Category Archives: Fiduciary Duties

December 14, 2015

Now There Are Tax Transcripts In Lieu of Estate Tax Closing Letters

by Carol Warnick

The Internal Revenue Service (“IRS”) announced earlier this year that it would no longer routinely send out an estate tax closing letter and that such letters would have to be specifically requested by the taxpayer. The change in procedure was effective for all estate tax returns filed after June 1, 2015.

Previously, an estate tax closing letter was evidence to show that the IRS had either accepted an estate tax return as filed, or if there has been an audit, that final changes had been made and accepted. Receipt of an estate tax closing letter has never meant that the statute of limitations on the return has run, but it has given comfort to the estate administrator that he or she could make distributions and/or pay creditors knowing that the chances of further IRS review of the return was not likely. Many personal representatives and trustees have made it a practice to wait for such a closing letter before funding sub-trusts or making any significant distributions.

On December 4, 2015, the IRS announced that “account transcripts, which reflect transactions including the acceptance of Form 706 and the completion of an examination, may be an acceptable substitute for the estate tax closing letter.”   Such account transcripts will be made available online to registered tax professionals using the Transcript Delivery System (TDS). Transcripts will also be made available to authorized representatives making requests using Form 4506-T. They still must be requested, but may be easier to obtain than an estate tax closing letter.

For further instructions, here is the link to the information on the IRS website: http://tinyurl.com/plhb6f6.

August 17, 2015

Colorado Court of Appeals Limits Settlor’s Ability to Exercise Retained Power of Substitution

by Helen Rogers

A recent Colorado Court of Appeals decision suggests that a settlor who retains the power to substitute assets into an intentionally defective irrevocable trust (an “IDIT”) may be prevented from substituting a promissory note into the IDIT, even if the settlor retained the right to substitute assets into the IDIT without the supervision of a fiduciary. The decision, along with the District Court order that it upholds, suggests that a settlor’s retained right to substitute assets into an IDIT is more limited than the settlor might imagine or hope.

In In the Matter of the Trust Created by Mark Vance Condiotti, 14CA0969 (unpublished decision), a settlor established an IDIT (the “Condiotti Trust”) for the benefit of his son. The trust agreement gave the settlor the right to reacquire the trust corpus by substituting other property of an “equivalent value.” The agreement stated that the settlor could exercise this power in a nonfiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity. This “substitution power,” also referred to as a “swap power,” is often included in IDITs because it causes the IDIT to be treated as a grantor trust for income tax purposes but does not cause the IDIT’s assets to be included in the settlor’s estate for estate tax purposes. When an IDIT is treated as a grantor trust, the settlor may pay the income taxes for the IDIT without incurring any gift taxes (thus increasing the value of the trust gift tax-free).

After funding the trust with a diversified portfolio of securities, the settlor notified the trustees of the Condiotti Trust that he intended to reacquire the entire corpus of the Trust in exchange for a promissory note. The promissory note had a face value equal to the value of the Condiotti Trust’s securities, and paid interest at the Applicable Federal Rate.

The trustees refused to accept the promissory note in exchange for the securities. The settlor threatened to sue. The trustees petitioned the District Court of La Plata County, where the trust was then administered, for instructions.

In their petition for instructions, the trustees argued that they could reject the promissory note because the trust agreement only permitted the settlor to substitute assets of equivalent value, and the promissory note did not have a value equivalent to the Trust’s securities because (1) it was unsecured, (2) it bore interest at a low rate, and (3) there was little market for promissory notes. They also argued that the settlor’s proposed substitution was actually a request for a loan from the Condiotti Trust to the settlor, which was not permitted by the trust agreement.

The settlor argued that the promissory note did have a value equal to that of the Condiotti Trust’s assets because it had a face value equal to the value of the trust’s securities, and, under Section 7872 of the Internal Revenue Code, a promissory note is valued at its face value as long as it pays interest at the Applicable Federal Rate and the Settlor is solvent.

The District Court issued an order stating that the trustees were entitled to reject the proposed substitution. First, it stated that, in the context of an asset substitution involving an IDIT, assets will be considered to be of equivalent value if they have (1) an equivalent value under the Internal Revenue Code, AND (2) an equivalent fair market value. As the settlor’s promissory note bore interest at a low rate and there is little market for reselling promissory notes, the District Court found that the note did not have an equivalent fair market value to the Condiotti Trust’s more liquid diversified securities.

