While a “trust” can take many forms, at bottom, it is an arrangement that is often set out in a trust instrument whereby someone’s property or money is held for the benefit of another. Usually, a trustee manages the property or money subject to the trust on behalf of the trust’s beneficiaries. One or more people, or a company, may serve as a trustee or co-trustees. In all instances, a trustee owes duties to the trust beneficiaries and, in certain instances, may owe duties to other interested parties.
Where do a trustee’s powers come from?
To determine which powers any particular trustee holds, the first place to look is the trust instrument itself. Typically, the trust instrument will describe what the trustee can or should do, whether there are any limitations on the trustee’s powers, and may prohibit the trustee from taking, or refraining to take, certain actions. In addition, the provisions in Title 15, Article 5, Part 8 of the Colorado Revised Statutes confers broad power to a trustee to administer the trust and manage the property it holds. Generally speaking, Colorado statute empowers a trustee “all powers over trust property that an unmarried competent owner has over individually owned property,” unless that power is “limited by the terms of the trust.” § 15-5-815(1)(b), C.R.S. But, as Voltaire (and then Spiderman’s uncle Ben) said, with great power comes great responsibility. A trustee’s broad power is subject to numerous fiduciary duties.
What duties does a trustee owe to the beneficiaries of a trust?
As a fiduciary, a trustee owes the beneficiaries of a trust several duties. The Colorado General Assembly has codified many of the fiduciary duties that a trustee owes to a beneficiary in Title 15 of the Colorado Revised Statutes. But, the trust instrument and common law often play a critical role in determining the scope and precise nature of any given trustee’s duties. Below is an overview of some of the most fundamental duties that a trustee owes to the beneficiaries of a trust:
- Trustee’s duty to administer the trust in good faith: Where a trust instrument exists, the trustee must adhere to its terms and administer the trust in good faith. 15-5-801, C.R.S. The law measures good faith many different ways, depending on the circumstances, but generally speaking, the duty to act in good faith requires a trustee to not only honestly believe that his or her action complies with the trust instrument and the law governing trustee conduct, but also that the trustee be free from knowledge or circumstances that ought to put the trustee on notice that more needs to be done to protect the trust property.
- Trustee’s duty of loyalty: The duty of loyalty is one of the most characteristic rules of trust law. It requires a trustee to invest and manage trust assets solely in the interest of the beneficiaries. 15-5-802, C.R.S. Thus, a trustee must act exclusively for the beneficiaries and, absent authorization by the terms of the trust, a court, or the beneficiaries, a trustee cannot act for his or her own benefit or that of others, and the trustee may not allow his or her own personal motives to interfere with the discharge of his or her obligations to the beneficiaries.
- Trustee’s duty of care: A trustee must administer the trust as a prudent person would, given the purposes, terms, and requirements of the trust and use reasonable care, skill, and caution. 15-5-804, C.R.S. When a trustee possesses specialized skill – i.e. banking, investment management, legal training, etc… – the trustee must use those skills or expertise to administer the trust. § 15-5-806, C.R.S. Known as the “Prudent Investor Rule,” a trustee has a duty to invest trust assets, and once invested manage those assets, as a prudent investor would. § 15-1.1-102, C.R.S. Whether a trustee’s decisions meet the standard imposed by the Prudent Investor Rule is judged by the terms of the trust and the provisions of the Uniform Prudent Investor Act. § 15-1.1-101, C.R.S., et seq.
- Trustee’s duty of impartiality: Where a trust names two or more beneficiaries, the trustee must act impartially, e. the trustee cannot favor one beneficiary, or one group of beneficiaries, over others, in investing, managing, and distributing trust property. § 15-5-803, C.R.S.
- Trustee’s duty to maintain records: A trustee must abide by very specific record keeping rules, which require the trustee to, among other things, keep trust property separate from his or her own property, put trust property in the name of the trust (when feasible), and keep adequate records of trust administration, including records relating to ownership, investment, distribution, and spending of trust property.
- Trustee’s duty to account: Colorado law requires a trustee to provide a beneficiary with specific information about the trust and its administration. 15-5-813, C.R.S. A trustee must send certain trust beneficiaries a report that includes a description of trust assets and property (and, if feasible, the market value of the assets), liabilities, receipts, disbursements, and amount of the trustee’s compensation at least annually, or more often if the beneficiaries request such information. Id. at (3)(a).
What are some of the typical ways a trustee breaches his or her duties?
