Under the Uniform Trust Code, regardless of the terms of the instrument, a trustee has a duty “to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”[1] The good faith formulation, of course, was one of the traditional grounds for courts to intervene and take corrective action in abuse of discretion cases:
“[E]quity has established certain limitations on this doctrine (of non-intervention) which are deemed to be necessary to prevent the frustration of the settlor’s intent and inequitable conduct by the trustee.”
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“Many courts describe the cases where they review and upset the trustee’s use of discretionary powers as those involving “an abuse of discretion,” “bad faith,” “dishonesty,” or “arbitrary” action. It is believed that these phrases cover a variety of improper actions, for example, acting for the benefit of the trustee himself, or some third person, or for the purpose of harming the beneficiary or out of ill will or prejudice against him, or an action contrary to the purpose of the trust.”[2]
When applying the good faith test, courts looked to whether the trustee exercised his or her discretion “reasonably.” Thus, in ordinary situations, a trustee must exercise his or her discretion in “good faith” and “reasonably.” Reasonableness is generally viewed as an objective standard – something that a court could review and opine upon.[3] It would seem obvious that both “good faith” and “reasonableness” should be measured – in all cases – by the overall intent of the settler:
[1] Unif. Trust Code § 105(b)(2).“Even when the trustee has discretion, however, the court will not permit him to abuse the discretion. This ordinarily means that so long as he acts not only in good faith and from proper motives, but also within the bounds of reasonable judgment, the court will not interfere; but the court will interfere when he acts outside the bounds of reasonable judgment.”[4]
[2] George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 560 (rev. 2d ed. 1980).
[3] For tort liability, for example, reasonable care and a reasonable person standard is used that is free from subjective interpretation: “The [reasonable person] standard … must be an objective and external one, rather than that of the individual judgment, good or bad, of the particular individual … [The standard] affords a formula by which, so far as possible, a uniform standard may be maintained.” Restatement (Second) of Torts § 283 cmt. c (1965). See Kristin Harlow, “Applying the Reasonable Person Standard to Psychosis: How Tort Law Unfairly Burdens Adults with Mental Illness,” 68 Ohio L.J. 1733 (2007).
[4] 3 Austin Wakeman Scott, The Law of Trusts § 187 (3d ed. 1967).
