Breach of Trust
The Uniform Trust Code (UTC) §804 stipulates that the trustee has a duty to administer the trust with skill and care as a person of ordinary prudence would use in dealing with his or her own property and to be loyal to the beneficiaries (§802). The trustee is a fiduciary for the beneficiaries. Any actions taken by the trustee are viewed in respect to these duties and to the trustee's fiduciary obligation. The focus is on what a reasonable person would do to accomplish the trust's objectives, not the trustee's subjective intentions. For instance, if the trust document stipulates that the beneficiaries are to receive enough income for their comfort and support, then the trustee has a duty to inquire into the condition of each beneficiary to determine their needs. If the trustee fails to carry out the terms of the trust or falls short in his fiduciary obligation to the beneficiaries, then he may be liable for breach of trust.
Because beneficiaries enforce the terms of the trust, as a practicable matter, a breach of trust claim is more likely to be filed if they perceive that their benefit is less because of mismanagement of the trust's assets, self-dealing by the trustee, or the lack of impartiality in distributing the benefits of the trust.
The trustee has a duty to avoid conflicts of interest where it may deal with a third-party buyer where the trustee has a relationship that may affect the assessment of the proposed transaction. If the transaction involves a possible conflict of interest but is not self-dealing then the transaction is assessed to see if it was reasonable and fair under the circumstances before any liability is attached.
The trustee is also guilty of breach of trust because of commingling of the trust funds with his own, because it makes the funds more difficult to trace and could subject them to the personal creditors of the trustee.
The trustee may also be liable for breach if the trustee consents to an action by a co-trustee that constitutes a breach, or negligently fails to stop or try to stop co-trustees from engaging in the action that constitutes a breach, since a trustee's fiduciary duties include monitoring the conduct of co-trustees. Failure to monitor the actions of co-trustees or delegating one's non-ministerial responsibilities to co-trustees constitutes a breach of trust.
Consequently, co-trustees are jointly liable. If one trustee is held liable, the other trustees will share the liability, unless the trustee acted in bad faith or benefited personally from the breach of trust.
However, a trustee is generally not liable to the beneficiary for breach to the extent that the trustee acted in reasonable reliance upon the provisions of the trust.
Liability of Third Parties
One problem with managing the trust is liability of third parties dealing with trust property. Historically, third parties were held strictly liable for any breach of trust by the trustee involving any transaction that they engaged in. The law imposed a duty upon the third parties to inspect the trust document to ensure that the transaction was authorized by the trust document and that the trustee was acting in the best interests of the beneficiaries. This legal liability deterred third parties from dealing with trusts, and, thus, restricted the trustee's ability to deal with trust property.
UTC §1012 eliminates the duty of third parties to inquire about the terms of the trust to protect themselves from liability because of the trustee's breach unless they have actual knowledge of the breach, but only requires that third parties act in good faith and give valuable consideration for their transactions.
Remedies for Breach of Trust
Generally, UTC §1005 requires that a beneficiary must commence a proceeding against a trustee within 1 year of being issued a report where the breach was evident or if there was information that the beneficiary should have inquired about. However, if a breach was not evident from any report, a beneficiary must bring a claim within 5 years of the sooner of:
- the removal, resignation, or death of the trustee;
- the termination of the beneficiary's interest in the trust;
- or trust termination.
The remedy for breach of trust depends on the breach, but the main objective is to make the beneficiaries whole. UTC §1001(b) lists the following remedies, allowing the court to:
- order a trustee to give an account of the trust;
- compel the trustee to perform his duties, pay money, or restore the property;
- enjoin the trustee from committing a breach of trust;
- reduce or deny compensation to the trustee;
- appoint a special fiduciary to replace the trustee;
- void an act of the trustee, impose a lien or a constructive trust on trust property, or recover property wrongfully disposed of or its proceeds; or
- order any other appropriate relief.
If the trustee sells property for too low a price, then the trustee may be liable for the difference between the actual sale price and the price that should have been realized. If the trustee sells property that he was not authorized to sell, and the property appreciates, then appreciation damages will be awarded. Appreciation damages constitute the difference between the sale price and the value the property as of the date of the court's decree.
The trust pursuant rule provides a remedy for breach of trust when the trustee disposes wrongfully of trust property in exchange for other property — the court creates a constructive trust of the property for the beneficiaries. The constructive trust is also imposed on any transferees who take the property with notice of the breach or who give no value or little value for the property.
The make-whole standard is implemented by holding the trustee liable for any losses incurred and gains foregone as a result of the breach or any profits earned by the trustee because of the breach (UTC §1002).
Several methods have been used by the courts to assess damages:
- the total-return damages approach is the profits that would've been made had the proper actions been taken;
- the capital lost plus interest approach calculates a rate of interest based on the historic average annual rate of inflation as reflected by long-term government bonds or the legal rate applied to money judgments;
- and the market-index approach calculates damages by comparing the difference between the trust portfolio performance versus the performance of a broad market index such as the S&P 500.
Sometimes the trustee may make a profit from a commission or bonus from a third-party in exchange for the trust's business. While this is not necessarily a breach, allowing this may motivate the trustee to engage in the transaction even when it may not be best for the beneficiaries. Hence, the trustee is typically restricted to the compensation specified in the trust document and any profits made outside of this compensation are payable to the beneficiaries. (UTC §1003)
Personal Liability of the Trustee
A trustee is not personally liable for torts committed in the course of the administering the trust unless the trustee was personally liable. The trustee is also not personally liable for any breach of contract entered into as a fiduciary of the trust. However, a claim based on the contract can be asserted against the trustee in the trustee's fiduciary capacity. (UTC §1010)