FIDUCIARY DUTIES AND BREACH – WHEN TRUSTEES AND REPRESENTATIVES GO BAD – PART 1
Property usually passes from a decedent to others by means of a will or trust. Regardless of the method used, someone has to be in charge of the process. Many people name their children or other individuals to be their executors or trustees. Most representatives do what they are supposed to do. However, especially where the representative is also a beneficiary, family battles may arise and a fiduciary may misbehave. Even where institutions or other neutral third parties serve as the fiduciary, trouble may result.
This series of articles will explore the duties owed by trustees, executors, administrators, guardians, and other fiduciaries to heirs, legatees, wards, and other intended beneficiaries of the assets administered by a fiduciary. Prior Estate Department articles have explored breach of fiduciary duty in connection with the validity of documents and transfers and similar situations. By contrast, these articles begin with a fiduciary relationship established by law or by a written document and address the duties of a fiduciary, the rights of the beneficiaries, the most common areas of breach by the fiduciary, and the remedies of the beneficiaries for breach by the fiduciary.
As more than one court has said, a fiduciary “owes a fiduciary duty to a trust’s beneficiaries and is obligated to carry out the trust according to its terms and to act with the highest degrees of fidelity and utmost good faith.” The fiduciary also must manage the trust assets capably and address any issues that arise. Although not an exclusive list, the three traditional duties of a fiduciary are care, impartiality, and loyalty.
Duty of Care
The most basic duty, the duty of care, requires a fiduciary to carefully manage trust or estate assets. What is appropriate may be determined by the terms of the governing document or by statute. To the extent the document and law disagree, the document will usually control.
In making investments, a fiduciary other than an executor or administrator is governed by the “prudent investor rule,” which requires a fiduciary to use reasonable care, skill, and caution in managing assets. An executor or administrator is held to a “prudent man” standard, which is lower than a “prudent investor.” The prudent investor rule requires a fiduciary to continually monitor all investments to make them productive and to avoid losses. It is not necessary to maximize return. It may be more reasonable to put money into insured bank accounts which produce only a modest return rather than to risk loss in the value of investments.
In an investment climate where markets continue to make large gains, a fiduciary used to have to choose whether to seek greater income with lower appreciation of assets or vice versa. When the beneficiary entitled to income is different from the ultimate beneficiary who will benefit from an increase in the value of the assets, that situation often puts the fiduciary in a conflict between them. In response to that dilemma, Illinois recently authorized “total return trusts.” The law allows fiduciaries to invest in growth assets as opposed to income-producing assets and then to deem part of the growth to be “income” for beneficiaries entitled to receive the income. As such, the law allows greater total trust returns without penalizing income beneficiaries or requiring fiduciaries to arbitrarily choose investments that lead to income but not growth.
All financial actions must be fully accounted for to the interested parties. An accounting must be transparent, and beneficiaries have the right to review all financial documents. Taxes must be filed and paid.
A fiduciary must protect non-cash assets. Real estate must be secured and insured. Personal property must be safeguarded and insured. Businesses must be managed. Assets must be sold at proper prices and on proper terms.
A fiduciary may and should hire any necessary advisors, including attorneys, accountants, and financial advisors. Ultimately, however, the fiduciary must make or approve the decisions and may not delegate that duty. If decisions are improperly delegated and loss results, the fiduciary will be liable for the loss.
Ignoring the duty of care may lead to serious problems. In one ongoing case, my client is suing her uncle who became trustee of a trust established by my client’s mother upon her death in July, 2001. Even before September 11, the stock markets were already plunging. Over the next year, the trust lost approximately $300,000.00 in value while the trustee did nothing despite repeated pleas from the beneficiary to act. The trustee had a securities broker but told the broker not to buy or sell anything. Those acts were a clear breach of the trustee’s fiduciary duty of care.
Duty of Impartiality
A fiduciary must not favor any beneficiary over another. That statement may sound simple, but it is often very difficult to follow. Many decisions must by definition benefit some beneficiaries more than others, for example, dividing personal property, determining dates of distribution, and making certain tax decisions and elections. Remaining impartial may prove especially difficult where one beneficiary continually confronts the trustee or makes demands, but the trustee must still remain neutral. It is harder to be impartial when the fiduciary is also a beneficiary. As a beneficiary, the fiduciary usually wants to favor himself. Acting as fiduciary, however, the fiduciary must treat himself no better than any other beneficiary.
The issue of impartiality often arises in litigation. The trustee may not take a position in litigation which favors any beneficiary over any other.
In this case, Northern Trust acted properly in seeking the circuit court’s construction of the trust agreement concerning the appropriate distribution of the trust. However, when it argued that the trust should be interpreted in a manner beneficial to Winterbauer and detrimental to Heuer, it exceeded its role as trustee and breached its duty of impartiality. The circuit court’s award of Northern Trust’s attorney fees and costs, in excess of those incurred in preparing and filing the complaint for construction of the trust and in gathering and presenting the information necessary to interpret the equalization clause, constituted an abuse of discretion and is reversed.
Northern Trust Company vs. Heuer, 202 Ill.App.3d 1066, 560 N.E.2d 961, 148 Ill.Dec. 364 (Ill.App. 1 Dist. 1990).
If the fiduciary is unsure of how to act, he should first try to achieve agreement among the affected beneficiaries. If that fails, he may ask a court for instructions or interpretation, which proceeding will then afford beneficiaries the opportunity to assert their positions with the court. If a fiduciary violates this duty, nothing good will result. At the worst, it can lead to liability for the violation of the fiduciary duty of impartiality. At a minimum, the fiduciary may be denied fees for his actions.
©2007 by Cary A. Lind, all rights reserved.