Second, the District Court held that the trustees could reject the proposed substitution because it was in fact a request for a loan from the Trust to the settlor, which was not permitted under the trust agreement.

On appeal, the Court of Appeals upheld the District Court’s finding that the proposed substitution was a request for a loan from the Trust to the settlor. The Court provided four questions for courts to consider when determining whether a particular transaction is a loan: (1) do the parties stand in the relationship of debtor and creditor; (2) was a promissory note executed; (3) was interested agreed to or paid; and (4) did the parties agree that the recipient would repay the monies received?

The Court of Appeals did not address the District Court’s finding that the note was not of equivalent value to the trust’s assets.

What does this case mean for settlors who wish to exercise their retained powers of substitution?

First, a settlor should ensure that his or her proposed substitution transaction does not appear to be a loan, especially where the trust agreement does not allow the trust to make loans to the settlor. In fact, the Court of Appeals’ four questions suggest that a settlor should never attempt to substitute a promissory note for trust assets. It is difficult to imagine a scenario in which a substitution of a promissory note into a trust does not result in (1) a debtor-creditor relationship between the settlor and the trust, (2) an executed promissory note, (3) agreed-to interest, and (4) an agreement that the settlor would repay the trust.

Second, any settlor who exercises his or her power of substitution should ensure that the asset being substituted into the trust is truly of equivalent value to the assets being taken out of the trust. The District Court’s Order indicates that a trustee may scrutinize both the tax value and the fair market value of any asset that a settlor proposes to substitute into a trust, and that the trustee may reject a substitution if it determines that either of those values is too low. Additionally, the settlor risks rejection if the property being substituted into the trust could not be resold to the same extent as the property being removed from the trust.

July 21, 2015

Opposition to the Uniform Fiduciary Access to Digital Assets Act

by Morgan Wiener

Despite the final version being passed by the Uniform Law Commission two years ago, the Uniform Fiduciary Access to Digital Assets Act (“UFADAA”) has not yet enjoyed widespread passage by state legislatures.  According to the Uniform Law Commission, to date, UFADAA has only been enacted in one state – Delaware.  An additional 26 states introduced legislation to enact a version of UFADAA during the first half of this year, but none of those measures have been passed.  As tempting as it may be to lay the blame on the sluggish pace of the legislative process, it’s important to note that UFADAA also faces substantive resistance.

Although much of the commentary surrounding UFADAA, both on this blog and in the estate planning community at large, has been positive, industry and consumer groups have both opposed the act on privacy grounds.  For example, letters published by both Yahoo! and a coalition of civil liberties groups have raised concerns that the relatively unfettered access to digital assets allowed by UFADAA goes too far and does not do enough to protect the privacy interests of not only a decedent, but also those who communicated with a decedent during his lifetime.  These letters can be found here and here.  The Internet Coalition, a group that represents the interests of major e-commerce and social media companies, the State Privacy and Security Coalition, Inc., and NetChoice, a group whose goal is to promote e-commerce, have all also opposed UFADAA’s enactment in various states.

NetChoice has gone further than simply opposing UFADAA and has proposed its own alternative to UFADAA – the Privacy Expectation Afterlife and Choices Act (“PEAC”).  Rather than providing automatic access to a decedent’s digital assets, PEAC contemplates that the probate court will grant access only upon making certain findings and contains a number of provisions that appear designed to protect the holders of digital assets.  You can read the full text of PEAC here.

It will be interesting to see whether UFADAA gains more traction during the next legislative session or whether the opposition holds firm.  Watch this space for updates.

May 12, 2015

What Does It Mean To Be A Trustee?

by Carol Warnick

We are constantly surprised to realize that the normal, average trustee who is not a professional fiduciary doesn’t really understand what is required of him or her and often makes serious mistakes.  You would expect that someone taking over the role of being a trustee would inquire or do some type of research as to what is expected, but unfortunately many new trustees don’t seem to take the responsibility seriously enough, often with disastrous consequences.

