A trustee is a person or entity designated by the grantor/settlor to administer the trust for the benefit of a person called the beneficiary. If you have been appointed as a trustee, you must be wondering, “what does a trustee do?”
To know what a trustee does, you must first know what a trust is. The basic concept of a trust is a grantor who transfers his property to a trustee, who then holds this property for the benefit of the trustor’s designated beneficiary.
Why would a grantor transfer his property legally to a trustee? There are many reasons why a grantor would establish a trust and transfer his assets to a trustee: to protect his assets from creditors, to be eligible for Medicaid, to avoid probate, to decrease his estate for purposes of computing the spousal elective share or to lower or defer capital gains taxes. These are just a few reasons why trusts are established.
What is the role of the trustee?
The trustee becomes the legal owner of the grantor’s property. For example, if you are a doctor and you would like to protect your house from medical malpractice claims, you can transfer the house to your brother B, who will act as trustee, and administer the trust for the benefit of your children. Your brother B will now hold legal title to the house as B, Trustee of ABC Trust. ABC Trust, when drafted correctly, can protect the house from creditors and any medical malpractice claims, while at the same time, preserving it for the benefit of your children.
Because the house will be legally under the name of your brother B, the trustee holds enormous power which can be subject to abuse. The trustee’s powers, however, are limited to what is stated in the trust agreement and the law and subject to fiduciary duties of care, loyalty, and honesty. If the trustee breaches his fiduciary duty, he can be held personally liable for damages. Unfortunately, for a beneficiary, you might need to file a lawsuit against the trustee for breach of fiduciary duty in order to make him liable for damages. This would entail legal costs, and one must do a cost-benefit analysis on the effectiveness and appropriateness of a lawsuit against the trustee.
What Can a Trustee Do?
In determining what a trustee can do, one must look at the trust agreement to see what kind of powers the grantor has given the trustee. Usually, the grantor would give the trustee discretionary authority, except to change the designated beneficiaries. In some cases, however, the grantor would also give the trustee authority, not to change the designated beneficiary, but to choose a designated beneficiary from a group or class of members. When correctly worded, it allows the trustee to designate the grantor as beneficiary.
Aside from the powers granted in the trust agreement, the trustee can also perform the following acts under Estates, Powers, and Trusts Law § 11-1.1, unless specifically prohibited from doing so under law, court order, or the trust agreement:
- To accept additional property to the trust from other sources;
- To acquire the remaining undivided interest in property in which the trust already holds an undivided interest;
- To invest and reinvest trust property;
- To acquire insurance to protect the trust property, trust, and fiduciary;
- To take possession, collect rents, and manage trust property, or sell such property at public or private sale, or lease the property for a period not exceeding 10 years, or mortgage the trust property;
- To make ordinary repairs on trust property;
- To grant options for the sale of property;
- With respect to any mortgage held by the estate or trust (A) to continue the same upon and after maturity, with or without renewal or extension, upon such terms as the fiduciary deems advisable; (B) to foreclose, as an incident to collection of any bond or note, any mortgage securing such bond or note, and to purchase the mortgaged property or acquire the property by deed from the mortgagor in lieu of foreclosure.
- To pay assessments and taxes;
- To contest, compromise or settle any claim in favor of or against the trust;
- To make distributions;
- To execute and deliver agreements, contracts, and other documents for the administration of the trust;
- To pay all other reasonable and proper expenses for trust administration.
Fiduciary duties of the trustee
The trustee, as a fiduciary, owes duties to the trust and its beneficiaries. This fiduciary duty mandates the trustee to always act in the best interests of the trust and the beneficiaries. The duties a fiduciary can breach are the duties of care, loyalty, and honesty. The trustee has the duty, not only to be honest but to volunteer all relevant facts in a transaction. In analyzing the duty of care, courts normally use the business judgment rule. Under this rule, the courts will not hold trustees personally liable even if the decision turns out to be the wrong one, for as long as the trustee acted in good faith on an informed basis, with care that an ordinarily prudent person in the same position would exercise, and in a manner reasonably believed to be in the best interests of its beneficiaries. Violations of duty of care are also evaluated under the gross negligence standard, not just simple negligence. The duty of loyalty requires the trustee to make decisions in his professional capacity without personal and economic conflict. These three fiduciary duties, the duties of care, loyalty and honesty, are normally intertwined.
Violation of fiduciary duty
A violation of any fiduciary duty entitles the other person owed that duty, not only to seek compensatory damages, but also damages for pain and mental suffering and punitive damages. Punitive damages penalize the wrongdoer in order to deter others from committing the same act. The advantage of being able to request damages based on pain and mental suffering and punitive damage is that the award can be large.
Not only is the trustee who breached his fiduciary duty liable, but also the person who induced the trustee to breach the fiduciary duty. To prove breach of fiduciary duty, one must prove: (a) the existence of a fiduciary relationship; (b) misconduct by the defendant; and (c) damages that were directly caused by the defendant’s misconduct. Under CPLR § 3016(b), the actions complained of must be stated with particularity and detail.
A trustee invests trust assets to a company owned by his son, despite the fact that such a company is not earning any money. Here, the duty of care, loyalty, and honesty have been breached. First, the trustee breached his fiduciary duty of loyalty to the beneficiaries. The trustee acted with personal and economic conflict of interest by investing trust assets in his son’s company. The trustee breached his duty of honesty to the beneficiaries because he should have volunteered facts about the conflicted transaction to the beneficiaries prior to making the investment. Lastly, he breached his fiduciary duty of care by acting in a manner that is not in the best interests of his beneficiaries and in a way an ordinarily prudent man wouldn’t do. An ordinarily prudent person would not invest assets in a non-earning company.
What a trustee can do is primarily governed by the trust agreement and the law. The trustee is expected to act to the highest standards so prudence is always required in their actions. If you are a trustee who has been accused of wrongdoing or you are a beneficiary who suspects the trustee of misconduct, we can help you. We have represented both beneficiaries and trustees in many breach of fiduciary duty cases. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.