Drivers of the trend

Private trusts began appearing around 2013, with their growth accelerating from 2017, leading to what is now known as the ‘private trust trend'. The obvious driver of this trend is elderly people’s increasing need to prepare for asset management in case they become unable to manage their assets themselves due to dementia or other incapacitating conditions, or to transfer their assets to family members according to their wishes upon death. Another major but less obvious factor is judicial scriveners’ desire to expand the scope of their professional services, coupled with the 2006 amendments to the Trust Act. A third contributing element is that banks and trust banks started offering trust bank accounts to private individuals, making the practical implementation of private trusts feasible.

The judicial scriveners’ work in Japan is, in principle, limited to preparing legal documents for their clients (eg documents necessary for registering real estate ownership or company registration) (article 3 of the Judicial Scriveners Act (Act No 197 of 1950)).Footnote ¹¹ While judicial scriveners may also prepare documents to file court cases or record mediations and reconciliations, they are not permitted to provide legal advice related to the matters addressed in those documents because their job is limited to document preparation.Footnote ¹² The Japanese judicial scrivener association has long advocated and lobbied to expand the scope of their work. The association’s advocacy intensified when a committee organised under the Cabinet Office issued a preliminary proposal to abolish the judicial scriveners system entirely in 1961 in order to streamline administrative procedures. This prompted even more outspoken efforts to expand their professional scope.Footnote ¹³ One of the association’s biggest successes was enabling judicial scriveners to represent clients in small claims cases in 2002.Footnote ¹⁴ The association has also attempted to expand its working domain as long as the work is or can be considered ‘preparation of legal documents’. For example, when the voluntary guardianship system started in 2000, the judicial scrivener association organised a major public campaign, positioning judicial scriveners as the professionals who could prepare the necessary documents.Footnote ¹⁵ The private trust trend is the most recent example of such efforts by judicial scriveners. Since preparing legal documents is judicial scriveners’ primary work, they viewed preparing trust instruments for elderly people as a lucrative market and coordinated an advertising campaign promoting the use of private trusts for the elderly.

The 2006 amendments to the Trust Act contributed to the private trust trend by making it easier, or at least making it seem easier, for judicial scriveners to enter the market. As was described earlier, serving as trustees as part of their business had been monopolised by the business trust industry. As a result, know-how in designing different trust instruments depending on settlors’ needs had also been kept within the industry. Even legal practitioners, such as attorneys, did not have opportunities to gain meaningful experience and expertise in designing trusts, which created a high entry barrier for judicial scriveners seeking to help elderly people design and draft trust arrangements.Footnote ¹⁶ The 2006 Trust Act amendments lowered this entry barrier (or at least appeared to do so) because the primary objectives were to eliminate court supervision over trust management and to make trust law rules default rules.Footnote ¹⁷ Following the amendments, many academics and practitioners, particularly those in the trust industry, repeatedly stated that Japanese trust law had become based on default rules. This reduced the psychological barriers for judicial scriveners to enter the business of preparing trust instruments.

While no bank had previously allowed private individuals to open bank accounts as trustees to hold trust funds, small local banks started to permit private individuals to set up trust bank accounts in 2016.Footnote ¹⁸ This accelerated the private trust trend because it made it possible to implement a mechanism that ensured trustees could properly separate trust funds from their personal money. Small local banks began offering this service because they believed encouraging private trusts would help reduce the risk of frozen bank accounts: banks’ operations could be disrupted if their elderly clients’ accounts were frozen because the clients became mentally incapable of managing their accounts without having alternative management arrangements in place.Footnote ¹⁹ Due to the emergence of numerous problematic trusts, banks currently implement strict procedures for opening trust bank accounts.Footnote ²⁰

Since trust banks also saw business opportunities in elderly people’s need to have their assets managed by someone else, they offer various trust services specifically targeting elderly people’s asset management. Some of the popular services are trusts where funds are managed by trustees for the educational benefit of the settlors’ grandchildren.Footnote ²¹ These educational trusts emerged in response to Japan’s 2013 tax reform, which created a gift tax exemption. The reform allows direct family members (eg grandparents and parents) to transfer lump sums of up to 15 million yen to their descendants (eg children and grandchildren) without incurring gift tax, provided the funds are used for educational expenses such as tuition and other school-related costs.

Another popular type of trust product is the trust with termination restrictions. Under the Trust Act, trusts may be terminated at any time through an agreement between the settlor and beneficiaries (article 164(1)). When the settlor is also the sole beneficiary, they may terminate the trust at their own discretion. However, since this is a default rule, the trust instrument may impose restrictions on termination rights (article 164(2)). These specialised trusts work by preventing the settlor/sole beneficiary from terminating the trust unilaterally, and instead require the consent of designated third parties.Footnote ²² Major trust banks, such as Sumitomo Mitsui, Mitsubishi UFJ and Mizuho, began offering these products between 2015 and 2017 as a protective measure against wire transfer scams targeting elderly people. By moving elderly people’s money from regular bank accounts into trust bank accounts (or converting their existing accounts into trust structures) and making it impossible for account holders (now serving as both settlor and sole beneficiary) to terminate these trust arrangements alone and withdraw funds, these trust products can serve as a barrier against fraud schemes that rely on pressuring elderly victims into immediate decisions to withdraw and transfer money.

While such trust products are popular, they also have limitations. One key limitation is that trust products offered to private individuals typically focus solely on money management, as exemplified above. If someone wishes to have both real estate and money managed together, which is how Japanese elderly people predominantly accumulate wealth, trust products offered by trust banks are inadequate. Additionally, as the trust products described above demonstrate, trust bank offerings are often designed for specific and specialised purposes. This naturally limits the ability to customise trusts based on individual asset management needs.

Judicial scriveners filled the gap that trust bank products cannot address by marketing private trusts as completely customisable solutions. They emphasised that private trusts could be arranged with complete flexibility because the current Trust Act is based on default rules, so that not only the types of assets and methods of managing trust assets, but also all the other related matters can essentially be determined freely. Their marketing depicted private trusts as a perfect tool to fulfil elderly people’s wishes and as ensuring those wishes were reflected through trust arrangements. Various instruction books and standard trust instrument forms were produced by judicial scriveners. However, these materials frequently contained inaccurate or misleading information that could easily be taken out of context, rendering them inappropriate guidance for designing private trusts. This is highly problematic also because these materials often involve exaggerations of the default rule aspect of trust law, creating the impression that individuals can accomplish anything they desire through private trust arrangements. As a result, private trusts became so highly regarded that they were even viewed as a panacea for elderly people’s fears and worries about their future asset management.Footnote ²³