The trustee stands in a special relationship with the grantor of the trust as well as to the beneficiaries.  This relationship is unique and the trustee should keep that in the forefront of his or her mind.  By appointing someone as trustee, the grantor is depending upon the trustee to both honor the provisions of the trust to the best of his or her ability, but also to respond to the needs  of the beneficiaries and to maintain their confidence and trust.  The trustee must be careful not to do anything which would benefit the trustee to the detriment of the beneficiaries or to ignore the duties and obligations of a trustee.  Thus the word “trust” inside the term “trustee” should not be taken lightly. 

The obligations of a trustee are defined not only by the trust agreement, but also by state law, some of which is statutory and some of which is common law.  State laws may differ from state to state, but some basic premises hold true wherever  a trust is being administered.  In general, these duties of a trustee are important and can result in litigation, removal, and potentially surcharge if the trustee ignores them.  

Some of the general duties of a trustee are set forth below, as taken from “What It Means to Be A Trustee:  A Guide for Clients,” published in the ACTEC Journal, Volume 31, No. 1, Summer 2005. 

  • Duty to Administer Trust by Its Terms.  The trust, including amendments,  provides a roadmap for the trustee and unless its terms are ambiguous, the trustee must follow its terms.  As mentioned above, state law will govern many areas where the trust is silent, so the trustee must be versed in the state law where the jurisdiction is administered. 
  • Duty of Skill and Care.  Skill, prudence and diligence — this is a high standard of performance — higher that one would be expected to follow if administering one’s own assets. 
  • Duty to Give Notice.  The trustee must be familiar with the language of the trust as well as state law to determine when he or she must give notice to beneficiaries, or perhaps a co-trustee.  Some examples requiring notice to certain individuals are resignation, delegation or designation of a successor trustee, rights of beneficiaries to withdraw principal at certain times, the naming of a professional investment advisor, of delegation of the investment function.
  • Duty to Furnish Information and to Communicate.  The trustee must keep the beneficiaries informed about the administration of the trust.  This may include information about investment performance, actions of the trustee or anything else reasonably requested by the beneficiary. 
  • Duty to Account.  The laws of most states require that the beneficiaries be given regular accountings reflecting the liabilities, receipts and disbursements of the trust.  The form and frequency varies from state to state or the language of the trust document. 
  • Duty Not to Delegate.  Generally, the trustee has the duty not to delegate acts requiring judgment and discretion (typically the trustee was chosen because he or she exhibited good judgment and sound exercise of discretion) unless specifically given that authority in the trust document or by statute.  The trustee may hire agents such as attorneys, accountants, investment advisors, etc. but the trustee should not blindly follow their advice.  The exception to that would be a Directed Trust, which is beyond the scope of this article
  • Duty of Loyalty.  The trustee has a duty to administer the trust solely in the interest of the beneficiaries.
  • Duty to Avoid Conflict of Interest.  The trustee should not use trust property for personal gain and should not use the trust assets in a manner that benefits the trustee personally.  The exception to this is when self-dealing provisions are written into the trust for the benefit of trustees who are also beneficiaries of the trust.  Even if such provisions are present, a trustee needs to be especially careful of self-dealing transactions and should consider appointing an independent trustee (if the trust or state law allows it) strictly for the purpose of authorizing such transactions. 
  • Duty to Segregate Trust Property.  The trustee must not co-mingle personal funds or any other non-trust funds with the assets of the trust.
  • Duty of Impartiality.  The trustee must treat all the beneficiaries impartially unless the trust itself instructs otherwise.  This becomes complicated when the trustee must balance the interests of the income beneficiaries with the interests of the remainder beneficiaries of a trust. 
  • Duty to Invest.  The trustee has a duty to invest the assets appropriately.  Unless otherwise specified, that includes a duty to diversify assets.
  • Duty to Enforce and Defend Claims.  The trustee must take reasonable steps to defend claims against the trust and to enforce claims the trust may have against others.  Part of the decision-making process in determining what is reasonable needs to be an assessment of the costs  of enforcing or defending versus the costs to the trust of not taking action on the claim.
  • Duty of Confidentiality.  The affairs of the trust should be kept confidential except with those who are by law “interested persons” such as the beneficiaries and co-trustees. The trustee should not disclose to third parties the identify or interests of the beneficiaries or the nature of trust assets, unless requested to do so by a beneficiary who may need certain information disclosed to a third party.  This duty of confidentiality also extends to personal things about beneficiaries that may come to the knowledge of the trustee in the process of administering the trust.

