It is a well established principle of trust law that trustees are fiduciaries who owe specific duties to the beneficiaries of a trust. These duties can be grouped into duties of loyalty and duties of care.
But what if a trust has beneficiaries with adverse interests to one another? It is not uncommon for a trust to have two kinds of beneficiaries – a current beneficiary as well as a remainder beneficiary. That is, the current beneficiary may have rights to the income from the trust, and perhaps even discretionary rights to the trust’s assets (also known as the trust principal or corpus); whereas the remainder beneficiary may have rights or equitable interest in what is left in the trust (the remainder) after a period of years or upon the death of the current beneficiary. These adverse interests can test the mettle of most individual or family trustees as both beneficiaries are owed duties of loyalty and care.
Suppose Mike Brady created a trust to take effect at his death. His trust includes the following (summarized) instructions:
- At my death, my trustee shall pay to my surviving spouse the net income from my trust for as long as my spouse shall live.
- In addition to the net income, my trustee may also pay to my surviving spouse from the trust’s principal, as much as my trustee shall deem necessary to maintain my spouse in [her] accustomed standard of living.
- Upon my spouse’s death, my trustee shall distribute my trust to my surviving children (Greg Brady, Peter Brady, and Bobby Brady) in equal shares.
Now supposed that when Mike Brady dies, Carol Brady is appointed to serve as trustee of Mike’s trust. Or, perhaps Mike’s oldest son, Greg, is appointed as trustee. This is not only permitted but done frequently, presumably to avoid paying a professional trustee. The conflicts to the Duty of Loyalty are obvious.
For example, if Carol Brady is trustee, it stands to reason that she would want to maximize current income from the trust while minimizing principal growth. Likewise, if Greg is trustee, he would want to maximize his ultimate share of the trust by investing for growth rather than income. In addition, asking either party to objectively define “accustomed standard of living” puts them both in awkward, if not conflicting positions. Should Alice’s services as a live-in housekeeper continue to be paid after everyone has moved on? Carol could certainly argue that the expense met the accustomed standard of living test, but would Greg require Carol to pay for it herself, or would he deny it saying it wasn’t necessary any longer?
Perhaps when Mike and Carol were in the attorney’s office, their response to these hypothetical situations was typical. “Oh our kids would never argue over this.”
It is possible to be loyal to both beneficiaries even if there are adverse interests. However, doing so requires a great deal of objectivity, scrutiny, and immunity to emotional persuasion. A wise trustee will establish clear expectations and open communication early in the relationship to avoid favoring one beneficiary over the other and risk breaching the duty of loyalty.