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Trust Law/Level I · The idea of a trust/1.1 Three roles/Lesson 6

Fiduciary duty: loyalty, prudence, impartiality

The three rules that keep a trustee honest: loyalty, prudence, and fairness.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. A trustee’s cheapest defence is the record: a separate account, written reasons and the annual report under UTC §813(c) cost little, and a report that adequately discloses a matter starts a one-year limit on claims (§1005).
  2. Low-cost diversified funds usually meet prudence: the Uniform Prudent Investor Act requires diversification unless special circumstances justify otherwise (§3) and permits only costs that are appropriate and reasonable (§7); document any concentrated holding.
  3. Avoid all self-dealing, however fair it looks: Keech v Sandford (1726) made a trustee give up a profit though the trust lost nothing; never buy from, sell to or borrow from the trust without written authority.
  4. Settle disputes without court: interested persons can sign a binding nonjudicial settlement agreement on accounts, trustee pay or trustee liability (UTC §111); it is valid only if it respects a material purpose of the trust.
  5. An informed beneficiary’s written consent or release protects the trustee (UTC §1009), and an exculpation clause works except for bad faith or reckless indifference (§1008); neither holds if the beneficiary did not know the material facts.

MaterialsA copy of any trust document you have readThe text of the Uniform Prudent Investor Act (1994)A sample bank statement showing interest earned

Wonder

  1. What happens if a trustee buys a house for themselves using trust money?
  2. How do I know if my trustee is being careful enough with investments?
  3. Who decides what ‘fair’ looks like between different beneficiaries?

Explore

  1. A fiduciary duty is a legal obligation to act in another person’s interest rather than your own. In a trust, the trustee holds the property but does not own it for their own benefit; they must manage it for the beneficiaries and within the trust’s terms. The standard is stricter than the rules for ordinary dealings between strangers, because beneficiaries depend on the trustee and often cannot watch every decision. The duties below exist to protect beneficiaries from a holder who might be tempted to put their own interests first.
  2. Loyalty means no self-dealing and no conflicts of interest. The classic English example is Keech v Sandford (1726). A trustee held a lease of Romford Market for a child. When the landlord refused to renew the lease for the child, the trustee took a new lease for himself. The Court of Chancery held that he must hand the lease and its profits to the child, even though there was no fraud and the child could not have obtained the lease anyway. The rule is applied strictly: a trustee must not profit from the position without authority.
  3. Prudence means care and skill. In the United States, most states have adopted the Uniform Prudent Investor Act (1994), which asks trustees to invest as a prudent investor would, considering the trust’s purposes and judging risk across the portfolio as a whole rather than one investment at a time. It also requires diversification unless special circumstances make that unwise. In England and Wales, the Trustee Act 2000 sets a statutory duty of care: the care and skill reasonable in the circumstances, with a higher standard for professional trustees and those with special knowledge.
  4. Impartiality means treating current and future beneficiaries fairly. Many trusts pay income to one person now and give the remaining capital to another later. The trustee must balance these interests, for example by not choosing investments that produce high income today at the expense of the capital the later beneficiary will receive. Impartial does not mean identical: under the US Uniform Trust Code (§803), the trustee must give ‘due regard’ to each beneficiary’s interests. The trust document can change the balance, for instance by telling the trustee to favour a surviving spouse.
  5. Trustees must also keep records and keep beneficiaries informed. That means accurate accounts of income, expenses, investments and payments, with trust property kept separate from the trustee’s own. Under the US Uniform Trust Code (§813), a trustee must keep the main beneficiaries reasonably informed, answer reasonable requests for information, and send current beneficiaries a report at least once a year. In England and Wales, trustees must keep proper accounts, and beneficiaries can usually inspect them. Without records, none of the other duties can be checked.
  6. When a trustee breaks one of these duties, it is a breach of trust. Beneficiaries can ask a court to order the trustee to restore what the trust lost, paid from the trustee’s own pocket; US courts often call this surcharging the trustee. Where the trustee made a profit from the position, as in Keech v Sandford, the court can make the trustee give up that profit even if the trust lost nothing. Courts can also remove a trustee. Lesson 2.3.7 covers these remedies in detail.

Key facts

  • Loyalty forbids a trustee from profiting from the position; Keech v Sandford (1726) is the classic English example.
  • Most US states have adopted the Uniform Prudent Investor Act (1994), which judges investments across the whole portfolio and requires diversification unless special circumstances apply.
  • The Trustee Act 2000 defines the statutory duty of care in England and Wales.
  • Trustees must act impartially between current and future beneficiaries, giving due regard to each one’s interests, unless the trust terms say otherwise.
  • Under the Uniform Trust Code (§813), a trustee must keep qualified beneficiaries reasonably informed and send current beneficiaries a report at least annually.
  • Courts can order a trustee in breach to restore losses from their own assets and to give up any profit made from the position.

Exercise nine, six, three, one

9CollectGather 9 examples from your own life or local news where someone held power over another person’s money (like a parent managing a child’s savings, a neighbor watching a house, or a company holding customer deposits).
6ClusterSort the 9 examples into 6 categories based on how much trust was required: none, low, moderate, high, very high, and absolute.
3DistillReduce the 6 categories to 3 core principles that explain why people agree to let others manage their assets safely.
1CrystallizeWrite 1 sentence that defines fiduciary duty using only plain words without any legal jargon.

Fact check

Dates, figures and claims checked against the published sources listed below.

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