Key Takeaways
- A trustee’s duty of impartiality means that they should not place the interests of one beneficiary over another during their management or distribution of the trust.
- Concerns over impartiality often arise when trustees are forced to make decisions between current or future investments or when a beneficiary places pressure on a trustee to take actions that benefit them.
- Other aspects of a trustee’s duty during trust administration include a duty of loyalty, a duty of care, a duty of prudence, and a duty to manage assets responsibly.
- The trustee should balance the interests of all beneficiaries by treating all beneficiaries equitably and addressing conflicts carefully.
Introduction
A trustee plays a vital role in the administration of a trust, as it is their responsibility to distribute trust assets to beneficiaries in accordance with the wishes of the trust creator and in the best interests of all beneficiaries.
As a central part of the trust administration process, a trustee has a fiduciary duty to act in the best interests of the trust and the grantor. This duty encompasses multiple aspects, which include responsibly managing assets, remaining loyal to the interests of the trust and its beneficiaries, and remaining impartial and unbiased toward any beneficiaries throughout the entire process.
If a trustee fails to uphold their fiduciary duty, then they may jeopardize the wishes of the trust, its creator, and its beneficiaries, and they may face significant legal consequences. It’s essential that trustees understand their duty of impartiality so they can responsibly manage the trust, and that beneficiaries understand this duty so they know when to address issues.
Understanding the Duty of Impartiality
The duty of impartiality states that a trustee must act impartially and without any personal bias throughout the trust administration and management process. Understanding this duty of impartiality and what it entails is crucial for a trustee to effectively and responsibly fulfill their duties while maintaining the best interests of the trust.
California Probate Code §16003 explicitly states that if a trust has two or more beneficiaries, the trustee has a duty to deal impartially with them and act impartially in investing and managing the trust property, taking into account any differing interests of the beneficiaries.
Legal Framework
It’s important for trustees and beneficiaries to understand the legal grounds for a failure to uphold a duty of impartiality and what actions constitute a breach of this duty.
Under California and Texas laws, the directions of the trust instrument always take precedence in the administration of the trust. It is up to the trustee to follow the grantor’s instructions for managing and distributing assets found in the trust document. As long as the trustee is making decisions that align with the wishes of the grantor, they are unlikely to be considered to breach their duty of impartiality.
For example, if the grantor specified that a beneficiary should receive a greater share of trust income than the others, and a trustee carries out this distribution, they are fulfilling their duties responsibly.
Examples of failing to uphold one’s duty of impartiality may include:
- Falling susceptible to beneficiary influence and taking actions that benefit one party over another.
- Reducing the current distribution of trust assets to beneficiaries in order to prioritize future investments.
- Choosing not to make investments when it could be beneficial for future distributions of the estate.
- Communicating with one beneficiary while failing to do so with the others.
- Withholding assets from a beneficiary because of a personal dispute.
Ultimately, if a trustee engages in any action that fails to uphold their duty of impartiality, they may be considered in breach of trust by the court and may be subject to removal from their role.
Common Conflicts with the Duty of Impartiality
Questions surrounding the duty of impartiality commonly manifest in the following two circumstances.
Balancing Competing Interests
First, a conflict of impartiality may arise when the trustee is faced with the decision to balance varying interests amongst beneficiaries. This is most common in the question of whether a trustee should prioritize future investment decisions or current distributions.
Trustees are accountable to both current and future beneficiaries, which can cause conflict if their desires for trust funds are not aligned. For example, some trust beneficiaries may prefer that the trustee invest in high-risk assets with the goal of potentially increasing future trust income, while others may prefer that no investments are made at all in order to preserve the current trust value.
According to Restatement (Third) of Trusts 227, the interests of a life income beneficiary are inherently in competition with those of the remainder beneficiaries. The rule states that the trustee must balance the competing interests of differently positioned beneficiaries in a fair and reasonable manner. This rule is then reinforced by Bowles v. Superior Court, which held that no Trustee can properly act for only some of the beneficiaries—instead, they must represent all beneficiaries or they cannot properly represent any of them.
