Duties of the Trustee

Terms:

Ministerial function:
A function as to which there is no occasion to use judgment or discretion.

Discretionary acts:
Those acts that have no preconceived course of conduct that one must or must not take, thereby requiring the judgment and choice of the person performing the act.

Imperative acts:
Those acts that are required to be done.

Prudent Man Rule:
The trustee may invest in a security if it is one which a prudent man of discretion and intelligence, who is seeking a reasonable income and preservation of capital, would buy.

“Statutory list”:
A list of approved investments for trusts or other fiduciary relationships.

Duty to administer trust according to its terms

When a trustee accepts this position, he or she is obligated to carry out the settlor’s intentions, as stipulated in the trust agreement. As mentioned in the last section, the trustee can delegate some of the duties to others; however, the trustee is still personally responsible for the administration of the trust assets and must therefore use care when delegating duties to others.

Traditionally, a trustee had more latitude in delegating routine “ministerial” functions of the trust, while personally performing duties that involved using decision-making skills—discretionary functions. In determining the acts which a trustee may properly delegate, some of the relevant factors are:

  • the amount of discretion involved;
  • value of the property;
  • whether the act is related to principal or income;
  • the remoteness of the subject matter of the trusts; and
  • whether the act involves professional skill possessed by the trustee herself.

Today, given that one of the trustee’s functions is ensuring that the trust assets are productive, it would be reasonable for the trustee to consult with qualified investment professionals for advice on the best course to take.

Regardless of which type of functions the trustee may decide to delegate, she must monitor and supervise the conduct of these agents, in keeping with her ultimate obligation of safeguarding the beneficiaries’ interests, which cannot be delegated. If the trustee merely accepts outside advice without diligently evaluating its suitability for the trust’s beneficiaries, the trustee faces being liable for breach of trust and any losses attributable to this lapse in judgment. See, e.g., Shriners’ Hospitals for Crippled Children v. Gardiner, 733 P.2d 1110 (Ariz. 1987).

Example: Jordan was the trustee of a trust fund to benefit his late brother’s children. In addition, he worked long hours as an accounting professor at a local community college. Plus, he had a wife and children of his own. One of his students was a stock market enthusiast. Therefore, Jordan felt comfortable letting the student pick stocks in which he would invest the trust fund assets. He did not have the time to investigate the track record of these stocks himself. Rather, he blindly invested the trust’s funds in these stocks. This type of delegation is improper and would constitute a breach of trust. Jordan has an affirmative duty to prudently invest the trust assets. That obligation can only be fulfilled if he takes an active part in the selection of the investments. As such, if any of these investments yield a loss for the trust fund, Jordan would be personally liable to the beneficiaries. See, e.g., Meck v. Behrens, 252 P. 91 (Wash. 1927).

On the other hand, if the trustee properly delegates a trustee function, there is no personal liability, provided the trustee used reasonable care in deciding to make the delegation and in selecting, instructing and supervising the agent. Instead, if the agent is guilty of some misconduct, such as negligence or dishonesty, only the agent would be liable.

When there is more than one trustee, each co-trustee is responsible for all functions in the administration of the entire trust and each must use reasonable care to prevent any co-trustee from breaching the trust.

Example: Jordan and his sister Veronica are trustees of a trust fund to benefit their late brother’s children. Jordan works as an accounting and finance professor at a local community college and is married with three children. Veronica is a nurse and a single mother of two children. Given Jordan’s expertise in accounting and finance, she passively allows him to make all the investment decisions for the trust assets. Despite Jordan’s superior knowledge of accounting and finance, Veronica’s complete deference to Jordan’s more sophisticated knowledge of the stock market amounts to a complete abandonment of her duties as a co-trustee. Except in an emergency or some other special circumstance, delegation to a co-trustee is permissible only to the extent that it would be permitted to an agent. As such, both were culpable in breaching the trust: Veronica for shirking her duties and Jordan for allowing her to coast. See, e.g., Caldwell v. Graham, 80 A. 839 (Md. 1911).

