The New Jersey Uniform Trust Code – Part 10A: Duties, Defenses and Liabilities of Trustees, Including Limitations of Actions for Trustee Liability
This section addresses the standards under the NJ UTC, New Jersey common law, and the Restatement of Trusts. Given the breadth of this area, the assessment will fall into four areas: (A) the basic duties of the trustee for which claims may arise; (B) defenses to those claims, including limitations of actions; (C) damages and remedies for breach of trust; and (D) special consideration of the duty to disclose.
A. Basic Duties of Trustees for Which Claims for Breach of Trust May Arise
- Basic Trustee Duties: NJ UTC
The NJ UTC is almost identical to the standard Uniform Trust Code. It is largely in line with common law and the Restatement, but with more defined parameters for each of the duties it prescribes. The NJ UTC does not substantially change New Jersey law with regard to trustee duties, except to the extent it has more clearly delineated the contours of the common law. See, e.g., N.J.S.A. § 3B:31-54 to – 70 (defining duties of trustees).
The NJ UTC incorporates the common law and the principles set forth in the Restatement of Trusts by establishing four fiduciary duties fundamental to the law of trusts: the duties of good faith, prudence, loyalty and impartiality. See N.J.S.A. § 3B:31-54 to 31-57. Cf. Restatement (Third) of Trusts Part 6, Ch. 15 Introductory Note (2007).
The duty of loyalty statute (N.J.S.A. § 3B:31-55) is lengthy. Subsections (b) and (c) include very detailed provisions concerning voidable transactions, in comparison to N.J.S.A. § 3B:14-36, which also addresses this issue. Pursuant to subsection (d), a transaction between a trustee and a beneficiary not concerning trust property is voidable if the beneficiary establishes that the transaction was unfair to the beneficiary. Subsection (f) addresses an overlap between trust and corporate law, and makes clear that a trustee may not use the corporate form to escape the fiduciary duties of trust law. Subsection (g) contains several exceptions to the general duty of loyalty, which apply if the transaction is fair to the beneficiaries and other conditions are met.
The duty of prudence standard contained in N.J.S.A. § 3B:31-57 is similar to that contained in New Jersey’s Prudent Investor Act, but applies to all aspects of administration and not just investments.
The new section concerning costs of administration (N.J.S.A § 3B:31-58) appears to reflect current law, as set forth in New Jersey’s Prudent Investor Act,, N.J.S.A. § 3B:20-11.8. Similarly, N.J.S.A. § 3B:31-59, which sets forth the standard of care to use special skills, is similar but not identical to New Jersey’s Prudent Investor Act, N.J.S.A. § 3B:20-11.3f. and § 3B:10-26.
More specifically, N.J.S.A. § 3B:31-59 states that a trustee who has special skills or expertise, or is named as trustee in reliance on the trustee’s representation that it has special skills or expertise, “has a duty to use those special skills or expertise.”
N.J.S.A. § 3B:31-60 — discussed in more detail below — permits trustees to delegate various aspects of trust administration to agents, subject to the standards contained in this section. Many of these standards are already found in New Jersey’s Prudent Investor Act, N.J.S.A. § 3B:20-11.10, as to investments. N.J.S.A. § 3B:31-60 permits delegation of ministerial, administrative, and management duties and powers, but not the exercise of fiduciary discretions. A trustee must also provide “reasonable written notice to the qualified beneficiaries on each occasion upon which the trustee delegates duties” of the trust and must include the identity of the agent assigned to perform such duties. N.J.S.A § 3B:31-60(c). The delegation must be in writing. § 3B:31-60(b)(2). The agent will also be held to the same standards as applied to the delegating trustee. § 3B:31-60(e).
A trustee shall keep adequate records of the administration of the trust. N.J.S.A. § 3B:31-63(a). This duty is implicit in the duty to act with prudence (N.J.S.A. § 3B:31-57) and the duty to report to beneficiaries (N.J.S.A. § 3B:31-67 (see below)). The duty of a trustee to enforce claims of the trust and defend claims against the trust, as set forth in N.J.S.A. § 3B:31-65, reflects existing New Jersey law. The duty to collect trust property and redress breaches of trust set forth in N.J.S.A. § 3B:31-66 is a specific application of the duty to enforce claims set forth in N.J.S.A. § 3B:31-65.