Trustees cannot prioritize future investments over current distributions or the other way around. Following the prudent investor rule, the trustee must be careful to make decisions that can maximize the potential income of the trust while ensuring not to sacrifice losing value in the principal in trust assets.
Pressure from Beneficiaries
Second, trustees may face pressure from beneficiaries to prioritize their interests over others. For example, a beneficiary may attempt to influence a trustee to make an investment with trust assets, urge the trustee to distribute a greater share of assets to them, or even request specific heirlooms, even if they are not entitled to them.
Due to the high stakes of trust administration and the beneficiaries’ interest in receiving the greatest possible distribution, situations of pressure and influence are common and may be difficult for trustees to avoid, especially in instances where the trustee is a family member or a close family friend.
In these cases, a trustee must be able to remain impartial and set their own personal feelings aside while putting the interests of the trust above all else.
Duties of Trustees
A trustee has several other duties that encompass their overarching fiduciary duty. If a trustee fails to uphold any of these responsibilities, they could be considered to be in breach of their responsibilities.
Duty of Loyalty
The duty of loyalty states that the trustee must place the interests of the trust, its grantor, and its beneficiaries over their own personal interests. This duty emphasizes the importance of following the instructions of the trust document and carefully considering the grantor’s wishes to guide any actions taken during the administration of the trust, from trust investments to distributions of assets.
Duty of Prudence
Also known as a duty of care, the duty of prudence states that a trustee must diligently perform their duties and manage trust property responsibly. This duty of reasonable care requires that the trustee be well-informed on their responsibilities so that they can carry them out effectively while acting as a prudent person.
Covering responsibilities such as the prudent investor rule, this duty means that the trustee should be cautious in weighing the risk of investments that could deplete trust assets and should ensure that assets are carefully protected from the risk of theft so that there is a reasonable income available to all beneficiaries. To fulfill this duty, a trustee should do their due diligence to consult advisors to ensure that they are following the law and making sound decisions.
Duty to Manage Assets
The trustee role provides considerable discretion in managing trust assets. As part of this responsibility, the trustee must ensure that they protect all assets in the trust and preserve their value by being diligent in their maintenance of personal property and real estate. Actions covered by this duty include ensuring that trustees make careful investments with trust funds, protecting funds in the appropriate accounts before distributing to beneficiaries, and paying taxes and debts to avoid fees against the trust.
Duty to Maintain Accurate Records
Trustees must diligently keep records of all transactions related to the trust. These records should include any documentation related to the accounting of the trust.
Trust records should include:
- Receipts from any sales or purchases made by the trust
- Bank statements
- Investment account statements that show principal and income
- Taxes, debts, or expenses paid by the trust
Having these records is important for being able to provide documentation to interested parties, which may be requested by the court upon closing the trust, by beneficiaries at any point during trust administration, and by the IRS if an audit is conducted.
Balancing Interests
As part of the trustee’s role, they must balance the interests of all beneficiaries while closely considering the wishes of the grantor laid out in the trust instrument, which is important during the administration process and if any disputes arise.
Equitable Treatment of Beneficiaries
All beneficiaries must receive equitable treatment from the trustee throughout the entire trust administration process. Whether in their communications with beneficiaries, the investments made with trust assets, or general trust distributions, it’s important that the trustee treat all beneficiaries equitably.
Failing to respond to each beneficiary within a reasonable time frame and communicate properly with all beneficiaries may be considered a breach of fiduciary duty. If the trustee is inequitable and appears to favor one beneficiary over in their communications, this may demonstrate additional acts of negligence in their management of the trust.
A trustee must also be impartial and treat beneficiaries equitably in their access to benefits from the trust. For example, a trustee cannot refuse to give a beneficiary money just because they have a personal bias against them. If the trust directs the trustee to act in a given manner, they are legally obligated to do so.
