To understand a trustee, you must first understand what a trust fund is. Typically, a trust is a document that appoints a person, a trustee, to manage the property for one or more beneficiaries. The settlor creates the trust and beneficiaries’ benefits from the trust’s assets and holds equitable title. A beneficiary can be one person or many people, or a beneficiary can be a corporation or entity.
What Is the Difference Between Legal Title and Equitable Title?
Title can be split into two categories: (1) equitable title and (2) legal title. Equitable title allows someone to use and benefit from the property while another person holds the legal title. The actual owner of the title holds legal title; this is usually transferred through a document like a deed, will, or in our case, a trust.
What Is a Trustee?
Now, a trustee holds legal title to the property that has been transferred from the settlor. This does not mean, however, that the trustee owns the property. Instead, they have a fiduciary duty to fulfill obligations to the beneficiaries imposed by the trust. A fiduciary duty is the obligation to act in the interest of another. Here, a trustee is obligated to work only to benefit the beneficiaries and follow the rules set up in the trust.
How Is a Trustee Appointed?
As stated above, a trustee is appointed by the settlor through a trust. A trustee does not need to be named when the trust is created, and so long as the settlor is alive, a trust can be made without a trustee appointed. However, if the settlor has passed and a trustee has not been named, the court will select one.
Like a beneficiary, a trustee can be one or more people or a corporation or entity, as long as they can take legal title over the property. Ultimately, an appointed trustee can choose whether or not they want the position. If they do decide to take on the responsibilities, it is very important that they explicitly accept so they can be held accountable for the actions they take as trustee.
What Are the Duties of a Trustee?
A person that holds a fiduciary duty is held to a higher standard than your average person. This duty requires a trustee to represent the beneficiaries to the absolute best of their ability and in a higher skill set than an average, reasonable prudent person, would. To do so, the courts have determined a trustee must have certain duties.
These duties can include:
- Duty of Loyalty: The key element of being a trustee is remaining loyal to the trust and the beneficiaries, a trustee cannot purchase trust property, and they cannot use the property for their own benefit and financial gain. A trustee must act only with the interest of the beneficiaries in mind.
- Duty to Delegate: Once a person is assigned as trustees, they cannot give their responsibilities on to anyone else.
- Duty Not to Commingle Trust Property: Trust property must be clearly identified and remain separate from a trustee’s own property and the property of another trust. For example, if Benjamin is the appointed trustee on two trusts, profits from Trust X must be deposited into that bank account under the name “Benjamin as Trustee.” These profits cannot be deposited into Benjamin’s personal account or the account of Trust Y.
- Duty to Control Assets: As soon as the trust is active, it is up to the trustee to take control and inventory the property for the beneficiaries. Often a trustee hires someone to appraise or calculate the value of the property.
- Duty to Account: A trustee must give a full report of transactions and activities that occurred during the management of the trust to the beneficiaries. A trustee is responsible for keeping all records, so the accounts are complete and accurate, and the trustee can prove full faithfulness to the trust.
What If a Trustee Violates Their Duties?
When a Trustee violates their duties, it is called a breach of fiduciary duty. A breach occurs when the trustee does not do what the trust asks of them or intentionally does what the trust asks them not to do.
For example, Benjamin is in possession of Trust X funds and is supposed to deposit these funds into the Trust X’s account. Instead, Benjamin deposits the funds into his personal account and uses these funds to purchase a new car. Here, Benjamin has misused trust funds and violated his duty as trustee. Even if Benjamin plans to pay the trust account back, or even if Benjamin has paid the Trust account back, he has violated his duty.
It is important to note a breach only occurs when the trustee is acting on behalf of the beneficiaries, not in their own personal interest outside of the trust. It does not even matter if the trustee is acting in good faith or breaches by mistake. They are held at such a high standard in their position; it only matters that the duty is breached, not why.
Accordingly, a breach of fiduciary duty usually leads to the end of the trustee position and repayment to the beneficiaries, or trust accounts, for the damages or loss. These cases are not criminal but processed through civil claims court and should be handled appropriately.
Do I Need a Lawyer for Assistance With Trustee Law?
Laws on trust and the relationship between trustee and beneficiary can be quite complex. It would be in anyone’s best interest to contact an estate planning lawyer to help them plan a trust. If you believe you need assistance with a lawsuit or drafting a trustee relationship clause, a local business lawyer can help you understand its steps.