Any trustee paying close attention to the duties listed above will stand a much better chance of making the trustee experience a positive one and will be much more likely to avoid problems or lawsuits from beneficiaries. 

February 2, 2015

Trustees Take Heed: Arizona Adopts the Fiduciary Exception to Attorney-Client Privilege

by Kelly Cooper

For trustees in Colorado, the question remains to what extent does the attorney-client privilege offer protection from disclosure of confidential communications between trustees and their attorneys in litigation with beneficiaries.  Despite the uncertainty in Colorado, several states and the U.S. Supreme Court have weighed in on this question and Arizona is the latest state to adopt the fiduciary exception to the attorney-client privilege.  Hammerman v. The Northern Trust Company, 329 P.3d 1055 (Ariz. App. June 3, 2014).

The Court of Appeals of Arizona held that a trustee’s attorney-client privilege “extends to all legal advice sought in the trustee’s personal capacity for purposes of self-protection.”  However, the Court also held that the trustee had an “obligation to disclose to Hammerman [beneficiary]  all attorney-client communications that occurred in its fiduciary capacity on matters of administration of the trust.”

These standards will inevitably give rise to many questions depending on the facts and circumstances of the trust administration at issue, but one will likely come up over and over again.  At what point will a trustee be permitted to seek advice for self-protection.  Is a question from a beneficiary enough?  Does a lawsuit have to be filed?  A demand letter sent?  Can the trustee use trust funds to pay for the advice?

In a departure from other courts, the Court of Appeals of Arizona held that the trustee’s attorney-client privilege does not end merely because the advice was paid for out of trust funds.  (For example, the U.S. Supreme Court noted that the source of payment for fees is “highly relevant” in identifying who is the “real client.”  United States v. Jicarilla Apache Nation, 131 S. Ct. 2313, 2330 (2011).  The Delaware Court of Chancery found that the source of payment was a ““significant factor… [and] a strong indication of precisely who the real clients were.”  Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709, 712 (Del. Ch. 1976).)

Without any clear guidance in Colorado, it is important for trustees (and their counsel) to keep a close watch on future developments. 

December 22, 2014

Updates on UFADAA

by Morgan Wiener

The Uniform Fiduciary Access to Digital Assets Act (“UFADAA”) is the Uniform Law Commission’s answer to the relatively new issues caused by the proliferation of digital assets (online bank accounts, social media accounts, computer hard drives, email, online photos, etc). UFADAA provides solutions to questions involving how fiduciaries can gain access to digital assets, what access fiduciaries may have to digital assets, and what fiduciaries may properly do with digital assets.

UFADAA is a new uniform act, it was adopted in its final form by the Uniform Law Commission in July 2014. Delaware is the only state that has adopted UFADAA so far, and the act will be effective in that state on January 1, 2015. Florida has also introduced legislation to adopt UFADAA.

In Colorado, the Trust & Estate Section of the Colorado Bar Association has been considering UFADAA and revisions to UFADAA so that it will better conform to existing laws and work with this state’s current framework for governing fiduciaries, trusts, and estates. Just this past week, the Statutory Revisions Committee of the Trust & Estate Section approved its final comments and proposed revisions to UFADAA. You can view the version of UFADAA approved by the Statutory Revisions Committee here. Although there are still a number of steps that must be taken before any version of UFADAA is enacted in Colorado, this is certainly a step in the right direction!

November 3, 2014

Fiduciary Duties of Employees

by J. Robert Smith

Most of us are familiar with the concept that a company’s officers and directors owe fiduciary duties to the company. In fact, most states have codified the fiduciary duties owed by officers and directors. It is also not surprising that upper level managers or those subject to employment agreements are often subject to certain fiduciary obligations. But what about “low-level” or “at-will” employees? I am referring to those non-management employees who are not subject to any employment contract or agreements and who can be terminated an anytime for almost any reason, with or without cause, and can likewise leave at any time and for any reason. Are these employees also subject to fiduciary duties? The answer is yes. In fact, many people are surprised to learn that employees, even “low-level” ones, owe fiduciary duties to their employers.

