An understanding of what a Trustee is—and how best to work with a trustee in a real estate relationship—rests on knowing what it means to be a fiduciary, and for one party to have a fiduciary duty to another.
A fiduciary is an individual or entity that is entrusted to act on behalf of another party, known as the principal or beneficiary, with a legal and ethical obligation to act in the best interest of that other party.
The “fiduciary relationship” is created by a legal mechanism in the form of an agreement, such as a trust document or financial planner contract, or the “fiduciary relationship” is created by the operation of law due to the nature of the relationship, such as in the relationships between attorney and client or corporate directors and shareholders.
The fiduciary relationship, and acting in the best interest of another, is further understood by identifying a bundle of duties the fiduciary owes to the beneficiary. The following a some of these duties.
- A Duty of Loyalty is the duty to act in the best interest of the beneficiary by placing their interest above the fiduciary’s personal interest. Conflicts of interest are to be avoided, or must be fully disclosed to the beneficiary and their informed consent to the conflict obtained. Regardless of this consent, a fiduciary must still put the interest of the beneficiary ahead of their own.
- A Duty of Care must be exercised when taking action on behalf of the beneficiary. This means they must prudently manage the assets, investments, and affairs under their care. Their decisions must be well-reasoned and, where the fiduciary lacks expertise, the fiduciary should thoroughly research or seek expert advice.
- A Duty of Good Faith obligates the fiduciary to act honestly and in good faith in all relationships, not just the beneficiary. Illegal and unethical activities that may be in the best interest of the beneficiary would violate this duty of good faith. The fiduciary acts with integrity and transparency, and avoids deception, fraud, or misrepresentation. The fiduciary always wears the white hat.
- A Duty of Confidentiality is necessary to protect the interests of the beneficiaries. Information of those in a fiduciary’s care must be kept private and only used for authorized and appropriate purposes.
- A Duty to Account requires the fiduciary to maintain detailed records for financial transactions, and provide clear reporting to the beneficiaries. Beyond just tracking the transactions, it is incumbent on the fiduciary to account for financial decisions.
- A Duty of Impartiality is essential to the fiduciary relationship held with all beneficiaries, both current and remainder. All beneficiaries must be treated fairly, without bias, and resources under the care of the fiduciary should be allocated equitably. Competing interests among beneficiaries must be balanced by the fiduciary according to the agreement or law that governs the fiduciary relationship.
- A Duty to Act in Accordance with the Agreement obligates the fiduciary to act according to the agreement that established the fiduciary relationship. The terms, objectives, provisions, and restrictions of the governing documents must be known by the fiduciary so they are aware of the scope of their authority.
A trustee is a fiduciary put in place by a trust agreement. Governing documents empower trustees to manage investments, such as real estate. Not all governing documents are the same, and often they limit the powers that a trustee has to hold, sell, manage, or operate real estate investments.
Trust real estate is therefore restricted in its operation and opportunity by the duties and obligations of a trustee. Real estate professionals that want to work with trustees will do well to notice a few key takeaways from studying the definition of a trustee as a fiduciary:
- The duty of care drives a trustee to obtain multiple opinions of value for real estate, and to interview multiple real estate brokers to optimize their research and validate that they are leaning on an expert.
- The cost to operate real estate in trust can be higher than when an individual owns the real estate and makes the decision directly. For example, trustees best fulfill their duties when they hire expert, thorough appraisers to evaluate real estate.
- Trustees must account for transactions, provide clear reporting to beneficiaries, and defend their financial decisions. Well-developed listing presentations provided by brokers help trustees defend their decision to go with one broker over another.
There are several other principles of working with a trustee that we will cover later. Stay tuned!