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TRUSTEES
by Ben Gutshall, ATG Law Clerk

A trust is a popular and flexible form of property management. In a typical real estate trust arrangement, the trustee manages a property for the benefit of the beneficiary or, more typically, the beneficiaries. A trust creates a fiduciary relationship between the trustee and the beneficiary. For all trusts except land trusts, which are not permitted in Wisconsin, the beneficiary holds an equitable ownership interest in the trust property, while the trustee holds legal title to the property. The trustee has a fiduciary duty to manage the property solely in the interest of the beneficiaries. Most typically, the trustee manages a property and the income derived from the property is distributed to the beneficiaries. If the trustee breaches that duty, he or she can be subject to personal liability or removal. The duties and rules governing the trustee's actions are outlined below.

The Trustee

The trustee is the person in the trust arrangement who owns legal title to the property that is subject to the trust agreement, or legal and equitable title to the property in the case of an Illinois land trust. In most instances, anyone can serve as a trustee as long as that person would be eligible to hold real or personal property, which basically means the person must be of sound mind and of legal age. A sole beneficiary cannot serve as a sole trustee in the same trust. In that situation, both legal and equitable interests of the trust would vest in the same individual and defeat the underlying purpose of a trust: to place those interests in two separate individuals. However, one can both serve as trustee and be a beneficiary as long as there is at least one other trustee or beneficiary. Such a situation is acceptable because when there is more than one person serving as trustee or beneficiary the trust's interests will not all vest in the same person.

The trustee doesn't necessarily have to be an individual person. Corporations can also serve as trustees. In most instances, the corporation, subject to limitations placed upon its powers by its own charter or by statute, may hold property in trust and may act as trustee of a "business trust." In addition, counties, municipalities, towns, townships, or school districts can serve as trustees. Usually, however, these trusts must exist for a public and charitable purpose to be valid.

Corporation as Trustee

A person may elect to nominate a corporate fiduciary to administer the trust. This corporate fiduciary is subject to laws imposed by the state and the corporate entity must meet certain requirements, as required by the incorporation laws of the respective state.

For instance, Illinois has enacted the Corporate Fiduciary Act, 205 ILCS 620/1-1 et seq., to govern corporate entities that act as trustees. The Act, in 205 ILCS 620/2-1, allows "any corporation which has been or shall be incorporated under the general corporation laws of this State for the purpose of accepting and executing trusts" to be appointed a fiduciary or trustee. Under 205 ILCS 620/1-6, the Act specifically empowers a state bank, state savings and loan association, state savings bank, corporation or a limited liability company to act as trustee or fiduciary. Additionally, the entity has to have been properly incorporated under the applicable Illinois general corporation statutes to serve as a corporate fiduciary. Please see the provisions of 205 ILCS 620/1-6 for reference to the applicable statutes.

Similarly, in Indiana, the Uniform Fiduciaries Act, IC 30-2-4-1, allows "a corporation, limited liability company, partnership, or other association" to serve as a trustee. Wisconsin, under Wis Stat § 701.19(5) allows trust property to be managed by a partnership, limited liability company, or corporation.

Successor Trustee

Typically, the trust agreement will provide a method for appointing a successor trustee if the original trustee, due to death, resignation, or removal, can no longer serve. However, in some cases, the trust agreement is unclear on how to appoint a successor trustee and in that case, one may be able to rely on statutory provisions to appoint a successor.

In Illinois, the Trusts and Trustees Act, 760 ILCS 5/13, allows a successor trustee to be appointed by a majority in interest, a majority in number of the beneficiaries, or by an instrument in writing, signed by the beneficiaries, delivered to the successor. Wisconsin, under Wis Stat § 701.17, provides that the court may appoint a successor trustee "unless the creating instrument names or provides an effective method for appointing a successor." Similarly, Indiana, under IC 30-4-3-29 (c), allows a court to appoint a trustee "to replace a removed, resigned, or deceased trustee," unless a successor trustee is "named in or selected according to a method prescribed in the terms of the trust."

The Fiduciary Duty

The essential role of the trustee is to perform his or her fiduciary duty to the beneficiaries in good faith. This means the trustee must act in good faith in the administration of the trust by acting honestly and with undivided loyalty to the trust and the interests of the beneficiaries. This is a rather high standard to meet, and the failure of the trustee in meeting the standard can lead to his or her removal as trustee and possible liability for the breach of the duty, which will be discussed later. The high standard of care required is illustrated by the court of appeals of Indiana when it held that "[o]ne of the most fundamental duties of the trustee is that he must display throughout the administration of trust complete loyalty to the interests of the beneficiary and must exclude all selfish interest and all consideration of the interests of third persons." Massey v St Joseph Bank and Trust Co, 411 NE2d 751 (Ind Ct App 1980). The Supreme Court of Wisconsin has required a trustee to show "impartiality and utmost fidelity ... in the performance of his duties." Zimmerman v Brennan, 56 Wis 2d 623, 202 NW2d 923 (Wis 1973).