The rule that employees, including at-will employees, owe fiduciary duties to their employers arose out of the law of agency. Simply put, all employees are “agents” of their employers. And as agents, employees have a fiduciary duty to act loyally for the principle’s (the employer’s) benefit in all matters connected with the agency relationship. Restatement (Third) of Agency §8.01. As comment c to that section states:

All who assent to act on behalf of another person and subject to that person's control are common-law agents as defined in §1.01 and are subject to the general fiduciary principle stated in this section. Thus, the fiduciary principle is applicable to gratuitous agents as well as to agents who expect compensation for their services, and to employees as well as to nonemployee professionals, intermediaries, and others who act as agents.

Now that we know all employees owe fiduciary duties to their employers, what are those duties? Well, as the Restatement explained in §8.01, the duty centers on the duty of loyalty. In fact, Restatement (Third) §1.01 comment g explains that “as agents, all employees owe duties of loyalty to their employers.” But what does that mean?

In the employment context, aspects of the duty of loyalty include the duty that the employee will not compete with their employer, solicit the employer’s customers, clients or employees prior to the leaving the company, or use work time to further the employee’s own interests. It also includes the duty not to misappropriate confidential information or trade secrets of the employer by sharing that information with the new employers. In addition, the duty includes the duty to account for profits and to deal fairly with his or her employer in all transactions between them. It also includes the duty to disclose the existence of conflicts or adverse information to the employer. And this is true even if the employer is not harmed by the undisclosed adverse interest or information. This list is, of course, not exhaustive. There are certainly other situations that can arise in the employment context that obligates an employee to act in the best interests of the employer. Such situations are fact intensive and can depend on the nature of the trade or business.

One such situation that has often resulted in litigation is whether the employee breaches his fiduciary duty to his employer by secretly taking steps to set up a competing business, or seeking employment with a competitor, while the employee is still employed. There is clearly a conflict between preparing to compete, or preparing to work for a competitor, and the duty not to act in any matter that is adverse to the employer’s interest. Nevertheless, the majority of courts that have considered this issue have concluded that an employee is permitted to make preparations to compete with his or her employer while still employed. This is true even if a group of employees agree among themselves while still employed to start a competing business. The rationale behind such rulings is the need for courts to balance the employee’s interests and to promote free competition. See Maryland Metals, Inc. v. Metzner, 382 A.2d 564 (Md. 1978); Scanwell Freight Express Stl., Inc. v. Chan & DiMerco Express, 162 S.W. 3d 477 (Mo. 2005); White Cap Industries, Inc. v. Ruppert, 119 Nev. 126, 67 P.3d 318 (Nev. 2003). Thus, “the law allows employees a privilege to plan and prepare for competition in recognition of the ‘competing interest of allow allowing the employee some latitude in switching jobs . . . .’” Scanwell Freight, at 479. Of course, this privilege is not without limitations. Although an employee may prepare to compete with his employer while still employed, that employee – while still employed – cannot actively solicit an employer’s customers or employees to leave the company. Nor can the employee prepare to compete with his employer, or prepare to work for a competitor, during the time he or she is supposed to be working for his or her current employer.

An interesting corollary to the above privilege involves the situation where one employee knows another employee is planning on leaving the company to start a competing business. Does the first employee have a duty to disclose such information to the employer. As previously mentioned, employees have a duty to disclose information that that the employee knows is adverse to the employer’s business. Based on that rule, one would think an employee who knows another is about to leave and start a competing business would have a duty to inform their employer. But the likely answer is that the employee does not need to disclose such information. For instance, the Nevada Supreme Court ruled in White Cap Industries v. Ruppert, supra, that because an employee has the right to prepare to compete with his employer, there is no duty for an employee to report on the employee who is engaged in such activity. In other words, an employee does not breach his fiduciary duty to disclose information by refusing to tell the employer about another employee who is planning on leaving and competing.

It is also important to point out that resignation does not necessarily absolve an employee from his or her fiduciary duties. Some duties survive termination of the employment relationship. For instance, post-termination competition with the former employer may constitute a breach of fiduciary duty if it is based on information gained during the employment relationship. Therefore, employees should be careful after they depart from employment not to use such information to compete with their former employer.