Standard of care, skill and caution

Generally, a trustee must exercise that degree of care, skill and caution that a reasonably prudent person would exercise in dealing with her own property. A trustee’s personal deficiencies will not reduce the minimum degree of skill required. Touting the fact that the trustee relied on expert advice is not an automatic panacea for this requirement. Rather, courts view expert advice as only persuasive, not conclusive, in justifying an investment decision gone awry.

Conversely, if the trustee possesses some special skill, the degree of skill required to be exercised by the trustee will be elevated to this superior level. This is particularly true for professional fiduciaries, such as trust companies or banks. They are held to a higher standard than the lay trustee. See, e.g., Estate of Beach v. Carter, 15 Cal. 3d 623 (1975).

Duty of loyalty to beneficiaries

The trustee is under a duty of absolute loyalty to the beneficiaries. As previously mentioned the trustee must put the beneficiaries’ interests before her own and administer the trust solely for their benefit. As such, the trustee must not undertake any transaction that would be adverse to the beneficiaries’ interests, especially avoiding any self-dealing.

Example: In addition to being a trustee for his late aunt’s trust fund, Gianni sold real estate. One of the assets in the trust was his aunt’s former residence. Since the real estate market was heating up, Gianni decided to sell the residence, handling the listing himself. When the home sold several months later, Gianni pocketed the 6% commission. Unless authorized by a trust provision, court order or consent of all the beneficiaries, it is a violation of the trustee’s duty of loyalty to the beneficiaries to engage personally in any financial transaction involving trust property. Here, Gianni clearly breached this duty when he sold the home and took the commission from the proceeds. See, e.g., Broder v. Conclin, 121 Cal. 282 (1898).

Another act that has an appearance of self-dealing, thereby violating the trustee’s fiduciary duties, is when the trustee accepts compensation, such as a bonus or commission, from a third party for an act done in the administration of the trust.

Example: Gianni is the trustee for his late aunt’s trust fund. One of the assets in the trust is a personal residence. One of Gianni’s duties is to safeguard trust property, so he shopped around for the best price for a homeowner’s policy on the residence. Since one of Gianni’s neighbors was an insurance agent, he offered him a very good price and a commission in appreciation of the business. By accepting this commission, Gianni violated his fiduciary duty to the trust.

Duty to secure and safeguard trust estate

After accepting the appointment as trustee, the trustee has a duty to take and keep control of the trust property in accordance with the terms of the trust agreement. This process involves collecting any land, tangible personal property and documents associated with intangibles, such as stock certificates. Accompanying this duty to collect trust assets is a duty to enforce all rights or claims of the trust against third parties. If the trustee delays taking control of the assets, any resulting loss will be chargeable to the trustee personally. See, e.g., Kline’s Estate, 124 A. 280 (Pa. 1924).

In addition, the trustee must exercise reasonable care in safeguarding the assets collected. If the trustee is derelict in her duties, she can be held personally liable for any losses.

Example: Tina is the trustee of her late sister’s trust fund. Before depositing the funds ($50,000) into a bank account, she diligently investigated several federally insured banks in the area. Subsequently, the bank she chose became insolvent. Due to Tina’s exercise of reasonable care in picking the bank, she did not breach her fiduciary duty and would not be personally liable for any loss. See, e.g., King v. Porter, 160 So. 101 (Ala. 1935).

Duty to segregate and identify assets

The trustee is required to keep trust assets separate from her own assets and earmark them as specifically associated with the trust. If the trustee fails to undertake these steps, the trustee will be absolutely liable (i.e., even without fault or negligence) for any loss the property might sustain.

