Liability of Trustee in Contract and Tort

Question 1

Personal Liability of Trustee in Contract

Answer 1

(1) how a trustee signed contract is key to determining liability:
(a) if trustee signed on behalf of the trust, no liability
(b) if trustee signed personally and merely mentioned the trust, then personally liable

(2) even if there is personal liability the trustee will be reimbursed by the trust if:
(i) the contract with in powers of trustee; AND
(ii) trustee was acting in the course of proper administration

Question 2

Personal Liability of Trustee in Tort

Answer 2

(1) trustee is personally liable for all torts by trustee or trustee’s employees
- no exceptions
- to limit this, trustee should buy liability insurance and charge the cost to the trust

(2) trustee can get reimbursement from the trust for any tort claims if:
(i) trustee must have been acting within trustee’s powers, AND
(ii) trustee was not personally at fault.

Question 3

Trustee’s Investment Power- duties

Answer 3

Trustee must manage the property of the trust on behalf of the beneficiary and this means the investment of the corpus

Question 4

Trustee’s Investment Power- governing statute

Answer 4

NY has adopted the Uniform Prudent Investor Act (UPIA) which gives a broad latitude to trustees to choose investments

Question 5

Trustee’s Investment Power- application

Answer 5

modern portfolio theory of investment, where the trustee creates a custom-tailored investment strategy for this particular trust

factors:

(1) trustee must consider the role each investment plays within the overall trust portfolio
(2) trustee must consider the expected total return from income and capital gain

-trustee does no need to justify the prudence of one investment by itself; can balance off risky speculative investments against safe, conservative investments

• specific things to remember:
  (i) prudence is not measured by hindsight
  (ii) trustee can exercise adjustment power and allocate capital gains to income to protect beneficiary and vice versa
• end goal is fairness to all beneficiaries

-key to UPIA is flexibility to shape the investment strategy for maximum total return, along with the flexibility to adjust income between the income and remainder beneficiaries to be fair to each of them.