Entrusted with managing assets for the benefit of others, a Trustee has a significant responsibility to act in the beneficiaries’ best interests. This fiduciary duty requires Trustees to adhere to high standards of care and loyalty. Breaches of this duty, however, can occur. To ensure proper management and accountability in trust administration, it’s important for both Trustees and beneficiaries to understand fiduciary duties. With that in mind, the Long Island attorneys at Eghrari Law Firm explain seven ways a Trustee can breach their fiduciary duty.
- Ignoring Trust Terms: A Trustee is legally obligated to follow the terms outlined in the trust agreement unless a term is illegal, impossible, or unconscionable. Deviating from these terms without proper authorization or court approval is a breach of fiduciary duty. For instance, if the trust specifies that certain assets should be held in a specific investment until a beneficiary reaches a particular age, the Trustee must adhere to this requirement.
- Engaging in Self-Dealing: One of the most egregious breaches of fiduciary duty is self-dealing. This occurs when a Trustee exploits their position to benefit personally at the expense of the beneficiaries. Examples include personal transactions like purchasing property from the trust at below-market value or selling personal property to the trust at an inflated price. Although Trustees can earn fees for their services, benefiting personally from transactions involving trust assets can be a clear breach.
- Poor Communication with Beneficiaries: Trustees have an obligation to keep beneficiaries informed about the trust and its management. This involves providing regular updates, financial statements, and relevant information, and responding to beneficiaries’ inquiries promptly. Failure to maintain open and effective communication with beneficiaries is a breach of fiduciary duty.
- Lack of Investment Diversification: Trustees must invest trust assets prudently, which includes diversifying investments to minimize risk. Failing to diversify and thus exposing the trust’s assets to unnecessary risk constitutes a breach of fiduciary duty. For example, putting all trust assets into a single stock can make the trust vulnerable to market fluctuations, which a prudent Trustee should avoid. A Trustee is also required to follow any specific investment instructions included in the trust agreement.
- Showing Favoritism Among Beneficiaries: Trustees must act impartially and treat all beneficiaries fairly. Favoritism occurs when a Trustee makes decisions or distributes assets in a way that unjustly benefits one beneficiary over others, often based on personal relationships or biases rather than the trust’s terms. Such actions are a breach of fiduciary duty.
- Poor Asset Management: Trustees are required to manage trust assets with a high level of care, skill, and caution. Poor management can include neglecting to keep accurate records or failing to supervise agents handling trust assets properly, such as investment advisors or property managers. It can also refer to making risky investments that fail to protect the trust principal.
- Misusing Trust Assets: Misuse of trust assets by the Trustee, such as theft or unauthorized use, constitutes a breach of fiduciary duty. Examples include embezzling funds or property from the trust or making unauthorized loans to themselves or acquaintances. Any unauthorized use of trust assets for personal purposes is a serious violation.
Do You Have Additional Questions about How a Trustee Can Breach His/Her Fiduciary Duty?
For more information, please join us for a FREE estate planning seminar. Whether you are a Trustee, trust creator, or trust beneficiary, if you have additional questions about how a Trustee can breach the fiduciary duty, contact the Long Island estate planning attorneys at Eghrari Law Firm by calling us at 631-265-0599 to schedule your appointment.
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