A trustee has authority to take a wide variety of actions. However, the trustee must always tailor his or her actions in accordance with the terms of the trust and act exclusively in the interest of the trust. Trustees are not allowed to use trust assets for their individual needs or desires; the trustee's focus is to best serve the interests of the trust and its beneficiaries. While at times it may be hard to define or identify such actions, the view typically espoused is that of an ordinarily prudent person. In other words, the standard of care, diligence, and skill required of a trustee in the administration of the trust is that of an ordinarily prudent person in the conduct of his or her private affairs under similar circumstances and for a similar goal. Regardless, honesty and loyalty to the trust and the interests of the beneficiaries is paramount.

While many powers of a trustee are implied, the states have granted certain powers and restrictions in statutes, which will take effect if the trust agreement does not specify the trustee's powers. For example, Illinois allows trustees to sell trust estate, lease the trust estate and borrow money against the estate. 765 ILCS 5/4 et al. Also, Illinois allows trustees to grant easements, execute contracts, and purchase insurance for the trust property. 765 ILCS 5/4 et al. Similarly, Indiana trustees are allowed to buy, sell, or exchange property, invest and reinvest the trust estate, receive additions to the assets of the trust, enter into a lease, mortgage trust property, and employ persons to advise and assist the trustee in matters concerning the trust property. IC 30-4-3-3. As is typical, trustees in Wisconsin have statutory authority to sell, mortgage, and lease trust property. Wis Stat § 701.19 (1). Wisconsin prohibits a trustee from making discretionary income payments to himself, unless this power is granted in the trust agreement itself. Wis Stat § 701.19 (10).

Trustees also have the authority and duty to maintain legal actions and defend the property against charges brought against the trust. Similarly, any actions brought against the trust are brought against the trustee, although the beneficiaries are also necessary parties. However, a third party cannot bring a suit against the trust if the action is against the trustee in his or her personal capacity.

One other duty of a trustee is making the accounts and financial transactions of the trust available to the beneficiaries. This includes statements of incomes, expenditures, and other associated financial matters that affect the beneficiaries' interests.

Delegation of Fiduciary Duty

In certain situations, a trustee may be unable to properly execute his or her duties or responsibilities and may find it necessary to delegate responsibilities to another person. An Illinois case, McCormick v McCormick, 118 Ill App 3d 455, 455 NE2d 103, 74 Ill Dec 73 (1st D 1983), illustrates that a trustee can delegate authority if the terms of trust agreement include the power to delegate. In McCormick, the beneficiary of a trust alleged that the trustees breached their fiduciary duty when they delegated judgmental and discretionary responsibilities to a third party. The court disagreed, and pointed out that the trust agreement granted the trustees the power "to employ agents and counsel, including investment counsel, and delegate to them any powers of the trustees." The court would not find a breach of fiduciary duty simply because the trustees delegated authority to a third party, absent evidence that the trustees failed to use proper discretion when making the delegation of power or failed to exercise discretion over its execution. Thus, it is possible for a trustee to delegate discretionary and judgmental responsibility to a third party when the trust agreement explicitly allows that delegation.

The settlor (a person who creates a trust) imposes a personal fiduciary duty on the trustee, and that duty cannot be delegated or assigned to another without the settlor's consent. For this reason, a trustee also may not execute a power of attorney, without specific authority to do so in the trust agreement. If you have a transaction in which a trustee is not available to make a necessary conveyance, take the following steps:

1. Consult the trust agreement. If the trust agreement provides for a successor trustee, that person may make the conveyance required.

 

2. If the trust agreement does not provide for a successor trustee, consult the statutes. In Illinois, the Trusts and Trustees Act, 760 ILCS 5/1, et seq., provides guidance. Section 5/13 specifically addresses how to proceed upon the death, resignation, refusal, or inability of a trustee to act. It allows a remaining trustee to act on behalf of the trust. If there is no remaining trustee, this section allows the beneficiaries to appoint a successor trustee. Please examine the statute for details of this procedure. In Indiana, IC 30-4-2-2(e) provides that if the trust agreement does not name a successor trustee, the court will appoint a trustee in a court proceeding. Please examine the statute for details of this procedure. In Wisconsin, the Trusts Act, Chapter 701 of the Wisconsin Statutes, sets forth the statutory powers of a trustee, including the power to sell or mortgage real estate. WSA § 701.19. Please examine the statute for details of this procedure.

Breach of Fiduciary Duty and Remedies for Breach of Trustee's Duties

Typically, a trustee is responsible for the duties identified in the trust agreement. If the trustee fails to properly meet his or her obligations, then the trustee has breached the fiduciary duty. While determination of a breach may depend on the actual trust agreement, some types of actions are consideredprima faciebreaches of fiduciary duty. For example, if a trustee deeds the trust property to himself or herself, such action is considered a breach unless the trustee can provide additional evidence to overcome the presumption that such action is aprima faciebreach of fiduciary duty.

