Archive for the ‘Trusts’ 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.

How to accomplish a Private Total Return Unitrust conversion for a trust.

Monday, March 28th, 2016

The power of a trustee to adjust receipts and disbursements between principal and income was recognized under Section 104 of the 1997 Uniform Principal and Income Act (“UPIA”).

Most states have recently enacted enabeling legislation setting forth the various steps required to convert a net income trust to a private unitrust. State statutes may typically include many of the following provisions:

  • Definitions – Terms used in the statute.
  • Fiduciary duties and general principals – requirement for a fiduciary allocating receipts and disbursements between principal and income.
  • Fiduciary power to adjust between principal and income to the extent the fiduciary considers it necessary.
  • Total return unitrust definitions.
  • Indication that the trustee may in it’s sole discretion and without judicial approval convert an income trust to a total return unitrust if the trustee adopts a policy for the trust stating that future distributions from the trust will be unitrust amounts not net income.
  • The trustee will send notice of its intention to take such action along with copies of such written policies to the grantor, if living, qualified trust beneficiaries, and trust advisors and protectors.
  • No person receiving such notice shall object within a stated time period.
  • The fair market value of the trust shall be determined at least annually.
  • The percentage used in determining the unitrust amount shall be either a stated fixed amount or within a certain range.
  • If the trustee desires to convert an income trust to a unitrust, but does not want to do so under the statutory provisions, the trustee may in many cases petition the appropriate court for an order to do so.

See Internal Revenue Service (“IRS”) Regulation Section 1.643(b)-1 (“643 Regs.”) redefining a safe harbor income amount of between 3% and 5% of the fair market value of the trust assets as being a “reasonable apportionment” of the total return of the trust. A switch using the method authorized by state statute will not constitute a recognition event under Internal Revenue Code Section 1001 and will not result in a taxable gift from the trust’s grantor or any of the trust’s beneficiaries. The 643 Regs clarify circumstances under which capital gains are included in the Distributable Net Income (“DNI”) of the trust. See, “Drafting to Allow for the Inclusion of Capital Gains in DNI under the 643 Regulations”, by Timothy A. Nordgren, North Carolina Bar Association, 2014.


Hopefully, this report will provide useful information on the advisability of the potential investment and administrative benefits of converting a trust from an income trust to a private total return unitrust.

Benefits of a Private Total Return Unitrust conversion.

Monday, March 21st, 2016
  • Modern Portfolio Theory utilizes a Total Return approach which  is the sum of income (dividends and interest) and realized and unrealized capital gains.
    Generally, the terms of the trust specify whether unitrust amounts are to come in whole or in  part from net trust accounting income, in whole or in part from the trust principal account, or whether the settlor has left it  to the trustee to make the call. Absent such guidance, the better view is that the trustee has the default authority to make the unitrust disbursements from the general funds of the trust without regard to distinction between income and principal. See 3 Scott & Ascher, Section 13.2.8.
  • The trustee and the income beneficiaries would know at the beginning of the year the precise amount that would be distributable in the course of the year and can set up automatic monthly or quarterly distributions in a uniform amount.
  • The interests of the life beneficiary and the remainder men are aligned by conversion to the unitrust, everyone is happy!

What is a private total return unitrust versus a net income trust?

Tuesday, March 8th, 2016

Net Income Trusts

If you have a client that is either the income beneficiary or the remainderman of a traditional net income trust, they might be receptive to exploring the suggestion to convert the investment and dispositive provisions of that trust to a private unitrust.

Trusts have been used for many years to hold title to property and, in some cases, pass title to a beneficiary. A trust holds title to property for someone’s benefit. In establishing a trust the person establishing it, the grantor or settlor bifurcates the ownership of the property, the trust corpus or principal placed in to the trust. The designated trustee, or co-trustees, receive the legal title to the trust corpus, and the equitable title passes to the trust beneficiaries.

Quite often a trust is established with two classes of beneficiaries: the income beneficiaries who receive the current income produced by the trust corpus, and the remainder beneficiaries who will receive the trust corpus upon the occurence of a given event such as the termination of the trust. This arrangement is often described as a split interest trust or a net income trust .

Private Unitrusts

Unfortunately with a net income trust the rigid demarcation between trust income and trust principal is counter productive when it comes to trust investments. The trustee is often caught in the middle between the life income beneficiaries who are clamoring for more income and the remaindermen who are clamoring for more growth in the trust principal. Under these circumstances Modern Portfolio Theory and a total return investment strategy aimed at growth rather than income is difficult to pursue. See 4 Scott & Ascher, Section 20.11 and Section 20.610.

Over the past several years the significant decline in interest rates and an unprecedented decline in dividend yields has produced an impossible task for the trustee today to satisfy both the income beneficiaries and the remaindermen of a net income trust. The typical noncharitable unitrust governing instrument will provide that all of the trust accounting income shall be added to principal and the life beneficiary in a given year shall then receive a fixed percentage of the net market value of the trust estate valued at the end of the prior year. The more a trustee pursuing a total return investment strategy invests for growth the more the duty of impartiality is implicated.