What is a Trustee in New York City

A trustee is a person appointed by the grantor to legally own property transferred by the grantor to the trust, to be managed for the benefit of the trust’s beneficiaries.

Because of this position of trust and confidence, trustees are charged with a fiduciary duty to act in the best interests of the beneficiaries. When the trustee breaches his fiduciary duty, the beneficiaries can petition to remove the trustee and to make the trustee liable for damages incurred due to the breach of fiduciary duties.

The Trust

A person can be the trustee of a revocable or irrevocable trust. A revocable trust is a trust that can be revoked, amended, or modified by the grantor, while an irrevocable trust is a trust that cannot be amended, modified or revoked by the grantor.

Although an irrevocable trust appears to be more detrimental because it cannot be modified, irrevocable trusts are a useful tool in estate planning due to its ability to reduce a person’s assets on paper, an important attribute needed for creditor protection and Medicaid planning.

Trustee’s Powers

The trustee is given powers authorized by the trust document. In New York, EPTL § 11-1.1 provides for additional powers of a trustee, and these powers can be exercised for as long as it does not conflict with the powers granted in the trust document.

Because of the broad powers given to a trustee, experienced New York estate planning attorneys may include the appointment of a trust protector who can monitor the trustee to prevent trustee abuse and who has the power to remove the trustee. This is especially important in cases of irrevocable trusts because the grantor cannot revoke or modify the trust once executed.

Types of Trustee Discretion

A trust can grant the trustee a range of discretion in distributions, from absolutely no discretion to absolute discretion.

When the trustee has no discretion, it becomes mandatory. This can be found in the language of the trust document, which does not give the trustee any discretion on when to make distributions to the beneficiaries. The trust document outlines when, how, and what distributions are made. For example, these distributions could be lump-sum or periodic distributions (such as monthly intervals) and could be income distributions or principal distributions. The trustee has no discretion but to follow the trust document.

Sometimes, the trustee is given some discretion using a criteria or standard. The most common criteria or standard in distributions is the HEMS standard (health, education, maintenance, and support). Health, education, maintenance, and support is usually not defined or vaguely defined in the trust document. For this reason, the trustee has some discretion on whether to make a distribution based on HEMS. Still, the exercise of this discretion can be questioned in court.

For example, when a grantor gives the trustee discretion to make distributions based on education, would rent be included in education? When the trust document is silent, case law may provide information. Should you have issues in the interpretation of a trust document, a skilled trust attorney may assist you in the matter.

In some cases, the trustee is given absolute discretion to decide whether to make distributions to the beneficiaries or not. This does not mean, however, that a trustee has unlimited power when it comes to distributing funds. A trustee cannot simply refuse to distribute discretionary funds for a bad reason or no reason. A trustee still has to act reasonably and fairly when making distributions from the trust, meaning that they can’t simply refuse to make distributions without some sort of good cause.

Fiduciary Duties

The duties a trustee can breach are the duties of care, loyalty, and honesty. A 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 the duty of care are also evaluated under the gross negligence standard, not just simple negligence. The duty of loyalty requires the trustee to make their decisions in their professional capacities without personal and economic conflict. When a trustee puts his own interests before the beneficiaries’ interests, there is self-dealing, which is actionable as a breach of fiduciary duty. The three fiduciary duties, the duties of care, loyalty and honesty, are normally intertwined.

Examples of Breaches of Fiduciary Duties

An example of a breach of fiduciary duty would be a trustee selling trust property to himself or his spouse, even if the sale price was within market value. The sale of trust assets to the trustee or his spouse will always be considered self-dealing per se, regardless of the sale price.

It is also a breach of fiduciary duty when a trustee sells trust property to his relative, friend or a third party below market value. The sale of trust property below market value can be considered wasteful dissipation of assets and can be a ground for the trustee’s removal and surcharge liability for the difference between the market value and the price the house sold for.

When the trustee sells trust property below market value for good reason, the trustee may have a defense against a claim for breach of fiduciary duty. However, the trustee should still observe his duty of honesty with the beneficiaries by volunteering facts to the beneficiaries prior to making the transaction.

Statute of Limitations

The statute of limitations provides for the period within which a claim must be brought before it is barred. In breach of fiduciary duty claims, there is no one period observed by the courts. In IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132 (2009), the Court of Appeals held:
“New York law does not provide a single statute of limitations for breach of fiduciary duty claims. Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks (Loengard v Santa Fe Indus., 70 NY2d 262, 266 [1987]). Where the remedy sought is purely monetary in nature, courts construe the suit as alleging “injury to property” within the meaning of CPLR 214 (4), which has a three-year limitations period (see e.g. Yatter v Morris Agency, 256 AD2d 260, 261 [1st Dept 1998]). Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213 (1) applies (Loengard, 70 NY2d at 266-267). Moreover, where an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213 (8) (Kaufman v Cohen, 307 AD2d 113, 119 [1st Dept 2003]).”

Thus, in determining whether a breach of fiduciary duty claim has been timely filed, the court will look into the primary relief sought (in case the reliefs requested are both monetary and equitable in nature). If the relief is primarily of monetary damages, then the three-year period applies. If the relief sought is primarily an equitable remedy such as an injunction, an accounting, or return of the property, the six-year period will be used.

Trustee and beneficiary matters can be complex. When you have legal issues, it is important to seek the advice of a lawyer with expertise in this field. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].