Balancing Interests: The Trustee’s Duty of Impartiality

When a person establishes a trust, they often have more than one beneficiary in mind. A spouse might receive income during their lifetime, while children or grandchildren are slated to inherit what remains. This creates two distinct classes of beneficiaries: those who benefit now and those who benefit later. Navigating these competing interests is one of the most challenging aspects of administering a trust. At the heart of this challenge lies the trustee’s duty of impartiality—an obligation to treat all beneficiaries fairly and to balance their divergent needs.

Why Impartiality Matters

At first glance, treating all beneficiaries fairly sounds simple. In practice, it can be anything but. Trustees must manage assets, make investment decisions, and authorize distributions in ways that neither favor nor disadvantage any beneficiary. Failing to do so can lead to allegations of breach of fiduciary duty, strained family relationships, and even litigation. The duty of impartiality exists to ensure that trustees do not allow their personal preferences, loyalties, or external pressures to interfere with the trust’s purpose. Instead, they must continually align their decisions with the terms of the trust and the settlor’s intent.

Impartiality does not require that every beneficiary receive the same amount of money at the same time. Rather, it requires that a trustee weigh competing interests thoughtfully. A current beneficiary may depend on the trust for living expenses, while remainder beneficiaries are more concerned with preserving principal for the future. A trustee who ignores either perspective risks failing in their duty.

Understanding the Classes of Beneficiaries

Most trusts are designed to serve multiple beneficiaries over time. The two primary categories are:

• Current beneficiaries. These beneficiaries—sometimes called life or income beneficiaries—are entitled to receive distributions now. Their primary concern is often cash flow: they rely on the trust for income to pay bills, fund healthcare, or sustain their lifestyle.

• Remainder beneficiaries. These are the individuals or institutions who will receive the trust’s principal after the current beneficiaries’ interests end, typically upon the death of a spouse or after a specified term. Their focus is on preserving and growing the trust principal so that something substantial remains when their turn comes.

Because current and remainder beneficiaries may have conflicting goals, the trustee’s impartiality is vital. Imagine a trust holding a portfolio of stocks and bonds. The current beneficiary might push for high‑yield bonds or dividend‑paying stocks to maximize income, while the remainder beneficiary might prefer growth stocks to preserve purchasing power over decades. If a trustee favors one investment style exclusively, they risk disadvantaging the other class.

Balancing Investments: The Tension Between Income and Growth

A trustee’s investment strategy is often where the duty of impartiality is most severely tested. On one hand, a trust must produce reasonable income for current beneficiaries. On the other, it must maintain—or ideally increase—principal for the remainder beneficiaries. How can a trustee do both?

The key lies in diversification and careful allocation. A balanced portfolio that includes both income‑producing and growth‑oriented assets can satisfy both interests. Trustees should resist the temptation to chase yield at the expense of principal preservation or, conversely, to prioritize capital appreciation without regard for cash flow. Instead, they should aim for a middle ground that delivers steady income while allowing the corpus to grow over time.

In some jurisdictions, trustees have statutory authority to adjust between principal and income. This allows a trustee to reclassify certain receipts or disbursements as either principal or income to achieve fairness. Another tool is the unitrust approach, where a trust pays a fixed percentage of its value each year regardless of investment income. By converting the trust into a unitrust, the trustee provides predictable distributions while ensuring that principal fluctuates based on the market. These mechanisms help resolve the inherent tension between income and growth, provided that the trust document or applicable law authorizes their use.

Following the Trust Document and the Settlor’s Intent

The duty of impartiality is not absolute. The terms of the trust instrument may direct a trustee to favor one class of beneficiaries over another. For instance, a trust may state that the settlor’s spouse’s welfare is paramount, or that principal may be invaded as needed to provide for a child’s education. In such cases, the trustee’s duty is to carry out those instructions faithfully, even if it means deviating from what would otherwise be considered impartial.

When the trust is silent on preference, trustees must exercise discretion. Courts generally presume that the settlor intended beneficiaries to be treated equitably. Trustees must therefore interpret the trust provisions and apply them in a way that honors the overall purpose of the trust. If the language is ambiguous, trustees should seek professional advice or court guidance rather than guessing at the settlor’s intent.

Practical Challenges and Real‑World Examples

Consider a scenario where a trust holds a large position in a family business that pays modest dividends but has strong long‑term growth potential. The current beneficiary is struggling financially and wants the trustee to sell shares and reinvest the proceeds in high‑yield bonds. The remainder beneficiaries, who stand to inherit the business interest, object to the sale. An impartial trustee must evaluate whether selling some shares to generate income is reasonable or whether it would unduly harm future beneficiaries by giving up potential appreciation. A compromise may involve selling a portion of the shares and supplementing income with other investments, thereby balancing both interests.

In another example, a trust owns an investment property that generates rental income but requires substantial maintenance. The current beneficiary might want to keep the property for the income, while the remainder beneficiaries prefer to sell it and invest the proceeds in more diversified assets. The trustee must assess factors such as market conditions, ongoing expenses, and the property’s long‑term prospects. If selling the property preserves value for remainder beneficiaries without unduly depriving the current beneficiary of needed income—perhaps by reinvesting in income‑producing securities—the trustee might decide a sale is appropriate.

These examples illustrate how decision‑making is rarely black and white. The duty of impartiality requires trustees to gather facts, consider options, and seek professional guidance when necessary. Documenting the reasons for decisions is also essential. Detailed records demonstrate that the trustee acted thoughtfully and can defuse potential disputes.

Communication: A Pillar of Impartial Administration

An often overlooked aspect of impartiality is communication. Trustees who keep beneficiaries informed reduce suspicion and misunderstandings. Regular updates about investment performance, expenses, and the rationale behind distribution decisions help beneficiaries see that the trustee is striving to balance their interests. When beneficiaries understand why a trustee retained funds, reinvested proceeds, or adjusted allocations, they are more likely to accept those decisions—even if they don’t align perfectly with their personal preferences.

Communication also includes listening. A trustee should be aware of each beneficiary’s needs and concerns. This does not mean the trustee must cater to every request, but understanding individual circumstances can inform fairer decisions. For instance, knowing that a remainder beneficiary plans to use their inheritance for a particular purpose might influence how the trustee structures investments or distributions over time.

When Conflicts Arise

Despite a trustee’s best efforts, conflicts among beneficiaries may arise. Sometimes these disputes stem from misunderstandings; other times they reflect genuine differences in priorities. When beneficiaries disagree, trustees should revisit the trust document and, if necessary, seek legal advice. Neutral mediation can also be a useful tool to resolve differences without resorting to litigation.

If a trustee believes that following the trust’s terms would violate their duty of impartiality, or if the trust terms are unclear, they may petition a court for instructions. Courts generally defer to trustees who can demonstrate that they acted with diligence and good faith. Conversely, trustees who favor one beneficiary without justification may face removal and personal liability for any resulting harm.

Conclusion

Administering a trust is a delicate balancing act. The trustee’s duty of impartiality requires more than equal treatment; it demands a nuanced understanding of competing interests, a willingness to adapt strategies, and an unwavering commitment to the settlor’s intent. By investing prudently, communicating openly, and documenting decisions, trustees can navigate the inherent tensions between current and remainder beneficiaries. In doing so, they honor the trust’s purpose, preserve family harmony, and fulfill their fiduciary responsibilities.