While there are no statistical data showing the exact number of private trusts in Japan, since private trusts do not have to be publicly recorded, one estimate suggests that 2,000 to 3,000 private trusts were created in two years from 2017.Footnote ²⁴ There were 2,223 private trust instruments notarised in 2018, and this figure rose to 2,974 in 2019.Footnote ²⁵ For comparison, in 2021, there were 106,028 notarised wills and 12,871 notarised voluntary guardianship contracts.Footnote ²⁶ While the number of notarised private trust instruments is small compared to these figures, it represents a significant increase considering that private trusts had been virtually non-existent until then. Among private trusts presented by settlors and/or trustees to Sumitomo Mitsui Trust Bank to open trust bank accounts in 2018, approximately 70% were designed by judicial scriveners (the remainder were designed by lawyers, tax accountants and others).Footnote ²⁷

As outlined above, the private trust trend gained momentum through a combination of elderly people’s increasing needs and judicial scriveners’ desire to expand their professional scope. The judicial scrivener association successfully marketed private trusts as highly flexible solutions that could be ‘freely designed’ to meet individual needs because of the 2006 amendments to the Trust Act. While judicial scriveners’ marketing claims about the flexibility of private trusts may be technically true, it does not mean that everything can be written in trust documents. Even though judicial scriveners’ job is limited to drafting legal documents based on their clients’ intentions, rather than proactively providing legal advice, the reality has shown problematic tendencies. Potential settlors are elderly people who lack specialised legal expertise. More problematically, many of them are at a life stage where they are experiencing cognitive decline affecting their information-processing capabilities, which is precisely why they wish to entrust their assets to someone else.Footnote ²⁸ Similarly, potential trustees – the settlors’ family members – are also laypeople. These deficiencies are compounded by the fact that the majority of judicial scriveners lack the requisite knowledge and competency for drafting trust instruments. It was inevitable that private trust instruments drafted by such inadequately equipped parties would create multiple legal issues.

Fundamental design failures in private trusts

Shortly after the private trust trend emerged, various problems began to appear.Footnote ²⁹ These problems can be categorised into two types. The first category involves sham trusts and other poorly designed private trusts that should be considered invalid, either partially or wholly. The second category includes problematic private trusts from the perspective of the trustees’ duties, particularly the duty of loyalty, as discussed in the next section.

The first category, sham and invalid trust arrangements, includes trusts that fail to establish the fundamental characteristics of a trust: trust assets must be managed by the trustees for purposes other than exclusively benefiting themselves while the settlors transfer legal title to the asset. Situations in this category can violate the core structure of trust in three ways: (i) trusts where the purpose is not specified in the trust instrument; (ii) trusts where the beneficiary’s rights are not stipulated in the trust instrument; and (iii) trusts where the settlor practically remains the owner of the trust property.Footnote ³⁰

Regarding type (i), the purpose of trusts is a requisite element for trust creation because the trustees’ obligations would not be identifiable without a specified purpose. Therefore, trusts without a specified purpose are deemed invalid. Examples are trust instruments that give trustees unfettered power to modify and terminate trusts.Footnote ³¹ Such trusts would also be considered invalid because they effectively serve no purpose other than benefiting the trustees, which violates article 8 of the Trust Act.Footnote ³²

Type (ii) includes situations where beneficiaries are identified but their rights are either completely unstipulated or defined so vaguely that it is impossible to determine the specific amount beneficiaries will receive, when they will receive it or under what conditions.Footnote ³³ Another problematic variant involves trusts granting trustees power to freely change beneficiaries and beneficiary rights.Footnote ³⁴ While the existence of beneficiaries is not required for trust validity, trusts must be structured in ways that prevent trustees from managing trusts exclusively for their own benefit (article 2(1)).Footnote ³⁵ Trusts would be considered invalid if trust instruments fail to specify who may receive what benefits, when, or how, because this would permit trustees to handle trust assets freely.

Type (iii) includes situations where a trustee delegates the entire management of the trust assets back to the settlor. These do not constitute valid trust arrangements because they allow settlors to handle trust assets as their own property even after creating trusts. Another instance is where trust instruments fail to specify who will receive residual trust assets upon termination of trusts, instead stating that residual assets will be distributed according to the settlors’ wills.Footnote ³⁶ While these trust arrangements are valid, the specific clauses governing the distribution of residual assets are considered void because trust assets belong to trustees upon the creation of trusts, and therefore, settlors cannot direct the allocation of residual assets through their wills.Footnote ³⁷

Such sham trusts are readily avoidable once practitioners acquire familiarity with basic rules in Japanese trust law. Given that most trust instruments are created by legal professionals, judicial scriveners in particular, the prevalence of problems within the private trust trend reveals significant deficiencies in the knowledge and experience of legal professionals in trust law. As previously noted, in the past, legal practitioners had very limited opportunities to develop expertise in designing private trusts. When the private trust trend emerged, these legal professionals were essentially novices in the design and drafting of such instruments.

Legal professionals’ insufficient expertise can also create problems by misguiding clients (eg settlors, trustees and/or beneficiaries). For example, in a case decided by the Tokyo District Court on 17 September 2021, X and his son Z had consulted judicial scrivener Y in 2018 regarding the possibility of creating a trust whereby X would entrust his real estate property to Z for X’s benefit. Since the trust management involved property leasing, X and Z expressed the wish to open a trust bank account. As of 2018, there were only 20 financial institutions that allowed individual customers to open trust bank accounts. Mega banks were not included among them. Among trust banks, only Sumitomo Mitsui Trust Bank was accepting individual applications to open accounts.Footnote ³⁸ Financial institutions that would open trust bank accounts generally required customers to complete strict procedures. Some necessitated trust instruments to be prepared by specific lawyers designated by these institutions. Some others required trust instruments to be submitted for review before applying for an account. While notarisation of trust instruments was typically required, the verification requirements for opening accounts greatly varied from one financial institution to another. Unaware of this practice, Y used a standard form for private trusts. When Z was unable to open a trust bank account using the trust instrument, X was forced to invalidate the trust and create a new one.

Since Y’s main contractual obligation was limited to drafting a trust instrument according to X’s intentions and providing procedural assistance to have the instrument notarised, they did not owe an obligation to proactively ensure that X was able to open a trust bank account. However, Y handed over their business card bearing the titles ‘Welfare Trust Advisor’ and ‘Welfare Trust Designer’ and introduced themselves as being primarily engaged in inheritance and family trust affairs. Knowledge of banking practices regarding trust bank accounts constitutes basic common knowledge for trust law experts. X, in contrast, had little knowledge of private trusts and no experience of drafting private trusts. In such circumstances, the court appropriately found that Y owed an obligation, in light of good faith, to inform X that there was a risk that he might not be able to open a trust bank account with the trust instrument Y prepared.Footnote ³⁹

The widespread problems associated with poorly designed trusts have led to calls from academics and practitioners for enhanced professional education, emphasising that judicial scriveners and other legal professionals must develop a better understanding of trust law and incorporate this knowledge into their drafting practices.Footnote ⁴⁰ In response to these concerns, a study group was created under the Japan National Notaries Association (NNA), working together with another study group created under the Japan Federation of Bar Associations (FBA) (named Trust Centre). These groups published a set of model terms for private trusts in 2021 (the Model Terms).Footnote ⁴¹ The FBA subsequently published professional guidelines for drafting private trust instruments in 2022,Footnote ⁴² and in 2024, the Japan Federation of Judicial Scrivener Associations (JFJSA) also issued similar guidelines.Footnote ⁴³ These guidelines and model rules certainly contribute to elevating the quality of the drafting services and preventing the creation of sham trusts. However, their effectiveness remains limited because they cannot adequately address the second category of problems related to the trustees’ duties.