The law governing trustee conduct is complex and there are many nuances when it comes to determining whether a trustee has acted, or failed to act, appropriately. But, generally speaking, a trustee breaches the duties described above when the trustee refuses to follow the terms of the trust or the law governing the trustee’s actions. A trustee breaches the duty of loyalty by self-dealing, spending trust funds for his or her own benefit, paying himself or herself an unreasonable fee, entering into a transaction that involves trust property with a family member, agent, or business owned by the trustee, or competing with the trust. A trustee breaches his or her duty of care by failing to obtain control over, protect, or invest trust property, put trust property to productive use, or, once invested, failing to manage the property prudently or properly. A trustee breaches the duty of impartiality by treating one beneficiary better than another. Finally, a trustee may breach his or her duties to account by failing to provide a beneficiary with the information that the law requires a trustee to maintain and provide.
How can a beneficiary hold a trustee accountable for breaching his or her duties?
When a trustee commits a breach of trust or a trustee breaches his or her fiduciary duty, several different remedies may be available to a beneficiary. The following are some of the most common remedies a beneficiary can pursue against a trustee who has breached the duties the trustee owes to the beneficiaries:
- Restraining a Trustee’s Powers in an Emergency: If a trustee’s acts, or failure to act, poses an imminent risk of substantial harm to the trust’s financial interests, the court may – without a hearing – order the immediate restraint, restriction, or suspension of one or more of the trustee’s powers. 15-10-503(1), C.R.S.
- Permanent Removal of the Trustee: In non-emergent situations, after a hearing, a court can impose a number of restrictions and limitations on a trustee. For example, the court can order supervision of the trustee’s conduct, temporarily restrain the trustee’s powers, or suspend the trustee. 15-10-503(2). If the situation calls for it, the court may also remove the trustee permanently and appoint a temporary or permanent successor trustee. Id. at (2)(e), (h); see also § 15-5-706, C.R.S.
- Surcharge: When a trustee’s improper conduct or breach of fiduciary duty has harmed the trust, the trust’s beneficiaries, or another interested person, the court may surcharge the trustee for the amount of damage or loss. 15-10-504(2)(a). Such damages may include compensatory damages – that is, the amount required to restore the value of the trust property to what it would have been had breach not occurred – plus interest, attorneys’ fees, and costs. §§ 15-5-1002(1), C.R.S, 15-10-504(2)(a).
- Civil Theft: In certain situations, the trustee’s conduct may rise to the level of civil theft. In order to prove civil theft, a beneficiary must show that: (i) the defendant (ii) knowingly (iii) obtained, retained, or exercised control over (iv) anything of value (v) without authorization or by threat or deception and: either (a) intended to deprive the other person permanently of the use or benefit of the thing of value, or (b) knowingly used, concealed, or abandoned the thing in such manner as to deprive the other person permanently of its use or benefit. § 18-4-401(1)(a), (b), C.R.S. “‘In the context of theft of . . . trust funds, the ‘knowingly using’ element of mental culpability . . . does not require a conscious objective to deprive another . . ., but instead requires the offender to be aware that his manner of using trust funds is practically certain to result in depriving another person of the use or benefit of the funds.’” In re Emberton, 501 B.R. 392, 402 (Bankr. D. Colo. 2013) (quoting People v. Anderson, 773 P.2d 542, 545 (Colo. 1989)). If a beneficiary can show that the trustee committed civil theft, the beneficiary is entitled to collect three-times the amount of his or her actual damages, plus attorneys’ fees and costs.
- Declaratory and Injunctive Relief: If a trustee breaches the trust, a court can force the trustee to perform his or her duties, prohibit the trustee from committing a breach of trust, compel the trustee to take, or refrain from, some action, or order the trustee to provide the beneficiary with an accounting, financial report, or inventory regarding the trust.
- Attorneys Fees for Successfully Litigating Breach of Trust: Ordinarily, litigants cannot obtain attorneys’ fees from their opponent, unless a contract, statute, or procedural rule permits it. While certain statutes governing trustee conduct specifically permit the recovery of attorneys’ fees in certain situations, Colorado common law allows a beneficiary who establishes that the trustee committed a breach of trust to recover reasonable attorneys’ fees from the trustee. Buder v. Satore, 774 P.2d 1383, 1390-91 (Colo. 1989).
If you act as a trustee, we can advise you about your duties, responsibilities, and how to avoid liability. If you are a concerned beneficiary, or a beneficiary who believes a trustee has acted improperly, we can discuss whether it makes sense to challenge the trustee’s conduct and, if it does, how to proceed against the trustee in the most efficient and effective way. Contact attorney Jim Fogg or another member of our trust and estates litigation team for more information at 303-592-5900.