Trust Administration

Question 1

What powers can the trustee exercise?

Answer 1

Only those expressly or implied conferred upon them. They may be expressly conferred by the trust instrument (these control!), conferred by the UTC, or implied because they are appropriate to achieve proper investment, management, and distribution of the trust property

Question 2

What powers does the UTC confer on trustees?

Answer 2

The power to collect and hold trust assets, operate a business, acquire an undivided interest in a trust asset, invest assets, buy/sell/encumber trust assets, enter into a lease, vote securities, pay taxes and assessments, insure assets, make distributions, and prosecute and defend claims

Question 3

When co-trustees cannot make a unanimous decision, what happens?

Answer 3

Co-trustees may act by majority decision

Question 4

What is the difference between an imperative and a discretionary trustee power?

Answer 4

Imperative powers are required by the trust instrument and discretionary powers are permissive.

Question 5

What happens when a trustee refuses to perform an imperative power?

Answer 5

They may be compelled by a court, on petition, to exercise it

Question 6

When may a trustee’s discretionary power be reviewed by a court?

Answer 6

It may only be reviewed for abuse of discretion, but does not escape review even if given “uncontrolled discretion”

Question 7

To whom does a trustee owe their duties?

Answer 7

A trustee of a revocable trust owes them exclusively to the settlor and the trustee of an irrevocable trust owes her duties to the trust beneficiaries

Question 8

What are the trustee’s duties?

Answer 8

(1) Duty administer the trust
(2) Duty of loyalty
(3) Duty to report
(4) Duty to separate trust property and keep records
(5) Duty to enforce and defend claims
(6) Duty to preserve trust property and make it productive

Question 9

What is the trustee’s duty to administer?

Answer 9

The trustee has a duty to personally administer the trust in good faith and in a prudent manner in accordance with the trust instrument and the interest of the beneficiaries. A trustee with special skills and expertise must be held to a higher standard

Question 10

What does a trustee’s duty to administer include when there are multiple beneficiaries?

Answer 10

It includes acting impartially and taking into account differing interests

Question 11

Can a trustee delegate discretionary functions?

Answer 11

No, but this would make the trustee a guarantor for any resulting losses

Question 12

What is a trustee’s duty of loyalty?

Answer 12

A trustee owes a duty of undivided loyalty to the trust and its beneficiaries. They cannot deal with the trust in their individual capacity absent express waiver in the trust instrument or court approval. The duty of loyalty means that the trustee cannot personally buy/sell trust assets, may not sell the trust’s assets to another trust of which they are trustee, cannot borrow trust funds or loan it their personal funds unless to protect the trust, cannot use trust assets to secure a personal loan, cannot personally gain from the trusteeship, and a corporate trustee cannot invest trust funds in its own stock (it can retain it if it was part of the original trust res and the prudent investor standard is met)

Question 13

What is indirect self-dealing by the trustee?

Answer 13

Entering into a trust transaction with their spouse, close relatives, attorney or corporation in which they own a significant interest

Question 14

Does the duty of loyalty extend equally to all beneficiaries?

Answer 14

Yes, unless otherwise stated

Question 15

What is the consequence of a transaction involving trustee self-dealing?

Answer 15

The transaction is voidable by the affected beneficiary unless (1) the court or trust terms approved it, (2) the beneficiary filed to timely sue, (3) the beneficiary gave consent, ratification or release, or (4) it involves a contract/claim arising before the trustee became trustee

Question 16

What is a trustee’s duty to report?

Answer 16

A trustee must (1) provide qualified beneficiaries with their name address and phone number, (2) respond to beneficiary request for info about administration and ac copy of trust instrument, and (3) furnish an annual accounting

Question 17

What is a trustee’s duty to separate trust property?

Answer 17

A trustee may not commingle trust property with their own or another trust’s. The trust property must be earmarked as trust-owned property.

Question 18

What is the consequences when a trustee commingles trust property?

Answer 18

Losses are charged to the trustee and gains are credited to the trust

Question 19

What is the trustee’s duty to preserve trust property and make it productive?

Answer 19

This duty usually implies a power to invest. the trustee is expected to take actions like leasing land, collecting claims and investing money

Question 20

What governs a trustee’s investment responsibilities?

Answer 20

States either use the Uniform Prudent Investor Act or statutory “legal lists.” The trust instrument may expand the trustee’s power beyond this, but such language will be strictly construed.

Question 21

What is the standard of care under the UPIA?

Answer 21

The prudent investor standard: a trustee must exercise reasonable care skill and caution in investing and managing trust assets and has a duty to use any of their skills and expertise. The trustees must act exclusively for the beneficiary and impartially as to multiple beneficiaries

Question 22

How is prudence evaluated under the UPIA?

Answer 22

In the context of the entire trust portfolio/as overall investment strategy

Question 23

What types of investment are permitted by the UPIA?

Answer 23

In any kind of property or any type of investment as long as they act prudently. There is no inherently imprudent investment

Question 24

What factors must the trustee consider in making an investment decision?

Answer 24

(!) general economic conditions

(2) possible inflation/deflation
(3) expected tax consequences
(4) role of each investment in the portfolio
(5) expected return and capital appreciation
(6) beneficiary’s resources
(7) needs for liquidity, regularity of income
(8) asset’s special value to trust purposes

Question 25

What UPIA requirements exist for diversification?

Answer 25

The trustee must diversify unless they reasonably determine that the purposes are better served without. In a revocable trust (where the duties are owed to the settlor), an order by the settlor to make non diverse investments will relieve the trustee of this duty

Question 26

How is compliance with the UPIA determined?

