Trust Administration

Question 1

Source of Trustee’s Powers

Answer 1

The trustee can properly exercise only such powers as are expressly or impliedly conferred upon them.

Express Powers:
- Trust instrument
- State law
- Court decree

Implied Powers:
- All powers that are necessary or appropriate to carry out the terms of the trust if those powers are not expressly forbidden by the trust instrument.

Question 2

Trustee’s Discretionary Powers

Answer 2

Powers that the trustee may or may not perform at their discretion.
- Must be exercised in good faith
- Subject to judicial review for abuse of discretion
- Trustee’s acts are still reviewable by the court even if the settlor grants the trustee absolute or uncontrolled discretion,

Question 3

Trustee’s Duties

Answer 3

Duty to Administer Trust
Duty of Loyalty
General Standard of Care
Duty to Separate and Earmark Trust Property
Prohibition on Delegation of Duties
Duty to Defend Trust from Attack
Duty to Preserve Trust Property and Make It Productive

Question 4

Trustee’s Duty to Administer Trust

Answer 4

Once the trustee accepts the position of trustee, the trustee is bound to follow the terms of the trust and will be liable for noncompliance.

Question 5

Trustee’s Duty of Loyalty

Answer 5

No Self-Dealing!

NOTE: A trustee’s good faith or actual benefit to the trust is irrelevant. Self-Dealing = Breach of Duty

Duty to Account: The trustee must keep accurate records of all trust transactions and render accountings to the beneficiaries or the court upon demand.

Question 6

What can B do if T engages in self-dealing

Answer 6

If a prohibited transaction takes place, the beneficiary may:
(1) set aside the transaction,
(2) recover any profit made by the trustee, or
(3) affirm the transaction.

Question 7

Trustee’s General Standard of Care

Answer 7

The trustee must exercise that degree of care, skill, and caution that would be exercised by a reasonably prudent person in managing their own property.

NOTE: If the trustee has greater or special skill, they will be held to a higher standard (E.g., attorney)

Question 8

Duty to Separate and Earmark Trust Property

Answer 8

No Commingling!

A trustee must keep trust assets physically separate from other assets.

If assets are commingles and some of the property is lost or destroyed, it is presumed that it was the trustee’s and the property still on hand belongs to the trust.

If a portion of commingled assets increases/decreases in value, it is presumed that it was the trustee’s assets

Question 9

Prohibition on Delegation of Duties

Answer 9

A trustee may only delegate acts that would be unreasonable to require them to perform personally.

Trustee may never delegate the entire administration of a trust or discretionary functions

Traditionally, investment decisions could not be delegated, but under the Uniform Prudent Investor Act (“UPIA”), a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances.

If a trustee improperly limits or surrenders their control, the trustee becomes a guarantor of the fund and is responsible for actual losses, no matter what the cause of the loss.

Question 10

Duty to Defend from Attack

Answer 10

A trustee owes a duty to defend the trust from legal attack unless examination reveals that the challenge is well-founded.

Question 11

Uniform Prudent Investor Act: Standard of Care

Answer 11

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

Question 12

What governs a trustee’s investment responsibilities?

Answer 12

Uniform Prudent Investor Act (“UPIA”)

Question 13

UPIA Portfolio Approach

Answer 13

Investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy.

Some speculation is allowed

Question 14

Diversification of Investments

Answer 14

A trustee must diversify the investments of the trust UNLESS they reasonably determine that the purposes of the trust are better served without diversification.

Question 15

Enforcement of Trust by Beneficiaries

Answer 15

The beneficiaries may seek to have the trustee surcharged or removed from office if the trustee breaches their duties.

The settlor may sue if they are also a beneficiary, but outsiders cannot enforce the trust.

Prior to actual breach, a court of equity will compel the trustee to perform their duties and enjoin the trustee from committing breach.

Question 16

What happens when the trustee is “surcharged”

Answer 16

Pay damages suffered by the trust

Question 17

What Damages is the Trustee Liable for?

Answer 17

Trustee is liable to the trust estate for:
- Losses resulting from the breach (e.g., depreciation in value of trust property)
- Any profit that clearly would have accrued to the trust but for the breach
- Any profit made by the trustee as a result of their breach.
- Any interest on T’s liability from the time of the breach.

