1
Title
Recourse at law or in equity of trust beneficiary who is dissati sfied with trustee’s proposed
settlement with insurance company of property-damage claim
Text
Assume entrusted property that has been duly insured by the trustee suffers damage
through no fault of the trustee. A current beneficiary, though, is unhappy with the trustee’s
proposed nonjudicial accommodation with the insurance company. The beneficiary requests that
trustee assign its contractual rights against the insurance company to the beneficiary personally
so that the beneficiary may take it upon himself to bring suit against the insurance company, with
any recovery to be remitted to the trust estate. The trustee declines to execute such an
assignment. What recourse, if any, should the beneficiary have at law and/or in equity?
If it would be imprudent/unreasonable for the trustee to further pursue the insurance
company, then the trustee should have no duty to assign the contractual rights to the beneficiary.
See §6.2.1.3 of Loring and Rounds: A Trustee’s Handbook, which is reproduced in its entirety in
Appendix A below.
On the other hand, if it would be imprudent/unreasonable for the trustee to enter into the
proposed settlement with the insurance company in the first place then the beneficiary would
have recourse in equity directly against the trustee personally. Id. But what if the trustee were,
say, judgement-proof? The beneficiary, qua beneficiary, then would have a right under equitable
principles to bring an action at law on the contract directly against the insurance company on
behalf of the trust (and at trust expense, if successful), provided the trustee had unreasonably
declined to do so. See §5.4.1.8 of Handbook, which is reproduced in relevant parts in Appendix
B below. In other words, the trustee’s unreasonable forbearance could effect what amounts to an
involuntary equitable assignment of the contractual rights to the beneficiary, an assignment that
the insurance company should be in no position to defeat.
As to the trustee in the face of its reasonable forbearance assigning anyway the
contractual rights to the beneficiary, what harm could that possibly do? There are several reasons
why the trustee should think twice before doing something like that. The first is doctrinal: The
beneficiary becomes a fiduciary agent of the trustee, which brings with it a duty on the part of
the trustee to monitor/oversee the agent’s activities. The second is practical: Who is to bear the
burden of the trustee’s attendant legal fees, monitoring costs, and other such expenses? The
trustee personally? The trust estate? The beneficiary? At the very minimum, the trustee is likely
to be made a nominal party in the beneficiary-agent’s litigation against the insurance company.
No way the trust estate the remaindermen will say.
Practice tip: Is the beneficiary entitled to principal distributions in the discretion of
trustee? If so, a discretionary principal distribution of contractual rights possessed by the trustee
as against the insurance company might be worth considering, assuming to do so would be
within the trustee’s discretionary authority. That way the trustee and the beneficiary can go about
their separate ways with respect to the matter no longer constrained by the fiduciary principle.
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Appendix A
§6.2.1.3 Duty to Protect and Preserve Trust Property; Duty to Enforce Claims; Duty to
Defend Actions [from Loring and Rounds: A Trustee’s Handbook (2021)].
To protect the beneficiary against excessive costs, the trustee should also
be alert to adjusting compensation for functions that the trustee has
delegated to others.101
If mutual fund firms ran gas stations, the fees would be posted in tiny letters
on the bathroom ceiling.102
Introduction. Except for the rare case where abandonment of an item of trust property serves
the interest of the beneficiaries and is in furtherance of the trust’s purposes, 103 the trustee is under
a duty to take all reasonable steps to protect104 and preserve/conserve the trust property.105
Indenture trustees are no exception.106 The reasonable costs of doing so are a legitimate trust
expense.107 This duty is not delegable.108 A necessary part of this general duty encompasses
vigilant protection of the trust property against deterioration or loss.109 The trustee could be liable,
for example, if he permitted stock subscription rights to expire110 or an entrusted life insurance
101UTC §805 cmt.
102Charles Stein, Only Scandal in High Fees Is Ignorance, Boston Globe, Dec. 14, 2003, at p. G5.
103See Restatement (Third) o f Trusts §86 c mt. f.
104Restatement (Third) of Trusts §76(2)(b). Se e, e.g., S. Leinberg & A. Gibbons, Performing Due
Diligence With Re spect to L ife Insurance Trusts Is Crucial, 30 Estate Planning 748 (2003) (discussing the
trustee's duty o f due diligence when the trust is funded with contractual rights incident to a life
insurance or a nnuity contract).
105See Bogert §582; 3 Scott and Ascher §§17.8, 18.1.2.1; 2A Scott on Trusts §176; Lewin ¶34-23
through ¶34-29 (England). See also UTC §809.
106Bogert §250, n.45. See generally §9.31 of this handbook (co rporate trusts; trusts to secure
creditors; the Trust Indenture Act o f 1939; protecting bondholders).
107See generally §3.5.2. 3 of this handbook (trustee’s equitable right to exo neration and
reimbursement from the trust estate); 3 Scott & Ascher §18.1.2. 1 (Preservation of the Trust Property).
108See generally 2A Scott on Trusts §171.
109See Restatement (Second) of Trusts §176 c mts. b, c; 3 Sco tt & Ascher §17.8. See also United States
v. White Mt. Apache Tribe, 537 U.S. 465, 475–476 (2003).
110See 3 Scott & Ascher §17.8; 2A Scott on Trusts §176 n.28 and accompanying text.
