Duties of Trustee

Question 1

Duties of the Trustee - List

Answer 1

• duty to administer trust
• duty of loyalty
• duty to report
• duty to separate trust property + keep records
• duty to enforce claims + defend trust from attack
• duty to preserve trust property + make it productive
• duties are owed to the beneficiaries

Question 2

Duty to Administer Trust - Basic Concept

Answer 2

• duty to personally administer the trust in good faith + in a prudent manner, in accordance w/ terms + purposes of trust instrument + the interests of the beneficiaries

Question 3

Duty to Administer Trust - Wrinkles

Answer 3

• if trustee has special skills or expertise, held to higher standard
• if more than one beneficiary, trustee must act impartially, taking into account any of their differing interests
• generally, trustee can’t delegate discretionary functions (would make trustee a guarantor for any losses caused by the improper delegation)

Question 4

Duty of Loyalty - Basic Concept

Answer 4

• trustee owes duty of undivided loyalty to trust + its beneficiaries

Question 5

Duty of Loyalty - Things Trustee Can’t Do as a Result of This

Answer 5

• can’t enter into any transaction in which trustee is dealing w/ the trust in their individual capacity (absent court approval or express waiver in trust instrument)
• can’t buy or sell trust assets even if the price is a fair one
• may not sell property of one trust to another trust of which they are also trustee
• may not borrow trust funds nor loan their personal funds to the trust
  -> any interest on the loan must be paid back to the trust
• cannot personally gain through their position as trustee
• corporate trustee can’t invest in its own stock as a trust investment (but can retain its own stock if such stock was a part of the original trust res)
• self-employment can constitute a form of prohibited dealing

Question 6

Indirect Self-Dealing

Answer 6

• trustee presumably violates their duty of loyalty if trustee enters into a transaction w/ their spouse, close relatives, attorney, or corporation in which they own a significant interest
• barred by duty of loyalty

Question 7

To whom does the duty of loyalty extend?

Answer 7

• extends equally to all beneficiaries, unless trust instrument specifies otherwise

Question 8

Beneficiary’s Rights in Case of Prohibited Transaction

Answer 8

• transaction involving trustee self-dealing is voidable by the beneficiary affected by the transaction
  UNLESS
  1) a court or the terms of the trust approved it
  2) the beneficiary failed to bring suit w/in the prescribed time period
  3) beneficiary gave their consent, ratification or release OR
  4) it involves a contract or claim arising before trustee became trustee

Question 9

Duty to Report

Answer 9

• trustee must:
  1) provide the qualified beneficiaries with the trustee’s name, address, and phone number
  2) respond to beneficiary requests for info about trust’s administration + provide a copy of the trust instrument if requested AND
  3) furnish an annual accounting of the trust

Question 10

Duty to Separate Trust Property and Keep Records

Answer 10

• no commingling
• trustee may not commingle trust property w/ their own property or that of another trust
• trustee must also “earmark” trust property by labeling it as trust, rather than individually owned, property
• if trustee does commingle, losses are charged to the trustee, + gains are credited to the trust
• trustee must keep records of the trust’s administration

Question 11

Duty to Preserve Trust Property and Make It Productive

Answer 11

• power to invest is normally implied from duty to make trust property productive
• trustee is expected to take actions to lease land, collect claims, + invest money, etc
• measure of damages for breach of this duty is the amount of income that would normally accrue from proper investments

Question 12

Investments

Answer 12

• trustee’s investment responsibilities are governed by the Uniform Prudent Investor Act (UPIA)
• trust terms can expand or limit trustee’s powers
  -> UPIA provisions apply only if there is no contrary provision in the trust instrument
• if trust instrument provides that investments may be made in trustee’s discretion, it’s a question of interpretation whether trustee’s power is expanded beyond UPIA

Question 13

Prudent Investor Rule

Answer 13

• UPIA
• standard of care: trustee must exercise reasonable care, skill, and caution when investing + managing trust assets

Question 14

UPIA - Portfolio Approach

Answer 14

• prudence evaluated as to overall investment strategy
• decisions evaluated in context of the entire trust portfolio + as part of an overall investment strategy w/ risk + return objectives reasonably suited to the particular trust

Question 15

UPIA - Kinds of Investment Permitted

Answer 15

• UPIA permits trustee to invest in any kind of property or any type of investment provided the trustee acts prudently
• no particular type of investment is inherently imprudent

Question 16

Factors Considered in Making Investment Decisions

Answer 16

• general econ conditions
• possible effect of inflation or deflation
• expected tax consequences of investment decisions or strategies
• role that each investment plays w/in the overall trust portfolio
• expected total return from income + the expected appreciation of capital
• other resources of the beneficiaries
• need for liquidity, regularity of income, + preservation or appreciation of capital
• asset’s special relationship or value to the purposes of the trust or one or more of the beneficiaries

Question 17

Diversification of Investments

Answer 17

• trustee must diversify investments of the trust unless they reasonably determine that the purposes of the trust are better served w/o diversification

Question 18

Diversification of Investments - Exam Tip

Answer 18

• watch for revocable trust + settlor directing trustee to make nondiverse investments
• b/c trustee owes their duties to the settlor in many states, such a directive may relieve trustee of their duty to diversify

Question 19

Reviewing Compliance w/ UPIA

Answer 19

• compliance determined in light of the facts + circumstances existing at the time of the trustee’s decision or action
• trustee who acts in substantial compliance with the Act will not be held liable

Question 20

UPIA - Trustee w/ Special SKills/Expertise

Answer 20

• trustees w/ special skills or expertise, or who have represented themselves as having such knowledge, have a duty to use such skills or expertise
• professional trustee or attorney may be held to a higher standard

Question 21

Trustee w/ Lower Skills

Answer 21

• trustee cannot excuse a breach by proving the trustee possesses + exercises in the trust’s private affairs subnormal business judgment

Question 22

UPIA - Duty to Review Trust Property

Answer 22

• when trustee assumes office, trustee must review trust assets to bring them into compliance w/ prudent investor rule
• if imprudent investments are discovered by successor trustee, successor trustee may need to sue prior trustee for breach of duty

Question 23

UPIA- Loyalty + Impartiality

Answer 23

• trustee must act exclusively for beneficiary when investing + managing trust assets
• accordingly, social investing may be problematic

Question 24

UPIA - Impartiality + Beneficiaries

Answer 24

• if there’s more than one beneficiary, trustee must act impartially + not favor one beneficiary over another when investing + managing trust assets

Question 25

UPIA - Delegation of Investment and Management Functions

Answer 25

• trustee may delegate investment + management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances
• trustee must act prudently in:
  -> selecting an agent
  -> establishing the scope + terms of the delegation AND
  -> periodically reviewing the agent’s actions
• if delegation is proper, trustee is NOT liable to beneficiaries for decisions/actions of agent

Question 26

Summary - Fiduciary Obligation

Answer 26

• standards imposed on trustee are harsh + designed to deter wrongful conduct + to ease the burden of proving breach of duty

Ask:
- was the act one that the trustee was authorized to perform by the instrument, by state law, or by implication?
- if the act was proper to perform ,did the trustee do so w/ appropriate care, skill, + caution?