TRUST BENEFICIARIES AND TRUSTEES

Three Rules Never to Forget

In our practice we continue to observe the proliferation of fiduciary litigation and, in particular, the growth of lawsuits against trustees. We receive many calls from beneficiaries claiming to be harmed by their trustee’s management, vexatious conduct or investment decisions. With that in mind, we thought it would be useful for clients and friends to be aware of certain sections of the Restatement (Third) of Trusts and its accompanying commentary. The Restatement is an influential treatise for practitioners of law, trustees and investment advisors, as well as a fundamental source of legal authority.

1. GENERAL STANDARD OF PRUDENT INVESTMENT (SECTION 227)

The Trustee is under a duty to the beneficiaries to invest and manage Trust funds as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the Trust. The following are well-respected principles of prudence that dictate Trustees’ decision making:

(1) Sound diversification is fundamental to risk management and is therefore ordinarily required of Trustees; (2) Risk and return are so directly related that Trustees have a duty to analyze and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the Trusts that they administer; (3) Trustees have a duty to avoid fees, transaction costs and other expenses not justified by needs and realistic objectives of the Trust’s investment program; (4) The fiduciary duty of impartiality requires a balancing of the elements of return between production of current income and the protection of purchasing power; and (5) Trustees may have a duty as well as having the authority to delegate as prudent investors would.

2. DUTY OF LOYALTY (SECTION 170)

The Trustee is under a duty to administer the Trust solely in the interest of the beneficiaries. A Trustee is in a fiduciary relation to the beneficiary and as to matters within the scope of the relation he is under a duty not to profit at the expense of the beneficiary and not to enter into competition with him without his consent, unless authorized to do so by the terms of the Trust or by proper court.

3. DUTY WITH RESPECT TO ORIGINAL INVESTMENTS (SECTION 229)

The Trustee is under a duty to the beneficiaries, within a reasonable time after the creation of the Trust, to review the contents of the Trust estate and to make and implement decisions concerning the retention and disposition of original investments in order to conform to the requirements of Sections 227 and 228. The Restatement comments: “The Trustee must decide which original investments and how much of each to retain and, if adjustments are to be made, when and in what order assets should be sold or exchanged. These decisions must include a determination whether … any property received from the settlor is an impermissible investment. The Trustee must also determine whether the Trust terms direct retention or disposition of any of the inception assets.”

If you have questions about the conduct of an executor or trustee, or are seeking guidance as to how to administer a trust, please contact SGR.