Archive for the ‘Trustee Duties’ Category

The Fiduciary Duties and Responsibilities of a Trustee and Executor

Monday, August 28th, 2017


What Constitutes A Trust

When property is transferred from one person to another the transferees legal status with respect to the property will depend on the transferor’s intent. If the intent is to make an outright gift, the transferor imposes no duties on the transferee with respect to the property. if, however, the intent is to create a trust then the transferor imposes certain enforceable duties on the transferee trustee with respect to the transferred property.

Unless a testator, grantor, or other transferor manifests an intention to impose enforceable duties on the transferee, the intention to create a trust is lacking and no trust is created. See Restatement (Third) of Trusts, Section 13, comment d. A trust relationship brings with it 5 fundamental duties: 1)duty to be generally prudent, 2) duty to act and carry out the terms of the trust, 3) duty to be loyal to the trust – honesty and good faith, 4) duty to give personal attention to the trust, 5) duty to account to the beneficiaries. In the creation of a trust one bifurcates the ownership of trust assets with the trustee being the legal owner and the beneficiaries being the equitable owners.

2. What are the fiduciary duties and responsibilities of a trustee or executor

Quite often in the dispute resolution process or fiduciary litigation consulting/expert witness activities we are called upon to review the activities of a trustee or executor to ascertain if any fiduciary duties or responsibilities were breached during the administration of the trust or estate resulting in damages to a beneficiary. In order to prove a breach of fiduciary claim the plaintiff is required to show: 1) a fiduciary relationship does exist, 2) the relationship was breached, 3) damages were proximately caused by the breach. Typically, breach of fiduciary duty claims focus on either how the trust assets were managed, or how the trust was administered, or both.

A fiduciary is required to act honestly, in good faith and in the best interest of another person because of the relationship that exists between them. A fiduciary relationship is generally described as arising when there has been a special confidence reposed in one who in equity and good conscious is bound to act in good faith and with due regard for the interests of the one reposing confidence. De Jure fiduciary relationships would include: attorney-client, executor and heir/devisee, guardian and ward, principal and agent, trustee and beneficiary.

In pursuinig a potential breach of fiduciary duty claim a plaintiff should examine:
1) Parameters of the potential defendant’s fiduciary obligation.
2) What standards will be used to measure the potential defendant’s fiduciary obligations
3) Burden of proof
4) Documents or facts altering the fiduciary obligations.

3. Duty of Loyalty – Self Dealing

The trustee shall administer the trust solely for the interests of the income and remainder beneficiaries in good faith and in accordance with the trusts terms and purpose and shall avoid self dealing and conflicts of interest. See Uniform Trust Code (“UTC”) Section 78, comment c(2). The trustee’s two primary duties are loyalty and prudence with loyalty the more fundamental of the two.

A transaction affected by a conflict between the trustee’s fiduciary and personal interests is voidable by a beneficiary who is affected by the transaction. See UTC Section 802, comment, and Restatement (Second) of Trusts, Section 170, comment p (1959). The trustee is entitled to take a reasonable fee for all fiduciary services. See UTC Section 802(h)(2). An unauthorized act of self- dealing will be regarded as constructively fraudulent and, at the option of the beneficiaries, will be set aside. See Restatement (Second) f Trusts, Section 206, comment (b) (1959).

A trustee may not sell trust property to itself, purchase trust property, or use trust property for it’s own purposes. Further, a trustee may not be guided by the interests of a third party or sell trust assets to benefit a third party.

4. Duty of Impartiality

If the trust is structured as a split interest trust (ie. multiple income and/or remainder beneficiaries), the trustee must act impartially concerning the management of the trust assets and the investment and distribution of the trust assets.

If the trust is created for beneficiaries in succession, the trustee must act with due regard for their respective interests. Under the Uniform Principal and Income Act (“UPIA”) the trustee must give due regard for the production of income and the preservation of principal and the allocation of expenses between principal and income.
The trustee is not required to treat all income and remainder beneficiaries equally, but rather to treat them equitably considering the terms and purpose of the trust. See UTC Section 803, comment. The trustee is under a duty to act with due regard to the beneficiaries respective interests. See 4 Scott & Ascher Section 20.1. The trustee’s general duty of loyalty concerns the specific duty to treat all beneficiaries impartially. See Restatement (Third) of Trusts, Section 79 and 3 Scott & Ascher Section 17.5.

