(9) Trusts: Powers/Duties of Trustees

Question 1

Trustee Powers

Answer 1

A trustee’s powers can be expressly granted in the trust instrument or implied (all powers helpful in carrying out the trust purpose).

Question 2

Trustee Duties owed to Beneficiaries

Answer 2

1. Duty to Care
2. Duty to Loyalty
3. Duty to Impartiality
4. Duty to Account
5. Duty to be a Prudent Investor Rule
6. Duty to Distribute
7. Remedies for a Trustee’s Breach

Question 3

Duty to Care

Trustee Duties owed to Beneficiaries

Answer 3

The trustee owes a duty of care which requires the trustee to manage the trust as a reasonably prudent person would in their own dealings.

Question 4

Duty to Loyalty

Trustee Duties owed to Beneficiaries

Answer 4

The trustee owes a duty of loyalty which requires the trustee to (1) refrain from self-dealing; (2) administer the trust in the best interest of the beneficiaries; AND (3) give the same care and deference to each beneficiary.

Question 5

Duty to Impartiality

Trustee Duties owed to Beneficiaries

Answer 5

A trustee must treat all beneficiaries fairly.

Question 6

Duty to Account

Trustee Duties owed to Beneficiaries

Answer 6

Provide the court with clear and accurate accounting when required by statute, or requested by the court or the beneficiaries in a court action.

Cash dividends are treated as income and goes to income beneficiaries. Stock dividends is treated as principal and goes to remainderman beneficiaries.

Question 7

Duty to be a Prudent Investor Rule

Trustee Duties owed to Beneficiaries

Answer 7

The prudent investor rule requires a trustee to exercise the degree of care, skill and prudence of a reasonable investor investing in their own property. This includes diversifying trust assets, avoiding risky investments, and the duty to monitor investments, sell and reinvest if necessary to keep trust assets productive.

A court will consider the following factors to determine if a trustee has breached this duty: (1) the distribution requirements of the trust; (2) general economic conditions; (3) the role the investment plays in relationship to the trust’s overall investment portfolio; AND (4) the trust’s need for liquidity, regularity of income and preservation or appreciation of capital.

Question 8

Duty to Distribute

Trustee Duties owed to Beneficiaries

Answer 8

A trustee has a duty to distribute trust income and assets in accordance with the directions in the trust instrument.

Question 9

Remedies for a Trustee’s Breach

Trustee Duties owed to Beneficiaries

Answer 9

If a trustee breaches any duties they may be removed as trustee and held liable for (1) any loss or depreciation in the value of the trust; (2) any profit made by the trustee through the breach; and (3) any profit that would have accrued to the trust but for the breach.
*Only the attorney general can bring a breach of trust claim for a chartable trust.

Question 10

Duty & Liability of Co-Trustees

Answer 10

Rule: Where there is more than one trustee, both trustees are responsible for administering the trust and ensuring other co-trustees do not breach the duties owed to the trust.

Rule: A co-trustee is liable for the wrongful acts of another co-trustee if they (a) participate in, approve of, or conceal a breach of trust by a co-trustee; (b) negligently enable a co-trustee to commit a breach; (c) fails to take reasonable steps to compel a co-trustee to redress a breach of trust; or (d) improperly delegates the administration of the trust to a co-trustee.

Question 11

Duty & Liability of Co-Trustees - Defenses

Answer 11

If there are multiple trustees and the dissenting trustee loses to a majority vote the dissenting trustee will not be liable as long as they express their dissent in writing to the co-trustees.

Question 12

Rule & Exception:

Liability of Trustee to 3rd Persons

Answer 12

Default Rule: Trustee sues on behalf of the trust

Exception: Beneficiaries can sue on behalf of the trust if: (a) The trustee fails to file suit or refuses to due so; (b) If the trustee knowingly participates with the 3rd party in causing the loss to the trust; (c) If the trustee has abandoned the trust and no successor trustee has been appointed yet.

Question 13

Contract Suits

Liability of Trustee to 3rd Persons

Answer 13

If sued for a breach of K and the 3rd party prevails the trustee must pay the 3rd party. If the trustee is sued for K damages the trustee is entitled to indemnification or reimbursement from the trust assets if: (1) There was a K that was properly entered into AND (2) Breach of the K was not a result of the trustee’s breach of duty.

Question 14

Tort Suits

Liabilty of Trustee to 3rd Persons

Answer 14

a. Personally Liable: the trustee must pay the damages.
b. Not personally liable: the trustee must pay the damages but is entitled to indemnification or reimbursement from trust assets

Question 15

Liability of Trustee to Beneficiaries

Answer 15

1. Injunction
2. Rescission
3. Surcharging the Trustee

Question 16

Injunction

Liability of Trustee to Beneficiaries

Answer 16

Seek an injunction to stop improper action by a trustee or compel a trustee to perform their duties.

Question 17

Rescission

Liability of Trustee to Beneficiaries

Answer 17

Recession of any improper transaction that the trustee has entered into. An improper transaction breaches a trustee duty.

Question 18

Surcharging the Trustee

Liability of Trustee to Beneficiaries

Answer 18

Sue trustee for damages in the amount of actual loss and potential lost profit.