Addressing Conflicts and Resolutions
If conflicts or disputes occur during the trust administration process, it is crucial that the trustee maintains consistency and impartiality in resolving these disputes. Especially when disputes surrounding inheritance distributions arise, it’s important that the trustee takes an unbiased approach to addressing the disagreement.
The trustee cannot favor one beneficiary over another, especially if they have personal opinions about who should receive certain distributions or personal feelings about beneficiaries. Any decisions they make must be guided by the trust instrument’s instructions and the grantor’s wishes while also grounded in advancing the best interests of the trust.
If conflicts do arise, then it is important that the trustee consults an experienced trust litigation attorney about how to proceed. An attorney can provide guidance on the mediation process and alternative dispute resolution to help resolve the conflict sooner while seeking the best possible outcome for all parties involved. In the event that litigation is necessary, an attorney can help navigate these steps.
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Potential Liabilities and Challenges
As a trustee navigates their duty of impartiality, they may open themselves to legal liabilities and additional challenges.
Legal Consequences of Breach
A trustee who breaches their duty of impartiality, or any of their other fiduciary duties to the trust, could face legal consequences. If beneficiaries raise a breach of fiduciary duty claim and there is enough evidence to prove that the trustee acted with misconduct, they could be held liable for the wrongdoing.
If the trustee is found to be in breach of trust or their fiduciary duty, the typical first course of action is to submit a petition to remove the trustee from their role or pursue mediation to correct the issue, if possible. In more serious cases, beneficiaries may file a legal claim against the trustee.
If this breach of duty leads to significant financial losses to the trust, then the trustee may also need to pay damages and legal fees to compensate the trust for these losses. For example, if a trustee oversteps their responsibilities and redirects trust funds to their own personal accounts, they may be responsible for reimbursing the trust for any unaccounted funds and the legal fees required to pursue such a judgment.
Common Challenges Trustees Face
Trustees often face several challenges that may prevent them from remaining impartial throughout the scope of their duties. Even trustees with the best of intentions can fall into the common potential pitfalls associated with the role.
One common challenge is maintaining consistent and equitable communication with all beneficiaries. If a trustee has a closer relationship to one of the beneficiaries over the others, then they may end up appearing to favor this beneficiary over the other. It is important that the trustee remains neutral and impartial in their treatment of and communication with beneficiaries.
Trustees may also face the challenge of attempted influence from other parties through methods such as guilt, manipulation, or coercion. Trustees must be careful not to give in to such influence and continue to fulfill any responsibilities as they are described in the trust. If any disputes or conflicts do arise, it is important to consult a skilled trust litigation attorney as soon as possible for guidance on how to respond.
Navigate Trust Issues with RMO Lawyers
Failing to act with impartiality is a breach of fiduciary duty and could jeopardize the interests of the trust, its grantor, and its beneficiaries. If you believe that a trustee has shown signs of acting with bias or as a result of outside influence, you should contact a skilled attorney as soon as possible.
The attorneys at RMO LLP have decades of experience handling the intricacies of the trust administration process and disputes that can arise during it. Whether you are a beneficiary who suspects a trustee is acting with bias or a trustee facing a legal claim against your duties, our trust litigation attorneys are equipped to guide you through every step of the process.
Schedule a consultation with our attorneys at RMO LLP to discuss how we can best address your concerns about trust management together.
Glossary
Beneficiary – An individual or entity identified in a trust as an intended recipient of assets from the trust.
Grantor – The creator of a trust, who outlines what assets they want included under the umbrella of the trust and how they want these assets distributed to their identified beneficiaries.
Prudent Investor Rule – A legal guideline for trustees managing investment portfolios to act in the best interest of the trust’s beneficiaries and outline standards for legally controlling investment portfolios.
Trust Document – Also known as a trust instrument, the document that identifies beneficiaries of the trust and specifies how to allocate property and assets.
Trust Instrument – A written document or declaration that specifies how to allocate property and assets to beneficiaries.
Trustee – A person or entity named in a trust who is in charge of managing the trust and distributing assets in accordance with the trust document after the trustor has passed away.