For many clients, the inclusion of revocable and/or irrevocable trusts as part of their overall estate plan is an important feature. Revocable trusts can allow for probate avoidance and estate tax planning, whereas irrevocable trusts can be useful for leveraging the use of gift and estate tax exemptions through lifetime gifting.
The person who has the responsibility for managing a trust is the “trustee”. For revocable trusts, a client may often start out as his or her own trustee, but it will be necessary for the client to name one or more successor trustees to act upon the client’s death or incapacity. For irrevocable trusts, it may be necessary for tax reasons to name a third party as trustee from the date the trust is created.
If you find yourself in the role of trustee, it is essential to try and avoid common pitfalls which may give rise to a “breach of fiduciary duty” claim. By both common law and statutory provisions, the relationship of trustee gives rise to certain fiduciary duties to the beneficiaries of the trust.
Although the duties and obligations of a trustee will vary to some extent from state to state, as a general rule the fiduciary duties of a trustee can be broken down into three categories: (a) a duty of loyalty; (b) a duty of care; and (c) a duty of full disclosure.
The trustee’s duty of loyalty refers to a trustee’s obligation to manage the trust in a way that is in the best interests of the beneficiaries, rather than in the trustee’s own personal interest. A trustee must avoid conflicts of interest in dealing with the trust assets and the beneficiaries. For example, a trustee should not borrow funds from a trust or purchase assets from (or sell assets to) the trust, at least not without full disclosure and consent of the beneficiaries.
The trustee’s duty of loyalty also prevents a trustee from favoring one beneficiary (or class of beneficiaries) over another. For example, if the trust has certain beneficiaries who are entitled to receive current trust income, the trustee should not invest totally toward growth without regard to providing the income beneficiary with a reasonable rate of return.
The trustee’s duty of care requires the trustee to monitor trust investments and make changes as may be necessary in view of market conditions and other factors. Absent some language in the trust agreement to the contrary, a trustee is generally bound by the “prudent investor” standard in determining how to invest trust assets. The duty of care also requires a trustee in most situations not to delegate certain tasks to others, and a trustee should never take any actions which are outside of the guidelines for distributions and investments which are set forth in the trust agreement.
A trustee’s duty of full disclosure requires a trustee to furnish the beneficiaries with a copy of relevant portions of the trust agreement (or in some jurisdictions a complete copy of the trust agreement) so that the beneficiary will be aware of what his or her rights are under the document. A trustee is required to provide annual accountings and statements of assets to beneficiaries as required by law. The compensation of the trustee must be reasonable and must be fully disclosed to the beneficiaries.
Fiduciary duties can be complex and may vary from state to state. We therefore recommend that a trustee always seek legal advice when acting on behalf of a trust, and tread particularly carefully in situations where there may be conflict between the beneficiaries or ambiguities under the trust agreement.
