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Question 1

What are the major duties that a trustee owes to beneficiaries?

Answer 1

- duty of loyalty
– duty of care or prudent investment
– duty to inform and account
– duty to follow instructions
– duty to earmark trust property
– duty not to commingle trust property
– duty to collect and protect trust property
– duty to bring and defend claims
– duty to keep adequate records

Question 2

What is involved in the duty of loyalty for a trustee?

Answer 2

The trustee owes a fiduciary duty to the beneficiaries to use good faith to act in their best interest and to put their interests ahead of his own for all interactions regarding the trust.

Question 3

What are the two major ways that you can breach a duty of loyalty as a trustee?

Answer 3

• self-dealing

– conflict of interest

Question 4

Essentially the duty of loyalty for a trustee is a duty to what?

Answer 4

Be good

Question 5

Who else is involved in a duty of loyalty when there’s a trustee?

Answer 5

The spouse of the trustee, and there is a split on the kids of the trustee.
– UTC: for any transaction with a relative (includes kids, siblings, parents, grandkids, spouses, or spouses of those people), it is presumed there is a conflict of interest

Question 6

If there has been a breach of the duty of loyalty by a trustee, what is the remedy?

Answer 6

– profit: the trust can recover any profit that the trustee made
– loss to the trust: if the trustee didn’t make a profit, but the trust suffered a loss, the beneficiaries get that amount

Question 7

If a trust is worth $100,000 and the trustee sells it to himself for $100,000, then he resells the trust for $125,000, what happens?

Answer 7

This was a breach of the duty of loyalty, so the court can give the beneficiaries the $25,000 profit that the trustee made off of his self dealing

Question 8

If a trustee sells a $100,000 trust home to himself for $90,000, and then the value goes down to $70,000, what happens?

Answer 8

The trust can get the $10,000 difference between the purchase price and the market value because that is the loss to the trust based on the breach of the duty of loyalty by the trustee

Question 9

If a breach of loyalty by the trustee was fraudulent or an egregious intentional wrongdoing, what can be given?

Answer 9

Punitive damages

Question 10

What is the major thing to consider when there has been a breach of the duty of loyalty?

Answer 10

Look to see if there’s a difference between the value the trust currently has and what it would have had if the trustee did what he was supposed to do. I.e.: if the trust has $80,000, but it should’ve had $150,000, the damages would be $70,000. If instead the trustee was allowed to sell the home, but he only sold it for $80,000, then it would be the difference between what the trust currently has and what it should have had if he had done what he was supposed to do. He should’ve sold for $100,000, so the damages would be $20,000.

***Extra points: in real cases there is usually lost interest on the extra $20,000 as well, so this is a good thing to bring up on an essay

Question 11

What is involved in a breach of loyalty when a trustee self deals?

Answer 11

This happens when the trustee is on one side of the transaction and occurs when the trustee:

• buys property owned by the trust
• sells property to the trust
• lends money to the trust
• borrows money from the trust
• the trust deals with someone closely aligned to the trustee that is considered part of the same economic unit as the trustee [spouse or kids]

Question 12

If there has been self dealing by a trustee, what happens?

Answer 12

The transaction is voidable, so the beneficiaries can affirm it if it is profitable to the trust

Question 13

What is involved in the “no further inquiry rule” for self dealing for a trustee?

Answer 13

If a transaction involves self-dealing the court will use this rule and it will not bother to make any further inquiry into whether the trustee was acting in good faith toward the beneficiary or objectively reasonably, it will just conclusively say the transaction involves self-dealing and was a breach of the duty of loyalty

Question 14

What is the rationale for the “no further inquiry rule“ for a breach of loyalty that involves self-dealing?

Answer 14

Such transactions are very unlikely to be in the beneficiary’s best interest and they have the appearance of impropriety, so it is not worth the time or effort to figure out if it was fair or not

Question 15

What are the three exceptions to the “no further inquiry rule” as a part of the breach of loyalty for self dealing?

Answer 15

• court approval before entering the transaction
  – beneficiary approval after full disclosure before entering the transaction
  – trust instrument expressly authorized self dealing

Question 16

Is it possible for the court to approve self-dealing of a trustee after the self-dealing has occurred?

Answer 16

Yes, but this is very risky

Question 17

What are remedies for when a trustee self deals?

Answer 17

The beneficiary can select whatever remedy is most beneficial to him:
– trustee must disgorge the profits
– beneficiaries can recover any loss to the trust
– beneficiaries can affirm the deal and decline to sue
– beneficiaries can void the transaction

Question 18

If a trust has a house, and the trustee buys the house for $100,000, which is the market value, what has happened?

Answer 18

That is self dealing

Question 19

If a trust has a house, and the trustee buys the house for $100,000, which is the market value, and three months later he sells the house for $120,000, what happens?

Answer 19

Because this is self dealing, the beneficiaries can sue the trustee to disgorge the profit that he made. Even though he bought the house for its market value and the trust is no worse off, it was still self dealing, so the beneficiaries can make him disgorge the $20,000 profit

Question 20

If the market value of a house is $100,000, but a trustee bought it for $80,000, and then a month later the market value went down and the trustee sold the house for $70,000, what has happened?

Answer 20

This is a breach of the duty of loyalty, and the trustee lost money, so the beneficiaries can recover the $20,000 he lost because the trustee bought it for below market value

Question 21

If the market value of a house is $100,000 and the trustee bought the house from the trust for $100,000, then the market value dropped to $75,000, what happens?

Answer 21

There was a breach of the duty of loyalty because it was self dealing, but because it was good for the beneficiaries, they can just affirm the deal and decline to sue

Question 22

If a trustee sold a house to the trust for $100,000, and the market value goes down to $90,000, what happens?

Answer 22

This was self dealing, so the beneficiaries can choose to void the transaction by going to court and unwinding the sale. That involves giving the trustee back his house, and getting the $100,000 for the trust back. The same would be true if the value had gone up, as long as the beneficiaries want the house back.

Question 23

If there has been trustee self-dealing and the beneficiaries want to unwind a transaction, what is the timeframe that it has to happen in?

Answer 23

A reasonable amount of time

Question 24

If the beneficiaries of a trust want to unwind a self-dealing transaction but the trustee has already sold the property to a third-party, what happens?

Answer 24

The beneficiary can trace the assets to the third-party and force the third-party to return the property, unless:

• the third-party was a BFP who gave valuable consideration without notice (then the beneficiary’s remedy is just to sue the trustee for damages)
• if you can get the property back because the buyer was not a BFP, then the beneficiaries get the property back and the buyer has to sue the trustee for damages

Question 25

What is involved in the breach of loyalty that has a conflict of interest regarding the trustee?

Answer 25

This occurs when the trustee doesn’t put the beneficiary’s interest above his own or that of a third-party.

Question 26

Does the “no further inquiry rule” apply to conflict of interest?

Answer 26

No

Question 27

What do the courts consider when they’re looking at a conflict of interest involving a trustee?

Answer 27

The trustee’s good faith and the objective reasonableness of the transaction. If the court decides that the trustee used good faith and was reasonable, that is a defense to the breach of loyalty.

Question 28

If a trust had a car and the trustee was authorized to sell that car and invest the cash, what must the trustee do to avoid a breach of loyalty?

Answer 28

He must ensure that the car sells for its approximate market value

Question 29

What are different ways that a trustee can accomplish a sale of trust property?

Answer 29

Public auction, posting an ad, trading with a dealer, etc.

Question 30

If a trustee buys trust property himself, what has happened?

Answer 30

A breach of loyalty because of self dealing

Question 31

If there is a woman that the trustee likes, so he sells her a trust car worth $20,000 for only $15,000, is that self dealing?

Answer 31

No, because he was not the buyer, but because he put his own romantic interest above the beneficiaries’, that is a conflict of interest

Question 32

If a trustee researched the value of a trust car and found out that it was $20,000, but that most dealers would only take $14,000, and an auction would take six months to do and would only net $16,000, but someone that the trustee wants to date is willing to pay $15,000 tomorrow, would that be OK?

Answer 32

Yes likely

Question 33

What are the things that allow a trustee to engage in a conflict of interest?

Answer 33

If he gets prior court approval or informed beneficiary consent

Question 34

What are the remedies for conflict of interest by a trustee?

Answer 34

Same as for self dealing
- beneficiary confirms the transaction
– beneficiaries can avoid the transaction within a reasonable time
– beneficiaries can recover property unless it was sold to a BFP
– beneficiaries can sue the trustee for damages: either loss to the trust or profit to the trustee