The Ultimate Guide To Corporate Trustee Duties

Executive summary 

• A corporate trustee is a financial institution or trust company dedicated to trust administration and distributing assets from a trust to the identified beneficiaries. 
• Working with a corporate trustee over an individual trustee offers several benefits, like being able to rely on their advanced expertise and peace of mind knowing they’ll follow rigid procedures.
• Trusts often include provisions that protect corporate trustees, such as the ability to use trust assets to pay legal fees.
• Some best practices a corporate trustee should follow include developing a strong relationship with beneficiaries, implementing risk management strategies, and maintaining accurate and detailed records.

Introduction 

Corporate trustee duties are complex and highly scrutinized. Why? When a trust is particularly large or contains a complex mixture of assets and investments, real properties, businesses and the tax considerations that go along with them, a corporate trustee is often appointed instead, or as a co-trustee to a family member successor trustee. 

Corporate trustees are usually banks, institutions, or trust companies. They have the same fiduciary duties as any other trustee, but are sometimes subject to heightened legal risk. Below, we discuss the many professional obligations and responsibilities of corporate trustees, and some common reasons they are sued and/or removed for breach of fiduciary duty.

Because of their advanced expertise in trust administration, appointing a corporate trustee often offers a variety of benefits over appointing an individual. Their duties are similar to an individual trustee, but the expectations are often higher because of their extensive experience. 

If a dispute arises surrounding a trust or the duties of a corporate trustee, then it’s important to understand the scope of their responsibilities and legal protections. If there are any questions or ambiguities surrounding these responsibilities, an attorney can help act as a valuable resource in resolving them.

What is a corporate trustee?

A corporate trustee is a professional organization, such as a trust company or the trust department of a bank. The employees of the bank or trust company are well-versed in trust administration and have a professional track record in managing trusts for various estates. 

As a result, a corporate trustee typically has extensive experience and various credentials in managing trusts compared to an individual or family member close to the trustor. There are a variety of benefits of appointing a corporate trustee, including:

• Advanced knowledge and experience – Corporate trustees manage trusts every day, so they are familiar with laws, taxes, responsibilities, potential contingencies, and more. 
• Potentially greater investment returns – The expertise of corporate trustees means that they may be more likely to provide better investment advice for trust assets than an individual. 
• Objectivity in family disputes – Because a corporate trustee is an unrelated third party to the family, they are less likely to approach the situation with bias or self-interest. It may also be easier for parties in an active dispute to accept the recommendations of a corporate trustee because of the perceived impartiality.
• Access to resources – The experience of a corporate trustee means that they have a network of qualified contacts and advisors to point you to for advice surrounding finances, estate planning issues, retirement, and more.
• High standard of support – Corporate trustees are held to a high standard by the institutions they work within, meaning a higher standard of care when managing a trust.

If you have a particularly complex or high value trust, a corporate trustee may be helpful in handling the ins and outs of the administration process.

What is a fiduciary duty for corporate trustees? 

A fiduciary duty is the responsibility of one party in a contractual agreement to act in the best interests of another when managing their finances. For corporate trustees, this duty means making financial transactions and managing a trust with the trust creator’s and beneficiaries’ best interests in mind. 

Breaching this fiduciary duty would include actions like violating terms of the trust or making transactions that would harm the financial holdings of the trust. In the event that a corporate trustee breaches their fiduciary duty, they may be subject to removal from their position or even legal action.

What are the key fiduciary duties of a corporate trustee?

While specific corporate trustee laws may vary a bit from state to state, in almost every state, a corporate trustee has the following fiduciary duties to the trust and its beneficiaries. This fiduciary duty means that a corporate trustee must act in the best interests of a trust, free from subjectivity or personal interest.

These fiduciary duties include:

• Duty of loyalty – A corporate trustee must never place their own self-interest above what is best for the trust and its beneficiaries. They must refrain from self-dealing and disclose and avoid any conflicts of interest. 
• Duty of administration – A corporate trustee must administer the trust in accordance with its terms and provisions. 
• Duty to furnish information – A corporate trustee must keep all parties to the trust reasonably informed of any material facts regarding its administration and management.
• Duty of impartiality – A corporate trustee must never show preferential treatment to one beneficiary over another. 
• Duty to enforce and defend claims – A corporate trustee must defend the trust against any legal action taken against it and must proactively seek to compensate the trust if another party has wrongfully caused harm or loss.
• Duty of prudent investment – A corporate trustee must make appropriate investment decisions with regard to the trust’s provisions and intent. They must not subject trust assets to undue risk or fail to reinvest and/or diversify as needed. 
• Duty to keep trust property separate and maintain adequate records – A corporate trustee must never commingle funds and must always keep a full and up-to-date accounting of trust assets. 
• Duty to control and protect property – A corporate trustee must take steps to secure and protect all assets held in the trust.
• Duty not to delegate – A corporate trustee must generally not delegate any tasks to another party if they could perform the task themselves. But note that many states now have laws allowing delegation for certain tasks, such as investment management. 