Deficient trustee constraint mechanisms

The second category of problematic trusts involves private trusts that are subject to inadequate constraints on the trustees’ power.

Such trusts lead to an erosion of the duty of care. With respect to the trustees’ duty of care, instruction books commonly advise that parties may include clauses in trust instruments that allow trustees to handle trust assets with the same degree of care they would exercise when managing their own property.Footnote ⁴⁴ Standard forms for private trust instruments, readily available through online searches, typically incorporate clauses based on this reduced standard of care. Representative examples include provisions stating that ‘The trustee must handle the management, disposal and other trust affairs of trust property with the same care as they would exercise toward their own property.’ A more comprehensive version commonly found in standard forms provides:

Even standard forms that establish the general principle that ‘The trustee shall handle trust affairs with the care of a prudent manager in accordance with the purpose of this trust’ commonly include instructional notes stating that the standard of care may be reduced to that applicable to one’s own property through trust agreements. The Model Terms essentially take the same approach, though their accompanying commentary emphasises the necessity of ensuring that reasonable justification exists when inserting clauses to lower the degree of care in trust instruments.Footnote ⁴⁵

This approach of inserting general clauses to reduce the trustees’ required standard of care stems from two considerations. First, the duty to exercise due care of a prudent manager is provided in article 400 or article 644 of the Japanese Civil Code.Footnote ⁴⁶ The duty has traditionally been contrasted with the duty to pay the level of care that obligors would exercise for their own property. The latter requires a lower level of care than the former obligation, since the latter duty uses a subjective standard and requires obligors to exercise the degree of care in accordance with their individual capabilities. In contrast, the duty of care evaluates obligors’ actions or inactions based on the objective standard of care that would reasonably be required given the obligors’ profession and social and economic status.Footnote ⁴⁷ When prospective trustees view their role as managing family assets rather than handling another person’s property, they naturally tend to treat trust assets as they would their own. Consequently, they are inclined to seek reduced obligations. The concept of exercising care equivalent to that applied to ‘one’s own property’ intuitively appeals to such prospective trustees’ preferences.

The second reason relates to the statutory framework of trust law. Article 29(2) of the Trust Act, which provides trustees’ duty of care, permits parties to modify this duty. The provision states, ‘A trustee must administer trust affairs with the due care of a prudent manager; provided, however, that if the terms of trust otherwise provide, the trustee must administer trust affairs with such care as provided for by the terms of trust.’ This flexibility is often characterised as establishing the trustees’ duty of care as a default rule, with commentary noting that the duty of care can be reduced to the level of care one would exercise for their own property.Footnote ⁴⁸

However, this approach is significantly problematic both theoretically and practically. From a theoretical perspective, trustees owe an obligation to administer entrusted trust affairs as their main obligation (article 29(1) of the Trust Act). Since the duty of care merely provides a standard for performing this obligation by requiring due care, the duty of care is fundamentally the same as the objective reasonableness standard used to determine negligence in tort law.Footnote ⁴⁹ Consequently, general clauses that reduce the trustees’ required standard of care, such as those mentioned above, lack substantive meaning without specifying the substantive content of trust management methods that constitute the obligation to administer entrusted trust affairs. More critically, such clauses can essentially negate a core element of trusts and make the entire trust void. This can occur because these clauses can practically permit trustees to exercise no meaningful care in handling trust affairs when management methods are not properly stipulated in trust instruments. Since trusts are a system whereby trustees manage affairs for another’s benefit, any arrangements that allow trustees to handle trust assets without exercising any meaningful care cannot legitimately be considered trust arrangements.Footnote ⁵⁰

This theoretical danger translates into substantial practical concerns because of the ways private trusts are typically established. Potential trustees – commonly sons or other family members of prospective settlors – frequently accompany settlors to consultations with judicial scriveners and often take the lead in trust instrument drafting discussions. It is not uncommon for only potential trustees to approach judicial scriveners to draft trust instruments on behalf of settlors, while it is quite rare for prospective settlors to consult judicial scriveners independently.Footnote ⁵¹ Since these potential trustees are typically also prospective heirs of the settlors, they often possess personal interests in how settlors’ assets will be managed or preserved for the future. Although the guidelines issued by the FBA and JFJSA emphasise that trusts must be designed according to settlors’ intentions and for their benefit (given that settlors are typically the beneficiaries), potential trustees may be tempted to structure trusts in ways that reduce their obligations, minimise their responsibilities, and potentially benefit themselves. This dynamic explains why types (i) and (ii) of sham trusts outlined earlier are a common occurrence in the private trust trend.

A stereotypical illustration of this dynamic can be found in a case where X, the son of a settlor, conspired with his wife to appropriate his father’s assets. Leveraging his position as his father’s legal guardian, X established a trust by designating his wife as trustee on behalf of the father and transferred the father’s assets to her without specifying any beneficiary rights. This arrangement enabled the couple to use the father’s assets freely for their own purposes. This case represents a classic example of a sham trust that appears in the trust trend, as the trust merely serves as a disguise for the trustee (the wife) to become the de facto owner of the assets. The judicial scrivener who facilitated this trust arrangement without properly understanding trust law principles was subjected to disciplinary action for professional misconduct.Footnote ⁵²

Another common occurrence involves situations where trustees manage the trusts for the benefit of potential heirs of the settlors, including the trustees themselves, rather than beneficiaries. This frequently happens, particularly when trustees are also holders of vested rights, as they are psychologically inclined to treat trust property as their own. This frequently leads to legal disputes between the trustees, who, as potential heirs, seek to derive benefits from the trusts, and other family members.Footnote ⁵³

The problems surrounding the duty of loyalty are even more pronounced. Standard forms for trust instruments almost universally lack any clauses addressing the duty of loyalty. Even the Model Terms remain silent regarding the imposition of the duty of loyalty on trustees. As for trustees’ obligations generally, the Model Terms only contain two substantive clauses: one addressing the duty of care, as was mentioned above, and another concerning the duty to segregate trust assets.Footnote ⁵⁴ The Model Terms merely acknowledge the possibility of inserting clauses to address specific conflict-of-interest situations on a case-by-case basis, treating these as optional provisions without providing any model language or substantive guidance for such clauses.Footnote ⁵⁵

This omission likely stems from practitioners’ risk-averse attitudes toward an obligation that remains largely theoretical. While the duty of loyalty has long been an established principle under Japanese law, it has functioned more as a conceptual obligation than one implemented in practice across major areas where it should play crucial roles, including agency, corporate and trust law. In agency law, there is no express provision establishing the duty of loyalty, and consequently, no reported cases that have addressed this obligation.

