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Duties of a trustee

Photo by Michigan Municipal League is licensed by CC 2.0

The duties of a trustee are a matter of great legal significance. The trust’s trustee owes the trust and its beneficiaries a fiduciary duty, meaning that the trustee is expected to act solely in their best interest. In this post, I provide a brief overview of the legal duties of a trustee.

The Duties of a Trustee of a Trust

The duties of a trustee include:

  1. The duty of loyalty
  2. The duty or prudence
  3. The duty of impartiality
  4. The duty to collect and protect
  5. The duty to earmark
  6. The duty not to comingle
  7. The duty to inform

The Duty of Loyalty

A trustee must administer the trust for the sole benefit of the beneficiaries in accordance with the terms outlined by the settlor—or creator—of the trust. The trustee therefore cannot engage in self-dealing, meaning that he or she cannot take advantage of the position for personal gain.

The law takes this duty seriously. All self-dealing transactions are voidable by the beneficiaries, even if the transactions were reasonable or harmless. This is known as the No Further Inquiry Rule and exists to ensure that the trustee acts only in the interests of the beneficiaries.

Self-dealing may be permissible, however, under the following limited circumstances:

  1. The settlor of the trust expressly authorized self-dealing in the trust documents.
  2. The beneficiaries have consented to the self-dealing prior to its occurrence.
  3. The trustee is a financial institution.

The Duty of Prudence

The duty of prudence requires the trustee to administer the trust as a prudent person would by considering the purposes, terms, distribution requirements, and other circumstances of the trust. To satisfy this standard, the trustee must exercise reasonable care, skill, and caution.

From this duty of the trustee comes the Prudent Man Rule, which states that any investment made with trust property will be scrutinized individually as to whether it was a prudent investment. Under this rule, trustees may not invest in high-risk stocks because they would run afoul of this rule if the investment does not bring a high return.

This in turn gives rise to the Prudent Investment Rule, which states that the trustee is held to a complete portfolio standard. To comply with this rule, diversification is key. The trustee may delegate investment authority but must still stay appraised of what’s happening. The duties of the trustee do not allow for the “set it and forget it” strategy of investing.

The Duty of Impartiality

The duty of impartiality states that where there are multiple beneficiaries, the trustee must not show partiality toward any one beneficiary over another. The trustee must treat all beneficiaries the same.

The Duty to Collect and Protect

The duty to collect and protect states that the trustee must gather applicable assets within a reasonable period of time. With respect to testamentary trusts, there is a duty to inspect the property and to ensure that the executor has upheld his or her duty to protect the property.

The Duty to Earmark

The duty to earmark provides that the trustee must designate trust property as such. The trustee must distinguish it from his or her own property.

The Duty Not to Commingle

The duty not to commingle provides that the trustee cannot commingle his or her own funds with that of the trust. There is, however, an exception for corporate trustees.

The Duty to Inform

The duty to inform states that the trustee must keep the beneficiaries informed as to what is happening with the trust and its assets.

Conclusion

This is just a brief overview of the differing duties of a trustee. If you find yourself serving as a trustee, I encourage you to reach out to a competent attorney to achieve a more comprehensive understanding of the legal duties that have been assigned to you.


See Also:

Introduction to Trusts
Creating a Trust

Categories: Estate Planning

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