The essence of a trustee’s duty of impartiality is that the trustee may not favor one beneficiary over another, unless authorized to do so by the governing instrument.1 The duty of impartiality applies not only to successive equitable interests but also concurrent ones. In other words, the duty of impartiality is also relevant to a trustee’s treatment of several beneficiaries, each of whom has the same or a similar interest in the trust.2
Generally, if a trustee does have discretion to favor one beneficiary over another, a court will not control the exercise of this discretion, except to prevent an abuse of discretion.3 The duty of impartiality may also be implicated when a trustee furnishes material information about the affairs of the trust to some members of a beneficiary class but not to others.4 Neutrality is key – especially in dealing with those with conflicting equitable interests. Yet, just as apples and oranges are inherently different, and require different treatment, so also, successive beneficiaries are inherently different and require different treatment.5 If a dispute were to arise between two beneficiaries, a trustee may not advocate for either side or assume the validity of either beneficiary’s respective position.
The challenge for trustees in balancing conflicting beneficiary interests often arises in matters of investment and disclosure.6 Investment decisions are typically balanced utilizing the Prudent Man Rule, Prudent Investor Rule, applicable enacted statute, and the terms of the governing instrument, whereas incident to the trustee’s general duty of loyalty is the specific duty of disclosure.
Now, as a matter of practice, trusts are typically drafted and settlors specifically bestow trustees with considerable discretionary authority, particularly the authority to invade principal for the benefit of the life beneficiaries and to accumulate income for the benefit of the remaindermen.7 Consequently, it is more difficult for a trustee of a discretionary trusts to violate the duty of impartiality in carrying out his investment responsibilities than that of a trustee administering a traditional or specific income-only trust. Conferred additional authority to invade principal does not necessarily eliminate the inherent tension or “economic competition” between differing equitable beneficiary interests, although it does mitigate it somewhat.
1 2A Scott on Trusts §183.
2 3 Scott & Ascher §17.15.
3 3 Scott & Ascher §17.15.
4 3 Scott & Ascher §17.15.
5 4 Scott & Ascher §20.1.
6 Restatement (Third) of Trusts §79 cmt. f.
7 Restatement (Third) of Trusts §90 cmt. i.