The corporate law contexts present a more complex picture. Although article 355 of the Companies Act (Act No 86 of 2005) stipulates directors’ duty of loyalty, the Supreme Court once characterised this duty as merely a specific obligation derived through the application of the duty of care.Footnote ⁵⁶ This judicial interpretation effectively renders the duty of loyalty conceptually equivalent to the duty of care. While the current majority of corporate law scholars recognise that the duties of loyalty and care are fundamentally different in nature, the distinction remains unclear. The problem of mixing the two duties has been left unsolved because it does not cause practical problems in Japanese corporate law, as directors’ liabilities to the company upon a violation of either duty receive essentially the same treatment under the same provision (article 423).Footnote ⁵⁷

In trust law, the duty of loyalty is conceptually differentiated from the duty of care, and trustees’ liabilities for violations are also governed by different rules.Footnote ⁵⁸ However, since commercial trust practices have been subject to extensive regulatory oversight, no case law has emerged addressing trustees’ duty of loyalty. Consequently, the practical implementation of this duty remains difficult to observe. Given this legal landscape, practitioners’ reluctance to address the duty of loyalty in their trust drafting practices is somewhat understandable.

As a consequence, prevalent trust instruments prove ineffectual in constraining trustees’ exercise of their power. With respect to the duty of care, the standard can be reduced to essentially negligible levels. Regarding the duty of loyalty, the obligation may be entirely omitted from consideration. Given the virtual absence of preventative mechanisms in trust instruments, it is no surprise that abuse of trustees’ power for personal benefit has emerged as a significant problem, as was outlined earlier.

The primary (reactive) response to such trustees’ abusive management is the implementation of third-party monitoring mechanisms. One proposal advocates for reviving the court’s supervision over trust administration.Footnote ⁵⁹ As previously mentioned, the 2006 amendments to the Trust Act made formerly mandatory rules into default rules. Regarding the duty of loyalty, the old Trust Act lacked a general provision imposing this duty on trustees. Instead, the Act contained one specific provision prohibiting trustees from engaging in self-dealing unless they obtained court permission (article 22 of the old Trust Act). This provision was considered mandatory because the prohibition of self-dealing could only be lifted through judicial authorisation.Footnote ⁶⁰ The 2006 amendments eliminated the requirement for court permission and replaced it with permission through trust instruments or beneficiary consent (article 31 of the Trust Act). The current proposal seeks to restore judicial oversight.

Another response involves encouraging the use of trust supervisors or beneficiary agents to oversee trust management.Footnote ⁶¹ Trust supervisors may be appointed through trust instruments (articles 124(1), 131(1)). Trust supervisors have the authority to exercise monitoring rights on behalf of the beneficiaries (articles 125, 132). While beneficiary agents similarly have power to exercise monitoring rights on behalf of beneficiaries, they differ from trust supervisors in two respects: (i) beneficiary agents may be appointed to represent only individual beneficiaries within the trust, whereas trust supervisors oversee trust management for all beneficiaries collectively, and (ii) beneficiaries represented by agents are prohibited from exercising their own monitoring rights (article 139(4)), while beneficiaries may exercise their rights concurrently with trust supervisors.

However, these proposals have significant limitations. Regarding judicial supervision, legislative amendments would be required, making this impractical as an immediate response. Moreover, one must exercise caution given Japan’s experience with the adult guardianship system. This system was originally proposed to change the then-existing system into a more flexible family asset management mechanism. However, due to a surge in embezzlement cases by legal guardians, the system introduced comprehensive court supervision over legal guardians’ management.Footnote ⁶² This ultimately rendered the system quite unpopular.Footnote ⁶³ In fact, many individuals now choose private trusts specifically to avoid what can be characterised as the ‘public aspects’ of the adult guardianship system, including high, court-determined guardian and supervisory fees, as well as judicial oversight.Footnote ⁶⁴ It would be a societal loss if private trust flexibility were eliminated to such an extent that private trusts suffer the same fate as the adult guardianship system.

The appointment of trust supervisors and beneficiary agents also presents practical challenges. These positions often cannot be filled due to the absence of appropriate family members willing to serve. Although proposals typically encourage having professionals (eg lawyers or judicial scriveners) assume these roles, compensation costs can easily become prohibitive. As a result, ‘few trusts currently have trust supervisors or beneficiary agents in place’Footnote ⁶⁵.

Fundamentally, the primary mechanism for controlling trust management lies in designing trust instruments that properly delineate trustees’ powers and obligations. Given the generally inadequate quality of current trust instrument drafting, implementing proper drafting practices that effectively constrain trustees’ authority becomes even more critical. In any event, monitoring functions, regardless of who performs the monitoring (eg beneficiaries, trust supervisors or beneficiary agents), cannot operate effectively unless trust instruments clearly specify trustees’ required and prohibited conduct. Therefore, designing trust instruments to control trustees’ power serves as a prerequisite for effective monitoring.

Reconstructing the duty of care through specific obligations

Regarding the duty of care, given that trustees are typically settlors’ family members who often lack specialised knowledge in asset management, the desire to reduce expectations for the quality of trustees’ performance compared to professional/commercial trustees is understandable. However, this accommodation should not be achieved merely by lowering the generally applicable standard of care, as discussed above. Instead, the appropriate method for relaxing the duty of care is to specify particular asset management methods and adjust management methods based on the trustees’ capabilities.Footnote ⁶⁶

For example, in the case of monetary management, trust instruments may state, ‘When investing trust funds, the trustee may limit investments to bank deposits’ if the trustee lacks substantial investment expertise. Similarly, for real estate property management, trust instruments may specify that ‘When managing rental property, the trustee may select tenants based on standard screening procedures employed by real estate agents’ rather than requiring comprehensive background investigations of prospective tenants. This approach allows trustees’ specific obligations to be calibrated according to their individual competencies. Since the duty of care serves as a standard for assessing trustees’ performance, having detailed specifications of trustees’ obligations within trust instruments establishes more precise parameters for the application of this standard. Such specification enhances the effectiveness of monitoring mechanisms because it becomes easier to determine whether trustees have fulfilled their duties with appropriate care.

While specifying trustees’ obligations in detail would naturally increase trust instrument complexity, this concern is overstated given that private trust management typically involves asset preservation rather than active wealth generation through investment. Moreover, current standard trust instrument forms typically contain merely 20 clauses, with a maximum of 30, and some contain only 10 to 14 provisions. These provisions address only the fundamental framework of trust: (i) purpose of the trust, (ii) trust property identification, (iii) scope of trustee’s authority, (iv) identification of trust parties, (v) rules on termination of trust and (vi) trust asset distribution manners upon termination. Since current instruments function only as basic trust blueprints rather than instruments designed to constrain trustees’ power, adding detailed specifications regarding trustees’ obligations would not render the drafting process prohibitively burdensome. Furthermore, considering that prospective trustees are typically laypeople with no prior trustee experience, reviewing specific expected duties and making necessary adjustments according to their capabilities would constitute an effective method for helping prospective trustees understand the responsibilities inherent in accepting trusteeship.

