"Limiting Liability Exposure for a Private Family Trust Company" by John Bunge Waller Private Family Trust Company Research
Provisions in a trust instrument can expressly limit and define the scope of the PFTC’s fiduciary duties, including the Prudent Investor Rule and the duty to inform and report. Generally, the ability to limit fiduciary duties is subject to “mandatory” rules dictated by state statutes or common law. Some states have stringent mandatory rules, while other states seek to maximize the trust settlor’s freedom of disposition and freedom of contract. For example, section 105(b) of the Uniform Trust Code (UTC) provides that the terms of a trust cannot eliminate the duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.
Prudent Investor Rule
Provisions in a trust agreement can also limit a PFTC’s potential liability from violations of the “prudent investor rule.” The prudent investor rule generally requires a trustee to use investment strategies that are objectively reasonable, which would include a duty to diversify investments, employ prudent asset allocation, and control investment costs. PFTCs should be aware of the potential issues with holding non-traditional assets, concentrated equity positions (for example, stock in a family company), and other assets that would not typically be considered “prudent” investments for a trustee under applicable state law. Other examples of investments that could violate the default prudent investor rule include family real estate such as farms, ranches, and vacation homes.
State laws vary on the degree to which a trust agreement can waive the default requirement that trust assets be invested based on modern notions of prudent investment, so PFTCs should be aware of what law applies. PFTCs may also explore the possibility of changing the applicable law or modifying the trust agreement in order to address prudent investment concerns.
Duty to Inform and Report
Provisions in a trust agreement can limit a PFTC’s statutory and common law duties to inform and report to beneficiaries, but the extent to which such provisions are effective depends on applicable state law. For example, section 105(b) of the UTC would not allow a trust agreement to eliminate the duty to inform a “qualified beneficiary” who has attained age 25 of the existence of their beneficial interest, nor would the UTC allow a trust agreement to eliminate the duty to respond to beneficiary requests for trustee’s reports and certain other information. Some states have more stringent mandatory duties to inform and report than the UTC, while other states liberally allow the provisions of the trust agreement to control these requirements. For example, Tennessee’s trust code allows a trust agreement to include “silent trust” provisions, whereby the trust agreement can eliminate any requirement to inform a beneficiary or the trust agreement can designate a third party to receive reports on a beneficiary’s behalf.