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Trust Law/Level IX · Trusts on chain/9.3 Full circle/Lesson 2

Fiduciary duty in code

Which parts of a trustee’s duties of loyalty, prudence, impartiality and reporting code could support, which still need human judgement, what encoding errors can do, and why the trustee stays accountable.

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. Use the public ledger as a free transaction record, then add the off-chain items a UTC §813 report needs: liabilities, receipts, compensation and asset values. Catch: the ledger shows what moved, not why, so keep written reasons for each discretionary payment.
  2. Code rules such as blocking transfers to trustee-linked addresses cheaply support the duty of loyalty (UTC §802). Catch: conflicted transactions off-chain remain voidable by an affected beneficiary, and no code can detect them.
  3. Treat reliance on a code provider as delegation: select it carefully, set the terms and monitor it (UTC §807), and a complying trustee is not liable for the agent’s actions. Catch: skipping monitoring removes that protection.
  4. Encode only mandatory distributions, since any discretion, even ‘absolute’, must be exercised in good faith under the trust’s terms and purposes (UTC §814). Catch: a bug that pays the wrong address is still the trustee’s breach, recoverable only through the law.

MaterialsLesson 1.1.6, on loyalty, prudence and impartiality, and lesson 4.3.7, on reporting to beneficiariesUniform Trust Code §§802, 803, 807, 814 and 1001, in a state enactment such as Maine Revised Statutes title 18-BLesson 9.2.5, on escrow, smart contracts and the word ‘trustless’

Wonder

  1. Could a smart contract stop a trustee from paying trust money to itself?
  2. Can code decide whether a beneficiary’s circumstances justify a discretionary payment?
  3. If code pays the wrong person, who answers to the beneficiaries?

Explore

  1. Lesson 1.1.6 described a trustee’s core duties: loyalty, prudence, impartiality, and keeping records and informing beneficiaries. Blockchains and smart contracts can carry out some trust tasks automatically, such as paying fixed amounts on set dates or recording every transfer. This lesson asks which parts of each duty code could support and which still depend on human judgement. It is reflective: it discusses ideas rather than a working design and recommends no product. The statutory rules cited are from the US Uniform Trust Code (UTC), as enacted in many states, and from England and Wales.
  2. Under UTC §802, a trustee must administer the trust solely in the interests of the beneficiaries, and a transaction affected by a conflict between the trustee’s fiduciary and personal interests is generally voidable by an affected beneficiary. Code can enforce some loyalty rules mechanically, for example by refusing transfers to addresses linked to the trustee. But it sees only what happens on-chain. It cannot tell whether a trustee steered business to a friend, took a side payment or used an opportunity gained as trustee, as in Keech v Sandford (1726). Loyalty concerns motives and relationships that code cannot observe.
  3. Prudence means care, skill and caution. Under the Uniform Prudent Investor Act (1994), a trustee invests as a prudent investor would and generally diversifies; in England and Wales, the Trustee Act 2000 sets a statutory duty of care. Code can apply a rule chosen by people, such as rebalancing to fixed proportions. Choosing the rule, and changing it when markets, the trust’s purposes or the beneficiaries’ needs change, is the prudent judgement. Under UTC §807, a trustee who delegates must take reasonable care in selecting an agent, setting the terms and monitoring performance; relying on code or a code provider raises similar questions.
  4. Under UTC §803, a trustee of a trust with two or more beneficiaries must act impartially, giving due regard to their respective interests. Code can treat every beneficiary identically, but impartial does not mean identical (lesson 1.1.6). Many trusts also give the trustee discretion, for example to pay for a beneficiary’s education or health. Under UTC §814, even a discretion described as ‘absolute’ must be exercised in good faith and in accordance with the trust’s terms and purposes. Applying such standards to one person’s circumstances is a judgement that code can record and carry out, but not make on its own.
  5. Reporting is where code helps most. A public ledger records every on-chain transfer with its time and amount, and its records are hard to alter. But a report under UTC §813 also covers liabilities, receipts, disbursements, the trustee’s compensation and asset values, much of which is off-chain (lesson 4.3.7), and a ledger does not explain why a payment was made. Encoding errors carry their own risk: a bug can pay the wrong address or lock funds, and an on-chain transfer generally cannot be reversed by the network. Any recovery then depends on the law, such as a claim against the recipient, not on the code.
  6. Whatever tools are used, the trustee remains accountable. A breach of a duty owed to beneficiaries is a breach of trust, and under UTC §1001 a court can compel the trustee to perform, order an accounting, require the trustee to restore losses or remove the trustee (lesson 2.3.7). Code that runs exactly as written can still carry out a breach if it was written or set up wrongly, and a complete record of a wrong payment does not make the payment right. Automation changes how duties are carried out; it does not move them from the trustee to the software or its developers.

Key facts

  • Under UTC §802, a trustee must administer the trust solely in the interests of the beneficiaries; code can block some self-dealing transfers but cannot observe motives or off-chain conflicts.
  • Under UTC §807, a trustee who delegates must take reasonable care in selecting an agent, setting the terms of the delegation and monitoring performance.
  • Under UTC §803, a trustee must act impartially, giving due regard to each beneficiary’s interests, which does not mean treating them identically.
  • Under UTC §814, a trustee must exercise a discretionary power in good faith and in accordance with the trust’s terms and purposes, even if the discretion is called ‘absolute’.
  • A ledger records on-chain transfers but not off-chain assets, liabilities or the reasons for payments, which a §813 report and proper records also need.
  • Under UTC §1001, a court can remedy a breach of trust, for example by ordering the trustee to restore losses or removing the trustee, whatever tools the trustee used.

Exercise nine, six, three, one

9CollectList up to 9 trust tasks described in this lesson or a source you are reading (some sources give fewer), noting for each whether code could carry it out, support it, or not help at all.
6ClusterSort them into 6 categories: loyalty, prudence, impartiality, discretionary decisions, reporting and records, and errors and remedies.
3DistillReduce the 6 categories to 3 groups: tasks code can carry out, tasks code can support, and tasks that need human judgement.
1CrystallizeWrite 1 sentence explaining, in your own words, why using code does not move a trustee’s duties to the code.

Fact check

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

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