4. Trust Administration

Question 1

What is the New York Fiduciary Powers Act (FPA)?

Answer 1

It sets out powers that can be exercised by a trustee, executor, or administrator without court order and without express authorization in the trust.

Question 2

Executor:

Answer 2

The person nominated in a testator’s will to act as personal representative and execute the will provisions. The executor carries out the will’s directions regarding disposition of the testator’s estate.

Question 3

Administrator:

Answer 3

A person appointed by the probate court as personal representative to administer (collect, manage, and distribute) the estate of a person who dies intestate, or for the estate in a will that does not name an Executor, or the named Executor is not available.

Question 4

Trustee(s) CAN:

Answer 4

(i) Sell any real or personal property.
(ii) Mortgage property.
(iii) Lease property.
(iv) Make ordinary repairs.
(v) Contest, compromise or settle claims. OR
(vi) Do almost anything to manage the corpus of the trust.

Question 5

Trustee(s) CANNOT:

Answer 5

(i) Engage in self-dealing,
(ii) Borrow money, or
(iii) Continue a business

Question 6

The five (5) prohibitions on self-dealing:

Answer 6

1. Trustee cannot buy or sell trust assets to himself/herself.
2. Trustee cannot borrow trust funds.
3. Trustee cannot lend money to the trust.
4. Trustee cannot profit from serving as trustee (except for appropriate trustee fees).
5. Corporate trustee cannot buy its own stock as a trust investment.

Question 7

The two (2) affirmative duties on self-dealing:

Answer 7

1. Duty to segregate trust assets from personal assets.

2. Duty to earmark trust assets by titling them in trustee’s name.

Question 8

Remedy for violation of a trustee’s duty to segregate trust assets from personal assets:

Answer 8

1. If commingled funds are used to buy an asset and the asset goes down in value, there is a conclusive presumption that personal funds were used.
2. If the asset goes up in value, there is a conclusive presumption that trust funds were used.

Question 9

Beneficiary’s remedies for trustee’s breach of fiduciary responsibilities:

Answer 9

1. Beneficiary can sue to remove the trustee, or
2. Beneficiary can ratify the transaction and waive the breach, or
3. Beneficiary can sue for any loss.

Question 10

An action to recover losses to the trust is called

Answer 10

A surcharge

Question 11

The No Further Inquiry Rule

Answer 11

Breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made.

(1) Good faith is NOT a defense.
(2) Reasonableness is NOT a defense.

Question 12

If trustee engages in a prohibited transaction, such as self-dealing, and sells trust property to a third party, may the beneficiary sue the third party?

Answer 12

The beneficiary cannot sue the purchaser of property from the trustee if that purchaser was a bona fide purchaser (BFP) for value without notice.

Question 13

Indirect Self Dealing:

Answer 13

Self-dealing rules also apply to loans or sales to a relative of the trustee; or to a business of which the trustee is an officer; employee; partner; or principal shareholder.

Question 14

Can exculpatory clauses be used to shield trustee(s) from liability for breach of a fiduciary duty?

Answer 14

Not in a testamentary trust because relieving an executor or testamentary trustee from liability for negligence is void as against public policy.

But exculpatory clauses can be used in a lifetime trust.