Duty of loyalty
Loyalty is the cornerstone fiduciary duty. It requires the trustee to act exclusively in the interest of the beneficiaries — not in the trustee's own interest, not in the interest of a friend, and not in the interest of an institution the trustee happens to work for.
The duty of loyalty prohibits self-dealing: the trustee may not buy trust assets for themselves, sell their own property to the trust, lend trust money to themselves or relatives, or take a fee that is not authorized. Even if the transaction is objectively fair, it is generally voidable by the beneficiaries.
Example
A trustee wants to buy the trust's vacation cabin at appraised value. Even though the price is fair, this is self-dealing. To proceed safely, the trustee usually needs unanimous beneficiary consent in writing or a court order — and full disclosure of every term.
Duty of prudence
Prudence requires the trustee to act with the care, skill, and caution that a prudent person would use in managing the affairs of another. The standard is higher than what you might use for your own money, because the assets belong to someone else and you are accountable for the outcome.
Prudence is judged by the process the trustee used, not by hindsight on results. A well-documented decision that loses money is generally defensible; an undocumented decision that happened to gain money is not. Keep notes on why you did what you did.
Knowledge check
A trustee invests in a stock that drops 30%. Years later a beneficiary sues. The court will most likely focus on:
Duty of impartiality
When a trust has multiple beneficiaries, the trustee must balance their interests fairly. This is especially important when the trust has an income beneficiary (someone who receives current income, like a surviving spouse) and a remainder beneficiary (someone who will receive what is left, like children from a prior marriage). Decisions that favor one class at the expense of the other are a breach of impartiality.
Example
A trust pays income to the surviving spouse for life, then passes to the grantor's children. Investing 100% in high-dividend bonds favors the spouse; investing 100% in growth stocks with no dividends favors the children. A balanced allocation reflects impartiality.
Duty to account and inform
Beneficiaries are entitled to know what is going on. The trustee must keep clear records of receipts, disbursements, and asset values, and must report to beneficiaries on a regular schedule — typically annually, though the trust document and state law set the exact frequency. Many states also require an initial notice within 60 days of taking office.
An accounting is not just a list of numbers. It is a narrative the beneficiaries can follow: where assets came from, what the trustee did with them, and where they stand now. Sloppy or missing accountings are the single most common source of trustee disputes.
Knowledge check
Which scenario is the clearest breach of fiduciary duty?