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Trusts • Trustee Powers & Duties
TRUSTS#042
Legal Definition
A trustee has a duty to act impartially toward both the income and principal beneficiaries. A trustee cannot make only investments that increase the income but damage the long-term value of the trust property.
Plain English Explanation
Sometimes trusts live longer than the people they benefit. For example, some states allow for the creation of so-called "dynasty trusts," which exist for the purpose of sharing wealth across multiple generations. If you were the trustee of such a trust, you would not only be responsible for maximizing value for living beneficiaries, but also future, not-yet-born beneficiaries.
In other words, your investment strategies must be fair to both current and future beneficiaries, even if the living ones are super annoying and have the ability to beg and plead for riskier investments that may maximize the amount of money they get while harming those in the future.
In other words, your investment strategies must be fair to both current and future beneficiaries, even if the living ones are super annoying and have the ability to beg and plead for riskier investments that may maximize the amount of money they get while harming those in the future.
Hypothetical
Hypo 1: Bob is the trustee of a trust set up by Sam's grandparents to provide for Sam during his life, with the remainder going to charity after Sam dies. Bob invests most of the trust assets in high-yield junk bonds, which generate lots of income but carry high risk. This boosts Sam's payouts but jeopardizes the principal. Result: Bob breached his duty to act impartially by favoring the income beneficiary over those who will benefit after Sam (the charity). His risky investment strategy was improper.
Hypo 2: Bob is trustee of a trust to pay for the education of George, Sam's young son, with any surplus going to George at 25. Bob keeps most assets in safe investments like Treasuries. This preserves principal for George but provides little income for school now. Result: Bob failed in his duty to impartially balance the interests of the current and remainder beneficiary. His conservative investments harmed George's current needs.
Hypo 2: Bob is trustee of a trust to pay for the education of George, Sam's young son, with any surplus going to George at 25. Bob keeps most assets in safe investments like Treasuries. This preserves principal for George but provides little income for school now. Result: Bob failed in his duty to impartially balance the interests of the current and remainder beneficiary. His conservative investments harmed George's current needs.
Visual Aids
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