Wills & Trusts
Fiduciary Relationship - An Important Concept in Trusts
The relationship created by the formation of the trust between all of these parties is a special relationship recognized by law as a fiduciary relationship. A fiduciary relationship requires that some of the parties may have duties to the others in the relationship which are greater than one would normally have in a transaction with a neighbor or friend or associate. This means that in some situations where one might be free to act in a manner that would not benefit a friend or associate, the same person who is acting as a Trustee of a trust might not be free to act in the same manner.
This is best exhibited by an example. Assume that a Trustor transferred property to a Trustee to hold in trust and the Trustee knew that the property would be used for a shopping center development. However, in order to be beneficial for this purpose, the Trustor had to purchase an adjacent piece of undeveloped land which accessed a freeway. The Trustee may not, with this knowledge, purchase the tract of land first and then try to sell it to the Trust or the Trustor at a high price. Compare this to a normal person who owned that land and casually learned about the shopping center and the need of the Trustee for the land. That person is free to charge as much as the market will pay.
This special relationship creates certain obligations for all of the parties concerned. As we will see, each of these parties must be extremely careful to understand the nature of his/her duties, and to understand that a failure to follow these duties and responsibilities can subject a person involved in a trust to enormous liability. In fact, unless you fully understand the obligations imposed upon you by the law, it is wise to decline when a person "asks you for a favor," that is to be a Trustee for his three year old child's trust.