It is said that two grand principles underlie much of the Anglo-American law of trusts: the trustee’s duties of loyalty and of prudence.1 The customs and practices of a corporate fiduciary require that it act with a duty of prudence to administer and manage the Trust with care, skill, and caution considering the purpose, terms, and distributional requirements of the Trust and all relevant circumstances. The standard of prudence is judged on the basis of conduct, not performance.2 A trustee has a duty to make the trust property productive; “to provide returns or other benefits from trust property.”3
Inherent in the duty of prudence is the duty to invest. The duty of prudence also requires that a trustee sufficiently diversify assets to minimize exposure to a single asset class, and to diversify in accordance with the Prudent Investor Rule in a cautious, skillful manner. Prudence also dictates that the trustee assign qualified, experienced personnel to administer the trust. In certain situations, a trustee has a duty to seek the advice of consultants and advisors for the proper administration of the trust. Periodic reviews of the investment portfolio are prudent to verify that investment decisions conform to the purpose and terms of the governing instrument. In particular, the trustee should pursue an investment strategy that considers risk and return objectives reasonably suited to the purpose of the trust consistent with the duty of impartiality. If there were to arise a situation where a limitation on the trustee’s investment authority could materially affect or cause harm to the beneficiaries’ interests, the trustee is obligated to inform all interested parties, and should thereafter petition the Court for instruction, direction, and clarification. The Restatement (Third) of trusts would impose an affirmative duty on the trustee to initiate a modification or deviation action when circumstances warrant an equitable deviation.
The customs and practices of a corporate fiduciary also require that it inform and account to the beneficiaries. Incident to the trustee’s duty to be generally prudent and to account or report to the beneficiaries is the trustee’s duty to keep adequate records of the administration of the trust. Such duty is fundamental to the trust relationship; a trustee must keep the beneficiaries reasonably informed of their interests in the trust, any significant developments during the course of administration, and any changes to the governing instruments that could affect their interests. The trustee must maintain precise, complete, and accurate books and records with respect to trust property. If such recordkeeping duty is delegated, the trustee has a duty to prudently select, instruct, and monitor the delegated agent. Certain circumstances may require the trustee to take affirmative steps to provide additional information. A corporate fiduciary is obligated to disclose its fees and compensation, and to ensure that interested parties understand the mechanics of how the fees and compensation are calculated/charged and in what intervals. It is also standard practice for the trustee to maintain a periodic, ongoing dialogue with beneficiaries regarding their interests.
1 3 Scott & Ascher §17.2.
2 Restatement (Third) of Trusts §77 cmt. a.; Scott on Trusts §§204, 227.
3 Restatement (Third) of Trusts §76(2)(c).