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Wills, Trusts > Fiduciary Duties > Flashcards

Fiduciary Duties Flashcards

1
Q

Fiduciary Duties: What are they?

A

How we make sure trustees act right when they have nothing at stake personally.

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2
Q

Fiduciary Duties: Who do they apply to?

A

Applies to trustees and personal representatives of an estate.

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3
Q

Fiduciary Duties: What are the 2 big fiduciary duties?

A

1) Duty of Loyalty
2) Duty of Prudence (Care)

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4
Q

Duty of Loyalty: What is it?

A

Trustees must make decisions for the exclusive benefit of beneficiaries.
(Have to do things for the beneficiaries and not yourself).

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5
Q

Duty of Loyalty: Rule in a revocable trust:

A

If the settlor and trustee are the same person, the beneficiaries have very few ways to keep the settlor/trustee in check.
(Because settlor can revoke or change the trust at any time).

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6
Q

Duty of Loyalty: No further Inquiry Rule: The rule:

A

Of there is self-dealing (or self-interested transactions). there is no further inquiry and the duty is breached.

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7
Q

Duty of Loyalty: Easy Rule:

A

No self dealing, and no self-interested transactions allowed in the duty of loyalty.

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8
Q

Duty of Loyalty: What if self-dealing makes a lot of sense?

A

Too bad, Colbrook (farmer) proved this to be evident.

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9
Q

Duty of Loyalty: What case is famous for self-interested transactions?

A

Rothko.

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10
Q

Duty of Loyalty: 2 Remedies?

A

1) Unwind the transaction (can’t always be done)
2) Damages (difference in sales price or could disgorge the trustees of the profits made)

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11
Q

Duty of Loyalty: 4 Exceptions to the no further inquiry rule:

A

1) Settlor Authorization (explicit or implicit)
2) Court Approval (Advance Approval Doctrine)
3) Beneficiary Consent (release signed by all beneficiaries)
4) Certain institutional trustees get pass (banks investing in their own mutual funds.

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12
Q

Co-Trustee Duty:

A
  • Duty to prevent co-trustees from breaching their duties.
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13
Q

Who gets stuck with damages when there are co-trustees?

A

Co-Trustees are jointly and severally liable for damages.

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14
Q

How can a trustee resign under Common Law?

A

Trustees can not resign without court permission.

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15
Q

How can a trustee resign under Modern Law?

A

Generally, trustees may resign if trustees give 30 days notice. (does not insulate trustee from liabilities which have already occurred)

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16
Q

Duty of Prudence: What is it generally (2 things)

A

-How one should use the trustee power.
- The power over distributions.

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17
Q

Duty of Prudence: What are the two types of mandatory provisions in a trust?

A

1) Mandatory trust provision
2) Mandatory support provision

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18
Q

Duty of Prudence: Mandatory Trust Provision: What is it?

A

Trust documents specify that beneficiaries get paid certain amounts of money on certain dates.

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19
Q

Duty of Prudence: Mandatory Trust Provision: How much control does the trustee have?

A

very little

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20
Q

Duty of Prudence: Mandatory Support Trust Provision: What does it require?

A
  • Trustee to distribute as much of the income/principal as necessary for the support and maintenance of the beneficiary.
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21
Q

Duty of Prudence: Mandatory Support Trust Provision: Broken down:

A

Support the lifestyle of the beneficiary

22
Q

Duty of Prudence: Mandatory Support Trust Provision: There is a duty to ________ about how the beneficiary is doing.

A

Inquire

23
Q

Duty of Prudence: Mandatory Support Trust Provision: Default rule

A

Trustee can’t consider the beneficiary’s other source of income (dumb rule)

24
Q

Duty of Prudence: Discretionary Trust Provision: What is it?

A

Trustee has discretion to pay beneficiaries what they think they should be paid.

25
Q

Duty of Prudence: Discretionary Trust Provision: Spray:

A

Discretion to determine which beneficiaries get what amounts.

26
Q

Duty of Prudence: Discretionary Trust Provision: Sprinkle

A

Does not have to distribute all the income in the trust.

27
Q

Duty of Prudence: Discretionary Trust Provision: Support

A

Discretion to make distributions necessary for beneficiary support and maintenance.

28
Q

Duty of Prudence: Discretionary Trust Provision: There is always a duty to __________.

A

Inquire

29
Q

Duty of Prudence: Discretionary Trust Provision: Can a beneficiary waive inquiry rights?

A

Yes, if they are fully informed and it must be in writing.

