As noted in previous columns, a trustee is subject to statutory duties to protect and preserve trust property, as well as to make that property productive. The trustee has a responsibility to keep the property invested, and may be held liable for breach of that duty. For instance, if a trustee lets money sit idle, rather than making it productive by generating interest, the trustee may have potentially breached his or her fiduciary responsibility. All fiduciaries are answerable to the beneficiaries for whom they act if they commit any breach of their responsibilities or duties as trustees, executors or guardians.
Occasionally, trustees entrusted with large sums of money have been tempted to divert it to their personal use. Let's say that a trustee borrows trust assets for his personal use by converting these funds and never repaying the trust. If discovered, the beneficiaries have a right of action against the trustee both civilly and criminally. Frequently, however, a breach of fiduciary duty may not be as evident.
Suppose a trustee keeps funds in bank savings accounts secured by the Federal Deposit Insurance Corporation. He or she could be accountable to the income beneficiaries because these accounts are earning only a relatively low percentage of interest annually. Because other liquid investments yield a higher return, is the trustee in the second example breaching fiduciary duty to keep the money invested properly? The trustee walks a fine line in this area.
It seems that practically all decisions made by a trustee are fraught with some degree of potential liability. In addition, impartiality among different classes of beneficiaries as well as among beneficiaries of the same class must always be maintained. Can the trustee invest in assets that will increase the income to the income beneficiaries at the expense of safety of principal for the remainder beneficiaries? The answer is no. Sometimes the investment that produces the highest yield is also acquired at the greatest risk. While the higher yield investment is likely to please the income beneficiaries, the greater risk aspect of the investment is sure to displease the remainder beneficiaries. It may be incumbent upon the trustee to discover two or more investments that are approximately equal in financial safety. Then, once determined, the trustee has a duty to invest in the investment that produces the higher yield.
Not only must there be impartiality among different classes of beneficiaries, there also cannot be any conflicts of interest between the trustee and the beneficiary. Clearly, a trustee cannot profit at the expense of the trust. For example, a corporate trustee may be permitted under state law to retain its own shares of stock in an account when its shares were held as an original investment by the grantor of the trust. However, in dealing with its own stock, the corporate trustee has to exhibit undivided loyalty to the trust. This type of situation could occur, for instance, when a trust first comes into existence and there are shares of the corporate trustee's own stock that were investments originally owned by the grantor and are transferred to the trust. In that case, a corporate trustee may be able to keep its own shares of stock in the trust account. On the other hand, if the trust did not already contain the corporate trustee's own stock, a corporate trustee has a duty not to purchase this stock unless the trust instrument expressly authorizes or instructs it to do so.
In other states a trustee may be required to sell the corporate trustee's stock via a transfer to the trust within a reasonable time. In this case, the trustee has a duty to sell the stock at a fair price. Generally speaking, statutory authority does not encourage retention of original investments that might create a divided loyalty, or even the appearance of placing the trustee in conflicted circumstances.
The best and least questionable time a trustee can retain stock owned by the creator of the trust, regardless of whether these stocks are permissible under state law, is when the trust instrument specifically authorizes or directs the trustee to retain those investments. A trustee has an obligation to look first to the trust instrument and then to the state's statute for guidance as to the trustee's responsibility. If the trust instrument contains a provision authorizing the trustee to retain original investments without liability to the trustee (except for loss or depreciation resulting from improper retention), the trustee may be permitted to do so without liability. However, in all cases regarding new investments, the trustee's duty is to invest trust assets in such a way that the intent of the trust is carried out and the interest of the beneficiary will be best served.
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