Duties of a Trustee

If you run through old bar exam essays testing the subject of Trusts, it's unlikely you'll see an issue repeat more often than the issue testing the duties of a trustee. It's a topic that shows up often and isn't especially difficult. There are two main duties to understand well: the duty of care and the duty of loyalty.  There are also duties tested less often but are still worth knowing. In total, there are 6 duties to keep in mind.

Duty of Care:

Simply stated, a trustee has a duty to administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries. A trustee should remain impartial and if a given trustee has special skills then that trustee might be held to an even higher standard of care than the one stated here in the general rule.

Duty of Loyalty:

This one has a bit more complexity as there are multiple ways that a trustee might breach the duty of loyalty. A trustee must not do any of the following:

--buy or sell trust assets for the trustee's own benefit (as opposed to for the benefit of the trust)

--sell property of one trust to another trust if the trustee is the trustee of that other trust

--borrow trust funds or loan personal funds to the trust

--use trust assets to secure a personal loan

--personally gain through the position of trustee (though this would not include reasonable compensation)

--invest in a corporation's stock if the trustee is a trustee of the corporation that owns the stock.

More generally, absent court approval or express waiver, a trustee cannot enter into a transaction in which the trustee is dealing with the trust in the trustee's individual capacity (ie, self dealing). And self dealing will be presumed if the trustee enters into a transaction as trustee with the trustee's spouse, close relatives, attorney, or a corporation in which the trustee owns a significant interest. 

Importantly, a transaction that involves self dealing is voidable (rather than void) by the beneficiary affected by the transaction unless a court approves the terms of the transaction, the beneficiary fails to bring suit within a prescribed time period, the beneficiary consents or otherwise ratifies the transaction, or the transaction arose before the trustee became the trustee. 

Duty to Report:

A trustee must provide all qualified beneficiaries with the trustee's name, address, and telephone number. A trustee also must respond to beneficiary requests for information about the trust's administration and provide a copy of the trust instrument if requested. Lastly, a trustee must furnish an annual accounting of the trust.

Duty to Separate Trust Property and Keep Records:

This is the classic "no commingling." The trustee must earmark trust property by labeling it as trust property. If the trustee commingles trust property with the trustee's own property, losses are charged to the trustee and gains are credited to the trust. Not great for the trustee.

Duty to Enforce Claims and Defend Trust from Attack:

The trustee has a duty to enforce claims and to defend the trust. That's about it for that one.

Duty to Preserve Trust Property and to Make it Productive:

This is essentially the duty to invest the trust property as a prudent investor. The trustee is expected to lease land owned by the trust, invest money earned by the trust, etc. The measure of damages if the trustee breaches this duty is the amount of income that normally would accrue from such investments.