5. Duty to Administer a Trust Prudently and in Good Faith

The trustee must administer the trust according to the terms of the trust instrument and in the interests of the income and remainder beneficiaries. In exercising reasonable care, caution and skill, the trustee must also take control, collect, and insure the trust assets. See UTC Section 801, 804 &805.

The trustee shall administer the trust as a prudent person would by considering the purposes, terms, distribution requirements and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skil,l and caution. See UTC, Section 804. Upon acceptance of the trusteeship the trustee shall administer the trust in good faith and in accordance with its terms and purposes, and the interests of the beneficiaries. See UTC, Section 801, Restatement (Second) of Trusts, Section 609 (1959) and 3 Scott & Aschher, Section 17.14.

In addition, the trustee must take control of and segregate the trust assets. See Restatement (Second) of Trusts, Section 175 (1959), and make trust assets productive, ie. provide returns or other benefits from trust property. See Restatement (Third) of Trusts, Section 76(2) ( c ).

The affairs of the trust must be kept confidential. See Restatement (Second) of Trusts, Section 170, comment s (1959). Finally, the trustee has a duty to cooperate with his/her co-trustees, unless it would be unreasonable to do so. See Restatement (Third) of Trusts, Section 81, comment c.

6. Duty to inform, report and maintain accurate records

The trustee’s duty to account to someone other than himself is indispensable. A trustee must act honestly and in a state of mind contemplated by the settlor. See Restatement (Third) of Trusts, Section 50, comment c and UTC, Section 813 & Section 105.

The trustee must provide beneficiaries with a copy of the trust instrument, information on the actual trust assets, and the ability to inspect the trust assets in order to protect their equitable interests. See Restatement (Third) of Trusts, Section 813(a).

The trustee must inform, on an ongoing basis, those entitled or eligible to receive distributions of income or principal, and those who would be entitled to take their share of the trust upon the termination of the current interest or the trust itself, whether their interests are contingent or vested, ie. “qualified beneficiaries” and “fairly representative beneficiaries”. See UTC, Section 103(12) and Restatement (Third) of Trusts, Section 82. Restatement (Third) of Trusts, Section 82, comment b, sets forth the initial information that must be furnished to fairly representative beneficiaries.

7. Duty Not to Delegate/Duty to Delegate

Under common law a trustee was not allowed to delegate duties to an agent. Recently, however, with the increasing complexity and sophisticatin of trust investment alternatives, a failure to effectively delegate may be a breach of fiduciary duty. A trustee has a fiduciary obligation to seek whatever assistance necessary to execute the efficient and competent administration of the trust. See 3 Scott & Ascher, Section 17.3.1.

The trustee may eliminate or contain its fiduciary liability by using care, skill, and caution in the selection of an agent, establishing the scope and terms of the delegation, and monitoring the agent’s activities. A downward adjustment of fees may be appropriate if a trustee has delegated significant duties to agents, such as the delegation of investment authority to outside managers. See UTC, Section 708, comment.

The trustee may not delegate to an agent the responsibility to coordinate the trust’s administration and to supervise other agents. See Restatement (Third) of Trusts, Section 80, comment d(2). The trustee may not delegate discretion on how income and principal may be used in furtherance of the purpose of the trust. See Restatement (Third) of Trusts, Section 80, comment f(3). Ministerial tasks such as custody and record keeping may be delegated to others. See Restatement (Third) of Trusts, Section 80, comment e. A trustee may delegate some investment discretion to investment advisors and others provided there is adequate supervision by the trustee. See Restatement (Third) of Trusts, Section 80, comment f, and UTC Section 807. The trustee must define the trust’s investment objectives and establish the trust’s investment strategies and programs to avoid fiduciary liability. See UTC, Section 807( c ).

