Fiduciary Duties of a Trustee Flashcards
Delegation
The trustee may delegate management functions that a prudent trustee would delegate, and must exercise reasonable care, skill, and caution in selecting an agent, establishing the scope and terms of the delegation, and periodically reviewing the agent’s actions.
Duty of Care
The trustee must manage investments as a prudent investor would, and thus must exercise reasonable care, skill, and caution. Care relates to the trustee’s diligence and efforts. Skill relates to the trustee’s capabilities.
The duty of care includes the duty to investigate—to make a reasonable effort to research and verify information likely to affect the value of investment assets.
Duty of Prudence (to Diversify)
As noted, a trustee is required to make prudent investments. Prudence requires diversification and placing trust assets into investments that will maximize the value of trust assets. Thus, a mutual fund may be better than investment in the stock of one company, and investment in several stocks, even if they are more conservative, may be more prudent than investment in one that promises fast growth but has no track record.
Duty of Loyalty
A trustee has a fiduciary duty of loyalty to the beneficiaries. A duty of loyalty prevents a trustee from purchasing trust property for the trustee’s own account or that of related persons. Before entering into such a “self-dealing” transaction, a trustee must obtain court approval.
Duty to Act Impartially
A trustee has a duty to act impartially toward both the income and principal beneficiaries. A trustee thus cannot make only investments that increase income but damage the long-term value of the trust property.
Principal and Income Allocation
Generally, allocation follows these rules: money is allocated to income unless it is capital gain or in distribution of liquidation of an entity; insurance proceeds are allocated to principal, except for business income loss, which is allocated to income; proceeds from patents, copyrights, oil and gas royalties and lease payments, and similar payments are allocated 10% to income and 90% to principal because they represent depreciating assets.
Expenses Allocation
Expenses are also allocated: half of the trustee’s compensation, investment, advisory, or custodial fees, expenses for accountings, judicial proceedings, and other expenses that affect both the income and remainder interests are allocated to income, and half to principal. The entire cost of ordinary expenses (including interest, repairs, regularly recurring taxes and insurance premiums) are allocated against the income interest. The entire cost of payments on the principal of a trust debt, estate taxes, and disbursements on environmental matters are allocated to principal.
Remedies for Breach of Fiduciary Duty
The trustee is liable for all losses resulting from the breach, and will be surcharged for the loss. A loss from one breach cannot offset a gain from another breach—the trustee will still be liable for the entire amount of the loss. As an additional remedy, the trustee can also be removed as trustee.
