law.
Duties to perform
A trust is only created if the trustee has duties to perform.5 Trustee duties are usually active, requiring that the trustee do something, but a duty may also be passive, implying only that the trustee has an obligation not to interfere with the beneficiary's enjoyment of the trust property.6
Formalities of execution
The validity of a trust created by will is ordinarily determined by the law of the decedent's domicile. In other words, if the will creating the trust is valid in the jurisdiction where it was executed, the trust is also valid.7 In regard to the law regarding the validity of inter vivos trusts, the law is less certain.8 The Restatement (Third) of Trusts provides that except where required by the Statute of Frauds, no writing is required to create a valid trust.9 However, not all jurisdictions recognize oral trusts. Pennsylvania, for example, does not recognize oral trusts. In cases when writing is required, it is sufficient to satisfy the statute if it is signed by the settlor.
Trust purpose
A trust may be created only for purposes that are lawful, not contrary to public policy, and not impossible to achieve.10 A trust may be created for charitable or noncharitable purposes, or for a combination of the two.11 A charitable trust may be created for the relief of poverty; advancement of education or religion; promotion of health, governmental, or municipal purposes; or other purposes for which the achievement is beneficial to the community.12
A trust or a particular trust provision is invalid if
its purpose is unlawful or its performance calls for the commission of a criminal or tortious act;
it violates rules relating to perpetuities;13 or
it is contrary to public policy.14
The fact that the trust purpose cannot be achieved by lawful means will not necessarily invalidate the trust if there is a substantial valid purpose that can be achieved by methods that are not unlawful. This will not be the case if the purpose or method directed is so essential to the settlor's objective(s) that the permissible and impermissible purposes cannot be separated.15
Finally, a noncharitable private trust, or a particular provision in the trust, may be invalid because all the purposes for which a trust is created are so indefinite that they cannot be enforced. Also, if the trust purposes are impossible to perform, the trust will be terminated.
The fiduciary duty
The “trustee” is the person or entity that holds legal title to the trust property and manages that property for the sole benefit of the trust beneficiary or beneficiaries. The interests of the beneficiaries are protected under the law against mismanagement or misappropriation by the trustee.16 In performing its duties, the trustee is held to a “fiduciary standard” of conduct. Fundamentally, the fiduciary standard requires a duty of loyalty and a duty of prudence. This means that the trustee must act for the sole benefit of the trust beneficiaries and in a prudent manner in administering the trust. The trustee must also exercise the same care and skill as a man of ordinary prudence would exercise in dealing with his own property,17 and act in a manner which makes the trust property productive.18
The fiduciary standard also includes a host of subsidiary duties which act to reinforce the duties of loyalty and prudence.19 Those duties include the duty to keep accurate records with respect to the administration of the trust,20 and to provide complete and accurate information to the trust beneficiaries concerning the nature of the trust property upon reasonable request.21
Nature and extent of trustee's duties
The nature and extent of a trustee's duties is determined first by the trust agreement, and then in areas not addressed by the trust agreement by the law governing the trust.22 In carrying out this responsibility, the trustee has what is called a fiduciary duty to the trust beneficiary or beneficiaries. Generally, the trustee is charged with the responsibility of administering the trust property solely in the interest of the trust beneficiaries.23 If there is more than one trust beneficiary, the trustee must deal with them all impartially.24
The trustee is generally entitled to reasonable compensation for performing its duties as trustee.25 Often the trustee's compensation is based on a percentage of the value of the trust assets. The trustee must also keep accurate records with respect to the administration of the trust26 and provide complete and accurate information concerning the nature of the trust property upon reasonable request.27
Investments of the trust
Sometimes the trust document will provide specifically how the trust principal is to be invested (for example, only in “triple A-rated bonds”). However, most of the time, the document will not specifically direct the trustee as to how to make investments; instead, the manner in which they are made is controlled by the trustee's fiduciary duty and the terms of the Uniform Prudent Investor Act (UPIA). Under the terms of the UPIA, the trustee is not restricted to one type of investment but may invest in a manner which is prudent and consistent with the trust purpose. Under the UPIA, the trustee's performance will be judged not on the basis of a single investment but rather on the basis of total return of the entire trust portfolio. The underlying premise of this approach is to allow trustees to use modern portfolio theory in analyzing risk versus return.
Breach of duty
If, in managing the trust, the trustee breaches the trustee's fiduciary duty and causes damage to the trust, the trustee can be held liable for the loss (“surcharged”).28
