Duties of Colorado Trustees

The first thing to do, always, in evaluating a Colorado trustee’s duty is to read the trust itself.  The trust document is more important than any case law in describing what a trustee may do, or must do. A trustee is probably not liable if the trustee acts as directed or allowed under the terms of the trust.  If the trust is not specific about the trustee’s duties, or if it is unclear, the following general rules likely apply.

A trustee has the duty to act solely in the best interests of the beneficiaries and cannot engage in transactions that involve a conflict of interest.  This is commonly known as the duty of loyalty. A conflict arises when the trustee takes an action that is in the trustee’s personal interest and to the detriment of the beneficiaries. The trustee cannot profit from a transaction at the expense of a beneficiary.  The duty of loyalty cannot be completely eliminated by the terms of a trust because it is critical to the very existence of a fiduciary relationship. Regardless of the trust language, the trustee still has a duty to act in the interest of the beneficiaries and to act prudently. A trustee will violate the duty of loyalty if the trustee acts in bad faith or unfairly. If the trustee breaches a duty of loyalty, the beneficiaries may require the trustee to return any profits he or she made to the trust.  It does not matter if the trust also made a profit.  The beneficiaries might also sue for damages for losses caused to the trust by the breach of duty.

A trustee is under a duty to treat the beneficiaries impartially.  Personal prejudice cannot be allowed to affect the duty to deal fairly with all beneficiaries.  However, a trust might include language allowing the trustee to favor certain beneficiaries over others. It is not uncommon for a trust to provide that a child with a disability or special need receive all the trust assets, if the child needs them. It is perfectly legal for a trust to exclude someone who seems like he or she should be natural beneficiary, provided the person creating the trust was competent, and not subject to undue influence.

A trustee has the duty to keep accurate records of the administration of the trust. Colorado law imposes several mandatory duties on trustees to produce information to beneficiaries, including an accounting. Accordingly, a trustee should keep accurate and detailed records.

What often happens if a trustee breaches a duty is the trustee is sued.  The person bringing the lawsuit might ask for damages, removal of the trustee, accounting, surcharge (making the trustee repay the trust) or reformation (rewriting the trust to carry out the clear intention of the person who created it.)