Being entrusted with the management of assets for the benefit of others, a Trustee holds a position of great responsibility. This fiduciary duty requires a Trustee to act in the best interests of the beneficiaries, adhering to a high legal standard of care and loyalty. Unfortunately, breaches of fiduciary duty can and do occur from time to time. To ensure proper management and accountability during the administration of a trust, both Trustees and beneficiaries should have a clear understanding of the fiduciary duty owed by a Trustee. With that in mind, the attorneys at Legacy Care Law Firm explain 10 ways a Trustee can breach the fiduciary duty owed to the beneficiaries and the trust.
How a Trustee Might Breach His or Her Fiduciary Duty
- Self-Dealing: Self-dealing is one of the most blatant breaches of fiduciary duty. It occurs when a Trustee uses their position to benefit themselves at the expense of the beneficiaries. This can take many forms, including both personal transactions and conflicts of interest. For example, a Trustee might engage in transactions with the trust assets that benefit them personally, such as buying property from the trust at below-market value or selling their own property to the trust at an inflated price. A conflict of interest can also be a breach if a Trustee has a financial interest in a transaction that involves the trust, and they fail to disclose that interest. A Trustee is entitled to earn a fee for acting as Trustee; however, if a Trustee personally benefits from personal or business transactions involving the trust it may be a breach of fiduciary duty.
- Failing to Follow the Trust Terms: A Trustee is legally bound to follow the terms set out in the trust document unless a trust term is illegal, impossible, or unconscionable. Ignoring or deviating from these terms without proper authorization or court approval constitutes a breach of fiduciary duty. A Trustee should pay particular attention to terms related to how assets are to be distributed to each beneficiary and terms directing how to invest trust assets. A breach of fiduciary duty can occur, for example, if a trust document specifies that certain assets are to be held in a particular type of investment until a beneficiary reaches a certain age and the Trustee fails to wait or fails to keep the assets in that type of investment.
- Failure to Diversify Investments: Trustees are required to invest trust assets prudently, which includes diversifying investments to minimize risk. Failure to diversify, thereby putting the trust’s assets at unnecessary risk, constitutes a breach of fiduciary duty. Trustees must understand and manage the risk associated with different types of investments. And avoid concentrating investments in a single asset class or investment. For instance, if a Trustee invests all trust assets in a single stock, the trust becomes highly vulnerable to fluctuations in that stock’s value. This lack of diversification is a breach of the Trustee’s duty to act prudently.
- Negligence in Asset Management: Trustees are required to manage trust assets with a high degree of care, skill, and caution. Negligence in managing these assets can take many forms, such as failing to maintain accurate and detailed records of transactions, decisions, and the status of trust assets or failing to adequately supervise agents, such as investment advisors or property managers, who are handling trust assets.
- Misappropriating Trust Assets: Misappropriation involves the theft or unauthorized use of trust assets by the Trustee. Embezzlement (taking funds or property directly from the trust for personal use) and making unauthorized loans to themselves or to friends/relatives are two examples of how a breach of fiduciary duty can occur from misappropriating trust assets. Of course, taking funds directly from the trust for personal use is also a misappropriation of trust assets.
- Improper Delegation: While a Trustee can delegate certain tasks, such as investment management or administrative duties, a Trustee cannot delegate his/her entire fiduciary responsibility. Allowing others to make critical decisions that the Trustee should make themselves and failing to adequately supervise those to whom tasks have been delegated may amount to improper delegation. A Trustee failing to properly supervise an accountant hired to prepare the trust tax returns, for instance, would be a breach of fiduciary duty.
- Failure to Communicate with Beneficiaries: Trustees have a duty to keep beneficiaries informed about the trust and its administration. A Trustee should provide regular reports, financial statements, updates on trust activities, and other relevant information to trust beneficiaries and respond to questions or concerns expressed by beneficiaries in a timely manner.
- Failing to Prepare or Pay Taxes Tax: A Trustee must ensure that the trust complies with all applicable tax laws, prepare and file tax returns, and make sure that taxes owed by the trust are paid before the appropriate deadline expires.
- Favoritism Among Beneficiaries: Trustees must act impartially, treating all beneficiaries fairly and equitably. Distributing assets in a manner that unfairly benefits one beneficiary over others or making decisions that favor one beneficiary based on personal relationships or biases rather than the terms of the trust are examples of favoritism that could be considered a breach of fiduciary duty.
- Failure to Protect Trust Assets: A Trustee is responsible for safeguarding trust assets against loss, damage, or theft. Failure to obtain adequate insurance for trust properties as well as failing to maintain and protect physical assets such as real estate may constitute a breach of fiduciary duty on the part of the Trustee.
Do You Have Additional Questions of Concerns about How a Trustee Can Breach the Fiduciary Duty Owed to the Beneficiaries?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how a Trustee might breach his/her fiduciary duty, contact our estate planning attorneys in our North Andover, Woburn, and Beverly offices at (978) 969-0331. Our Salem and Nashua, New Hampshire office can be reached at (603) 894-4141.
Attorney Daniel A. DeBruyckere has been practicing law in New Hampshire and Massachusetts since 1998, and has helped hundreds of clients with their estate planning and elder care issues. He is very well respected in the area of estate planning, probate, trust administration, elder law issues, and business planning Read More!
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