Establishing the duty of loyalty as operative law

As for the duty of loyalty, this duty, along with the duty of care, constitutes a core element of the trust. An arrangement could not be considered a trust if the trustees do not owe a duty of loyalty.Footnote ⁶⁷ Therefore, this duty cannot be treated as an optional clause in trust instruments, as the Model Terms suggest. It is true that the Trust Act provides three provisions related to the duty of loyalty, and that they are imposed upon trustees regardless of whether specific clauses appear in trust instruments. However, inserting explicit duty of loyalty clauses in trust instruments carries significant practical implications for both educational and regulatory functions.

Given that private trusts are used by laypeople, it becomes essential to accurately convey trustees’ obligations and ensure that trustees understand their obligations. Since the trust instrument drafting process represents the moment when parties focus most intently on the arrangement’s terms, it is an optimal opportunity to educate trustees about their duties. As previously explained, the duty of loyalty has been treated as a conceptual or theoretical construct lacking practical implementation in Japanese trust law practice. However, this duty is a direct tool for controlling trustees’ abusive trust management. It should be actively employed for its intended purpose rather than being left as a theoretical principle. This approach is particularly crucial given that many current problems in private trusts constitute violations of the duty of loyalty.

Furthermore, the duty of loyalty provided in the Trust Act must be calibrated to provide rules suitable for private trusts because the duty of loyalty under the current Trust Act was established against the background of commercial trust practices. By incorporating terms in trust instruments that reflect this calibration, parties can modify the loyalty rules in the Trust Act to implement appropriate rules for private trusts. In the next sections, the current rules involving the duty of loyalty and associated problems are discussed in order to make them appropriate for private trusts, and methods for implementing these calibrated rules in trust instruments are proposed.

Clarifying the motivational standard of loyalty

Since the duty of loyalty accompanies exemption rules, as will be discussed, specific rules to be incorporated into trust instruments have two aspects: (i) substantive content of the duty of loyalty and (ii) exemption rules.

As for the substantive content of the duty of loyalty, the Trust Act offers a statutory framework of the duty of loyalty through articles 30, 31 and 32. Article 30 is the general provision of the duty of loyalty, mandating that ‘a trustee must administer trust affairs and conduct any other related acts loyally for the beneficiary.’ Article 31 articulates the no-conflict principle through categorical prohibition of four specific types of transactions. Article 32 establishes the no-profit principle by prohibiting trustees from acquiring profits from trust management.

Transactions prohibited by article 31(1) are: (i) self-dealing, where trustees acquire trust property for themselves, (ii) inter-trust dealing, involving transactions between two trusts managed by the same trustee, (iii) double-agent dealing, encompassing transactions between trusts, on the one hand, and parties represented by the trustees as their agents, on the other, and (iv) personal debt security arrangements, where trustees place mortgages on the trust property to secure their personal debts. As the specific instances prohibited under article 31(1) show, the no-conflict principle in Japanese trust law is equivalent to that in common law jurisdictions.

Article 32(1) provides the no-profit principle by prohibiting trustees from performing acts for themselves or closely connected parties instead of performing them for the trust, even when carrying out such acts falls within trustees’ administrative authority and would benefit the trust. Unlike the no-conflict principle, the no-profit principle in article 32(1) differs significantly from that in common law jurisdictions, having more limited applicability. Three conditions must be satisfied for article 32(1) to apply: (i) the trustee did not perform a certain act for the trust when it could have been performed for the trust, (ii) the trustee instead performed the act for themselves, and (iii) the trustee’s failure to act for the trust was contrary to the beneficiaries' interests. An example situation involves a trustee who, having identified suitable property for trust acquisition during the course of the trust management, purchases the property for personal benefit rather than for the trust. In contrast, a trustee’s profit-taking in a case like Keech v Sandford Footnote ⁶⁸ would not be prohibited because the provision only prohibits trustees from performing acts for themselves when they could and should have performed them for the trust (condition (i) would not be satisfied).Footnote ⁶⁹ Similarly, a case like Boardman v Phipps Footnote ⁷⁰ – in which trustees make investments (eg purchasing a company’s stock) for themselves based on information acquired during the course of managing the trust – would not be prohibited by the provision because the trustees could have made the same investments for the trusts (condition (iii) would not be satisfied).

Article 30 establishes the general duty of loyalty and operates as a blanket provision to encompass all forms of loyalty violations not specifically addressed by article 31 or 32. While what constitutes a violation of article 30 remains unclear, the provision would prohibit, for instance, a trustee pocketing money from trust management.

The Model Terms’ approach to the duty of loyalty is to incorporate individual clauses that address specific acts enumerated in articles 31(1) and 32(1), with clause selection determined by the individual client’s circumstances and needs, as was discussed. However, this approach is fundamentally flawed. The primary deficiency is that this piecemeal approach fails to capture the underlying principle of the duty of loyalty. By fragmenting the duty of loyalty into discrete prohibitions, this approach risks conveying to trust parties a negative implication that only the particular acts specified in trust instruments are prohibited, and that other conduct falls outside the scope of the duty of loyalty. As a consequence, this approach can merely encourage mechanical compliance with specific prohibitions rather than compliance with the duty of loyalty. For instance, while a trustee pocketing money from trust management is covered by article 30, trustees might fail to be aware of that through a mechanical compliance approach. This is particularly problematic considering that a significant portion of the problems caused in the private trust trend involve violations of the duty of loyalty where trustees practically treat trust assets as their own.

Therefore, the key is to establish the core principle of the duty of loyalty. While the substantive content of the duty has historically been subject to debate and uncertainty,Footnote ⁷¹ the author’s previous analysis has clarified its essential nature.Footnote ⁷² The duty of loyalty operates as an obligation to regulate trustees’ motives and require them to act with the specific motivation to advance the interests of the beneficiaries. The violation of the duty of loyalty occurs when trustees’ actions or inactions related to the management of the trusts are motivated by intentions other than the benefit of beneficiaries. Such improper motivations encompass intentions to derive personal benefit from the actions/inactions, to benefit third parties with whom the trustee has relationships, and to harm beneficiaries’ interests. While malicious intent directed solely at harming beneficiaries represents a theoretical possibility, most violations arise from trustees acting to benefit themselves or individuals with whom they have close personal relationships, as rational actors rarely engage in purely malicious conduct without some corresponding benefit. Therefore, most cases captured by violations of the duty of loyalty would be those where trustees performed actions or inactions based on motivations to benefit themselves or others close to them.Footnote ⁷³

In this manner, the duty of loyalty offers a distinct framework for evaluating trustees’ conduct compared with the duty of care. While the duty of care employs an objective reasonableness standard to assess trustees’ actions or inactions, the duty of loyalty applies a subjective motivational standard that examines whether trustees’ actions or inactions were driven by the proper intent to advance beneficiaries’ interests.Footnote ⁷⁴ With the establishment of this clear dichotomy, the addition of the duty of loyalty in private trust management provides a more comprehensive framework for ensuring proper trust management. Acts listed in articles 31 and 32 are merely illustrative situations where violations of the duty are typically observed and therefore prevented. Conduct not specifically addressed by those two provisions may nevertheless constitute violations of the duty of loyalty where trustees’ actions or inactions involving the trust management were motivated by intentions other than those to advance beneficiaries’ interests.Footnote ⁷⁵

With the content of the general duty of loyalty explained above in mind, trust instruments should incorporate a general clause establishing the duty of loyalty in order to ensure comprehensive coverage of and compliance with the duty of loyalty. Incorporating explicit clauses of the duty of loyalty in trust instruments not only provides clear guidelines for trustees but also helps establish loyalty rules within trust law practice. The latter aspect is crucial particularly given that the duty of loyalty has not been recognised clearly in the current practice.

