Accepting the office and the duties that attach, the duty to inform and report, the annual accounting and what it must show, investing under the prudent investor standard, impartiality between income and remainder beneficiaries, self-dealing and the no-further-inquiry rule, removing a trustee, surcharge for losses, and modifying or terminating a trust.
A trustee must invest and manage trust assets as a prudent investor would, considering the purposes, terms, distribution requirements and other circumstances of the trust. Individual holdings are not evaluated in isolation but as part of an overall strategy with risk and return objectives suited to the trust. Diversification is required unless special circumstances make the trust better served without it. Delegation is permitted where the trustee takes care in selecting and monitoring the agent.
A settlor, cotrustee or beneficiary may ask a court to remove a trustee, and a court may act on its own initiative. The statutory grounds are a serious breach of trust, a lack of cooperation among cotrustees that substantially impairs administration, unfitness or persistent failure to administer effectively, and in most states a substantial change of circumstances or a request by all qualified beneficiaries. The last grounds also require a suitable successor.
A trustee must administer the trust solely in the interests of the beneficiaries. A sale, encumbrance or other transaction involving trust property entered into by the trustee for the trustee's own account, or otherwise affected by a conflict between fiduciary and personal interests, is voidable by an affected beneficiary. Proof that the price was fair does not save it. The exceptions are narrow and specific.
The terms of an irrevocable trust may be altered by agreement, by court order, or by the trustee's own exercise of a distributive power. Consent modification requires the settlor and all beneficiaries, or all beneficiaries alone where the change respects a material purpose. A court may modify for circumstances the settlor did not anticipate. Decanting lets a trustee with discretion over principal distribute it to a second trust.
A designated trustee takes office by accepting, either in the manner the trust instrument prescribes or by accepting delivery of trust property, exercising a power, or performing a duty. Acceptance carries the duties of loyalty, prudence, recordkeeping and reporting from the moment it occurs. A person who does not wish to serve must decline within a reasonable time; silence past that point is treated as rejection, and the vacancy is filled in the order the instrument and the statute specify.
A beneficiary who receives a trust accounting may approve it, object to it, or do nothing, and the third option is not neutral. Under the uniform limitation provision a report that adequately discloses a potential claim starts a short period, commonly two years, against the recipient. Consent, release or ratification bars a claim outright, but only where the beneficiary knew the material facts and the consent was not induced by improper conduct.
A trustee of a trust with two or more beneficiaries must act impartially in investing, managing and distributing the property, giving due regard to their respective interests. Impartiality is not equality. Where one beneficiary takes income and another takes what is left, the principal and income act classifies each receipt and expense, and the resulting accounting income may bear little relation to total return. Most states supply a power to adjust between the two accounts.
In a directed trust the instrument gives a third party, commonly called a trust director or adviser, power over a defined function such as investments or distributions. The directed trustee holds the property and executes directions. Statutes relieve that trustee of the duty to monitor or second-guess the director within the scope of the power, but retain a residual duty that varies by state. The director owes fiduciary duties of its own.
A trustee must keep current beneficiaries reasonably informed about the administration and about the material facts they need to protect their interests. Certain notices are owed without being asked, including notice of acceptance and, in most states, notice that a revocable trust has become irrevocable together with the right to request a copy of the instrument. Other information is owed on request, and refusal must rest on a stated ground rather than on inconvenience.
A trustee who commits a breach of trust is liable for the greater of the amount required to restore the value of the trust property and distributions to what they would have been had the breach not occurred, or the profit the trustee made by reason of the breach. The first branch requires proof of a counterfactual. The second is disgorgement and needs no proof of loss.
A trust accounting reports the property on hand at the start of the period, the receipts and gains during it, the disbursements and losses, and the property on hand at the close. The schedules must reconcile, principal and income are shown separately where the trust divides them, and the trustee's compensation must be disclosed by source and amount. A reviewing court looks first at whether the account balances and second at whether each disbursement is explained.
