Legal Definitions - fiduciary duties of trustees

The term "fiduciary duties of trustees" refers to the fundamental legal and ethical obligations that an individual or entity (the trustee) must uphold when managing assets or property held in a trust for the benefit of others (the beneficiaries). These duties are among the highest recognized in law, requiring the trustee to act with utmost good faith, loyalty, and prudence, always prioritizing the beneficiaries' interests above their own.

Specifically, these duties include:

• Duty of Care: The trustee must manage the trust assets with the same level of caution and skill that a reasonably prudent person would use in managing their own affairs. This includes making informed decisions, preserving assets, and ensuring proper administration.
• Duty of Loyalty: The trustee must act solely in the best interest of the beneficiaries, avoiding any conflicts of interest or opportunities for personal gain. This strictly prohibits "self-dealing," where the trustee uses trust assets for their own benefit.
• Duty of Impartiality: If there are multiple beneficiaries, the trustee must treat all of them fairly and equitably, without favoring one over another, even if their interests might differ.

Here are some examples illustrating these duties:

• Example 1 (Duty of Loyalty - Self-Dealing):

  Imagine a trustee managing a trust that includes a valuable piece of commercial real estate. The trustee also owns a separate real estate development company. The trustee decides to sell the trust's commercial property to their own development company at a price below market value, believing it will benefit their personal business. This action directly violates the duty of loyalty and the prohibition against self-dealing. The trustee used their position to benefit their personal company rather than ensuring the trust received the highest possible value for its asset, which would have been in the beneficiaries' best interest.

• Example 2 (Duty of Care - Prudent Management):

  Consider a trust established to provide for a beneficiary's future medical expenses, holding a significant portfolio of conservative investments. The trustee, without conducting proper research or consulting financial experts, decides to liquidate most of these stable investments and place all the funds into a single, highly speculative startup company, leading to a substantial loss when the company fails. This demonstrates a breach of the duty of care. A prudent person managing funds for an important purpose like medical care would diversify investments and avoid excessively risky ventures without thorough due diligence. The trustee failed to manage the trust assets in a reasonable and responsible manner.

• Example 3 (Duty of Impartiality):

  Suppose a trust is established for two adult children, one of whom is financially struggling and the other is very wealthy. The trustee, feeling sympathetic towards the struggling child, consistently distributes a disproportionately larger share of the trust's discretionary income to them, even though the trust document specifies that distributions should be made equally or based on objective criteria that are not being followed impartially. Here, the trustee has violated the duty of impartiality. While their intentions might seem kind, they are legally obligated to treat both beneficiaries fairly according to the terms of the trust, without favoring one sibling over the other based on personal feelings or perceived circumstances outside the trust's guidelines.