For example, the Tokyo District Court's decision on 23 October 2018 demonstrates the inadequacy of the implementation of the duty of loyalty in private trust practices. The case involved a trust where the trustee was obligated to manage real estate through leasing for the settlor, who was the father of the trustee and also the beneficiary, and provide necessary funds for the beneficiary’s living expenses, care costs and medical expenses from trust income upon the beneficiary’s request. The real estate comprised both the settlor’s residential and rental spaces. The trust was designed to be terminated upon the settlor’s death, and the trust designated the trustee as sole holder of vested rights. When the settlor subsequently requested that his adopted daughter become a tenant to continue cohabiting with the settlor and his wife, the trustee refused. The trust instrument did not specify tenant selection criteria or types of tenants. The trustee’s refusal was motivated by his desire to leave the adopted daughter out of the property so that he could safely acquire the real estate upon the termination of the trust.

Due to the disagreement, the settlor attempted to terminate the trust, arguing also that the holder of vested rights designation applied only to termination upon his death rather than termination during his lifetime. This argument was unsuccessful because the court enforced a trust instrument clause stating that the beneficiary may alter or terminate the trust partially or wholly through an agreement with the trustee, and the trustee clearly opposed termination.

This case would have been solved differently if the duty of loyalty had been properly recognised in practice. Even where trust instruments require the trustee’s consent for altering or terminating the trust, trustees do not possess unfettered discretion to agree or disagree with such changes. As for modifying the trust, the Trust Act provides that settlors and beneficiaries may alter trusts provided modifications do not harm trustees (article 149(3)(i)). If the settlor is also the sole beneficiary, they may modify the trust alone. The harm under the article refers to increased trust administrative burdens without corresponding fee adjustments. This framework indicates that trustees lack substantive stakes in trust modifications except where their obligations expand without compensation.

The rules on termination of the trust share the same principles. Article 164(1) permits termination through a settlor-beneficiary agreement. Paragraph (2) of the article states that the settlor and beneficiary must compensate the trustee for any damages; provided, however, that this does not apply if there is a compelling reason for terminating the trust. These provisions reflect the underlying principles that trust termination does not require trustees’ consent because trustees lack stakes in the continuance of the trust and that compensating damages to the trustee (ie providing promised fees) provides adequate protection for the trustees’ interests.Footnote ⁷⁶

For both modifications and terminations, the Trust Act allows that parties may provide different procedures in the trust instruments (article 149(4) for alterations, article 164(3) for terminations). Those provisions were added upon the 2006 amendments in response to the business trust industry’s demands for deregulation. However, such provisions do not alter the fundamental character of trust modification or termination. Since trustees are prohibited from acquiring any benefits beyond fees, trustees lack legitimate interests in preventing alterations or terminations except for situations where changes could increase their work without additional compensation or deprive them of promised fees.

Therefore, if clauses in trust instruments require trustees’ consent for modification or termination, such requirements create trustees’ power rather than rights. Since trustees’ powers are subject to the constraints of the duties of care and loyalty, trustees are required to exercise the authority to give consent with due care and loyal motivation. The duty of loyalty specifically prohibits exercising such power based on self-interest.Footnote ⁷⁷ Trustees’ refusals to consent to trust alteration or termination motivated by their personal interests, such as those in remainder trust assets, should be prohibited or rendered void because of violations of the duty of loyalty.

With the proper understanding of the duty of loyalty, the trustee’s refusal to terminate the trust in the Tokyo District Court case would have been prohibited or considered void because such refusal violated the duty of loyalty.Footnote ⁷⁸ Therefore, the settlor would have been able to either modify the trust in the way of permitting his adopted daughter to become a tenant of the real estate or terminate the trust.

Another common situation is where trustees refuse to provide adequate financial support to beneficiaries when remaining trust assets diminish because trustees serve as holders of vested rights.Footnote ⁷⁹ Such scenarios arise frequently because trust instruments typically authorise trustees to provide necessary amounts for beneficiaries’ living expenses and other costs upon beneficiaries’ request rather than establishing fixed periodic distributions. With the proper understanding of the general duty of loyalty, beneficiaries may challenge trustees’ funding decisions by arguing that refusals to provide support violate their duty of loyalty because they are motivated by trustees’ self-interest.

Inserting clauses on the duty of loyalty in trust instruments provides essential guidance for trust parties while also establishing the duty and making it operative in trust practices. Therefore, the principle of the duty of loyalty must be established in the trust instruments.

Clarifying exemption rules for private trust contexts

Since the duty of loyalty operates to protect beneficiaries’ interests, trustees may be exempted from violations under certain conditions.Footnote ⁸⁰ Before considering methods for incorporating exemption rules into trust instruments, the exemption rules must be clarified for private trusts as well.

The current statutory framework provides two primary conditions for exemption: advance permission in trust instruments (articles 31(2)(i) and 32(2)(i)) or advance permission from beneficiaries for specific acts that would otherwise constitute violations of the duty of loyalty (articles 31(2)(ii) and 32(2)(ii)). Permission from beneficiaries is valid only when it is based on the disclosure of material information regarding the act. Material information means information necessary for beneficiaries to properly assess the reasonable necessity and justifiability of the transaction at issue.Footnote ⁸¹ It should be noted that consent from beneficiaries given after the fact can provide exemption from liability for violations of the duty of loyalty (article 40). However, this ex-post exemption applies to liability based on violations of any duty that trustees owe. Therefore, this is not a rule unique to violations of the duty of loyalty.

For transactions prohibited under the no-conflict principle in article 31(1), additional exemptions exist. Even without advance permission in trust instruments or from beneficiaries, performing prohibited transactions may be justified if they are considered reasonably necessary for achieving the purpose of the trust (the reasonable necessity test) and satisfy either: (a) it is clear that the transactions will not harm beneficiaries’ interests (the no harm test), or (b) despite potential harm to beneficiaries, justifiable grounds exist for performing the transactions considering the impact of the transactions on trust property, the purpose and manner of the transactions, the nature of the trustee-beneficiary relationship that creates the conflict of interest and other relevant circumstances (the justifiability test) (article 31(2)(iv)). This combined evaluation is often referred to as the fairness test.

