Many people unwittingly accept responsibility as a trustee without knowing the full extent of their legal duties. This can happen for a variety of reasons, including the trustee wants to be the “person in control” or the trustee feels a sense of duty to fulfill a friend or family member’s wishes. Without proper training and education, however, the trustee can step on a landmine of legal exposure.
The term “fiduciary relationship” means “legal relations between parties created by law or by the nature of the contract between them where equity implies confidence and reliance.” Thompson v. Vinson & Elkins, 859 S.W.2d 617, 623 (Tex. App.—Houston [1st Dist.] 1993, writ denied). In a fiduciary relationship, parties “must of necessity rely upon the integrity and good faith of each other” and no proof is required to show that they have done so. Peckham v. Johnson, 98 S.W.2d 408, 416 (Tex. Civ. App.—Fort Worth 1936), aff’d, 132 Tex. 148, 120 S.W.2d 786 (1938).
There are two types of fiduciary relationships: formal fiduciary relationships that arise as a matter of law and informal fiduciary relationships or “confidential relationships” that may arise from moral, social, domestic, or personal relationships. In re Estate of Abernethy, 390 S.W.3d 431, 437–38 (Tex. App.—El Paso 2012, no pet.)(citing Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 593–94 (Tex.1992)).
It is well-established in Texas that trustees owe their beneficiaries fiduciary duties as a matter of law. See Ditta v. Conte, 298 S.W.3d 187,191 (Tex. 2009); See Herschbach v. City of Corpus Christi, 883 S.W.2d 720, 735 (Tex. App.–Corpus Christi 1994)(“A fiduciary relationship exists between a trustee and the trust beneficiary, and the trustee must not breach or violate this relationship.”); Ames v. Ames, 757 S.W.2d 468, 476 (Tex. App.–Beaumont 1988) aff’d as modified, 776 S.W.2d 154 (Tex. 1989)(“A trustee is definitely required to conduct himself, in his trustee affairs, with scrupulous good faith and fidelity when dealing with the interests of his beneficiary.”).
Once a trustee accepts his or hers position as trustee, the trustee owes the beneficiaries fiduciary duties and must administer the trust in accordance with these duties (in addition to other duties imposed by law). Texas Trust Code § 113.051 declares that a trustee must administer the trust according to its terms and the Texas Trust Code and in the absence of any contrary terms in the trust instrument, the trustee shall perform all of the duties imposed on trustees by the common law.
The fiduciary duties imposed on trustees by the common law are extensive and include, but are not limited to, the following:
- The duty to administer the trust according to its terms. Restatement (Third) of Trusts § 76 (2007); Tex. Trust Code § 113.051. The trust instrument provides the trustee with his or her “marching orders” and operates as the trustee’s basic “playbook.” Key trust provisions include, but are not limited to, those that identify the beneficiaries and their rights to trust distributions (income and/or principal), the dates/events requiring the trust to terminate, the trustees and successor trustees and any applicable trustee removal process, the powers and responsibilities of the trustee with respect to investments and income/principal allocation, whether arbitration applies, whether a beneficiary is prevented from contesting the terms of the trust, and whether the trustee is exculpated for any acts and/or omissions.
- The duty of good faith and fair dealing. Herschbach v. City of Corpus Christi,883 S.W.2d 720, 735 (Tex. App.–Corpus Christi 1994, writ denied)(a trustee owes to his beneficiaries an unwavering duty of good faith, fair dealing, loyalty, and fidelity).
- The duty of full disclosure of all material facts that might affect the beneficiaries’ rights. A trustee owes his or her beneficiaries a fiduciary duty of full disclosure of all material facts known to the trustee that might affect the beneficiaries’ rights. Huie v. DeShazo, 922 S.W. 2d 920, 923 (Tex. 1996); Montgomery v. Kennedy, 669 S.W.2d 309, 313 (Tex. 1984); Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502, 508–09 (Tex.1980). The existence of strained relations between the parties did not lessen the fiduciary’s duty of full and complete disclosure. Texas Bank & Trust Co. v. Moore, 595 S.W.2d at 508; Johnson v. Peckham, 132 Tex. 148, 151–52, 120 S.W.2d 786, 788 (1938).
- The duty of loyalty. Texas courts have recognized that a “trustee’s duty of loyalty prohibits him from using the advantage of his position to gain any benefit for himself at the expense of his trust and from placing himself in any position where his self-interest will or may conflict with his obligations as trustee. Musquiz v. Keesee, 07-15-00461-CV, 2017 WL 4341463, at *5 (Tex. App.—Amarillo Sept. 28, 2017, pet. denied) (citing Lesikar v. Rappeport, 33 S.W.3d 282, 297 (Tex. App.–Texarkana 2000, pet. denied); Slay v. Burnett Trust, 187 S.W.2d 377, 388 (Tex. 1945)); See also Restatement (Third) of Trusts § 78 (2007); Slay v. Burnett Tr., 143 Tex. 621, 640, 187 S.W.2d 377, 387 (1945); InterFirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 898 (Tex. App.—Texarkana 1987, no writ), disapproved of by Texas Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240 (Tex. 2002)(“self-dealing and the duty of loyalty are entwined to require the trustee to forego his own personal interest and opportunities for gain with respect to property subject to the fiduciary relationship and to act completely in the interest of the beneficiaries of the relationship.”). These rules prohibit the trustee from “wearing two hats” or “sitting on both sides of a transaction” and attempting to advance the trustee’s personal interests while at the same time attempting to protect the interests of the beneficiaries. A settlor may, however, alter these self-dealing rules. Tex. Trust Code §§ 113.052 through 113.057.