Example: Tina is the trustee of her late sister’s trust fund. Since she was very busy at work, Tina did not have the time to diligently investigate where she should deposit the funds. As a temporary measure, she deposited the $50,000 trust assets into her savings account without disclosure of her fiduciary relationship to the money. Subsequently, the bank fails. Tina learns at that time that the bank was not federally insured. As such, the funds are lost. Due to Tina’s breach of fiduciary duty, she is personally liable for the loss, even if the loss was not Tina’s fault.

Duty to account

As part of the trustee’s duty of administering the trust property, the trustee must keep clear and accurate records and make regular accountings (encompassing all properties, receipts and expenditures) to the beneficiaries. In addition, the trustee may have to periodically make an accounting to the court.

Accounting to beneficiaries can get more complicated (and can generate conflicts) if the beneficial interests are split between: an income beneficiary (usually for life or some other period) and a remainder beneficiary (eventually entitled to the trust principal).

Generally, ordinary and current expenses (e.g., taxes, repairs and maintenance) of trust administration come out of trust income, whereas expenses that are “extraordinary” or solely beneficial to the remainder beneficiaries (e.g., expenses for improvements or preservation of the trust corpus) should be paid from the capital account.

In addition, any losses sustained from operating a business owned by the trust come from the principal. See, e.g., In re Estate of Davis, 54 Misc. 2d 1065 (1967). Thus, it is essential to properly classify receipts and disbursements so that they are credited or charged to the income or principal accounts.

In managing dual interests, certain biases may develop because the rules of trust accounting often differ from generally accepted accounting principles (“GAAP”). For example, in trust accounting, there is a tendency in some types of issues to favor income beneficiaries and in other situations to avoid a forced income distribution of properties or funds likely to be important to maintaining a properly functioning trust estate.

An “income bias” (bias in favor of income beneficiaries) could take the form of charging depreciation to principal rather than subtracting depreciation from income. A principal bias (bias in favor of principal, usually remainder, beneficiaries) could be the reinvesting of stock dividends entirely and keeping them in the principal rather than treating the receipt of dividends as income.

Duty to invest and to make property productive

As previously discussed, part of the trustee’s obligation is to prudently invest the trust property to make it productive for the income beneficiaries. This duty can take two forms: require the trustee to make every asset productive, thereby forcing the trustee to sell unproductive assets or oblige the trustee to focus on the overall return of the trust estate. Regardless of the approach, the key is to manage the assets to fulfill the needs of both income and principal beneficiaries.

Example: Dylan holds a home and lot in trust for Cameron. Dylan negligently permitted the roof to deteriorate and leak so that rain caused damage to the plaster on the ceiling and the hardwood floors. Given the degree of disrepair, no one wanted to rent the house. Clearly, Dylan is not fulfilling his duty to make the home productive. As such, Dylan would be liable to Cameron for the loss of income and damage to the trust property.

Before investing the trust property, the trustee must evaluate the appropriateness of the proposed investment. Some states even have specific rules that address investment standards as guidance for trustees. One such aid is a “statutory list” or “legal list” of approved investments for trusts or other fiduciary relationships. These lists could be “mandatory” (a trustee is in breach if she invests in anything else) or “permissive” (a trustee is taking chances by investing outside the list). See, e.g., In re Cook’s Trust Estate, 171 A. 730 (Del. 1934).

In addition, the investment must be prudent, given the circumstances, and be in line with the objectives of the trust and its distribution requirements. Prudence still applies even if the trustee must follow an approved list of investments. Blindly investing the trust’s assets is never permissible. A cardinal principle of prudent investment requires that the trustee diversify the investment portfolio in order to minimize the risk of loss. See, e.g., In re Dickinson, 25 N.E. 99 (Mass. 1890).

Example: Pablo is the trustee for a trust to benefit the children of his late brother, Carlos. The trust agreement favored investing in government securities. Pablo was enthusiastic about energy stocks, so he invested the entire $200,000 trust in Enron stock. When Enron collapsed the entire trust fund was lost. Pablo violated one of the main tenets of investing—diversification. As such, he breached his fiduciary duty and would be liable to the trust for the loss.

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