Trust administration

Question 1

Powers of trustee

Answer 1

1. trustee has those powers expressly conferred by trust instrument, state law, or court decree, and all powers implied as are helpful or appropriate to accomplish the trust purpose
2. joint trustees
   i. traditional view: unanimous agreement needed to exercise powers
   ii. modern view: majority agreement needed for three or ore joint trustees
3. imperative powers
   i. powers the trust instrument requires trustee to exercise
   ii. court will order trustee to exercise the power as required in the trust instrument
4. discretionary powers
   i. powers that the trustee may or may not exercise
   ii. subject to judicial review for abuse of discretion
   iii. a trustee is not immune from review even if given uncontrolled discretion, and court will intervene if trustee fails to exercise any judgment at all
5. implied powers
   i. all powers helpful appropriate to operate the trust (ex. powers of sale, invest, lease land)
   ii. UTC: can incur expenses, lease, borrow, etc.
   a. common law: a trustee had no implied powers to borrow money, mortgage, or encumber trust property

Question 2

Duties of trustee

Answer 2

1. fiduciary: trustee owes fiduciary duties only to the settlor in a revocable trust, and only to the beneficiary in an irrevocable trust

duty of due care, loyalty, account, earmark, segregate, perform personally, defend from attack, preserve and make it trustworthy

Question 3

Duties of trustee- duty of due care

Answer 3

1. bar: always discuss this for any breach on the bar
2. trustee must act as a reasonably prudent person would in managing their own property
   i. if trustee has special skills, then held to a higher standard

Question 4

Duties of trustee - duty of loyalty

Answer 4

1. no self-dealing: trustee cannot deal with the trust in their individual capacity
   i. a trustee’s good faith or benefit to the trust are both irrelevant
   ii. self-dealing only okay with court approval or express waiver in the trust instrument
2. requirements of duty of loyalty: no self-dealing
   i. no buying or selling trust assets (even at a fair price)
   ii. no transfers of assets from to another trust of which trustee is also a trustee
   iii. no borrowing trust funds nor loaning personal funds (any interest paid must be returned)
   iv. no using the trust assets to secure a personal position
   v. no personal gain from position as trustee
   vi. a corporate trustee cannot invest in its own stock as a trust investment
   a. can retain its own stock if it was part of the original trust res
   b. must meet prudent investor standard
   vii. self-employment is prohibited dealing
   a. additional compensation may be okay for extraordinary services rendered
3. no indirect self-dealing through relatives, business associates, or corporations where trustee is a director, officer, or principal SH
4. trustee has a duty to keep accounts of her activity
5. the duty of loyalty extends to all beneficiaries unless specified otherwise
6. remedy: if there is a prohibited transaction, beneficiary may
   i. set aside the transaction, or
   ii. recover any illicit profit, or
   iii. affirm the transaction

Question 5

Duties of trustee- duty to account

Answer 5

1. trustee must give beneficiaries a statement of income and expenses of the trust on a regular basis
2. remedy: beneficiaries can file action for an accounting

Question 6

Duties of trustee- duty to earmark

Answer 6

1. trust property must be marked as trust property
2. if property is not earmarked
   i. common law: trustee is personally liable for loss of non-earmarked property, no causal connection needed (ex. liable for stock market crash)
   ii. modern law: trustee is personally liable for loss of non-earmarked property if the failure caused the loss (ex. trustee’s creditors attach the property)

Question 7

Duties of trustee- duty to segregate (not commingle)

Answer 7

1. trustee must separate trust assets from:
   i. own assets and
   ii. assets of other trusts (of which they are also trustee)
2. title to property must be in the trustee “as trustee” for that specific trust
3. commingled property that was lost or destroyed is presumed to belong to trustee
4. increase in value of commingled assets is presumed to belong to trust, and decrease in value to the trustee (i.e. that trustee’s personally property was what decreased)

Question 8

Duties of trustee- duty to perform personally (no delegation)

Answer 8

1. cannot delegate entire trust administration or any discretionary functions (ex. making discretionary distributions)
   i. cannot delegate to a third person or another trustee
2. can only delegate duties that would be unreasonable to perform personally
3. investment decisions
   i. common law: nondelegable
   ii. modern law: reasonable delegation are allowed (ex. to mutual fund manager)
4. remedy: trustee becomes a guarantor of the fund and is responsible for actual losses, regardless of cause

Question 9

Duties of trustee- duty to defend trust from attack

Answer 9

1. duty to defend the trust from legal attack unless challenge was well-founded

Question 10

Duties of trustee- duty of preserve trust property and make it productive

Answer 10

1. duty to take profitable actions like collecting claims
2. three alternative rules on duty to invest (discuss all three on bar)

i. state lists:
a. lists of investments the trustee must follow unless trust directs otherwise
b. allow trustees to invest in things like gov’t bonds, federally insured certs, some public stocks, first position mortgages, etc., but no speculation (ex. derivatives)

ii. common law prudent person test:
a. trustee must act as reasonably prudent person investing his own property, but held to that higher standard if trustees holding themselves himself out as having greater skill
b. each investment is individually scrutinized
c. no speculation (ex. derivatives)

iii. (majority) Uniform Prudent Investor Act:
a. trustee must invest as a prudent investor would
b. performance of entire trust portfolio is scrutinized, instead of individual investments
i) allows investments that would be prohibited under other theories

iv. general requirements
a. duty to diversify investments to prevent loss of entire portfolio

v. remedy:
a. if loss, trustee must make good the loss
b. if profit, beneficiary affirms
c. if mixed, no netting: trustee surcharged for loss, and beneficiary affirms the gain

Question 11

Remedies for breach

Answer 11

1. damages
2. constructive trust remedy
3. tracing and equitable liens on property
4. ratify the transaction if good for beneficiary
5. remove trustee

Question 12

Bar tip

Answer 12

1. look for three or four duties breached on bar exam; you never less than three
2. always be able to discuss due care, so don’t leave it out