Powers & Duties of Trustees

Question 1

Duty to administer trust

Answer 1

Trustee must administer trust:

1. In good faith
2. In accordance with the trust purpose and terms, and
3. In the interests of the trust beneficiaries.

Question 2

Duty of loyalty: self-dealing

Answer 2

Trustee must administer trust solely in the interests of the beneficiaries.

If the trustee engages in self-dealing, the transaction is voidable by the affected beneficiary or they can seek damages.

Question 3

“no further inquiry” rule

Answer 3

A transaction entered into by the trustee for their own benefit is automatically presumed to be a conflict of interest.

Voidable without further inquiry – fairness/good faith is immaterial.

Question 4

Duty of loyalty: conflict of interest

Answer 4

A transaction is presumed to be affected by conflict of interest if entered into by someone related to the trustee, their agent/attorney, or an entity in which the trustee has an interest.

Question 5

Duty of loyalty: duty to act impartially

Answer 5

Trustee must act impartially and with regard to the other beneficiaries’ interests.

Question 6

Prudent investor standard

Answer 6

A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.

Must diversify assets and avoid risky investments, but keep trust assets productive.

Question 7

Duty to separate and earmark property

Answer 7

Trust assets must be kept physically separate from trustee’s personal assets and assets of other trusts.

Question 8

Delegation of trust duties

Answer 8

A trustee may delegate duties and powers that a prudent trustee would delegate.

Trustee must act prudently in:

1. Selecting an agent
2. Establishing the scope and terms of the delegation, and
3. Monitoring the agent’s performance.

Question 9

Remedies for trustee’s breach of trust

Answer 9

1. Specific performance
2. Enjoin trustee from committing breach
3. Compel trustee to pay money equal to profit or restore property (whichever is greater)
4. Suspend or remove trustee.

Question 10

Remedies for self-dealing

Answer 10

1. Affirm the transaction if the trust profited
2. Set aside the transaction if the trust lost money
3. Trace profits from the trustee if the trustee profited.

Question 11

When is a trustee not liable for breach?

Answer 11

1. If the trustee acted in reasonable reliance on the terms of the trust, or
2. The beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction.

Question 12

Damages for wrongful invasion of trust assets

Answer 12

The greater of:

1. The amount required to restore the value of trust property/distributions, or
2. Any profit made by the trustee from the breach.

The trustee is liable to a beneficiary for any profit arising from administration of the trust, even if no breach.

Question 13

What is the trustee’s adjustment power?

Answer 13

If the trustee determines that by distributing only the trust’s income the trustee is unable to treat all beneficiaries fairly, the trustee may adjust between principal and income to the extent necessary.

Question 14

What receipts/expenses must be allocated to income?

Answer 14

1. Receipt of rental payments
2. Money received from an entity
3. Ordinary expenses and repairs

Question 15

What receipts/expenses must be allocated to principal?

Answer 15

1. Proceeds from the sale of a principal asset
2. All other property received, other than money received from an entity
3. Extraordinary expenses and repairs.

Question 16

What is a trustee?

Answer 16

A person who holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries.