To Serve or Not to Serve: a Trustee’s Duty of Good Faith

Many people choose to set up trusts for their children either before they die, or in their will.  For the individual creating a trust, called the settlor, who to choose as trustee can present some tough questions.  Initially, the settlor may choose to serve as trustee, but what happens once they die?  Does he choose a close family member, a spouse, or perhaps a lawyer or financial advisor.  For the individual appointed as trustee should, there are more questions to consider before accepting.  What are the duties of a trustee and is there any liability in the event those duties are not carried out.

All trustees have the absolute duty to act in good faith when carrying out his or her duties.  Unfortunately, this does not mean what most non-legal persons believe it means.  Everyone knows ignorance of the law is no excuse.  For purposes of being a trustee, ignorance of a trustee’s duties are no excuse.  It is not enough that a trustee himself subjectively thinks what he is doing is right.  The duty of good faith also requires that the trustee’s actions be objectively made in good faith.  To do this, courts will look at what the “prudent person” would believe to be proper.  If the prudent person would know that trust funds should have been invested, trust property should have been sold, or that property taxes must be paid and rent must be collected on real property, and it was not, the trustee can face personal liability.

While many people prefer to have a family member serve as trustee, it is important that the person creating the trust and the potential trustee know what is to be expected.  By ensuring the selected trustee knows exactly what is to be expected, and the duties he must fulfill, problems can be avoided down the road.