Trusts, Agency, and the ability to Delegate

Take-Away: A trust and agency are both legal concepts about relationships. Because of this commonality in the relationships, the two concepts are often confused by the public. However, they are legally quite different. A trustee is not an agent of the beneficiary. Nor is the trust beneficiary an agent for the trustee. The trustee owes duties to the trust beneficiary, but not the other way around. A trustee can, though, enter into an agency relationship with third parties with regard to its ministerial duties.

Background: Recently I read an email where it was claimed that the trustee serves as the trust beneficiary’s agent. I suggest that is not the case. Legally, a trustee is neither an agent for the settlor nor an agent of the trust beneficiaries. While an agent may owe similar duties to the principal as a trustee owes to trust beneficiaries, these two legal relationships are distinguished by several different legal factors. Practically speaking, there is no beneficiary in an agency relationship, only the principal and the agent, although it is sometimes said that “there is no harm in a trustee considering itself the agent of the trust’s settlor.” [Loring A Trustee’s Handbook, Section 6.1.2.] The element of control is the key difference between an agency and a trust. An agent is subject to the control and direction of the principal. A trust is enforceable even if the trustee is subject to the control of neither the settlor nor the trust beneficiaries. What follows are some of the distinctions between the two relationships.

Agency: An agency relationship is contractual in its nature.

An agency arises when one person, the agent, acts on behalf of another, the principal.
It is in effect a debtor-creditor relationship.
In an agency relationship, the principal retains both legal and beneficial ownership of the property.
The acts of the agent affect the legal obligations of the principal.
If the agent makes a contract on behalf of the principal, the agent himself is not a party to the contract with the other party.
An agent is subject to direction by the principal.
In most cases, a principal may end the agency at any time.
An agency relationship normally ends upon the death of either the agent or the principal.
When the agent becomes insolvent, the principal’s claims against the agent stands in-line with the other creditors of the agent.

Trust: A trustee derives its powers and duties by operation of law and equity. It is an equitable relationship.

A trustee acts independent of the legal position of the trust beneficiaries or the trust’s settlor.
A trustee must take legal title to property. A trust exists only if the trustee holds title to property.
A trustee that makes a contract in the administration of the trust contracts as if the trustee were the principal in that relationship.
A trustee is not subject to direction by trust beneficiaries.
Trust beneficiaries lack authority over trust assets.
No trust beneficiary can interfere with the exercise of the trustee’s duties.
The control over the trustee is limited to either ending the trust in certain situations, or suing the trustee to compel performance of the trustee’s duties for breach of trust.
Once a trust is created, it cannot be revoked unless that power is reserved by the settlor or expressly delegated to a third party.
A trust is not terminated with the death of the trustee.
If the trustee becomes insolvent, the trust beneficiaries possess rights to claim the trust property in priority over the trustee’s creditors.

In sum, a trustee, like an agent with discretionary authority, is a fiduciary. “However, unlike the principal in an agency relationship, the trust beneficiary cannot fire or vote-out his or her fiduciaries. Moreover, under the terms of a typical estate planning trust, it is not possible for the trust beneficiary to cut his or her losses by selling or otherwise disposing of their beneficial or equitable interest in the trust.” [Restatement (Third) of Trusts, Section 78, comment b.]

Delegation of Duties: The ability of a trustee’s to delegate some of its duties to an agent adds to the public’s confusion about whether the trustee acts as an agent for the trust beneficiary. As a general rule, a trustee may not delegate its discretionary functions to an agent, because those responsibilities were granted solely by the settlor to the trustee. EPIC expressly permits a trustee to delegate investment and management functions to an agent. [MCL 700.1510.] In addition, the default fiduciary powers conferred on a trustee under the Michigan Trust Code contemplate the delegation of powers of administration by virtue of the statutory authority given to trustees to employ services performed by “persons, including auditors, investment advisors, accountants, appraisers, brokers, custodians, rental agents, attorneys , realtors ….for the purpose of advising or assisting the trustee in the performance of an administrative duty…., and instead of acting personally, empoy one or more agents to perform an act of administration, whether or not discretionary.” [MCL 700.7801(v).] Thus, while only the trustee can act for the trust, the trustee can delegate ministerial functions of the trust to an agent for certain tasks at common law. Apparently the Michigan Trust Code would even permit a delegation of some discretionary powers. Note that some states, e.g. Illinois, impose a statutory duty on a trustee to ‘not delegate to others performance of any acts involving the exercise of judgment and discretion, except as constituting invesmtent functions.’ See 60 ILCS 5/5.1(a).

This, then, get into what constitutes the discretionary versus the ministerial or administrative functions of a trustee. Unfortunately, there is no clear demarcation between the two. The Restatement (Third) of Trusts, Section 80, presumably a restatement of the common law of trusts, confirms that ministerial powers may be delegated by a trustee, but the Restatement also acknowledges that there is no precise definition of what constitutes a ministerial power held by a trustee. The Restatement lists several factors that must be considered to make this decision, or distinction, when a trustee intends to hire its own agent and delegate powers to that agent:

The nature and degree of discretion or the judgement involved in the delegation;
The burdens and compleitof the decisions or activities involved;
The relationship of the acts or functions involved to the competent and facilities possessed (or represented) by the trustee;
The amoutnt of funds or the value and character of the property involved;
Consideration of efficiency, convenience, and cost in light of the situs of the property or activities involved; and
The fairness and appropriateness of the responsibilities in question to the trustee’s compensation and the overall burden of the trusteeship.

Conclusion: Agency and trusts are frequently confused relationships. A trust is not, however, a contract between the trustee and the trust beneficiaries, although in recent years some legal commentators would like to view a trust as a contract with the trust beneficiaries treated as third-party beneficiaries of that contract. At common law is clear that a trustee does not function as an agent of the trust beneficiary. Less clear is whether a trustee can delegate its discretionary powers under a trust instrument to its own selected agent, in light of the default term ‘whether or not discretionary’, that is used in the Michigan Trust Code.