Administration & Trustee Duties

Question 1

Who is generally entitled to principal and income allocations from a trust?

Answer 1

Life beneficiaries are entitled to trust income

Remaindermen entitled to trust principal

Question 2

How is trust principal and income to be allocated?

Answer 2

It must be balanced so as to treat present and future bene’s fairly unless otherwise authorized.

Question 3

What does the UPAIA say about principal and income allocation?

Uniform Principal And Interest Act

Answer 3

Says trustee can re-categorize and reallocate as necessary to fulfill trust purpose.

Question 4

How is a stock distribution allocated within a trust?

Answer 4

Treated as the distribution of the principal whether classified as dividend or split.

Question 5

How are receipts allocated within a trust?

Answer 5

• $$ received in exchange for trust property -> goes to principal
• $$ received for use of trust property ->
  goes to income

Question 6

How are expenses allocated within a trust?

Answer 6

• 1/2 of trustee’s compensation & 1/2 of accounting and other costs charged to income
• Remaining 1/2 of those interests to principal

Question 7

What powers does a trustee have?

Answer 7

The powers necessary to act as a reasonably prudent person in managing the trust (revoke, withdraw, or modify), including the implied power to contract, sell, lease or transfer trust property

Question 8

What is the duty of loyalty and good faith for a trustee?

Answer 8

• Duty to administer the trust in good faith (subjective standard), AND
• To act reasonably (objective standard) when investing property and otherwise managing the trust solely in the best interest of the bene’s.

Question 9

What is self-dealing for a trustee?

Falls under duty of loyalty and good faith

Answer 9

When the trustee personally engages in a transaction involving trust property, a conflict of interest arises b/t the trustee’s duties to the bene’s and her own personal interest.

Question 10

What sort of transactions are prohibited as self-dealing?

Answer 10

• Buying or selling trust assets
• Selling property b/t trusts that the trustee manages
• Borrowing from or making loans to the trust
• Using trust assets to secure a personal loan
• Engaging in prohibited transactions w/ friends or relatives
• Otherwise acting for personal gain thru position

Question 11

What is the result for a trustee who engages in self-dealing?

Answer 11

There is an irrebuttable presumption that the trustee breached the duty of loyalty when self dealing is an issue; no further inquiry into trustee’s reasonableness or good faith is required because self-dealing is a PER SE breach of duty.

Question 12

Are there any exceptions to self-dealing?

Answer 12

It can be authorized (by settlor, court order, or by all bene’s) but the transaction must still be reasonable and fair to avoid liability for breach.

Question 13

What is a trustee’s
duty of prudence?

Answer 13

The trustee MAY delegate responsibiliteis if it would be unreasonable for the settlor to require the trustee to perform such tasks; however, a critical function concerning the property is discretionary and NOT delegatable.

Question 14

What is a trustee’s
duty to oversee transactions?

Answer 14

The trustee can delegate the determination of mgmt and investment strategies but must oversee the decision-making process.

Question 15

What is the
Prudent Investor Rule?

Answer 15

Requires the trustee to act as a prudent investor would act when investing his own property (putting less emphasis on risk level)

The trustee must excercise reasonable care, caution and skill when investing and managing trust assets.

Question 16

What is the trustee’s duty to diversify?

Answer 16

They must adequately diversify the trust investments in order to spread the risk of loss under a total performance portfolio approach, but not if admin costs would outweigh the benefits.**

Question 17

What is the Trustee’s
duty to make property productive?

Answer 17

By pursuing all possible claims, deriving the max amount of income from investments, selling assets when appropriate, securing insurance, paying expenses, and acting within a reasonable period of time in all matters.

Question 18

What is the trustee’s
duty to be impartial?

Answer 18

Does not require that they treat each beneficiary equally, but it does require a trustee not be influenced by favoritism or animosity.

They must balance the interests of the present and future bene’s by investing property so that it produces a reasonable income while preserving the principal for the remaindermen.

Question 19

What is the trustee’s
duty to disclose?

Answer 19

They must disclose complete and accurate info about the nature and extent of trust property, including allowing access to trust records and accounts, if the trustee intends to sell a significant portion of the trust assets.

Question 20

What is the trustee’s duty to account?

Answer 20

Must periodically account for actions taken on behalf of the trust so that the trustee’s performance can be assessed against the terms of the trust.

Question 21

Who holds the powers of appointment and what do those powers allow?

Answer 21

Usually given to the bene; enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust.

Question 22

Beneficiaries have a right of enforcement towards trustee for what acts? What remedies are available?

Answer 22

• lost profits, interests and other losses resulting from a breach of trust are trustee’s responsibility
• Bene’s may sue the trustee and seek damages or removal of the trustee for the breach.

Question 23

What are a trustee’s liability relating to prior or co-trustee?

Answer 23

• Co-trustees are jointly liabile
• Trustee is liable for predecessor’s breach if he failed to address it
• Trustee will be liable for an agent’s breach if the trustee directs or conceals the agent’s act or fails to exercise reasonable suspicion

Question 24

What is a trustee’s liability towards third parties?

Answer 24

They are personally liable on K’s entered into for tortious acts committed while acting as trustee; can seek indemnity from trust if the trustee was acting w/in the scope of their duties.

When property is improperly transferred as a result of a breach of trust to a 3rd who is NOT a bona fide purchaser; a bene or successor trustee may have the transaction set aside.

Question 25

How can a trustee resign or be removed from role?

Answer 25

resignation: 30 days notice to qualified bene’s, living settlor and co-trustees; or by court approval.

removal: by court due to trustee being incapable of performing or materially breaching duty, conflict of interest, conflict b/t trustee and a beneficiary, poor trust performance.

Question 26

Future Interests in a Trust for a Grantor?

Answer 26

Grantor retains a reversion, possibility of reverter, or right of entry;

Beneficiary is given an executory interest or a remainder

Question 27

How are future interests applied
regarding class gifts?

Answer 27

The share of a deceased class member is paid to that CM’s surviving issue

By statute, the modern trend is that a substitute gift is created in the descendants of the deceased issue so that a predeceased bene’s interest will not lapse.