The duty of loyalty is one of the most basic, and important, trustee duties (Probate Code section 16002). At its core, the duty of loyalty requires the Trustee to administer the trust solely in the interest of the beneficiaries. That means the Trustee must do what is right for the beneficiaries in all situations.
Duty of Loyalty
The duty of loyalty starts with the management of the Trust assets. A Trustee cannot take advantage of a Trust’s business dealing for their own personal gain, they cannot enter into transactions with the Trust (especially where the Trustee gains an advantage), they cannot give away Trust benefits to a different Trust. In other words, all actions a Trustee takes must be to benefit the Trust and the Trust beneficiaries—not themselves.
Most importantly, the Trustee must never act adversely to Trust beneficiaries. Trustees may make tough decisions at times but doing what is right for the Trust is different from taking actions adverse to a Trust beneficiary. For example, a Trustee may be forced to abandon an asset that is worth less than the debt owed against it. This occurred during the Great Recession of 2008 when many homes were under water (meaning the mortgage balance of the home was higher than the value of the home). In these situations, it may be best for the Trustee to let the asset go rather than spending money to save a worthless asset. That can be a hard decision, but it ultimately is in the best interests of the beneficiaries to make good, tough decisions.
If, however, the Trustee were to sell a Trust home to themselves for half the price the home would achieve on the open market, then that is decidedly NOT a benefit to the Trust beneficiaries. As such, an inside sale of Trust assets violates the duty of loyalty (along with a few other duties).
Trustee Must be Careful
The duty of loyalty can also be violated during litigation. When a Trustee is involved in a lawsuit brought by a Trust beneficiary, the Trustee must walk a thin line. Even when being sued, a Trustee must still abide by their fiduciary duties. Taking unreasonable positions, or trying to pit one beneficiary against another, can be a violation of the Trustee’s duty of loyalty. The most common problem in litigation is when the Trustee treats the beneficiary like a typical lawsuit adversary. The Trustee may refuse to produce Trust records, refuse to answer questions, or refuse to make Trust distributions while the lawsuit is pending. These are all examples of breaching the duty of loyalty. The Trustee is not able to treat a beneficiary like a typical adversary. There are obligations the Trustee must meet to treat the beneficiary fairly. Withholding Trust documents and refusing to answer relevant Trust questions is not loyalty.
That’s not to say that the Trustee must admit defeat and lose the lawsuit. But it does mean that a Trustee must be careful when being sued by a beneficiary. The same applies to any lawsuit where one beneficiary is suing another beneficiary of the same Trust. The Trustee has an obligation to remain neutral and not take sides because doing so could violate the duty of loyalty owed to the losing beneficiary. It can all be quite tricky.
Then again, it’s not tricky at all if the Trustee remembers to administer the Trust in the sole interests of the Trust beneficiaries.