N.J.S.A. § 3B:31-68 makes it clear that even discretionary powers must be exercised in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. Subject to N.J.S.A. § 3B:11-4.1 and other New Jersey statutes, N.J.S.A. § 3B:31-69 grants a trustee the broadest powers, to be exercised in accordance with the duties of a trustee and any limitations stated in the trust.
Upon termination or partial termination of a trust, the trustee may mail or deliver a distribution proposal to every person who has a right to object to the distribution plan. N.J.S.A. § 3B:31-70(b). The proposal shall include notice that any person who may object must do so in writing to the trustee and that the objection must be received within 30 days after the mailing or delivery of the proposal. This section is similar to the provisions of N.J.S.A. § 3B:23-4, which applies to estates.
The definition of “qualified beneficiary” determines which trust beneficiaries receive notice of certain actions. Qualified beneficiaries are defined in N.J.S.A. § at 3B:31-3. However, another provision, N.J.S.A. § 3B:31-10, expands the concept to require that “certain other persons” (including a charitable organization expressly designated to receive distributions under the terms of a charitable trust and the Attorney General with respect to a charitable trust) be treated the same and have the same rights as qualified beneficiaries. If a trustee is required to give notice to a qualified beneficiary, the trustee shall also give notice to any other beneficiary who has sent a request for notice. N.J.S.A. § 3B:31-10(a). The NJ UTC also has extensive provisions regarding virtual representation, which should add much greater certainty to the application of modification and reformation of trusts by consent or the courts. See N.J.S.A. § 3B:31-13 to 17. Notice to a person who may represent and bind a beneficiary has the same effect as if notice were given directly to the beneficiary. N.J.S.A. § 3B:31-13(a)).
The trustee is required to notify qualified beneficiaries of a proposed transfer of a trust’s principal place of administration within 60 days of initiating the transfer. N.J.S.A. § 3B:31-8(d). Such notice shall include the name of the new jurisdiction, the address and telephone number of the new location, and the date on which the proposed transfer is anticipated to occur. N.J.S.A. § 3B:31-8(d)(1)-(3). The trustee may not transfer the trust’s principal place of administration if, within 60 days of receiving notice of the proposed transfer, the beneficiary notifies the trustee of an objection to the proposed transfer. N.J.S.A. § 3B:31-8(e). The trustee may overcome the objection by securing judicial approval for the transfer pursuant to 3B:21-2 through 3B:21-4. Id.
- Basic Trustee Duties: New Jersey Common Law
In the New Jersey common law, which remains valid unless modified by statute, see N.J.S.A. § 3B:31-6, a trustee generally owes to the beneficiary a duty of loyalty, Branch v. White, 99 N.J. Super. 295 (App. Div 1968) certif. denied, 51 N.J. 464 (1968)), a duty of care, Commercial Trust Co. of N.J. v. Barnard, 27 N.J. 332 (1958), and a duty of full disclosure, Fawcett v. Cooper Hosp., 131 N.J. Eq. 181 (E. & A. 1942); Branch, 99 N.J. Super. at 306-07. He must keep clear and adequate records and accounts of trust property, In re Herr, 22 N.J. 276 (1956), and where he fails to do so, all doubts are resolved against him. Societa Operaia Di Mutuo Soccorso Villalba v. Di Maria, 40 N.J. Super. 344, 349 (Ch. Div. 1956). The trustee is under an obligation to deal fairly and impartially with all the beneficiaries of the trust. In re Koretzky, 8 N.J. 506, 530 (1951); In re Bayles, 108 N.J. Super. 446, 453 (App. Div. 1970); Restatement (Second) of Trusts § 183 (1959). “It is axiomatic [. . .] that the duties of a trustee depend primarily upon the terms of the trust.” Mackenzie v. Reg’l Principals Ass’n, 377 N.J. Super. 252, 264 (Ch. Div. 2004) (citing Branch, 99 N.J. Super. at 306). Where the terms of the trust lack certain express or implied provisions, “the duties of a trustee are determined by principles and rules which have been evolved by courts of equity for the governing of the conduct of trustees.” Branch, 99 N.J. Super. at 306. In that regard, New Jersey courts have commonly relied upon the Second Restatement of Trusts when determining a trustee’s duties.