The Uniform Prudent Investor Act (“UPIA”) adopts modern portfolio theory and portfolio-level analysis. Accordingly, the trustee’s major duties under UPIA are:
1. Define risk and return objectives
2. Delegate investment discretion
3. Objectively evaluate the worthiness of initial investment assets
4. Diversify the trust portfolio
For the prudent investment of trust funds the trustee should:
1. Determine overall goal for the trust portfolio
2. Determine appropriate investment objectives – asset allocation
3. Statement (“IPS”)
4. Implement the investment strategy
5. Evaluate and maintain the portfolio
6. Regularly review – OCC Reg. 9 Requirement

8 A Breach of Trust versus A Breach of Fiduciary Duty

A breach of trust is a breach of contract action where the trust is the contract. This is distinguished from the trustee’s breach of the beneficiaries’ trust which is a breach of fiduciary duty or a constructive fraud claim. A trustee may be required to perform its duties, pay money, account, or it may be denied compensation or removed. In pursuing damages, courts may seek to restore the trust to the position it would it would have been if no harm occurred and disallow the trustee to profit from its wrong.

A violation by a trustee of any duty owed under the trust is a breach of trust. The failure by the trustee to perform as directed by the trust instrument is a breach of trust.

9. Breach of Fiduciary Duty versus Constructive Fraud

The requirements for a Breach of Fiduciary claim are discussed above. Constructive fraud requires: 1) That the defendant took advantage of a position of trust and confidence to bring about a transaction, 2) The defendant’s action to bring about the transaction benefited the defendant to the plaintiff’s detriment.

Constructive fraud claims in North Carolina have a statute of limitations of 10 years versus 3 years for a breach of fiduciary duty claim. The required fiduciary must benefit from a constructive fraud claim. The defendant must prove that he acted in an open, fair and honest manner to rebut the presumption of fraud, however, that does not constitute an affirmative defense.

10. Other Causes of Action Often Accompanying a Breach of Fiduciary Claim

1. Negligence
2. Gross Negligence
3. Unfair and Deceptive Trade Practices
4. Fraud and Fraud in the Inducement
5. Negligent Misrepresentation
6. Conversion
7. Legal Malpractice
8. Unjust Enrichment
9. Breach of Contract
9 Declaratory Judgement


I hope you will find the above material useful in your practice. Pease call me at: 704-618-8062, or email me at: [email protected] in the future if I can provide any assistance in the form of fiduciary litigation consulting or expert witness services.

Trustee/Investment Advisor Duties, Responsibilities and Liabilities

Monday, August 24th, 2015

Have you been presented with this question: “The bank has handled the investments for dad’s trust under his will for the past 10 years since he died. I don’t think that they have done a very good job, have they?”

Quite often we are contacted by litigation attorneys involved with a dispute resolution question similar to the one above concerning the duties, responsibilities and possible liabilities of a bank acting in some capacity for their client’s estate and/ or financial planning/wealth management needs. To a great extent, the duties, responsibilities and potential liability of the bank will depend on the actual capacity under which the bank is acting. This can often be ascertained by referencing the language in the underlying document, i.e. trust agreement, will (typically prepared by an attorney), investment management agreement, agency agreement, custody agreement, brokerage agreement, etc. (typically on bank prototype forms).

The bank may be acting in one of several capacities:

  1. Trustee or Cotrustee: Depending on the specific language in the underlying trust instrument (will or agreement), the bank will assume fiduciary duties and responsibilities.
  2. Investment Agent/Managing Agent: Under this account relationship, typically administered in the bank’s Trust Department, the bank would also assume fiduciary duties and responsibilities.
  3. Custodian: Again, this account relationship would typically be administered in the bank’s Trust Department. Tthe bank would generally not assume fiduciary duties and responsibilities being primarily responsible only for the safekeeping of the assets in the account and following the account principal’s directions as spelled out in the Custody Agreement form.
  4. Investment Agent/Managing Agent – administered by a Registered Investment Advisor (“RIA”) subsidiary of the bank or the bank holding company: The bank would assume fiduciary duties and responsibilities with it’s affiliate RIA being regulated by the Securities Exchange Commission (“SEC”) under the Investment Advisors Act of 1940.(“Act”)
  5. Broker: Under an account maintained at the bank’s, or the bank holding company’s, registered broker/dealer (“BD”) firm regulated by the Financial Industry Regulatory Authority (“ FINRA”) ,formerly the National Association of Securities Dealers (“NASD”), the bank currently has no fiduciary duty or responsibilities being held only to “suitability” rules governing the brokerage industry.Accordingly, the duties, responsibilities and potential liability of the bank are determined, to a great extent, by the exact capacity under which they are acting.

