Liabilities of Trustee

Question 1

Remedies for Breach of Trust

Answer 1

• if trustee commits, or is about to commit, a breach of trust duties, the court may:
  1) enforce specific performance of the trustee’s duties
  2) enjoin the trustee from committing a breach of trust
  3) compel the trustee to pay money or restore property OR
  4) suspend or remove the trustee

Question 2

Damages to Beneficiaries for Breach

Answer 2

If trustee commits breach of trust, trustee is liable to beneficiaries for the greater of:
- amount necessary to restore the trust property + distributions to what they would’ve been absent the breach OR
- trustee’s profit from the breach

• trustee is liable to beneficiary for any profit arising from administration of trust, even if no breach

Question 3

Virtual Representation

Answer 3

• in any action in which trust beneficiaries are parties, a minor, incapacitated, or unborn beneficiary may be represented by another beneficiary with substantially identical interests under the law of many states

Question 4

Remedies for Self-Dealing

Answer 4

Beneficiaries may have choice of:
- affirm the transaction if the trust profited
- set aside the transaction if trust lost money
- trace profits from trustee if the trustee profited

Question 5

When Trustee is Not Liable for Breach

Answer 5

• trustee not liable for breach if:
  1) trustee acted in reasonable reliance on the terms of the trust OR
  2) beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as beneficiary was not improperly induced

Question 6

Effect of Exculpatory Clauses

Answer 6

Void if they:
1) relieve trustee of liability for breach of trust committed in bad faith or w/ reckless indifference OR
2) appear in trust instrument b/c of trustee’s abuse of a confidential relationship w/ settlor

Question 7

Liability of Co-Trustees

Answer 7

• generally, co-trustee not liable for acts of co-trustees if the trustee did not join the action AND exercised reasonable care in preventing the breach of trust or compelling co-trustee to redress the breach

Question 8

Removal of Trustee

Answer 8

• court may remove trustee on its own motion or upon request by settlor, a beneficiary, or a co-trustee
• can remove trustee if continuation in office would be detrimental to the trust

Question 9

Trustee Liability to Third Parties - Contract

Answer 9

• trustee may be sued on the contract in trustee’s fiduciary capacity
• third party may sue trustee personally only if trustee, in entering into contract, failed to reveal the fiduciary relationship
• if contract was properly entered into for the trust + trustee was not in breach, trustee is entitled to indemnification or reimbursement from trust property

Question 10

Trustee Liability to Third Parties - Tort

Answer 10

• third party injured in tort can sue trust estate by proceeding against the trustee in their fiduciary capacity
• third party may also sue the trustee personally if the trustee is personally at fault, but not by reason of respondeat superior

Question 11

Liability of Third Parties to the Trust

Answer 11

• beneficiary or successor trustee can set aside transactions that are breaches if property NOT in hands of BFP
  -> BUT transfer to BFP cuts off beneficiaries’ equitable interests
• innocent donee of trust property not liable for damages but must restore the property, its value or its substitute to the trust
• knowing participant in a breach of trust is liable for resulting loss to the estate

Question 12

Beneficiaries + Third Parties - Direct Suit

Answer 12

• direct suits by beneficiaries not permitted against third parties who damage trust property
  -> only trustee can sue
  -> beneficiary remedy = bring suit in equity to compel trustee to sue third party

EXCEPTION - permitted where trustee:
1) participated in the breach
2) has left the jurisdiction + no successor trustee is appointed OR
3) fails to sue a third person liable in tort or contract