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.
What are the legal 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:
-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?
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. 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
-Failure to plan taxes advantageously
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.
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. But the heirs to the trust do not necessarily have equal faith in that person. Or sometimes, expansion at the corporate trustee’s employer results in impersonal, unresponsive, or overly passive trust management. Unless corporate trustees 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 position 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 they are not, their power of attorney agent may have the power to do this. But 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. But most corporate trustees won’t go down without a fight, and co-trustees are expected to be actively involved in trust administration and oversight. So if a co-trustee received proper notice of their co-trustee’s actions, and why wouldn’t they since they have their own fiduciary duty to be informed about the trust’s business, but failed to intervene, it may be harder for them to succeed. 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 be more likely to succeed in their removal effort.
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About RMO Lawyers
RMO LLP provides personal and efficient inheritance dispute services to individual and institutional clients. The firm’s attorneys focus on probate litigation involving contested trust, estate, probate, and conservatorship matters. Serving California and Texas, with offices in Los Angeles, Pasadena, Orange County, San Diego, Fresno, the Bay Area, Dallas, and Houston. For more information, please visit https://rmolawyers.com/.