Trustees owe “a duty to the beneficiaries to administer the trust solely in the interest of the beneficiaries.” Branch, 99 N.J. Super. at 306 (citing Restatement (Second) of Trusts § 170 (1959)). Trustees also have a duty to “notify beneficiaries of the existence of the trust and that they are under-taking to act as trustees.” Id. at 307. After the trustees have notified the beneficiaries of the existence of the trust, “[t]hey are required to make full disclosure of all facts within their knowledge which are material for beneficiaries to know for the protection of their interests.” Id. (citing Restatement (Second) of Trusts § 173 cmt. d (1959)). Further, a trustee owes a duty to beneficiaries to give them, upon request at reasonable times, “complete and accurate information as to the nature and amount of the trust property, and to permit [them] or a person duly authorized by [them] to inspect the subject matter of the trust and the accounts and vouchers and other documents related to the trust.” Mackenzie, 377 N.J. Super. at 264 (quoting Restatement (Second) of Trusts § 173 (1959)).
- Basic Trustee Duties: Restatement
The Restatement provides that there are three fiduciary duties fundamental to the law of trusts: prudence; loyalty; and impartiality. Restatement (Third) of Trusts Part 6, Ch. 15 Introductory Note (2007). Section 77 provides that a trustee owes a “duty to administer the trust as a prudent person would, in light of the purposes, terms, and other circumstances of the trust. [This duty] requires the exercise of reasonable care, skill, and caution.” Id. at § 77. Moreover, it requires a trustee who possesses special skills, or one who procured appointment as trustee by purporting to have such special skills, to exercise them in administering the trust. Id. The duty of prudence, therefore, is judged both objectively and subjectively, depending upon the circumstances. The caution, skill and care exercised by the trustee must at least be that of the ordinarily intelligent person. Id. at cmt. b. Consequently, a trustee who lacks ordinary intelligence, though he uses his best efforts, may simply be incapable of discharging the duties of a trustee. Id. The standard will be a subjective one, however, where the trustee’s skills or talents are greater than the ordinary person. In such a case, he must discharge his duties to the best of his abilities. Id. at cmt. e.
Section 78 describes the trustee’s duty of loyalty. The “duty of loyalty is, for trustees, particularly strict even by comparison to the standards of other fiduciary relationships.” Id. at § 78 cmt. a. This duty requires the trustee to administer the trust solely in the interests of the beneficiaries, to avoid self-dealing or conflict of interest transactions with the trust, and to openly communicate with the beneficiary, whether acting in a fiduciary or personal capacity. Id. at § 78. A trustee may, however, administer the trust for other than the beneficiary’s interest and may engage in self-dealing where the terms of the trust so provide. Id.; id. at cmt. c. Aside from those limited circumstances though, a trustee’s duty of loyalty is described as “absolute” and “undivided.” Id. at cmt. b.
The duty of impartiality is described in Section 79. This section requires a trustee to take into account the various interests of the beneficiaries, even if not necessarily aligned. Id. at § 79. Thus, where a trust has remainder beneficiaries, the trustee is required to invest the trust property so as to “produce income that is reasonably appropriate to the purposes of the trust and to the diverse present and future interests of its beneficiaries.” Id. at § 79(2). Of course, where beneficiary interests are diverse, and even competing, a trustee would be unable to equally account for every beneficial interest of the trust. In such a situation, a trustee will have fulfilled his duty by “balancing . . . those interests in a manner that shows due regard for—i.e., is consistent with—the beneficial interests and the terms and purposes of the trust.” Id. at § 79 cmt. c.
The remaining duties set forth by the Restatement may be viewed as ancillary to the fundamental duties discussed above. Restatement (Third) of Trusts Part 6, Ch. 15 Introductory Note (2007). Section 76 provides that a trustee is to administer the trust diligently and in good faith, according to its terms and applicable law. Id. at § 76(1). The specific duties of diligent, good faith trust administration include:
(a) ascertaining the duties and powers of the trusteeship, and the beneficiaries and purposes of the trust;
(b) collecting and protecting trust property;
(c) managing the trust estate to provide returns or other benefits from trust property; and
(d) applying or distributing trust income and principal during the administration of the trust and upon its termination.
