Duties of Trustee Flashcards
1
Q
Duties of the Trustee - List
A
- 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
2
Q
Duty to Administer Trust - Basic Concept
A
- 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
3
Q
Duty to Administer Trust - Wrinkles
A
- 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)
4
Q
Duty of Loyalty - Basic Concept
A
- trustee owes duty of undivided loyalty to trust + its beneficiaries
5
Q
Duty of Loyalty - Things Trustee Can’t Do as a Result of This
A
- 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
6
Q
Indirect Self-Dealing
A
- 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
7
Q
To whom does the duty of loyalty extend?
A
- extends equally to all beneficiaries, unless trust instrument specifies otherwise
8
Q
Beneficiary’s Rights in Case of Prohibited Transaction
A
- 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
9
Q
Duty to Report
A
- 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
10
Q
Duty to Separate Trust Property and Keep Records
A
- 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
11
Q
Duty to Preserve Trust Property and Make It Productive
A
- 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
12
Q
Investments
A
- 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
13
Q
Prudent Investor Rule
A
- UPIA
- standard of care: trustee must exercise reasonable care, skill, and caution when investing + managing trust assets
14
Q
UPIA - Portfolio Approach
A
- 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
15
Q
UPIA - Kinds of Investment Permitted
A
- 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
16
Q
Factors Considered in Making Investment Decisions
A
- 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
17
Q
Diversification of Investments
A
- trustee must diversify investments of the trust unless they reasonably determine that the purposes of the trust are better served w/o diversification
18
Q
Diversification of Investments - Exam Tip
A
- 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
19
Q
Reviewing Compliance w/ UPIA
A
- 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
20
Q
UPIA - Trustee w/ Special SKills/Expertise
A
- 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
21
Q
Trustee w/ Lower Skills
A
- trustee cannot excuse a breach by proving the trustee possesses + exercises in the trust’s private affairs subnormal business judgment
22
Q
UPIA - Duty to Review Trust Property
A
- 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
23
Q
UPIA- Loyalty + Impartiality
A
- trustee must act exclusively for beneficiary when investing + managing trust assets
- accordingly, social investing may be problematic
24
Q
UPIA - Impartiality + Beneficiaries
A
- if there’s more than one beneficiary, trustee must act impartially + not favor one beneficiary over another when investing + managing trust assets
25
Q
UPIA - Delegation of Investment and Management Functions
A
- 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
26
Q
Summary - Fiduciary Obligation
A
- 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?
27
Q
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