- The duty of impartiality. Restatement (Third) of Trusts § 79 (2007). This duty requires the trustee to act impartially and to take the diverse beneficial interests created by the terms of the trust into account and to administer the trust in a manner that fairly reflects the diversity of such beneficiaries’ concerns and different beneficial interests. For example, a trustee cannot make excessive distributions of income and/or principal from the trust to a life time beneficiary because doing so would harm, and be unfair to, the remainder beneficiaries.
- The duty not to self-deal. Absent a contrary provision in the trust instrument or court approval, a fiduciary may not use his position to self-deal. Healey v. Healey, 529 S.W.3d 124, 135–36 (Tex. App.—Tyler 2017, pet. denied), reh’g denied (Oct. 16, 2017)(citing Tex. Bank & Trust Co. v. Moore, 595 S.W.2d 502, 508-10 (Tex. 1980)). Self-dealing is generally defined as an occurrence in which the fiduciary uses the advantage of his position to gain a benefit at the expense of those to whom he owes a fiduciary duty. Mims-Brown v. Brown, 428 S.W.3d 366, 374 (Tex. App.–Dallas 2014, no pet.). A “benefit” can be an advantage, a privilege, profit, or gain. In re Estate of Miller, 446 S.W.3d 445, 453 (Tex. App.–Tyler 2014, no pet.). Similarly, an “advantage” is a “relatively favorable position.” Jordan v. Lyles, 455 S.W.3d 785, 795 (Tex. App.–Tyler 2015, no pet.).
A settlor may, however, alter these self-dealing rules. Tex. Trust Code §§ 113.052 through 113.057.
- The duty to account. Texas courts have noted that “one of the primary duties of a trustee is to keep full, accurate and orderly records concerning the status of the trust estate and of all acts performed thereunder.” Corpus Christi Bank & Tr. v. Roberts, 587 S.W.2d 173, 181 (Tex. Civ. App.—Corpus Christi 1979), aff’d, 597 S.W.2d 752 (Tex. 1980). “A trustee is charged with the duty of maintaining an accurate account of all of the transactions relating to the trust property [and] he is chargeable with all assets coming into his hands, the disposition for which he cannot account.” Id; Faulkner v. Bost, 137 S.W.3d 254, 259 (Tex. App.—Tyler 2004, no pet.); Shannon v. Frost Nat’l Bank of San Antonio, 533 S.W.2d 389, 393 (Tex. Civ. App.-San Antonio 1975, writ ref’d n.r.e.).
- The duty not to commingle trust assets. Moody v. Pitts, 708 S.W.2d 930, 937 (Tex. App.—Corpus Christi 1986, no writ). Commingling occurs where a trustee mixes his or her own property with trust property.
- The duty of reasonable care, skill and caution in the management of trust property. Restatement (Third) of Trusts § 77 (2007)(The trustee has a duty to administer the trust as a prudent person would, in light of the purposes, terms, and other circumstances of the trust; The duty of prudence requires the exercise of reasonable care, skill, and caution; and If the trustee possesses, or procured appointment by purporting to possess, special facilities or greater skill than that of a person of ordinary prudence, the trustee has a duty to use such facilities or skill);Jewett v. Capital Nat. Bank of Austin, 618 S.W.2d 109, 112 (Tex. Civ. App.—Waco 1981, writ ref’d n.r.e.)(“A trustee can exercise his fiduciary duty in such a negligent manner that his lack of diligence will result in a breach of his fiduciary duty.”); The Moody Found. v. Estate of Moody, 1999 WL 1041541, at *3 (Tex. App.—Austin Nov. 18, 1999, pet. denied)(“A trustee’s fundamental duties include the use of the skill and prudence that an ordinary, capable, and careful person would use in the conduct of his own affairs and loyalty to the trust beneficiary . . . A trustee commits a breach of trust not only where he violates a duty in bad faith, or intentionally although in good faith, or negligently, but also where he violates a duty because of a mistake.”)(citing Republic Nat’l Bank & Trust Co. v. Bruce, 105 S.W.2d 882, 885 (Tex.1937); Ertel v. O’Brien, 852 S.W.2d 17, 21 (Tex. App.—Waco 1993, writ denied)).
These are just a few of the most basic fiduciary duties a trustee owes. Only a brief summary of each fiduciary duty is provided. The application of these fiduciary duties to a particular set of facts will vary greatly depending on a variety of circumstances. Ultimately, whenever a trustee’s fiduciary duties are analyzed, the terms of the trust, as well as the Texas Trust Code must be carefully considered.