The term “fiduciary” can be considered a vague term that encompasses many different people and several different relationships. Under Colorado law, a fiduciary includes, without limitation, a trustee of any trust, a personal representative, guardian, conservator, receiver, partner, agent, or “any other person acting in a fiduciary capacity for any person, trust, or estate.” Colo. Rev. Stat. § 15-1-103(2). It is within this context that we examine a fiduciary’s duty of loyalty and how best to uphold that duty.
In the context of a trust, and as stated in the Restatement (Second) of Trusts § 2, a fiduciary relationship with respect to property arises out of the manifestation of an intention to create the fiduciary relationship and subjects the trustee “to equitable duties to deal with the property for the benefit of another person.” From this relationship stems several inherent and implied fiduciary duties. Generally, the fiduciary duties applicable to a trustee are: the duty of loyalty, the duty to exercise care and skill in managing the trust assets and administering the trust, and the duty to remain impartial to all beneficiaries.
The duty of loyalty, perhaps the broadest of the fiduciary duties, has been described as “inherent” in the trust relationship. George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543 (2d rev. ed. 1980). The duty of loyalty requires a trustee “to administer the trust solely in the interest of the beneficiary.” Restatement (Second) of Trusts § 170(1). This “sole interest” rule is widely regarded as the most fundamental rule of trust law. See Austin W. Scott & William F. Fratcher, Scott on Trusts § 170 (4th ed. 1987). This sole interest rule prohibits the trustee from placing himself in a position where his personal interest conflicts or possibly may conflict with the interests of the beneficiary. Under the duty of loyalty, the trustee must refrain from engaging in any act of self-dealing or conflicts of interests that may result in increased benefit to himself. Such transactions would constitute a breach of the trustee’s duty of loyalty, may expose the trustee to personal liability, and may be voided by the beneficiaries. See Restatement (Second) of Trusts § 170 cmt. b.
Moreover, a trustee’s duty of loyalty also requires the trustee to “communicate to [all beneficiaries] all material facts” in connection with the administration of the trust. Restatement (Second) of Trusts § 170. Failure to inform beneficiaries of important decisions or material facts may not only constitute a breach of the duty of loyalty, but frequently creates feelings of distrust toward the trustee. It is important, therefore, for the trustee to remain transparent, and adequately inform all beneficiaries during the course of the trust administration.
As stated above, the duty of loyalty is broad and requires the trustee to regularly ensure that he is acting solely in the best interest of the beneficiaries. Because the trust relationship places the beneficiary’s property under the control of the trustee, the danger inheres that a trustee has the opportunity to misappropriate the property for his or her own personal advantage. The duty of loyalty, which forbids that behavior, is an essential principle of trust fiduciary law. It is wise for any trustee to step back occasionally to make sure that his or her actions as trustee are taken in accordance with the duty of loyalty, and ultimately that the trust is being administered solely in the interest of the beneficiaries.