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THE TRUSTEE’S DUTY
TO DEAL IMPARTIALLY WITH BENEFICIARIES OF ALL KINDS
Introduction:
As discussed in our
articles on
Trusts and Wills and
Fiduciary Duty,
the Trustee and Executor owes to the beneficiaries of a Trust or
Will a fiduciary duty, the highest duty known to law. This duty imposes
personal liability on the Trustee to act in accord with the best
interests of the beneficiary.
However, many Trusts
have different categories of beneficiaries. For instance, a typical
Trust can have income paid to the spouse during his or her life with the
right to invade for need…and upon that spouse’s death, what is left over
is paid out to the next generation. In Trust parlance, the person
receiving the immediate benefit is the “beneficiary” or “income
beneficiary” while the people who are to receive the largess only after
the beneficiary has died are the “remainder beneficiaries.”
How is the Trustee
to coordinate and balance the interests of the two classes…or indeed
with more classes if they exist. For example, assume an income
beneficiary has a need for a great deal of income…thus wants high risk
investments that generate high income. But the remainder beneficiaries,
worried about drops in the market, and not receiving any income in any
event, want very conservative investments and claim the Trustee is in
violation of his duty if he invests in risky investments. How is the
Trustee to decide? Are there rules and guidelines?
Yes there are and
this article shall outline them.
THE BASICS:
THE DUTY TO DEAL IMPARTIALLY WITH ALL BENEFICIARIES
Under California
Probate Code 16003, if a trust has two or more beneficiaries, the
Trustee has a duty to deal impartially with them and shall act
impartially in investing and managing the trust property, taking into
account any differing interests of the beneficiaries.
Trustees are saddled
with a duty of impartiality and must treat future and income
beneficiaries fairly and equitably. Restatement (Second) of Trusts
183 (1995).
According to comment
(c) to Restatement (Third) of Trusts 227, the interests of a life income
beneficiary are “almost inherently in competition with those of the
remainder beneficiaries…these conflicting fiduciary obligations result
in necessarily flexible and somewhat indefinite duty of impartiality.
The duty requires the Trustee to balance the competing interests of
differently situated beneficiaries in a fair and reasonable manner.”
A Trustee must
struggle to structure the trust’s investments to balance the investment
desires of the current and future beneficiaries.
Bowles v.
Superior Court
(1955) 44 C2d 574. The court held that no Trustee can properly act for
only some of the beneficiaries-he must represent them all or he cannot
properly represent any of them.
The Trustee
must balance the interests of remainder and income beneficiaries
Restatement Second
of Trusts 232- Because of the duty of impartiality to balance competing
interests, a Trustee cannot invest solely or primarily in assets that
have no potential for capital appreciation but produce a high stream of
income unless the trust agreement specifically provides. Nor can the
Trustee invest solely or primarily in aggressive growth stocks that
produce little or no income. Restatement 232, comment b.
In Estate of
Bissinger (1963) 212 CA2d 831 an income beneficiary objected that
not enough stocks were sold to produce adequate income, but the
remainder beneficiary objected to the sale of low income producing
stocks made in order to buy bonds producing higher and more regular
income for the income beneficiary. The court concluded that the Trustee
acted prudently by selling part of the stock rather than all or none,
stating that neither the income beneficiary nor remainder man “advocated
a course that would not have ignored the claims of the other.”
In Bissinger
the court held that where the Trustee is directed to pay income to a
beneficiary for a designated period and on the expiration of that period
to pay the principal to another beneficiary, the Trustee is under a duty
to the former beneficiary to take care not merely to preserve the trust
property but to make it productive so that a reasonable income will be
available for him, and he is also under a duty to the latter beneficiary
to take care to preserve the trust property for him. Although the
Trustee is not under a duty to the beneficiary entitled to income to
endanger the safety of the principal in order to produce a large income,
he is under a duty to him not sacrifice income for the purpose of
increasing the value of the principal. Thus the Trustee is under a duty
to the life beneficiary not to retain unproductive property or low
income property although it is probable that the property will
appreciate in value. On the other hand the Trustee is under a duty to
the beneficiary who is ultimately entitled to the principal not to
purchase or retain property which is certain or likely to depreciate in
value, even though the property yields a large income, unless he makes
adequate provision for amortizing the depreciation. Therefore, he has to
balance the interests of all beneficiaries.
Many states provide
methods for a Trustee to attempt to balance the interests of current and
future beneficiaries. These methods include: the power to adjust under
the Uniform Principal and Income Act, unitrust statutes and the Uniform
Management of Institutional Funds Act. See also the
Prudent Investor Rule
discussed elsewhere on this web site.
TERMS OF THE
TRUST
But a Trustee’s duty
of impartiality may be modified by specific language in the instrument
by the Settlor. Such language may be mandatory, directing the Trustee to
favor specific beneficiaries or classes, or may be precatory, merely
asking the Trustee to consider the needs of one beneficiary first.
Although the Trustee
has a duty to treat all beneficiaries equally, the terms of the trust
instrument need to be taken into consideration. The trust instrument may
excuse the Trustee from “rigid adherence” to the duty of impartiality.
See 2-96 California Wills & Trusts 96.03, Probate Code 16000. The trust
may specify that the rights of remainder men are subordinate to the
rights of income beneficiaries or may authorize the Trustee to take
certain actions (such as making certain tax elections) that will have
the clear effect of favoring one class of beneficiaries.
For example a trust
can state that his spouse’s welfare is paramount, etc. In Estate of
Colyear (1970) 20 CA3d 670, 677, the court held that they should
look to the provisions of the will to see if there was specific
direction or a general pattern indicating that preference should given
to the income beneficiary or to the remainder men. Absent some
indication it is presumed that the testator did not intend to give
preferential benefits to the remainder men or to the income beneficiary
and the Trustee is then required to use his discretion so as not to
favor one class of beneficiaries over another. If the testators intends
otherwise, a clause is often inserted stating that in the case of doubt
the rights of one group shall be paramount to the rights of another.
Thus, the duty to
deal impartially applies to remainder men as well as to current
beneficiaries except where the trust instrument indicates differently.
TRUSTEE’S BEST
JUDGMENT
If the clauses of
the trust directing preference are too subjective for the Trustee to
follow confidently, he or she must use his or her best judgment in
carrying out the terms of the trust and following the intent of the
Settlor. Estate of Colyear (1970) 20 CA3d 670, 677, See
California Trust Administration (Depper & Bernstein) §3.41.
But if there is
anyway the Court can determine what the Settlor wished, the Courts are
firm that the Trustee is to follow those directions.
Wells Fargo Bank
v. Eda Sherman Huse
(1976) 57 Cal. App. 3d 927 (The trust is to be interpreted according to
the intention of the Settlor.); Lillian Stanton v. Wells Fargo
(1957) 150 Cal. App. 2d 763 (It is the general duty of the court to
enforce the provisions of the trust instrument. In Stanton the
court also noted that almost all interested parties in the trust sought
a certain action, and the fact that almost all of the parties sought the
same thing was “a factor to be considered.” Therefore, the amount of
interested parties who desire a particular act does matter.)
Conclusion:
A well written clear
instrument is by far the preferable method to instruct the Trustee. It
was (or is) after all the Settlor’s property and up to him or her to
determine how it is to be held. The Settlor, when drafting the trust
language, is well advised to attempt to find the right mix of
flexibility for the Trustee so that he or she can adjust to an unknown
investing climate, and clear directions so that the Trustee has a good
idea of the goals of the Settlor. Time spent drafting careful language
can save a great deal of anguish and, perhaps, years in expensive
wrangling in court. |