Answer 26

In light of the facts and circumstances existing at the time of the decision and action. Substantial compliance is sufficient to avoid liability

Question 27

Can a trustee delegate investment/management functions?

Answer 27

Yes, but must use prudence in selecting an agent, establishing the scope and terms of the delegation and periodically reviewing the agent’s decisions

Question 28

What are statutory legal lists?

Answer 28

They set forth approved investments for trust assets and may be either permissive or mandatory but the trustee must still exercise reasonable care, skill and caution in the investment choices

Question 29

What are proper investments under the statutory legal lists?

Answer 29

Government securities, first mortgages on land with adequate security, high grade corporate bonds and, increasingly, mortgage participations, common trust funds and mutual funds

Question 30

What are improper investments under the statutory legal lists?

Answer 30

Unsecured loans, second mortgages, unproductive land (courts are divided otherwise) and the lists usually exclude corporate stock

Question 31

What are the liabilities for the trustee for breach of trust duties?

Answer 31

The court may enforce specific performance, enjoin the trustee from the breach, compel the trustee to pay money or restore property, or suspend or remove the trustee. The trustee will be liable to the beneficiaries for the greater of (1) the amount necessary to restore the property and distributions to what they would have been absent the breach, or (2) the trustee’s profit from the breach.

Question 32

Is the trustee liable to beneficiaries for a profit from trust administration not obtained by breach of trust duties?

Answer 32

Yes

Question 33

When is a trustee not liable to a beneficiary for breach?

Answer 33

If they acted in reasonable reliance on the trust terms, or the beneficiary consented, released the trustee, or ratified the transaction

Question 34

What is the effect of exculpatory clauses?

Answer 34

They are void if they receive the trustee for liability for a bad faith or recklessly indifferent breach of trust or if they appear in the trust instrument as a result of the trustee’s abuse of a confidential relationship with the settlor

Question 35

What is the liability of co-trustees?

Answer 35

A trustee is generally not liable for the acts of a co-trustee if they did not join in the action and exercised reasonable care in preventing breach of trust or compelling redress of the breach.

Question 36

What is a trustee’s liability to third parties?

Answer 36

They may be sued in tort or contract. They may be sued on a contract where they failed to reveal the fiduciary relationship and may be sued in tort only if personally at fault, but not by reason of respondeat superior

Question 37

When can a beneficiary set aside breach of trust transactions?

Answer 37

When the property is not in the hands of a bona fide purchaser

Question 38

What is the effect of a transfer of trust property (breaching the fiduciary duty) to a bona fide purchaser?

Answer 38

They cut off the beneficiary’s equitable interest

Question 39

What is the liability of a knowing participant in breach of trust?

Answer 39

Liable for the resulting loss

Question 40

Who can sue third parties who damage trust property?

Answer 40

Only the trustee, not the beneficiaries (the beneficiaries can only sue in equity to compel the trustee to sue the third party). Direct actions by the beneficiaries would be permitted only where (1) the trustee participated in the breach, (2) has left the jurisdiction with no successor appointed, or (3) fails to sue a third person liable in tort or contract

Question 41

What is the Uniform Principal and Income Act?

Answer 41

Passed in most states, it applies to all trusts and estates unless the governing instrument states otherwise, and gives the trustee or personal rep an adjustment power to reallocate investment portfolio return and allows them to characterize returns like capital gains and dividend as income if right to carry out the trust purposes

Question 42

When may the trustee adjust between the trust principal and income in making distributions?

Answer 42

Where distribution according to traditional trust accounting does not allow them to treat all beneficiaries fairly

Question 43

What factors must the trustee consider in exercising the adjustment power?

Answer 43

Purpose, nature and duration of the trust
Settlor intent
Beneficiaries’ circumstances and needs
the nature of the trust assets
the extent of their power in the instrument to invade principal or accumulated income
tax consequences

Question 44

When is adjustment not permitted?

Answer 44

If the result would be adverse tax consequences

Question 45

How are receipts allocated?

Answer 45

Generally according to traditional accounting rules (e.g., net rental income is income, proceeds of sale of a trust asset are principal)

Question 46

How is money received from an entity characterized?

Answer 46

Income unless it is a capital gain for federal income tax purposes or received as part of liquidation of the entity

Question 47

How is non-cash property from an entity characterized?

Answer 47

Principal

Question 48

How are life insurance policy proceeds allocated?

Answer 48

To principal, same rule for contracts in which trust/ee is named beneficiary

Question 49

How are contracts insuring the trustee against a type of loss allocated?

Answer 49

To income

Question 50

How are periodic receipts from a deferred compensation plan allocated?

Answer 50

To income to the extent the payment is characterized by the payor as income. The balance is principal. If none characterized by payor as income, 10% will be income and the rest principal.

Question 51

What is a liquidating asset?

Answer 51

An asset whose value will diminish over time because it is expected to produce receipts over a limited period (e.g., patents and copyrights).

Question 52

How are the proceeds from liquidating assets allocated?

Answer 52

10% to income and 90 to principal

Question 53

What expenses are charged against income?

Answer 53

1/2 the trustee’s regular compensation (and of any person providing the trustee with custodial/advisory services); 1/2 of expenses for accountings, judicial proceedings, etc that affect both income and remainder interests; the entire cost of ordinary expenses, insurance premiums on principal assets

Question 54

What expenses are charged against the principal?

Answer 54

1/2 the compensation of trustee and advisors; 1/2 of the expenses for accounting/judicial proceedings; payments on the principal of a trust debt, expenses of a proceeding concerning an interest in principal, estate taxes, and disbursements related to environmental matters