Understanding a Trustee’s Duty of Loyalty

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A trustee who administers a trust in Texas has certain responsibilities and duties. These duties are commonly known as “fiduciary duties,” and they require a trustee to go “above and beyond” the exercise of ordinary care while carrying out tasks and responsibilities related to the trust.

A trustee’s duties can be grouped broadly into four categories, one of which is the duty of loyalty. The duty of loyalty demands that the trustee put the beneficiary’s interests above his or her own. In other words, if the trustee has a choice between two courses of action, he or she must choose the one that brings the greatest benefit to the beneficiary.

Some trustees find the duty of loyalty helpful as a “tie-breaker” in a situation in which a close call must be made. Others find themselves frustrated by what appears to be a demand for mind-reading. How is it possible to know, for instance, that choosing Investment A over Investment B will offer a better payout, when that payout could be years or even decades in the future?

Texas law does not require trustees to predict the future when they make decisions regarding the trust. However, Texas Trust Code Section 117.007 does require trustees to consider only the best interests of the beneficiary when making investment decisions.

But what if a trust has multiple beneficiaries? In this situation, the trustee may find himself or herself pulled between the conflicting interests of two or more beneficiaries. Section 117.008 of the Texas Trust Code states that in this type of situation, the trustee must act “impartially,” doing his or her best to balance the beneficiaries’ different interests in order to achieve a result that offers the most benefit.

A trustee who uses or takes trust property to benefit himself or herself, instead of handling it for the beneficiary’s benefit, is said to be engaging in “self-dealing.” If concerns about self-dealing arise, the court presumes that the fiduciary was acting unfairly (this is known as the “presumption of unfairness”). It becomes the responsibility of the trustee to prove that his or her actions were fair to the beneficiary – not the beneficiary’s responsibility to prove that they were unfair.