Pg 35

Question 1

What is involved in the trustee duty of care or prudent investment?

Answer 1

The trustee must act in a reasonably competent manner, he cannot act carelessly or negligently. This is a duty not to be dumb, but it doesn’t require that he take the absolute best course of action

Question 2

What is involved in the common law statutory list of safe investments, so that if a trustee invested in something on that list, the court would guarantee that it was a prudent investment and he could not be in breach of the duty of proven investment?

Answer 2

Blue chip stocks [securities in big well-established companies with proven track records of consistent earnings], bonds, etc.

Question 3

What is involved in the modern prudent investor standard for the duty of prudent investment for a trustee?

Answer 3

The trustee must invest trust assets with the same care and caution that he would if he was investing his own money. This doesn’t have a list of proven investments, but instead a general standard of care to act with reasonable competency in investing. The trustee doesn’t need expertise, he just needs a general duty of a reasonable person. But if he does have particular knowledge or skills, he is held at a higher standard and expected to use those advantages

Question 4

Under the duty of prudent investment, are risky investments forbidden by trustees?

Answer 4

No, but you do have to assess the risk/reward considering the trust and the beneficiaries. If the beneficiaries are 55 and they need income for retirement, they do not want a risky investment. If they are 20, then maybe it is OK

Question 5

What is the rule for the duty of prudent investment with regard to inflation?

Answer 5

The trustee must beat inflation and cannot erode the principal

Question 6

What is involved in the duty of diversification with regard to the duty of prudent investment?

Answer 6

The trustee cannot put all of the assets into one basket, but should invest in many things to prevent against major losses if a certain industry fails. The more diversified the investment, the more growth will be realized and the less risk involved.

Question 7

If a trustee invests more than what percentage in a single security, do you have an issue of a breach of the duty of diversification?

Answer 7

More than 5% in any one single security would require an explanation and a very good excuse for not diversifying

Question 8

What are inception assets?

Answer 8

Assets that are already in the trust at its inception.

Question 9

If a trustee says that he wants the trust to stay invested in a certain stock, but if it becomes clear that holding onto the investment will seriously impair the value of the trust, what does the trustee have to do?

Answer 9

Disregard the terms of the trust and sell the asset. I.e.: if a settlor tells the trustee to stay invested in VCRs, but those are now obsolete, the trustee must sell that stock

Question 10

What is the rule with regard to trustee delegation?

Answer 10

• common law: no delegation is allowed except for administrative duties like recordkeeping or paying taxes. Discretionary duties like when to make a distribution and what to invest in are non-delegable and have to be done by the trustee personally
  – modernly: the trustee can delegate investment assets but he cannot delegate investment authority. He still owes a duty of care to SELECT the agent, INSTRUCT the agent, and periodically MONITOR the agent. He is not automatically liable for errors made by the agent, but if he doesn’t prevent or stop those errors when they could’ve been stopped through his prudent selection, instruction, or monitoring, then he is liable for his own breach of duty

Question 11

If a trustee picks an investment agent on Craigslist, is that OK?

Answer 11

No, that would be a breach of prudent investment or duty of care because that is an imprudent selection

Question 12

If a trustee hires a respected advisor and then tells him to invest in anything he finds exciting, is that Ok?

Answer 12

No, that is imprudent instruction

Question 13

If a trustee hires a respected advisor, instructing properly, and then the advisor runs off with the money when the trustee didn’t make periodic inspections and didn’t notice right away, what happened?

Answer 13

That is a failure to prudently monitor the agent

Question 14

If a trustee lacks the ability to personally invest trust assets, what is his obligation?

Answer 14

He must delegate investment to an agent

Question 15

If there are multiple trustees, what is the rule for responsibility?

Answer 15

Everyone is equally responsible. They have a duty to monitor each other and an obligation to take action if they are not acting appropriately

Question 16

If a trustee wants to invest in risky stocks and he gets the permission of two out of the three beneficiaries to do it, but then the corporation goes bankrupt, what happens?

Answer 16

Only the beneficiary that wasn’t consulted will get a remedy for improper investment since the others consented

Question 17

What is the remedy for a breach of prudent investment by a trustee?

Answer 17

Damages will be the difference between what the trust currently has and what it would have had if the trustee had done what he was supposed to do.

Question 18

What is involved in the duty to inform and account?

Answer 18

Trustee has a duty to inform beneficiaries of major decisions or transactions relating to the trust and must keep beneficiaries reasonably informed about administration of the trust including:
– that the trust exists
– that the beneficiary is a named beneficiary of the trust
– that the trustee has accepted the role
– the beneficiary should be given a copy of the trust instrument
– disclosure of significant developments or intended transactions
– full and fair accounting at least annually to the beneficiaries of all relevant facts
– duty to provide accurate detailed records of trust transaction

Question 19

What is involved in a duty to follow instructions?

Answer 19

The trustee must distribute trust property according to the directions that are given in the trust instrument. It is a breach for him to act in a way that is inconsistent with the settlor’s instructions

Question 20

What is the remedy for a breach of the duty to follow instructions?

Answer 20

The beneficiaries get the difference between what they actually were distributed and what they were entitled to under the trust