Terms:

Trustee:
The trustee is the person or entity (e.g., a bank or other corporation) who holds legal title to the trust property.

Res/trust property:
The subject matter of a trust or will. The interest the trustee holds for the beneficiaries.

Fiduciary:
A person or institution who manages money or property for another and who must exercise a standard of care in such management activity.

Surcharge:
The amount with which a court may charge a fiduciary who has breached his trust through intentional or negligent conduct. The imposition of personal liability on a fiduciary for such conduct.

Prudent Man Rule:
The trustee may invest in a security if it is one which a prudent man of discretion and intelligence, who is seeking a reasonable income and preservation of capital, would buy.

Functions—preservation and productivity of trust res

A trustee acts in a fiduciary capacity (similar to an executor or administrator of an estate) with respect to specific property. The primary responsibilities of a trustee include preserving the trust res and making the trust property productive.

Preservation of the trust res involves identifying and segregating the property and safeguarding it while performing the trustee’s other functions during the course of the administration. Productivity is an on-going duty to make the trust property productive. Generally, a trustee has a broader investment responsibility than an executor or administrator because the trustee can invest and manage the trust funds to produce income for the current beneficiaries.

Since the trustee is acting in the beneficiaries’ best interests, the duties of preservation and productivity require the trustee to be impartial in his or her dealings, which requires the trustee to balance the terms, purposes and priorities of the particular trust in light of each beneficiary’s interest. In this balancing act, the trustee must struggle with the dual responsibility of preserving the trust corpus while producing adequate returns for the trust assets.

Trust terms and sources of trustee’s powers

As previously stated, the trust agreement is the main source of the trustee’s power and guideline for the trustee’s conduct. As such, the trustee must have a thorough understanding of its content in order to adhere to those dictates while administering the trust.

Another source of the trust terms and the trustee’s power is the law of the state where the trust is located. States often have statutes or judicial precedents that expressly confer certain requirements on the trustee.

Standards of fiduciary conduct

A trustee’s duties are owed exclusively to the beneficiaries of the trust. These duties are enforceable by the beneficiaries and violations of the trust’s terms may lead to the trustee being removed or surcharged for mismanagement of the trust’s assets. The basic standards of fiduciary conduct include:

• Duty to obey trust terms;
  
• Prudence—standards of care, skill and caution;
  
• Duty of loyalty; and
  
• Duty of impartiality.

In addition, if a transaction concerns the interests of the beneficiary, the trustee must disclose to the beneficiary all relevant facts, including the legal rights of the beneficiary.

Example: When Paulette established her trust two years ago (to benefit her children, Stacey and Harold), she picked a major bank to be the trustee. One of the assets in the trust was a three-story commercial building in downtown Fort Worth, TX. The trust agreement contained a provision authorizing the trustee to sell any property, where appropriate. Unbeknownst to Stacey and Harold, the bank sold the building in a private sale. The bank violated its fiduciary duty in the manner it handled the sale. Specifically, it did not notify Stacey and Harold about the impending sale and it did not obtain an independent appraisal of the property or offer it for sale on the open market. As such, it is unlikely that the bank was able to get the highest price possible for the property. See, e.g., Allard v. Pacific National Bank, 663 P.2d 104 (Wash. 1983).