30
Q

Duty of Prudence: Discretionary Trust Provision: How is discretion challenged by beneficiaries?

A
  • Reasonableness standard.
  • Even with “sole and uncontrolled” discretion.
  • Some courts apply good faith standard of review.
31
Q

Duty of Prudence: What is the duty to inquire?

A

Duty of a trustee in a discretionary trust to regularly inquire about the beneficiaries life circumstances.

32
Q

Duty of Prudence: Exculpatory Clause: What does it do?

A

Removes liability from trustee.

33
Q

Duty of Prudence: Exculpatory Clause: Generally enforceable in ______ states.

A

most

34
Q

Duty of Prudence: Exculpatory Clause: When can a trustee not be shielded?

A

Can’t Shield a trustee who acts:
1) In bad faith
2) with willful neglect
3) reckless indifference.

35
Q

Duty of Prudence: Exculpatory Clause: Lawyers drafting?

A

Shouldn’t draft for themself.

36
Q

Duty of Prudence: Exculpatory Clause: Why are trustees inherently conservative?

A

Pay too little: Court will order more money be paid from the trust.

Pay to much: Court will order the trustee pays money back from their own pockets.

37
Q

Duty to Manage Investments: Historically?

A
  • Preserving the trust was the primary goal, and the secondary goal was to generate income.
  • Prudent Man rule
  • using “safe investment list”
38
Q

Duty to Manage Investments: Modern Rule:

A

Prudent Investor Standard

39
Q

Duty to Manage Investments: Prudent Investor: What is it?

A
  • Modern portfolio theory
  • A duty to invest funds in a way a prudent investor would.
40
Q

Duty to Manage Investments: Prudent Investor: 4 general rules:

A

1) No investment should be analyzed in isolation.

2) No investment is “bad”, high risk = high reward.

3) Investment in a single security is less prudent than investing in a portfolio. (More than 10% in one is bad).

4) No individual investor can expect to outperform the market regularly, so give the responsibility to nerds.

41
Q

Duty to Manage Investments: 3 risks of not diversifying:

A

*Firm Risk (20%): Investment can go down w/ individual corp.
*Market Risk (30%): Always Presentrisk of seismic conditions.
*Industry Risk (50%): Risk to the whole industry.

42
Q

Duty to Manage Investments: Rule on diversification:

A

Trustees have a duty to diversify assets, unless trustee reasonably determines that because of special circumstances, the purpose of the trust is better served without diversification.

43
Q

Duty to Manage Investments: How soon must a trust be diversified?

A

In a reasonable amount of time.

44
Q

Duty to Manage Investments: How to get around duty to diversify?

A
  • Being left power to determine does not…but if testator mandates it then the duty is subverted in most states.
45
Q

Duty to Manage Investments: Diversification: Special Circumstances where diversification is not better:

A

1) Tax Consideration
2) Flooding the market
3) Family Business
4) Purpose of the trust is to manage the asset in question
5) In looking at the beneficiary if there are already pre-diversified trusts

46
Q

Duty of Impartiality: Principal income problem at its core:

A

income beneficiaries v. remainder man beneficiaries

47
Q

Duty of Impartiality: How to balance:

A

Generate a reasonable amount of income and maintain the rest.

48
Q

Duty of Impartiality: General Rule:

A

1) Read the trust and follow instructions given by the settlor.
2) Then, duty to generate a reasonable amount of income and preserve value of the corpus.

49
Q

Duty of Impartiality: Modern law (3) things

A

1) Unitrust: Make the best investments and periodically a % of the $ will be distributed to beneficiaries.

2) Uniform Principal and Income Act.

3) Power of Trustee to Adjust: take some of the value from long term stocks (that have no dividend) and pay the income beneficiaries.

50
Q

Duty of Administration: 4 things to do

A

1) Collect and Secure Property
2) You should label trust property as trust property (so it stays trust property).
3) Never comingle assets.
4) Bring and Defund Claims.

51
Q

Duty of Accounting: 4 things to do

A

1) Keep track of the Stuff, and beneficiaries get an annual report.

2) Respond to beneficiary requests for information.

3) Give beneficiary notice/disclose significant developments with the trust (notifying them of big things)

4) Allowed as a trustee to petition court for judicial accounting.
- Trustee bring before the court everything they have done with the money.
- If the court approves, there is an insulation of the trustee from legal action.
* Does not insulate from future action.
* Beneficiaries are informed.
* Risk: If something was done bad…you will be in trouble.

52
Q

Who came up with the modern day Prudent Investor Standard?

A

Harry Markowitz

Wills, Trusts (13 decks)

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