What does a corporate trustee do?

A corporate trustee handles the entire administration of a trust, from managing taxes and investments using estate funds to distributing trust assets to the beneficiaries named in the trust document. 

In the common course of their duties, corporate trustees will generally do all of the following:

• Manage and administer the trust according to its terms and intent. This includes making distributions to beneficiaries, managing the trust’s investments, filing trust taxes, selling property or real estate as instructed, paying any debts or creditors, and keeping a full accounting of the trust. 
• Communicate with co-trustees and beneficiaries, and give them timely written notice and disclosure of any relevant information pertaining to the trust. 
• Use sophisticated tax-planning strategies to minimize tax liability to beneficiaries and trust accounts
• Monitor investment performance and diversify as needed to maintain and leverage the value of trust assets
• File claims and collect proceeds on any life insurance policies 
• Make referrals or hire professionals as authorized to perform services required by the trust
• Stay up-to-date on all state and federal trust laws, rules, and regulations — and abide by them at all times

What are some common reasons corporate trustees get sued?

Unfortunately, corporate trustees get sued all the time. As a result, it’s important for corporate trustees to understand how to avoid common areas of miscommunication and for beneficiaries to understand the scope of a corporate trustee’s responsibilities.

Some common claims corporate trustees contend with are:

• Mishandling or mismanagement of assets 
• Self-dealing (though note that corporate trustees are generally allowed to invest in allied or proprietary financial instruments from the institution they work for, assuming the investment is prudent and reasonable)
• Conflict of interest
• Failure to diversify investments
• Improper accounting 
• Failure to plan taxes with the benefit of the estate in mind

Corporate trustees are often subject to internal regulation, so it is more rare for them to actually steal, divert, or embezzle trust funds. But it can and has happened, especially when there is relatively little oversight from beneficiaries or co-trustees. If you suspect misconduct on the part of a trustee, you should consult a trust litigation attorney as soon as possible to begin an investigation and explore your legal options.

Why do corporate trustees get sued?

Whatever the actual legal basis is for a corporate trustee lawsuit, the underlying reason for it is often that the beneficiaries, creditors, or co-trustees do not have a close or trusting relationship with the person now controlling the estate. Corporate trustees are often appointed by the trust’s creator because they had a close personal relationship with their banker, estate planner, wealth manager, or financial advisor. In other cases, the trust creator may choose a corporate trustee to prevent family bias or inexperience from impacting the trust administration process.

In any case, the heirs to the trust may not necessarily have equal faith in that person because of their lack of familiarity or personal relationship with the trustee. This initial lack of trust can compound to put trustees under intense scrutiny from a trust’s beneficiaries and lead to legal action at the slightest sense of suspicion and if they fail to uphold their responsibilities. 

For example, sometimes, circumstances at the corporate trustee’s employer can result in impersonal, unresponsive, or overly passive trust management. Corporate trustees should ensure that they communicate proactively with all parties to the trust, and remain directly accessible and accountable, their lack of personal ties puts them at greater risk of removal and claims of fiduciary breach.

Can corporate trustees pay their legal fees out of the trust?

Oftentimes, yes. Most trusts contain provisions authorizing the trustee to use trust funds to defend themselves and the trust in a potential lawsuit. These provisions often allow corporate trustees to advance funds from the trust to pay for attorney’s fees. 

But if settlement negotiations or a court concludes that the corporate trustee’s own negligence or misconduct caused the lawsuit, the offending trustee must generally pay legal fees out of their own pocket. This may mean reimbursing the trust for any legal fees already spent from it, or relinquishing the right to recoup legal fees already paid from non-trust assets.

Can a corporate trustee be removed?

Potentially, yes. Obviously, if the creator of the trust is still living, they may be persuaded to remove the corporate trustee themselves, which they always have the power to do if the trust is revocable, assuming they are of sound mind and capacity. If the trust creator is not of sound mind, their power of attorney agent may have the power to do remove the trustee. 