Id. at § 76(2). The collection of trust property requires a successor trustee to obtain from his predecessor trustee an accounting of the trust property. The duty to account for trust property includes taking reasonable steps to uncover and redress any breach of duty committed by a predecessor fiduciary. Id. at § 76 cmt. d.
Moreover, a trustee is required to perform his trust responsibilities personally, except that he may delegate those responsibilities to others where prudent. Id. at § 80(1). Where such power has been delegated, the agent performing trust functions assumes fiduciary responsibility. Id. at § 80(2); id. at cmt. g. A trustee is relieved of liability for his agent’s fiduciary breach so long as the delegation of authority was prudent. Id. at cmt. g. Where a trust has more than one co-trustee, each has a duty to participate in trust administration and a duty to prevent and redress breaches of trust by their co-trustees. Id. at § 81. Fiduciary authority is exercised by majority vote where there are three or more co-trustees. Id. at cmt. a.
Section 82 discusses a trustee’s duty to keep trust beneficiaries informed. This section provides that a trustee owes some specific duties to “fairly representative beneficiaries,” while he owes some duties to all beneficiaries generally. “Fairly representative beneficiaries” is a flexible concept, the purpose of which is to balance considerations of practicality for trustees against the importance of reflecting the diversity of the beneficial interests. Id. at § 82 cmt. a(1). Thus, the trustee’s duty is to make a good faith effort to select, and keep informed in accordance with this section, those beneficiaries whose interests are most likely to coincide with those of the trust’s beneficiaries generally. Id.
In the case of fairly representative beneficiaries, a trustee has a duty to promptly inform them of “the existence of the trust, of their status as beneficiaries and their right to obtain further information, and of basic information concerning the trusteeship.” Id. at § 82(1)(a). Moreover, he must keep them “reasonably informed of changes involving the trusteeship and about other significant developments concerning the trust and its administration, particularly material information needed by beneficiaries for the protection of their interests.” Id. at § 82(1)(c).
As to beneficiaries more generally, which of course includes fairly representative beneficiaries, a trustee must inform them of “significant changes in their beneficiary status,” id. at § 82(1)(b), promptly respond to their requests for information about the trust, and allow them to inspect trust records and property on a reasonable basis. Id. at § 82(2). This duty to keep beneficiaries informed, however, does not apply to revocable trusts while the settlor is still alive; in that case the duty is owed only to the settlor. Id. at § 82; Id. at cmt. a.
Section 83 requires a trustee to keep “clear, complete, and accurate” records of trust property and of trust administration, and to provide these records to beneficiaries upon reasonable request. Id. at § 83. Further, the trustee must keep trust property separate from his own property and from other non-trust property. Id. at § 84. He must also keep the trust property readily identifiable as such. Id.
The Restatement also provides a set of duties of prudent investment. Section 90 requires a trustee to invest trust property as a prudent investor would in light of the trust’s purposes, terms and distribution requirements. He must, unless prudent not to do so under the circumstances, diversify investments of trust property, incur only reasonable costs, and otherwise conform to the remaining duties of a trustee. Id. at § 90. Further, the trustee’s investments must comply with applicable statutes regarding investment by trustees. Id. at § 91. Upon creation of the trust, the trustee is required “to review the contents of the trust estate and to make and implement decisions concerning the retention and disposition of original investments in order to conform to the requirements of §§ 90 and 91.” Id. at § 92.
The trustee is ordinarily “not under a duty to the beneficiary to furnish information to him in the absence of a request for such information.” Restatement (Second) of Trusts § 173, cmt. d (1959). A trustee must, however, inform the beneficiary of any and all “material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person with respect to his interest.” Restatement (Second) of Trusts § 173, cmt. b. (1959). The trustee is under this duty “[e]ven if the trustee is not dealing with the beneficiary or the trustee’s own account[.]” Id. In addition, the trustee must keep and render accounts to the beneficiary. See Restatement (Second) of Trusts § 172 (1959); id. at cmt. c (“The trustee may be compelled to account not only by a beneficiary presently entitled to the payment of income or principal, but also by a beneficiary who will be or may be entitled to receive income or principal in the future. This is true even though the interest of the beneficiary is contingent.”).