Question 18

Beneficiary’s Remedy if T’s Self-Deals

Answer 18

B may have a choice of the following remedies:
* Affirm the transaction if the trust profited
* Set aside the transaction if the trust lost money
* Trace profits from the trustee if the trustee profited

Question 19

Defenses to Trust Enforcement

Answer 19

Equity will not enforce the trust if the beneficiaries consented to or joined in the breach of trust. NOTE: Mere failure to object at time of breach does not constitute consent.

The beneficiary must sue within a reasonable time or they will be estopped by the doctrine of laches.

Question 20

Trustee’s Liability for the Acts of Their Agents

Answer 20

A trustee will be liable for the acts of their agents if the trustee: (1) directs, permits, or acquiesces in the act, conceals the act, or fails to compel the agent to redress their wrong, (2) improperly selects or improperly delegates, or (3) fails to exercise reasonable supervision over the agent.

Question 21

Trustee’s Liability for the Acts of Co-Trustees

Answer 21

A trustee will be liable for acts of a co-trustee if the trustee: (1) approved, acquiesced, or participated in the breach or negligently disregarded their own duties; (2) concealed the breach or failed to take steps to compel redress; or (3) improperly delegated authority to the co-trustee.

Question 22

Trustee’s Liability for the Acts of Predecessor Trustees

Answer 22

A trustee will be liable for a predecessor trustee’s breach if the trustee: (1) knew or should have known of the breach and failed to compel redress, or (2) was negligent in determining what property should have been delivered to them.

Question 23

Effect of an Exculpatory Clause (i.e., a clause that relieves a trustee of liability for a breach of trust)

Answer 23

Clauses attempting to relieve a trustee of liability for breach of trust generally are strictly construed, but are enforceable where:
(1) no bad faith, intentional breach, or recklessness is involved, or
(2) they were not inserted in the trust as a result of the trustee’s abuse of a confidential relationship with the settlor.

Clauses absolving the trustee from all liability, however, are void.

Question 24

Trustee’s Contract Liability to Third Parties

Answer 24

A trustee is personally liable to third parties on contracts made in the course of trust administration.

However, trustee is entitled to reimbursement from the trust if the contract was within their powers and the trustee acted with reasonable prudence.

Question 25

Trustee’s Tort Liability to Third Parties

Answer 25

A trustee is personally liable for torts committed in the course of the trust administration, including those committed by the trustee’s agents.

There is indemnification only if the trustee was not personally at fault and the tort occurred as a normal incident to activity in which the trustee was properly engaged.

If the trustee is entitled to indemnification, creditors to whom the trustee is liable can reach trust assets to satisfy claims.

Question 26

Effect of an Exculpatory Clause (i.e., a clause that relieves a trustee of liability for a breach of trust)

Answer 26

Clauses attempting to relieve a trustee of liability for breach of trust generally are strictly construed, but are enforceable where:
(1) no bad faith, intentional breach, or recklessness is involved, or
(2) they were not inserted in the trust as a result of the trustee’s abuse of a confidential relationship with the settlor.

Clauses absolving the trustee from all liability, however, are void.

Question 27

Effect of an Exculpatory Clause (i.e., a clause that relieves a trustee of liability for a breach of trust)

Answer 27

Clauses attempting to relieve a trustee of liability for breach of trust generally are strictly construed, but are enforceable where:
(1) no bad faith, intentional breach, or recklessness is involved, or
(2) they were not inserted in the trust as a result of the trustee’s abuse of a confidential relationship with the settlor.

Clauses absolving the trustee from all liability, however, are void.

Question 28

Effect of an Exculpatory Clause (i.e., a clause that relieves a trustee of liability for a breach of trust)

Answer 28

Clauses attempting to relieve a trustee of liability for breach of trust generally are strictly construed, but are enforceable where:
(1) no bad faith, intentional breach, or recklessness is involved, or
(2) they were not inserted in the trust as a result of the trustee’s abuse of a confidential relationship with the settlor.

Clauses absolving the trustee from all liability, however, are void.