An Overview of Trusts and What it Means to be a Trustee

What is a trust and what are the powers, duties, and potential liabilities for serving as a trustee of a trust?

A trust is a fiduciary relationship with respect to property in which one person (the trustee) holds the legal title to trust property for the benefit of another person or persons (the beneficiary). Essentially, it is an instrument whereby one or more persons manage the property for the benefit of others. The person who creates the trust is called the settlor. A settlor is also known as a trustor and a grantor.

Under North Carolina law, a trustee is given certain powers and duties. The trustee is also subject to potential liabilities for not following these duties and for abusing such powers. Below is a brief explanation of some of the powers of a trustee, the duties of a trustee, and some ramifications for a breach of trust.

Powers of a Trustee:

Under N.C. Gen. Stat. § 36C-8-815, a trustee may exercise the following powers without authorization by the court:

1. Those powers expressly stated in the trust document;
2. The following, unless limited by the trust document:
3. All powers over the trust property that an unmarried competent individual has over his or her own individually owned property, unless limited in the trust document;
4. Any other powers appropriate to achieve the proper investment, management, administration, or distribution of the trust property, unless limited in the trust document; and
5. Other powers conferred by the North Carolina Uniform Trust Code, unless limited in the trust.

Duties of a Trustee:

Some of the duties of a trustee are listed below:

1. Standard of Care (C. Gen. Stat. §§ 36C-8-801 – 804):
   1. A trustee has a duty to administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust document and the interests of the beneficiaries.
   2. The trustee must exercise reasonable care, skill, and caution.

2. Duty of Loyalty (C. Gen. Stat. § 36C-8-802):
   1. A trustee has a duty to administer the trust solely in the beneficiaries’ interests.
   2. No Self-Dealing

3. Duty to Separate Assets (C. Gen. Stat. § 36C-8-810):
   1. Trust assets must be kept separate from the trustee’s personal assets and from the assets of other trusts.
   2. Title to the trust property must be in the name of the trustee, as trustee for the trust – example: John Smith, Trustee for the John Smith Revocable Living Trust, dated June 5, 2014.

4. Duty to Defend the Trust (C. Gen. Stat. § 36C-8-811):
   1. The trustee is under a duty to defend the trust and to protect its assets from claims of others.
   2. The trustee cannot take a position that is inconsistent with the best interest of the beneficiaries.

5. Duty to Report (C. Gen. Stat. § 36C-8-813):
   1. The trustee is under a duty to keep adequate records of trust activities.
   2. Depending on what the trust document says, the trustee may be under a duty to supply information regarding the activities and the status of the trust to the qualified beneficiaries upon request and at reasonable times.

6. Duty to Preserve Trust Property and Make it Productive (C. Gen. Stat. § 36C-8-809):
   1. There is a basic duty to preserve and protect the trust assets and an implied duty to make the trust property productive, which includes the duty to invest.
   2. Scope of the Duty:
      1. Exercise reasonable care to:
         1. Collect all claims due to the trust;
         2. Lease land or manage it so that it is productive or sell it if it is not productive;
         3. Protect trust property by doing the following:
            1. Record documents to protect title;
            2. Keep securities and funds in a safe place;
            3. Pay taxes on trust assets out of trust funds; and
            4. Secure insurance on trust properties.

7. Duty to Follow the Prudent Investor Act (C. Gen. Stat. §§ 36C-9-901 – 902):
   1. A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.
   2. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
   3. A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.
      1. Factors to consider in making investment decisions (N.C. Gen. Stat. § 36C-9-902):
         1. General economic conditions;
         2. The possible effect of inflation or deflation;
         3. The expected tax consequences of investment decisions or strategies;
         4. The role that each investment plays within the overall trust portfolio;
         5. The expected total return from income and the appreciation of capital;
         6. Other resources of the beneficiaries;
         7. Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
         8. An asset’s special relationship or value to the purposes of the trust or to one or more beneficiaries.

8. Delegation of Investment and Management Functions (C. Gen. Stat. § 36C-8-807):
   1. The trustee must exercise reasonable care, skill and caution in:
      1. Selecting an agent;
      2. Establishing the scope and terms of the delegation; and
      3. Periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.

Trustee’s possible liabilities:

1. Breach of Trust – a violation of a duty the trustee owes under a trust. To remedy a breach of trust that has occurred or may occur, the court may (C. Gen. Stat. § 36C-10-1001):
   1. Compel the trustee to perform the trustee’s duties;
   2. Enjoin the trustee from committing a breach of trust;
   3. Compel the trustee to redress a breach of trust by paying money, restoring property, or other means;
   4. Order a trustee to provide accounting;
   5. Appoint a special fiduciary to take possession of the trust property and administer the trust;
   6. Suspend or remove the trustee as provided in C. Gen. Stat. § 36C-7-706;
   7. Reduce or deny compensation to the trustee
   8. Subject to G.S. 36C-10-1012, void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds; or
   9. Order any other appropriate relief.

2. Damages to Beneficiaries for Breach – a trustee who commits a breach of trust is liable for the greater of (C. Gen. Stat. § 36C-10-1002):
   1. The amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or
   2. The profit the trustee made from the breach.

3. A Trustee is Not Liable for Breach:
   1. If he or she acted in reasonable reliance on the terms of the trust document and the breach resulted from that reliance. (C. Gen. Stat. § 36C-10-1006)
   2. If the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach, unless:
      1. The consent, release, or ratification of the beneficiary was induced by improper conduct of the trustee; or
      2. At the time of the consent, release, or ratification, the beneficiary did not have knowledge of the beneficiary’s rights or of the material facts relating to the breach. (N.C. Gen. Stat. § 36C-10-1009).

At Strauss Attorneys, PLLC, we understand the importance of properly following these duties and powers. We also recognize how critical it is for a trustee to avoid any potential liability for breaching these duties. Our experienced attorneys provide assistance to our clients who are serving in this capacity to properly guide that person through the complicated process of trust administration. If you are named as a trustee of a trust and need assistance, please give us a call.