What It Means To Be a Fiduciary

The term fiduciary is used regularly in communications, but seldom do individuals actually know what it means to be a fiduciary. Often fiduciary refers to the role in which one serves another, such as the personal representative of an estate, a funeral representative, a conservator, a guardian, or the trustee of a trust. A deeper look into the concept of acting as a fiduciary is to focus on the duties of that particular role, and the standards by which that role-player is held accountable in the exercise of their delegated authority.

With regard to a trustee, there are four primary duties that influence a trustee’s exercise of authority and discretion under a trust: the duty of loyalty, the duty of care, the duty to act impartially, and one administrative duty, which is to keep trust beneficiaries reasonably informed. Some of these duties are obvious, but their scope may not be fully appreciated.

DUTY OF LOYALTY: A trustee is under a duty to the beneficiaries of the trust to administer the trust solely in the interest of the trust beneficiaries. This duty of loyalty transcends any concerns that the trustee may have with regard to its possible removal by the trust beneficiaries. The Michigan Trust Code contemplates that in limited instances a trustee may enter into transactions for the trustee’s own personal account or interest notwithstanding this duty of loyalty. However, those transactions that constitute a conflict of interest are otherwise voidable by the trust beneficiaries unless certain conditions are satisfied, such as the self-dealing is expressly authorized by the terms of the trust, a court order approves of the self-dealing, or the trust beneficiaries’ consent to the trustee’s self-dealing. An example where a trust instrument authorizes a modification of a trustee’s general duty of loyalty would be if the company controller or a board of director’s member is named as co-trustee of the trust that holds title to the business that they serve. Such an appointment would present a conflict of interest that the trust’s creator could anticipate and modify in the trust instrument.

DUTY OF CARE: The duty of care, also referred to as the duty to act, generally requires that the trustee must administer the trust in good faith, according to its terms and purposes, and in the interests of the trust beneficiaries. The Michigan Trust Code defines this duty as follows: Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, expeditiously, in accordance with its terms and purposes, for the benefit of the trust beneficiaries. This fiduciary duty results in multiple factors that the trustee must take into consideration to manage the trust’s assets and make distributions from the trust. Those relevant factors relevant to this fiduciary duty include:

• Exercise reasonable care, skill and caution;
• Take reasonable steps to take control of and protect trust property;
• Act in a prudent manner;
• Take into account the particular facts and circumstances, i.e. become fully informed; and
• Act in accordance with the provisions of the trust instrument, the material purposes of the trust, the interests of the trust beneficiaries, and follow the law that governs the interpretation and administration of the trust.

This fiduciary duty is often reduced to act in good faith. However, because of the difficulty in how to define what constitutes good faith (or bad faith for that matter), and the implication that such vague terms require some assessment of motives, state-of-mind, or purpose, Michigan’s Trust Code declined to use good faith as a standard to evaluate a trustee’s performance of its duty of care. Unlike the duty of loyalty, as described earlier, which can be modified to an extent in the trust instrument, a trustee’s duty of care in Michigan cannot be modified, or eliminated, in a trust. There is one Michigan court decision where the court noted that even though the administration of a trust involved a ‘family situation,’ that fact did not exempt the trust from judicial oversight nor did it excuse the family-member trustee from ‘playing fast and loose’ with the trust’s administration.

DUTY OF IMPARTIALITY: The Michigan Trust Code requires that a trustee must act as would a prudent person in dealing with the property of another person. This duty also requires the trustee to manage and invest the trust’s assets consistent with what is often called the prudent investor rule. This fiduciary duty of impartiality is particularly central to the trustee’s discretion to make distributions from the trust. It requires the trustee to balance the interests of all trust beneficiaries, not just take into consideration the needs (or requests) of the beneficiary who may be entitled to currently receive a distribution from the trust. Restated, this duty of impartiality requires the trustee to administer the trust in a manner that is impartial with respect to the various beneficiaries of the trust — current and future — balancing their respective interests in the same trust. The trustee must act impartially and with due regard for these diverse beneficial interests created by the trust’s terms. This duty also entails the obligation to consult and otherwise communicate with all trust beneficiaries. In sum, the trustee must proceed in a manner that fairly reflects the diversity of all trust beneficiaries, including their concerns and their beneficial interests in the same trust, which often are not even remotely the same. Consequently, as a surprise to some, in order to fulfill its duty of impartiality, the trustee must take into consideration and accommodate both current and future beneficiaries’ interests in the same trust, unless the trust instrument expressly provides otherwise.

A trust instrument might modify the trustee’s duty of impartiality to include a priority of a beneficiary’s interests that must first be considered. An example would be a trust that authorizes a distribution of trust income or principal to the trust creator’s surviving spouse in a second marriage, and upon his or her death, the trust assets are only then to be distributed to the creator’s children from a first marriage. That trust instrument could direct that In the trustee’s exercise of discretion to make principal distributions to, or on behalf of, my surviving spouse for his/her health or support, the trustee need not consider the interests of any other beneficiary of this trust. Otherwise, the trustee must balance the surviving spouse and children’s respective interests in the same trust.

DUTY TO INFORM: Yet another fiduciary duty, that is the corollary to the duty of care, is the trustee’s duty to inform and report to all trust beneficiaries. The trustee is obligated to keep all of the trust beneficiaries reasonably informed about the administration of the trust of the material facts that are necessary to enable each trust beneficiary to protect their respective interests in the trust. Accordingly, upon a reasonable request, the trustee must promptly furnish to a trust beneficiary a copy of the terms of the trust that describe or affect the trust beneficiary’s interest and relevant information about the trust property. What is both reasonable and relevant is often open to debate. This duty to inform also entitles trust beneficiaries to the disclosure of the reasons and bases upon which the trustee makes discretionary distribution decision with regard to all trust beneficiaries. Thus, the expectation of confidentiality of a beneficiary’s request for a distribution from the trust can be frustrated.

Trustees do not take their fiduciary duties lightly. When the discussion centers on who should act as the trustee of a trust, it is important to keep in mind these various fiduciary duties that both guide and constrain the trustee in the administration of a trust, as well as the probability that the trustee candidate is both capable and willing to adhere to these important fiduciary duties.