Co–authored by Kristine M. Scott, Estate Planning Associate

In the last post, we talked about the role of Trustee in general, as well as the importance of a Trustee fulfilling his or her obligations to the trust and its beneficiaries. This week, we’ll elaborate on what each Trustee owes to the beneficiaries of the trust being managed.

The obligations placed on an individual acting as Trustee are commonly known as “fiduciary” duties. In the context of a trust, the Trustee and trust beneficiaries maintain a legal relationship whereby the Trustee holds legal title to the assets of a trust for the sole benefit of the trust’s beneficiaries.

Thus, the Trustee is the “fiduciary” and the beneficiary is the “principal,” with the law imposing various duties on the Trustee that are owed to the principal(s). It is this relationship that gives beneficiaries certain legal rights regarding the trust under which they benefit.

These fiduciary obligations can be summed up by saying there are two fundamental duties every Trustee must fulfill in administering a trust: a duty of loyalty and a duty of care. While there are other duties a Trustee must observe in their fiduciary capacity, most of them arise because of these two fundamental duties.

Duty of Loyalty

A Trustee owes a duty of absolute loyalty to the beneficiaries. Because of this, the Trustee must refrain from putting the personal and financial interests of the Trustee above those of the beneficiaries. For this reason, a trustee cannot engage in “self-dealing” with the trust by causing the trust to enter into a transaction that could place the trustee’s interests above those of the beneficiaries.

For example, if the trust is selling a building, the Trustee cannot enter into a purchase agreement with the trust to buy the building. This situation is prohibited for two reasons.

One, because the Trustee is purchasing the property for his own benefit, he or she may be inclined to sell the property at a lower price than could be secured on the open market. Two, in representing the trust, the Trustee is more than likely receiving compensation for facilitating the purchase. The combination is a violation of the duty to loyalty.

A similar situation can arise if the Trustee has an interest in a business that is a competitor of company in which the trust has a substantial ownership interest. Whether or not the Trustee actually engages in conduct that would adversely affect the trust-owned company, the potential is there. Such a transaction will be heavily scrutinized, and all doubt resolved in favor of the beneficiaries and against the Trustee.

It is imperative that Trustees not undertake any transactions that have even the potential of directly or indirectly adversely affecting the trust beneficiaries.

Duty of Care

Another cornerstone of the fiduciary relationship imposed on all trustees is the duty of care.

This duty of care also encompasses various subsets of obligations, but the overall theme is that all trustees must carefully and thoughtfully manage the property and assets of the trust. This includes:

• prudently investing trust assets,
• close monitoring of asset performance,
• safeguarding all property owned by the trust,
• ensuring trust assets are segregated from the trustee’s personal assets,
• and maintaining an accurate account/record of all trust transactions.

All of these obligations are intended to ensure a trustee, while holding legal title to the assets of the trust, manages the trust for the benefit of its beneficiaries.

If a Trustee fails to satisfy these fiduciary obligations, trust beneficiaries may have the right to remove their trustee “for cause,” in addition to possibly recovering damages against the trustee.

If you think that your trustee has failed to live up to his obligations, seek legal advice. You can reach our office at (904) 398-0900.