. Since this money becomes income to beneficiaries, trustees have a fiduciary duty. Investment decisions must be made to earn money. Trustees must exert reasonable skill and care in deciding what investments have a fair chance of earning money.
- The Duty of Accounting: This fiduciary duty requires that trustees make an accounting of and keep records for all financial transactions concerning the trust property. The trustee must keep records of expenses required to administer the trust.
The trustee manages the trust’s assets, a considerable responsibility. The settlor or the court would appoint the trustee if the settlor failed to appoint someone. The trustee must willingly accept their position. Once accepted, the trustee cannot resign without the approval of all of the beneficiaries or the court. A trust will not fail for want of a trustee.
Since the trustee holds legal title to the trust property, they owe fiduciary duties to the equitable title beneficiaries. The trustee must distribute the property per the settlor’s instructions and desires. Their three primary jobs include investment, administration, and distribution.
A trustee is personally liable for a breach of their fiduciary duties. The trustee’s fiduciary duties include loyalty, a duty of prudence, and subsidiary duties. The duty of loyalty mandates that the trustee administers the trust solely in the interest of the beneficiaries. The duty of prudence requires that the trustee is held to an objective standard of care in managing the trust property.
Subsidiary rules include the duty of impartiality (no favoritism between classes of beneficiaries), the duty not to commingle trust property and the trustee’s personal property, and the duty to notify and account to beneficiaries. The trustee will always have duties, or the trust will become passive and legal title will pass to the beneficiaries.
Under common law, the trustee had an affirmative duty not to delegate acts they could reasonably be required to perform personally. However, a trustee could employ agents and attorneys reasonably under the circumstances. The UniformTrust Code (UTC) commentary notes that a “trustee may delegate duties and powers that a prudence trustee of comparable skills could properly delegate under the circumstances.” Further, the UTC holds the trustee to a standard of reasonable care, skill, and caution when selecting an agent.
If there are multiple trustees, they carry dual accountability for their actions, inactions, and decisions and those of their co-trustees. When there were multiple trustees at common law, each had an obligation to participate in trust administration unless otherwise specified. When one trustee breached their fiduciary duty, the other trustees were required to compel them to redress it. Under the UTC, co-trustees are directed to exercise reasonable care, to partake in the performance of the trustee’s functions, unless they are effectively assigned to another co-trustee, and act by majority decision.
The UTC authorizes a dissenting trustee to absolve him or herself from liability by recording such dissent. But a dissenting co-trustee must prevent “any serious breach of trust” and must “compel a co-trustee to redress a serious breach of trust.”
Beneficiaries can recover improperly distributed trust assets if they are traceable back to the trust. Beneficiaries’ claims against the trustee are no higher priority than those of other trustee creditors. Beneficiaries, however, and not creditors, are the only parties who can reach the trust property. If a trustee wrongfully disposes of the trust property, the beneficiaries can retrieve it unless it has come into the hands of a bona fide purchaser for value. If the trustee disposes of the trust property and acquires other property with the sale proceeds, the beneficiaries can enforce the trust on the newly acquired property.
Can I File Suit for a Trustee’s Breach of Fiduciary Duty?
Under most state laws, any trustee’s fiduciary duties violation renders the trustee liable. The beneficiary must prove that a trustee breached a fiduciary duty in the lawsuit. If a trustee can show this, the trustee is entitled to money damages. These damages equal the full amount of the loss to the trust from the improper action.
Each state has a statute of limitations that controls how long a beneficiary has to file a lawsuit against a trustee. Normally, the statute of limitations does not begin to “run” until the beneficiary knows of the improper conduct. The beneficiary may gain such knowledge, for example, when the trustee files an accounting that reports the specific wrongful conduct.
Do I Need the Help of an Attorney With Breach of Fiduciary Duty Issues?
If you believe that a trustee has improperly administered a trust, you should contact a trust attorney. A knowledgeable estate attorney near you can review the trust documents, determine what rights you have under that document, and analyze whether a trustee engaged in a breach of fiduciary duty causing loss of money to the trust. The estate attorney can represent you at settlement proceedings, hearings, and in court.
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