Liability of Trustee in Contract and Tort

Question 1

When is a trustee liable in contract?

If the trustee is liable, when will the trustee be reimbursed by the trust?

Answer 1

Depends on how the trustee signed.

1) If trustee signed only on behalf of the trust, no personal liability.
2) If trustee signed personally and merely mentioned the trust, then trustee has personal liability.

Examples:

1. Signed “Mary Jones, Trustee of Jonathan Jones Trust.” Result: Personal liability, this is a mere mention of the trust.
2. “Jonathan Jones Trust, by Mary Jones, Trustee.” Result: No personal liab.
3. “Mary Jones, as Trustee of John…” Result: No personal liab.

NOTE: Even if there is personal liability, the trustee will be reimbursed by the trust if:

1. The contract was within the powers of the trustee
2. Trustee was acting in the course of proper administration

Question 2

When is the trustee personally liable in tort?

Answer 2

General Rule: Trustee or trustee’s employees are ALWAYS personally liable in tort.

So, BUY liability insurance!

But note, the trustee will be Reimbursed when:

1. Trustee was acting within the trustee’s powers, AND
2. Trustee was not personally at fault

Question 3

What are the rules regarding how the trustee can invest the trust property?

Answer 3

Follows modern-portfolio theory, and regulated by the UPIA (Uniform Prudent Investor Act).

Key word is FLEXIBILITY.

The trustee can create a custom-tailored portfolio for the risk preferences of the trust. Can balance risky investments with others, must consider the expected total return of the trust.

Prudence is not measured by hindsight.

Trustee can exercise adjustment power to allocate capital gains to income! [Shift gains to income] Key is flexibility to get the maximum total return and be fair to all beneficiaries.

Question 4

What is the general RAP?

Common law?

NY?

Answer 4

No interest is valid if it could VEST later than any life in being at the time of the creation of the interest, plus 21 years.

Vested means there is no condition that has to be satisfied and the identity of the taker is known.

NY: RAP Reform statute that automatically reduces all age contingencies to 21 years.

Remember to go through each interest and analyze it.

Question 5

What is the NY Rule against suspension of the power of alientation?

When is it a concern?

Answer 5

Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years, that is when there are no persons who could, together, [income+principal] transfer title in fee simple.

Suspension of alienation is a concern when:

1) Spendthrift income interests are in the trust (huge problem) [remember, a minor cannot consent! –need that person to turn 18]
2) A life estate is created in an unborn, or in an open class that may possibly include unborn persons.

Question 6

Do NY RAP reforms apply to suspension of alienation rules?

Answer 6

Yes, all do