Advice versus Transactions: Fiduciary Duties versus Suitability Requirements

Blacks Law Dictionary describes a fiduciary relationship as founded on trust or confidence reposed by one person in the integrity and fidelity of another. defines a fiduciary as, “ A person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty”. A fiduciary has both ethical and legal responsibility to act for another’s best interest at all times.

A RIA under the Act is required to act as a fiduciary , putting the clients interest above the RIA and to declare any conflicts of interest that may arise. A Broker, or a Registered Representative of a broker-dealer firm, regulated by the Securities Exchange Act of 1934, is required only to recommend investments that are “suitable” for the client. Thus, a broker can legally put his/her own interest above the client’s when recommending investments as suitable for the situation.

Brokers/Registered Representatives are typically paid by commission on products sold through transactions. In addition, many broker/dealer firms manufacture investment products and utilize their brokers as a prime distribution channel to sell their proprietary in house investment products. RIAs typically do not take marketing incentives or commissions from investment product providers. RIAs receive advisory fees generally based on the size of the account.

Registered Representatives of broker-dealer firms must provide the client with suitable investment products. However, the “suitability standard” is very broad and often difficult to impose. A suitable investment recommendation may mean that the investment has to fit the client’s needs and tolerance for risk. However, the suitability standard permits the Registered Representative to recommend an inferior investment fund because it gives them a higher commission, as long as it is still a suitable investment.

Fiduciary Responsibilities and Duties

Under common law Agency rules an investment advisor, as agent, owes fiduciary duties to its client, as principal. See Restatement (Third) of Agency, Section 1.01 (2006). The investment advisor’s fiduciary duty also comes from Section 206 of the Act , 75 U.S.C. Section 80b-1 et seq. and the rules there under, Title 17,Part 275 of the Code of Federal Regulations, also see Section 36(a) of the Act. Section 206 is an anti fraud provision securities section that prohibits an advisor from engaging in fraudulent or deceptive acts or manipulation. In addition, the SEC, and its Division of Investment Management, provide interpretive guidance. Also see SEC v. Capital Gains Research Bureau, 375 US 180 (1963) holding that Section 206 of the Act imposes a fiduciary duty on investment advisors by operation of law. It is implied that every violation of Section 206 would also ground a breach of fiduciary duty claim under common law. Section 202(a)(ii) of the Act sets forth who is required to register.

Fiduciary duties owed to the client by the advisor require care, loyalty, obedience, as well as acting in good faith and disclosure.

Broker-Dealer Registered Representatives may be subject to RIA fiduciary responsibilities

In March 2015 Mary Jo White, Chairman of the SEC, stated that she would propose , pursuant to Section 913(a) of Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), that a uniform fiduciary duty should be imposed on broker-dealer firms transactions, the same as on RIAs. Also see Section 913(g) of Dodd-Frank. indicating that when providing personalized investment advice about securities to retail customers, the standard of conduct shall be to act in the best interest of the customer without regard to the financial or other interest of the broker-dealer or investment advisor providing the advice. This process would be somewhat similar to the recently announced Department of Labor (“DOL”) rules amending it’s definition of a fiduciary under the Employee Retirement Income Security Act (“ERISA”).

Chairman White’s position was stated shortly after the Obama Administration advanced a plan through the Labor Department to impose the higher standard on brokers who manage retirement accounts. White’s plan would make all financial advisors follow the same rules.

Securities regulators agree that the fiduciary duty should not apply to all brokerage services, but only to those services that fall within a reasonable definition of personalized investment advice to retail customers. The regulators further state that personalized investment advice to retail customers should be governed by a fiduciary duty regardless of whether that advice is provided by an investment advisor or a broker-dealer.

Finally, J.P. Morgan Chase is currently in advanced talks with the SEC to pay more than $150 million to resolve allegations that it inappropriately steered investment clients to its own proprietary in house investment products, typically its mutual funds, without proper disclosure generating excessive fees for the bank.


In analyzing the duties and responsibilities taken on by the trustee or investment advisor of a trust, one must ascertain the exact nature of the appointment or engagement. Potential future regulatory changes could impact the duties and potential liability of the trustee/investment advisor.