In conclusion, unless otherwise altered, the relationship of employer and employee is one of agent and principal. As a result, employees have a duty of loyalty and if they act adversely to the employer, they breach their fiduciary duty. As the Restatement recognizes:

However ministerial or routinized a work assignment may be, no agent, whether or not an employee, is simply a pair of hands, legs, or eyes. All are sentient and, capable of disloyal action, all have the duty to act loyally.

Restatement (Third) §1.01 comment g.

October 27, 2014

Principal and Income Allocations — Attention to Detail

by Carol Warnick

I recently had the occasion to pull out some old CLE materials from 2001 after Colorado’s adoption of the New Uniform Principal and Income Act (UPIA).  That caused me to reflect on what has happened in the thirteen years since passage of the act in Colorado.  Unfortunately, there still seem to be individual trustees as well as attorneys and accountants who do not appreciate that the provisions of this act must be considered in determining such basic things as what is income and what is principal, unless that is clearly spelled out in the document.

Determinations of income and principal, in conjunction with the distribution provisions of the document, are critical to determining what each trust beneficiary is to receive.  The basic thrust of the UPIA is that the document will trump the UPIA rules, but the UPIA provides a set of default rules to make such determination if the trust is silent.  It also contains special rules for such things as depreciation expense, how to handle receipts from depleting assets such as mineral interests, and giving the trustee the power to adjust between income and principal under certain circumstances.     

A common mistake is to allocate principal and income based upon a recollection of what the UPIA says, or worse, how it was allocated for a previous client.  The first thing the trustee should do is to read the trust document because if the issue is discussed there, there is no need to look further.  However, most documents don’t go into the level of specificity in all areas as the UPIA does and therefore the practitioner must rely on the UPIA.  It is also important to read the correct state’s UPIA statutes as states have varied in their adoption of portions of the original uniform law.  Depreciation, for example, is one area that is treated differently by a variety of states. 

More and more trusts are spanning multiple generations and require trustees to manage trust assets for decades.  It is important to remember that a decision made today may be reviewed years later with 20/20 hindsight, when the cost of the trustee’s decision will have been compounding for years.  This means that decisions involving even low dollar amounts now can be subject to close scrutiny years later.  Trustees and their agents need to be fully aware of the provisions of the UPIA and make sure to follow them. 

September 29, 2014

Directed Trustees

by Rebecca Klock Schroer

Colorado recently enacted a set of statutes regarding directed trustees, with an effective date of August 6, 2014.  Colo. Rev. Stat. § 15-16-801 et. seq.   A directed trustee arrangement allows for the division of obligations and liabilities between two or more fiduciaries. 

There are many circumstances where a directed trustee arrangement could be beneficial.  For example, a settlor could appoint a corporate trustee as trustee of a trust and appoint a family member or other individual as a trust advisor to make certain decisions.  Colo. Rev. Stat. § 15-16-803 lists possible duties and powers of a trust advisor and includes:

(a) The exercise of a specific power or the performance of a specific duty or function that would normally be performed by a trustee;

(b) The direction of a trustee’s actions regarding all investment decisions or one or more specific investment decisions; or

(c) The direction of a trustee’s actions relating to one or more specific non-investment decisions, including the exercise of discretion to make distributions to beneficiaries.

The trust advisor can make decisions regarding specific issues, such as investments or distributions, while the corporate trustee retains the remaining obligations of a trustee. 

It is important for estate planners to consider the directed trustee statutes when drafting estate planning documents.  The statutes provide primarily default rules that can be altered by the provisions of a governing instrument.   For example, Colo. Rev. Stat. § 15-16-804 provides that the provisions of a trust governing removal of a trustee will also govern the removal of a trust advisor. 

A directed trustee arrangement is different than trustee delegation and different than the relationship between co-trustees.  When a trustee delegates duties to others, the trustee has a duty to monitor and is potentially liable for the actions of the person to whom the trustee has delegated.  A co-trustee retains liability for all trustee duties and also potential liability for the actions of a co-trustee.  Under a directed trustee arrangement, a trust advisor can take on certain duties and the trustee does not have a duty to monitor or any liability for the actions of the trust advisor.  In addition, the trustee and trust advisor have a duty to inform each other only to the extent necessary to fulfill their duties.  This arrangement makes it much easier for corporate trustees to enter into a trustee/trust advisor relationship without having to worry as much about liability.