However, most of the time, a corporate trustee only takes over after the trust’s creator has passed away. This is why most modern trusts often contain provisions granting others the power to remove a corporate trustee, and describing how and when it can be done. 

Many older trust agreements don’t contain such provisions. In that case, the person wanting to remove the corporate trustee may first ask them to voluntarily step down. If the corporate trustee will not step aside, the only option is to file a lawsuit to have the corporate trustee removed. To succeed, the petitioner will have to prove that the corporate trustee breached their fiduciary duty in some way. Because corporate trustees have so many duties, and handle so many different tasks, this may not be hard for a plaintiff beneficiary to prove. Any mistake by a corporate trustee can leave them open to legal liability and removal from their position. 

Can a corporate trustee be sued by a co-trustee?

Yes. Co-trustees are often granted the power to remove a corporate trustee by the trust document itself. Still, most corporate trustees won’t go down without a fight, and co-trustees are expected to be actively involved in trust administration and oversight. 

If a co-trustee received proper notice of their co-trustee’s actions, but failed to intervene, it may be harder for them to succeed in a lawsuit. However, if a corporate trustee acts in a rogue manner, such as engaging in fraud, embezzlement, or knowing and willful misconduct, a co-trustee will have strong legal backing and be more likely to succeed in their removal effort. 

Legal recourse and protections for corporate trustees

Like any trustee, corporate trustees have several legal protections in their favor. Generally, if a trustee can prove that they are acting in the best interest of the trust, they will be protected from legal action.

Paying legal fees from a trust

Most trusts specify that if legal action is taken against a corporate trustee, they may use funds from trust assets to protect themselves. However, if a trustee is ultimately found to be guilty of violating their duties or actively harming the trust, they will typically be responsible for covering all legal fees out of their own pocket. 

Trust provisions for legal defense

Some trusts will include provisions that offer protections for corporate trustees. For example, a provision may state that a trustee is protected from legal action as long as they are acting in the best interests of the trust. Another example is a trust that states that a trustee is not liable for any legal fees if they are acting in good faith.

It’s a good idea to review the trust document with a legal advisor to understand what protections are in place before beginning the trust administration process.

Best practices for corporate trustees

In order to ensure the well-being of a trust and uphold the interests of the trustor, corporate trustees should follow multiple procedures and best practices. The following strategies will support corporate trustees in fulfilling their duties and promote a smooth trust distribution.

Developing a strong relationship with beneficiaries

Because a corporate trustee is not related to the trustor or their family, many beneficiaries are skeptical of their actions. A corporate trustee should maintain close communication to minimize these concerns. The greater the transparency, the less likely beneficiaries are to raise concerns about actions taken.

Implementing effective risk management strategies

Corporate trustees should take a variety of steps to manage risks against trust assets. These steps may include diversifying trust assets to avoid losses and performing regular audits of trust accounting to avoid discrepancies. Corporate trustees should maintain close communication with professional financial, investment, and legal advisors in order to avoid taking fraudulent action.

Trustees should also stay informed about changes in laws and regulations as well as pursue continuing education regarding best practices in trust administration. Ongoing education through conferences and professional certifications will ensure that trustees stay up-to-date about recent developments in the law and ensure they continue to act according to the best practices of fiduciaries. This is particularly true as developments in technology continue to change how almost every aspect of society functions.

Maintaining accurate and detailed records

Beneficiaries should be able to request an accounting from the trustee as they feel necessary. It is up to the corporate trustee to ensure that they have accurate records surrounding all transactions made with trust assets. Corporate trustees should be sure to account for all actions taken and perform regular audits to ensure accuracy and consistency.

Take control of your corporate trustee responsibilities today 

A corporate trustee has similar duties to any individual trustee and is responsible for upholding the best interests of an estate. Appointing a corporate trustee is a good idea when an estate is complex or there are questions about the capabilities of a family member to administer the trust. Whether you are a corporate trustee or considering using a corporate trustee, an attorney can be a valuable resource. 

Our team of trust administration attorneys at RMO can support you in navigating the trust administration process and any disputes that may arise. We understand the ins and outs of the law and will take every necessary step to help beneficiaries secure their rightful access to an inheritance.

Schedule a consultation with RMO Lawyers to learn more about your legal options and how we can offer guidance in your case.