A trustee's breach of the fiduciary duties to the beneficiaries is a violation of the beneficiaries' rights under the trust agreement and can subject the trustee to personal liability to the beneficiaries for any loss of the trust estate or removal from the role as trustee. To establish a breach of duty, the beneficiary must establish that the trustee was responsible for the duty that the beneficiary claims has been breached.

Determining if a breach has occurred is often a complicated issue. For example, in one case from Illinois,Rubin v Laser, 301 Ill App 3d 60, 703 NE2d 453, 234 Ill Dec 592 (1st D 1998), beneficiaries brought suit against a trustee and alleged impropriety in his administration of the trust. InRubin, the trustee had purchased bank stock for himself and also for the trust. When the trustee later made further purchases of stock for himself but did not make any additional purchases of stock for the trust, the beneficiaries claimed that he had breached his duty as a trustee because his actions allegedly revealed a conflict of interest between his own interests and the interests of the trust. The appellate court admitted that there was a possibility of breach of duty by the trustee because a trustee is not allowed to compete with the trust's interest. Ultimately, however, the court concluded that there was no breach because the beneficiaries had failed to show any connection between the trustee's purchase of stock for himself and any resulting detriment to the value of the trust.

The personal nature of a trustee's liability means that if found to be in breach, the trustee must use his or her own personal resources to compensate the trust estate. In Illinois, a trustee breaching the trust agreement is chargeable with the following: (1) any loss or depreciation in value of the trust property as a result of the breach; or (2) any profit made by him or her as a result of the breach; or (3) any profit that would have accrued to the trust had there been no breach.Progressive Land Developers, Inc v Exchange National Bank, 266 Ill App 3d, 641 NE2d 608, 204 Ill Dec 384 (3rd D 1994).

Similarly, in Indiana, a trustee in breach of the duty is liable to the beneficiary for any loss or depreciation in the value of the trust as a result of the breach, any profit made by the trustee through the breach, any profit that would have been gained but for the breach, and reasonable attorney's fees. IC 30-4-3-11. In addition, a court can deny a trustee all compensation or reduce his or her compensation if the trustee has been found to be in breach. IC 30-4-5-17.

A trustee can be removed by any person granted the right to do so in the trust agreement, typically in an action brought by either a beneficiary or a co-trustee. The decision to remove the trustee is made by a court. In most instances, the general question to determine removal is whether the continued presence of the trustee would be detrimental to the trust. In other words, is the trustee jeopardizing the existence and purpose of the trust? Specifically, the question is typically whether the trustee has neglected to perform the fiduciary duties or has breached the trust agreement. This point is illustrated from an Illinois case, in which the appellate court held that when a trustee fails to administer a trust according to its terms, a breach of trust results.Northwestern Mutual Life Insurance Co v Wiemer, 96 Ill App 3d 549, 421 NE2d 1002, 52 Ill Dec 139 (3rd D 1981). InNorthwestern Mutual Life Insurance Co, the beneficiaries executed a trust agreement to consolidate their debt to the trustee and another bank, which enabled the beneficiaries to purchase a farm. Under the terms of the trust, the trustee had a duty to manage the farm and apply the income from that management to pay existing debts, including a prior mortgage. The trustee, however, paid the income to the trust account itself and, as a result, the prior mortgage was foreclosed. The court found that the trustee had violated the terms of the trust by not applying the income to the prior mortgage, as required under the trust agreement.

Other possible reasons for removing a trustee include mismanagement of trust property, failure to file accounts, and willful or malicious refusal to comply with the provisions of the trust. Dishonest behavior in dealings with the beneficiaries is another possible reason for removal.

In Indiana, the statute provides that a beneficiary of a trust may maintain the following actions: (1) compel the trustee to perform his or her duties; (2) to enjoin the trustee from committing an act that may be a breach of trust; (3) to compel the trustee to redress a breach of trust; or (4) to remove a trustee for cause and appoint a successor trustee. IC 30-4-3-22. In Wisconsin, statutory law allows a trustee to be removed "in accordance with the terms of the creating instrument" and also allows a court to remove a trustee that has "failed to comply" with the trust requirements. Wis Stat § 701.18 (2).

Conclusion

In summary, the key role of the trustee is to manage the estate or property in the manner that best serves the interests of the beneficiary or beneficiaries. To accomplish this goal, the trustee is empowered to do practically anything a typical legal owner of property could do. While the actual trust agreement may contain any number of specific requirements, goals, or stipulations, the underlying purpose of the trustee is to faithfully and honestly serve the trust and protect the interests of the beneficiaries. If the trustee fails to meet this duty, then the trustee may be removed and possibly held liable for any damages his or her actions caused the trust.

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