The no-profit principle provided in article 32 does not contain the fairness test because the acts prohibited under the article involve trustees’ failures to perform transactions that would be reasonably necessary for achieving the purpose of the trust and would benefit the trust, despite knowing this.Footnote ⁸² Therefore, investigating whether such failures satisfy the fairness test would be meaningless.

Article 30, which establishes the general principle of the duty of loyalty, contains no specific exemption rules. However, it is commonly understood that violations of the general duty of loyalty are subject to the same exemption framework.Footnote ⁸³

Problems with the current fairness test framework

Problems lie in the fairness test since the test was drafted in a manner that requires weighing multiple factors without clear guidance on how to balance them. Commentaries on the fairness test are also vague because they take a case-by-case approach and only provide several specific instances where the fairness test could be satisfied. Examples cited as satisfying the fairness test include the following four situations: (a) self-dealing scenarios where trust property land is publicly auctioned and trustees bid successfully, (b) cases where trustees purchase securities in the market with trust money that happen to be securities the trustees personally had sold, (c) cases where trustees, who also operate banks, deposit trust money into their own bank accounts at the same interest rate as other customers and (d) cases where trustees rent tenant buildings belonging to trust property under the same conditions as other tenants when no other tenants can be found.Footnote ⁸⁴ One commentary categorises the former two cases (a) and (b) as satisfying the no-harm test, and the latter two (c) and (d) as satisfying the justifiability test.Footnote ⁸⁵ In scenarios (a) and (b), since transactions follow market rules or public auction rules, there is no discretion on the part of trustees. Therefore, the transactions are considered to cause no harm to beneficiaries. In scenarios (c) and (d), the transactions themselves could potentially harm beneficiaries depending on the conditions. However, they are justified because they are conducted under the same terms as other similar transactions. This eliminates arbitrariness on the part of trustees in determining the contents of the transactions.

The fairness test was created in the 2006 amendments, primarily addressing demands for deregulation from the business trust industry. While business trustees sought maximum discretion in trust design and management, relaxing constraints on the duty of loyalty under the Trust Act appeared acceptable because the Trust Business Act provides separate and strict regulations of the duty of loyalty owed by business trustees. Compared with the exemption rules in common law jurisdictions, this fairness test can appear to be too lenient toward trustees, since common law jurisdictions generally uphold the so-called no further inquiry rule: trustees would not be exempted from liability even when they did not make any profits or cause damages to trusts, or acted in good faith unless the beneficiaries’ fully informed consent is obtained.Footnote ⁸⁶ Instead, on its face, the fairness test seems akin to Langbein’s proposal to permit inquiry into the fairness of transactions.Footnote ⁸⁷ However, in actuality, in the context of business trusts, the Trust Business Act modifies the fairness test to the extent that the test practically does not operate as an independent exemption rule. Under the Trust Business Act, business trustees may engage in otherwise prohibited transactions only when permitted by cabinet office order (article 29(2)). Permitted transactions under the order include: (i) transactions based on instructions from settlors, beneficiaries, or their delegates; (ii) transactions with disclosure of material facts and written consent from beneficiaries; (iii) transactions specifically approved by the Financial Services Agency as not harming the beneficiaries; and (iv) transactions reasonably necessary in light of the purpose of the trust and conducted through specific prescribed methods that eliminate trustees’ discretion (article 41(3) of the Trust Business Act Enforcement Rules, Cabinet Ordinance No 107 of 2004).

The last category (iv) is further subdivided by transaction type: (a) For securities and derivatives transactions, they are allowed only when conducted either on regulated exchanges/markets or at objective, market-based prices using published closing prices or other transparent pricing methodologies; (b) For real estate sales, they must be conducted at prices determined through appraisal evaluations by certified real estate appraisers; (c) For other transactions, they must be conducted under terms that are no less favourable to beneficiaries than market conditions for similar transactions of the same type and volume under comparable circumstances.

The architecture reflects the fundamental nature of transactions governed by the duty of loyalty. Such transactions involve situations where trustees cannot reliably make decisions that serve beneficiaries’ interests in light of the purpose of the trust because of conflicting self-interests. Furthermore, even for transactions categorised in (iv) where trustees do not have room for exercising their discretion, trustees need authorisation in trust instruments or permission from beneficiaries following material information disclosure (article 29(2) of the Trust Business Act). This requirement reflects the same fundamental nature of the regulated transactions: trustees cannot be the evaluators of the reasonableness of the transactions when their interests are involved, so either trust instruments or beneficiaries must be the decision-makers. Even where transactions are substantively fair, this fundamental principle remains unchanged because trustees cannot be reliable decision-makers as to the necessity of the transactions for the benefits of the beneficiaries in light of the purpose of the trust. As a whole, this regulatory framework is designed based on the nature of the transactions in which trustees have personal interests: trustees cannot be reliable evaluators of the fairness of the transactions, which includes (i) whether transactions do not cause any harm to beneficiaries; (ii) whether transactions are substantively justifiable; (iii) whether they are reasonably necessary for the trusts in light of the purpose of the trust.

The same analytical framework applies to trustees in private trusts because trustees in private trusts face identical conflicts when their personal interests intersect with decisions about trust administration. Regardless of whether trustees are experienced with the transactions at issue, anyone is equally susceptible to the influence of their self-interests. As a result, trustees in private trusts also become unreliable evaluators of (i) whether transactions cause no harm to beneficiaries or (ii) whether they are fair. Trustees also cannot properly determine (iii) whether transactions are reasonably necessary when their personal interests are involved. Therefore, the fairness test should be interpreted in the private trust context based on the same analytical framework applicable to business trustees.Footnote ⁸⁸

Therefore, the no-harm test should be interpreted narrowly to cover only transactions that have no potential to cause harm to beneficiaries because the substantive content of the transactions is determined by market forces. The justifiability test should apply where transaction terms are not determined by trustees’ discretion or arbitrary decisions but rather mirror the terms of comparable transactions. These interpretations align with the categorisation of example cases commonly understood to satisfy the fairness test, as was outlined earlier. This approach also corresponds to the framework established under article 108 of the Civil Code, which governs conflicts of interest in agency relationships. Under article 108, self-dealing and dual agency may be performed when agents receive advance permission from principals or when the acts at issue are part of the performance of obligations. The proposed interpretation maintains consistency with the rules in agency.

As for the reasonable necessity test, it should require that transactions are either authorised by trust instruments or that trustees obtain permission from beneficiaries. Under this interpretation, the fairness test itself may seem essentially the same as the primary exemption requirements – authorisation in trust instruments or prior permission from beneficiaries – rather than a separate additional requirement. However, this approach, as the one following the same framework applicable to business trustees, should be adopted because the fundamental problems remain the same regardless of whether trustees are professional or not: since trustees cannot serve as reliable evaluators of even the reasonable necessity of transactions, advance approval in trust instruments or permission from beneficiaries should constitute the primary indicators of reasonable necessity.