Hopefully the flexibility and clarity of the directed trustee statutes will encourage more trusts to be administered in Colorado.

September 15, 2014

Your Fiduciary Duty of Loyalty

by Elizabeth Meck

The Fiduciary Law Blog recently posted an article in which we observed that “fiduciary” is a vague term encompassing many different people and several different relationships. Under Colorado law, a fiduciary includes, without limitation, a trustee of any trust, a personal representative, guardian, conservator, receiver, partner, agent, or “any other person acting in a fiduciary capacity for any person, trust, or estate.” Colo. Rev. Stat. § 15-1-103(2).

Any fiduciary must abide by the duties and obligations generally known as “fiduciary duties,” which are among the highest duties under the law. This post is the first in a short series in which we will discuss the fiduciary duties applied to trustees, when it may be appropriate for a trustee to delegate certain duties, and a trustee’s potential liability for breaching these important duties.

In the context of a trust, and as stated in the Restatement (Second) of Trusts § 2, a fiduciary relationship with respect to property arises out of the manifestation of an intention to create the fiduciary relationship and subjects the trustee “to equitable duties to deal with the property for the benefit of another person.”

The trustee’s most basic function is to hold title to and manage trust property pursuant to the terms of the trust instrument, which he must do with the utmost loyalty, good faith and honesty. Generally, the fiduciary duties applicable to a trustee are: the duty of loyalty, the duty to exercise care and skill in managing the trust assets and administering the trust, and the duty to remain impartial to all beneficiaries. This post will focus on the duty of loyalty.

The duty of loyalty, perhaps the broadest of the fiduciary duties, has been described as “inherent” in the trust relationship. George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543 (2d rev. ed. 1980). This duty requires the trustee to remain loyal to the beneficiaries of the trust in all aspects of trust administration. Restatement (Second) of Trusts § 170.1 Fundamental to the duty of loyalty is the obligation to adhere to the terms of the trust instrument itself and to undertake all actions in accordance with applicable law. Restatement (Third) of Trusts § 76; Restatement (Second) of Trusts § 169.

As defined in Scott on Trusts, the trustee’s fiduciary duty of loyalty is the “duty of a trustee to administer the trust solely in the interest of the beneficiaries.” Austin W. Scott & William F. Fratcher, Scott on Trusts § 170 (4th ed. 1987) (emphasis added). A trustee, therefore, “is not permitted to place himself in a position where it would be for his own benefit to violate his duty to the beneficiaries.” Id. Under the duty of loyalty, the trustee must refrain from engaging in any act of self-dealing or conflicts of interests that may result in increased benefit to himself. Such transactions would constitute a breach of the trustee’s duty of loyalty, may expose the trustee to personal liability, and may be voided by the beneficiaries. See Restatement (Second) of Trusts § 170 cmt. b.

Further, the duty of loyalty requires the trustee to “communicate to [all beneficiaries] all material facts” in connection with the administration of the trust. Restatement (Second) of Trusts § 170. Failure to inform beneficiaries of important decisions or material facts may not only constitute a breach of the duty of loyalty, but frequently creates feelings of distrust toward the trustee. It is important, therefore, for the trustee to remain transparent, which we discussed in a prior blog post.

The duty of loyalty applies to the administration of a non-charitable trust as well as charitable trusts. This is the case even though a charitable trust may exist perpetually. A trustee of a charitable trust must administer the trust solely in the interests of effectuating the trust’s charitable purposes. See Restatement (Second) of Trusts § 379 cm. a.

As stated above, the duty of loyalty is broad and requires the trustee to regularly ensure that he is acting solely in the best interest of the beneficiaries. It is wise for any trustee to step back occasionally to make sure that his actions as trustee are taken in accordance with the duty of loyalty.

In the next blog entry in this series, we will discuss the duty of the trustee to exercise care and skill in the management of trust assets and administration of the trust.


1For further discussion on the duty of loyalty, see Austin W. Scott & William F. Fratcher, Scott on Trusts §§ 169-186 (4th ed. 1987); and George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543-543(V) (rev. 2d rev. ed. replacement vol. 1993).