One of a trustee’s fiduciary responsibilities to both income and remainder beneficiaries of grantor or testamentary trusts is the duty of impartiality.
Personal and testamentary trusts are often used as dispositive vehicles to accomplish a variety of purposes. In addition to tax savings, the trusts can be customized to hold and distribute assets to different groups of people over long periods of time. For example, a trust may be designed to take advantage of the federal estate tax’s marital deduction for a surviving spouse, who then receives an income interest with the right of invasion of principal during their lifetime as prescribed by the trust. At the spouse’s death, the trust income can be distributed to other persons, with principal in the trustee’s discretion, and a termination at a specified date or upon the death of the last beneficiary. A split-interest trust may be used to distribute trust income to individual beneficiaries until their deaths. The remaining trust assets would then be paid to a charity or charities named in the trust document.
Among the duties a trustee has in administering a trust for multiple classes of beneficiaries is the duty of impartiality.
The Uniform Trust Code section 803 states that the duty of the trustee to act impartially does not mean that the trustee is required to treat the various beneficiaries equally. Rather, the trustee must treat the beneficiaries equitably in light of the purposes and the terms of the trust. The trustee must act with due regard to the beneficiaries’ respective interests. The trustee’s duty of loyalty is the specific duty to treat all trust beneficiaries impartially and not to favor one beneficiary over another unless that is prescribed by the trust instrument. The duty of impartiality may be trumped or modified by specific provisions in the trust. The classic example is a trust created with marketable securities to provide income to the named beneficiaries, and, at their death, to distribute the trust property to the remainder beneficiaries.
The trustee’s duty of impartiality in the management of the trust property requires the trustee to balance the competing interests of investment income for the current beneficiaries and capital growth for the remainder beneficiaries. A trustee acting with due regard to the beneficiaries’ respective interests in this case would typically employ an asset allocation of diversifying asset classes to achieve both current income and long-term capital growth. The trustee must consider inflation and tax implications for the beneficiaries as well. However, complex multigenerational trusts may hold special assets, including collectibles, closely held businesses, real estate, mineral rights, and intellectual property that create administrative challenges for the trustee. Managing and evaluating special assets requires the trustee to consider issues of liquidity, cash flow, and business viability, among others, and must be done impartially when dealing with those with conflicting equitable interests.
The Uniform Prudent Investor Act, the Uniform Principal and Income Act, and the Uniform Trust Code provide trustees discretionary power to make adjustments between principal and income to comply with the trustee’s duty of impartiality, which may become necessary due to market conditions affecting the trust.
The trustee’s duty of impartiality to the various classes of beneficiaries in the administration of a trust is well defined for national banks and trust companies through the institutions’ policies and procedures. The complexity of multigenerational trusts, particularly those with special assets, requires experienced fiduciaries to work with both classes of beneficiaries and, in some cases, the court, to properly execute their duty of impartiality.