Trust Administration

Question 1

What law controls what trustees, executors, and administrator’s can do?

Answer 1

The FPA: The New York Fiduciary Powers Act

Question 2

What powers does the trustee have?

What can the trustee NOT do?

Answer 2

The Trustee CAN do almost anything:

1. Sell any real or personal property
2. Mortgage Property
3. Lease Property
4. Make ordinary repairs
5. Contest, compromise, or settle claims
6. Do almost anything to manage the corpus of the trust

But, the Trustee CANNOT:

1. Engage in Self-Dealing
2. Borrow Money from the trust
3. Continue a business without court approval. Surprising. [trustee will be liable for any losses!]

Question 3

What are the 5 trustee prohibitions on self dealing?

What are the 2 affirmative duties of trustees regarding self-dealing?

Answer 3

1. Trustee cannot buy or sell trust assets to himself or herself. [NO wiggle room, doesn’t matter if it helps the trust]
2. Truste cannot borrow funds [absolute rule]
3. Trustee cannot lend money to the trust [Absolute rule. Any interest earned must be given back to the trust, and any SI created is invalid].
4. Trustee cannot profit from serving as trustee (except appropriate fees). [Trustee cannot take advantage of confidential info learned from being trustee]
5. Trustee cannot buy its own stock as a trust investment.

2 Affirmative Duties:

1. Segregate trust assets from personal assets [Remedy: If commingled funds are used to purchase asset, if price goes up, assume trust assets used, if down, assme personal assets used].
2. Earmark assets by titling them in trustee’s “Name, as a trustee”

Question 4

What are the beneficiaries remedies for a trustee’s breach of fiduciary duties?

Answer 4

1) Beneficiary can sue to remove the trustee
2) Beneficiary can ratify the transactino and waive the breach [maybe beneficiary profited from the investment]
3) Beneficiary can sue for any loss to the trust created by the breach. This action is called a surcharge.

Note: No further inquiry rule: Breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made.

Good faith and reasonableness are NOT defenses.

Question 5

What is the no furhter inquiry rule?

Answer 5

No further inquiry rule: Breach of a fiduciary duty by trustee by engaging in self-dealing is an automatic wrong and no further inquiry need be made.

Good faith and reasonableness are NOT defenses.

Question 6

When can a beneficiary sue a third-party when the trustee engaged in self-dealing?

Answer 6

The beneficiary cannot sue if the third-party was a

1. Bona Fide Purchaser BFP
2. For Value
3. Without Notice

Notice requires not only that the third-party knew the trustee was in fact a trustee, but that the trustee was engaging in self-dealing.

Question 7

What is indirect self-dealing?

Can a trustee participate in it?

Answer 7

The self-dealing rules also apply to deals with a

1. Relative of the trustee
2. Business of which the trustee is an officer, employee, or partner or principal shareholder

Question 8

Can an exculpatory clause in a trust relieve a trustee from liability for breach of a fiduciary duty?

I.e., can the trust say the trustee will not be liable for a breach of fiduciary duty?

Answer 8

Exculpatory clauses:

Cannot be used in a testamentary trust [against public policy]

Can be used in a lifetime (inter vivos) trust.