Pg 34 Flashcards
What are the major duties that a trustee owes to beneficiaries?
- 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
What is involved in the duty of loyalty for a trustee?
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.
What are the two major ways that you can breach a duty of loyalty as a trustee?
- self-dealing
– conflict of interest
Essentially the duty of loyalty for a trustee is a duty to what?
Be good
Who else is involved in a duty of loyalty when there’s a trustee?
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
If there has been a breach of the duty of loyalty by a trustee, what is the remedy?
– 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
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?
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
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?
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
If a breach of loyalty by the trustee was fraudulent or an egregious intentional wrongdoing, what can be given?
Punitive damages
What is the major thing to consider when there has been a breach of the duty of loyalty?
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
What is involved in a breach of loyalty when a trustee self deals?
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]
If there has been self dealing by a trustee, what happens?
The transaction is voidable, so the beneficiaries can affirm it if it is profitable to the trust
What is involved in the “no further inquiry rule” for self dealing for a trustee?
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
What is the rationale for the “no further inquiry rule“ for a breach of loyalty that involves self-dealing?
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
What are the three exceptions to the “no further inquiry rule” as a part of the breach of loyalty for self dealing?
- court approval before entering the transaction
– beneficiary approval after full disclosure before entering the transaction
– trust instrument expressly authorized self dealing
Is it possible for the court to approve self-dealing of a trustee after the self-dealing has occurred?
Yes, but this is very risky
What are remedies for when a trustee self deals?
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
If a trust has a house, and the trustee buys the house for $100,000, which is the market value, what has happened?
That is self dealing
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?
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
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?
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
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?
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
If a trustee sold a house to the trust for $100,000, and the market value goes down to $90,000, what happens?
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.
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?
A reasonable amount of time
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?
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
