FIDUCIARY DUTIES AND BREACH – WHEN TRUSTEES AND REPRESENTATIVES GO BAD – PART 2
By Cary A. Lind
Duty of Loyalty
The duty of loyalty requires the fiduciary’s devotion to the beneficiaries, that is, the fiduciary must act solely in the interest in the beneficiaries and not in the interest of the fiduciary. “The fiduciary obligation of loyalty flows not from the trust itself but from the relationship of trustee and beneficiary, and the essence of this relationship is that the trustee is charged with equitable duties toward the beneficiary.” Fuller Family Holdings, LLC, vs. The Northern Trust Company, Ill.App. 3d, 863 N.E.2d 743, 309 Ill.Dec. 111 (Ill.App. 1st Dist. 2007). The words “trust” and “trustee” embody the duty of loyalty in that the fiduciary occupies a position of trust towards a beneficiary. When a fiduciary breaches the duty of loyalty, it is almost always intentional or done with at least reckless disregard for the relationship and fiduciary duties.
As an offshoot of the duty of loyalty, a fiduciary cannot be in a potential or actual conflict of interest toward any beneficiary. In Mucci vs. Stobbs, 281 Ill.App.3d 22, 666 N.E.2d 50, 216 Ill.Dec. 882 (Ill.App. 5th Dist. 1996), the Court held that merely being in such a conflict is grounds for removal of a trustee whether or not the trustee has acted improperly in any manner.
Many interesting issues arise about the precise extent of the duty of loyalty. For example, does a fiduciary have an obligation to furnish a copy of the governing document to each beneficiary? Wills are public documents, so the issue does not arise in that context. Trusts are private. Is a current beneficiary entitled to see and have a copy of the governing trust? There is no clear answer in the case law. However, based upon the duty of loyalty, there should be an obligation to furnish at least enough of the trust to satisfy the beneficiary’s right to confirm that he or she is receiving proper payments from the Trust. In the case of specific bequests, it should be sufficient to advise the beneficiary of the bequest and, if necessary, furnish a copy of that part of the document containing the bequest. In most cases, it should be of no consequence to a specific beneficiary what happens to the rest of the trust if a specific bequest is paid in full. However, in a recent case, my client was left a specific bequest of money and was told by the trustee that the balance (a substantial sum) was to go to several charities. My client wanted to know which charities were the beneficiaries in order to satisfy himself that no overreaching had occurred. The trustee agreed to that limited disclosure, and my client was satisfied.
It is a duty of every fiduciary to account in full to each beneficiary whose share of the trust is affected by the accounting. Probate representatives must account to all distributees in the time frame imposed by the Probate Act and local court rules. Section 5 of the Trusts and Trustees Act requires accountings to be furnished to the beneficiaries “at least annually.” While some trusts contain language excusing accounting, that provision would probably be deemed by a court to be a violation of public policy. The formal requirements of accountings have been set forth in Estate Department articles entitled Tracking the Money – Inventory and Accounting – Parts 1 through and 4. Those articles show that an accounting should start with assets held as of the beginning date, should detail all receipts and disbursements, and should show the disposition of what is left. The accounting should disclose all financial issues relating to the fiduciary and his fees. If the trustee becomes financially interested in some way, he must disclose that interest and must avoid issues with any beneficiary. Any objections to the accounting must be resolved by the parties or submitted to a court for resolution.
A current beneficiary of a trust is always entitled to an accounting. As a rule, contingent beneficiaries are not so entitled, because their share may not come into fruition. May a contingent beneficiary ask for an accounting of a prior period when the beneficiary’s share becomes vested? Recent cases say yes with some limits. That request could cover a period going back many years. In light of that possibility, a trustee should maintain all financial records for as long as may be necessary.
May a fiduciary demand a release from a beneficiary before making distribution? If no accounting is given, it should be a breach of the fiduciary duty of loyalty in of in and itself for a trustee to do so, because it puts the fiduciary’s interests in obtaining a release above the right of the beneficiaries to receive a full accounting and to be informed of the fiduciary’s actions before executing the release. However, fiduciaries, primarily trustees (and sometimes their attorneys), have still attempted to use a threatened delay in distribution to obtain a release from beneficiaries without an accounting.
The above discussion highlights common issues that arise with fiduciaries’ duty of loyalty, but it is by no means exhaustive. As fiduciaries continue to ignore their duty of loyalty, the issue will continually arise in new contexts
©2007 by Cary A. Lind, all rights reserved.