This interpretation also makes practical sense. Take scenario (b) where trustees acquire trust property through public auctions. Although the final purchase occurs under market rules, trustees must first decide whether to auction the property at all. They may choose to auction trust property with the underlying intention of acquiring it for themselves. The same concern applies to scenario (d), where trustees rent trust property under the same conditions as other tenants. While the rental terms mirror those of other tenants, trustees must first determine how vigorously to search for alternative tenants and what rental conditions to establish. Trustees interested in renting the property may not adequately market the property or prematurely conclude that no other tenants are available. Because these initial decisions about tenant search efforts are inseparable from subsequent self-dealing, trustees cannot serve as reliable evaluators of whether the overall course of action is reasonably necessary for the trust.

Even with this interpretation, the fairness test can still be distinguished from the primary exemption requirements in that situations may arise where trustees cannot obtain consent from beneficiaries because of insufficient time or other emergency situations; nonetheless, it is necessary for trustees to proceed without such consent. To accommodate these rare emergency situations, the fairness test still operates as an additional exemption requirement beyond trust instruments’ authorisation and beneficiaries’ consent.Footnote ⁸⁹

This interpretation creates a distinction from the regulatory framework in business trusts. Under the Business Act, even transactions conducted through prescribed methods that eliminate trustees’ discretion and cause no harm to beneficiaries must still receive either authorisation in trust instruments or consent from beneficiaries. The business trust regulatory framework provides no emergency exception. This distinction can be justified by the fact that private trust instruments can be drafted by parties who lack the necessary specialised expertise, so that trust instruments may not be drafted to provide comprehensive authorisation provisions. Private trustees may also encounter more practical obstacles to timely obtaining beneficiaries’ consent. In fact, the fairness test was introduced to address these concerns – possibilities that trust instruments may not anticipate every situation necessary to be governed and that trustees may face practical difficulty obtaining beneficiaries’ consent. Therefore, while the proposed interpretation narrowly construes the fairness test, it does not depart from the original understanding of the fairness test but rather properly identifies the specific situations the test should address.

Practical drafting framework for implementing the duty of loyalty

To summarise, the duty of loyalty operates as an obligation to regulate trustees’ motives and requires them to act with the specific motivation to advance the interests of the beneficiaries when administering trusts. Violations of the duty of loyalty occur when trustees’ actions or inactions related to trust management are motivated by intentions other than advancing the interests of the beneficiaries. This motivational standard provides a comprehensive framework and encompasses all situations where trustees act with improper intent regardless of whether such conduct falls within the categories explicitly prohibited in articles 31 and 32.

Since the duty of loyalty operates to protect beneficiaries’ interests, trustees may be exempted from violations if transactions that would otherwise constitute violations of the duty are permitted in trust instruments. Similarly, if trustees acquire advance permission from beneficiaries for specific transactions with material information disclosure, transactions may also become permissible. While Japanese trust law provides the fairness test as an additional exemption rule, the analysis presented above demonstrates that transactions at issue should be considered reasonably necessary, in principle, only when they are authorised in the trust instruments or permitted by beneficiaries. The fairness test should apply only in exceptional circumstances where there exists a justifiable reason for trustees’ inability to obtain prior permission from beneficiaries, such as emergencies where time constraints prevent obtaining consent from beneficiaries.Footnote ⁹⁰

To establish proper monitoring mechanisms, trust instruments should incorporate a general clause that imposes the duty of loyalty on trustees by explicitly stipulating that trustees may not administer trusts based on intentions other than advancing beneficiaries’ interests in light of the purpose of the trusts. This approach of establishing the duty of loyalty as a comprehensive general principle, rather than incorporating specific prohibitions in a piecemeal manner, serves both educational and regulatory functions by ensuring that trustees understand their fundamental obligation and by providing clear standards for evaluating their conduct. This comprehensive approach also parallels the standard treatment of the duty of care in trust instruments and is appropriate given that both duties are core obligations of trusteeship.

Furthermore, trust instruments should explicitly obligate trustees to disclose material information about transactions and acquire permission from beneficiaries when trustees or those close to them have personal interests in the transactions. Critically, trust instruments should establish this disclosure-and-permission requirement as the sole exemption mechanism without referencing the fairness test in article 31(2)(iv). By specifying only this exemption mechanism in trust instruments, the terms signal to trustees that disclosure and beneficiaries’ consent constitute the exclusive means of obtaining exemption from liability. This drafting approach, combined with the narrow interpretation of article 31(2)(iv) proposed in this article, practically denies the direct applicability of the fairness test in article 31(2)(iv) and effectively establishes that trustees may not rely on article 31(2)(iv) except in emergency circumstances where prior consent from beneficiaries was impossible to obtain.

When settlors wish to permit specific conflicts-of-interest transactions that trustees may need to perform, such transactions may be enumerated in trust instruments. However, authorisation terms must be drafted with sufficient specificity to prevent abuse while accommodating legitimate needs. Some commentators argue that permission in trust instruments may be comprehensive and vague, stating simply that ‘the trustee may purchase a part or whole trust asset for himself’ without identifying specific assets, because it is difficult to predict the types of conflicts-of-interest transactions that trustees may find necessary to engage in beforehand.Footnote ⁹¹ While it is true that settlors may not be able to specify the exact content of transactions that should be permitted in advance, which results in somewhat comprehensive terms, trust instruments that comprehensively exempt trustees from the prohibition in duty of loyalty rules are considered void if the instrument practically exempts the trustee from owing the duty of loyalty.Footnote ⁹² Therefore, authorisation in trust instruments should specify, at least, the type of transaction permitted in relation to a specific trust asset.Footnote ⁹³

Furthermore, authorisation terms should be drafted in ways that do not allow trustees’ discretion in order to properly implement monitoring mechanisms and prevent trustees from violating the duty of loyalty. Even when transactions are permitted by authorisation or permission from the beneficiaries, trustees are still found to violate the duty of loyalty if they intentionally benefit themselves or others through permitted transactions. For instance, where inter-trust dealing is permitted in trust instruments or by beneficiaries, the trustee would be found to violate the duty of loyalty if he intentionally favours one trust over the other.Footnote ⁹⁴ Therefore, from the perspective of designing trust instruments that effectively constrain trustees’ power, authorisation terms for conflicts-of-interest transactions should be written in ways that prevent trustees from favouring their own or others’ interests over beneficiaries’ interests. This approach is particularly important given that not just parties but also practitioners involved in private trusts remain unfamiliar with its proper application.

By incorporating those rules into trust instruments, trust instruments can effectively demonstrate essential principles of the duty of loyalty. Through such explicit incorporation and practical application, the duty of loyalty can be implemented in actual trust practices rather than remaining a theoretical construct. In this manner, the duty of loyalty can function as an operative rule that constrains trustees’ power while simultaneously providing meaningful guidance to all parties involved in trust arrangements, including legal practitioners, in the development of sound trust practices.