How Might a Trustee Breach the Fiduciary Duty?

A Trustee is tasked with managing assets for the benefit of beneficiaries in accordance with the terms of a trust agreement. This important role inherently involves a fiduciary duty, meaning, in this case, a legal obligation to act in the best interests of the beneficiaries. A Trustee can, however, breach this duty. Understanding how such breaches occur is crucial for Grantors, beneficiaries, and Trustees themselves to try and prevent misconduct. Toward that end, a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby explains how a Trustee might breach the fiduciary duty owed to the trust beneficiaries.

Understanding Fiduciary Duty

Before discussing how a Trustee might breach the fiduciary duty, it is essential to understand what a Trustee’s fiduciary duty entails. When a trust is created, the Grantor (also referred to as the Settlor or Trustor) appoints a Trustee whose job will be to manage and protect trust assets and to oversee the administration of the trust using the trust terms. A Grantor may appoint anyone they choose as the Trustee, including themselves, a close friend, a family member, or a combination of people appointed to be Co-Trustees. The Grantor can also decide to appoint a professional Trustee, which is often a wise choice. Regardless of who is appointed to be the Trustee, the same fiduciary duty applies. This duty encompasses several key responsibilities, including:

  • Duty of Loyalty: Trustees must prioritize the interests of the beneficiaries above their own and avoid conflicts of interest.
  • Duty of Care: Trustees are required to manage the trust assets with a high standard of care and diligence.
  • Duty of Impartiality: Trustees must treat all beneficiaries fairly and impartially, unless the trust terms specify otherwise.
  • Duty to Inform and Account: Trustees must keep beneficiaries informed about the trust’s activities and provide regular accounting.

Common Breaches of Fiduciary Duty

Trustees can breach their fiduciary duty in numerous ways, often causing a considerable financial loss for the trust. A Trustee can also face personal liability in some cases for breaching a fiduciary duty owed to the beneficiaries. Common ways in which a Trustee might breach the fiduciary duty include:

  • Self-Dealing: Self-dealing is one of the most blatant breaches of fiduciary duty. This occurs when a Trustee engages in transactions that benefit them personally at the expense of the trust and its beneficiaries. For example, if a Trustee sells property owned by the trust to themselves at a price below market value, they are engaging in self-dealing because the sale undermines the financial interests of the beneficiaries who are entitled to the full value of the trust’s assets. The converse can also be a breach of fiduciary duty. Imagine that a Trustee purchases trust assets at a steeply discounted price. The “sale” price results in a loss of profit for the trust beneficiaries, amounting to a breach of fiduciary duty.
  • Mismanagement of Assets: Trustees are required to handle trust assets with a high degree of care, skill, and caution. Mismanagement of assets can occur in several ways, including poor investment choices and failing to maintain assets. A Trustee should always protect the trust principal, avoiding risky investments. If a Trustee makes risky investments the Trustee has violated the “prudent investor rule,” causing a breach of fiduciary duty. Failing to properly maintain trust assets can also amount to a breach based on mismanagement of assets.
  • Conflict of Interest: When a Trustee’s personal interests clash with their duty to the beneficiaries it creates a conflict of interest that can rise to the level of a breach of fiduciary duty. A Trustee’s personal interests can create a bias when making trust decisions, even if the Trustee officially keeps his/her distance. For example, the Trustee might invest in a business that the Trustee has a relationship with even though that investment is risky.
  • Failing to Abide by Trust Terms: Unless a term is illegal, unconscionable, or impossible, a Trustee is legally obligated to abide by the terms set forth in the trust agreement. A breach of this duty can occur when a Trustee makes unauthorized distributions to beneficiaries, makes distributions early, or fails to make scheduled distributions. Ignoring terms or failing to take the trust purpose into account can also cause a breach of fiduciary duty by the Trustee.

A Trustee’s fiduciary duty is essential to the success of a trust agreement. When a Trustee breaches the fiduciary duty owed to the beneficiaries, it can cause the trust to suffer financially and can lead to a Trustee being held legally liable for financial losses incurred by the trust and/or trust beneficiaries. If you are serving as a Trustee, working closely with an experienced trust attorney is the best way to ensure that you do not breach your fiduciary duty.

Contact a Murfreesboro Trust Attorney 

If you have additional questions about how a Trustee might breach the fiduciary duty owed to trust beneficiaries, consult with an experienced Murfreesboro trust attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.


Stan Bennett