Trust Administration and Trustee Liability Flashcards
What body of law determines the scope of a trustee’s power?
New York Fiduicary Powers Act (FPA) sets out powers that can be exercised by a trustee without court order AND without express authorization in the trust
FPA controls not only what a trustee can do, BUT ALSO what an executor or administrator of the a decedent’s estate can do
What are specific powers that a trustee has?
Generally: a trustee can do ALMOST ANYTHING, like…
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
What are the key prohibitions for trustees?
1) Engage in self-dealing
2) Borrow money
3) Continue a business
** A trustee is liable for losses incurred by the business UNLESS trustee has court approval to continue the business
What are the key self-dealing prohibitions for trustees?
1) Trustee (absolutely) cannot BUY/SELL trust assets to himself
2) Trustee (absolutely) cannot BORROW trust funds
3) Trustee (absolutely) cannot LEND money to the trust
** Interest earned on any such loan must be returned to the trust, and any secuirty given to the loan is invalid
4) Trustee cannot PROFIT from serving as a trustee (EXCEPT for appropriate trustee fees)
** Can’t take advantage of confidential information received while trustee
5) Corporate trustee cannot buy its OWN STOCK as a trust investment
No Further Inquiry Rule = a breach of a fiduciary duty by engaging in SELF-DEALING is an AUTOMATIC wrong and no further inquiry need be made
- Good faith is NOT a defense
- Reasonableness is NOT a defense
What are the affirmative duties for trustees regarding self-dealing?
1) Duty to segregate trust assets from personal assets
Violation = if commingled funds are used to buy an asset
(i) and the asset goes DOWN in value, there is a conclusive presumption that personal funds were used;
(ii) and the asset goes UP in value, there is a conclusive presumption that trust funds were used (it gets ALL the profit)
2) Duty to earmark trust assets by titling them in trustee’s name AS TRUSTEE (i.e. “John Jones, as trustee”)
What are the remedies for breach of a trustee’s fiduciary duty?
1) Beneficiary can sue to remove the trustee
2) Beneficiary can ratify the transaction and WAIVE the breach (i.e. if it’s in the beneficiary’s interest)
3) Beneficiary can sue for ANY loss (i.e. a “surcharge” action)
What are remedies against 3rd parties implicated in a trustee’s self-dealing?
If trustee engages in a prohibited transaction, such as self-dealing, and sells trust property to a 3rd party, the beneficiary CANNOT sue the 3rd party purchaser IF he was a BFP for value
BFP ≠ one who (i) knows that she was dealing with a trustee; AND (ii) that the trustee was engaged in self-dealing; OR who is a family member or associate of the trustee
Do self-dealing rules apply to the associates of the trustee?
YES!
Self-dealing rules ALSO apply to loans or sales to….
- a relative - a business of which the trustee is an officer, employee, partner or shareholder
Can a trustee use an exculpatory clause to shield itself from liability?
Depends…
1) An exculpatory clause CANNOT be used to shield a trustee from liability for breach of a fiduciary duty in a testatmentary trustbecause relieving an executor or testamentary trustee from liability for negligence is VOID against public policy
2) An exculpatory clause CAN be used in a lifetime (inter vivos) trust
When can atrustee be PERSONALLY liable in contract?
1) If trustee signed ONLY on behalf of the the trust, then there is NO personal liability
2) HOWEVER, if trustee signed personally and MERELY MENTIONED the trust, then trustee ISpersonally liable
LIABLE =”Mary Jones, Trustee of the Jonathan Jones Trust” NOT LIABLE = “Jonathan Jones Trust, by Mary Jones, Trustee” or “Mary Jones, as Trustee of the Jonathan Jones Trust and not individually”
When can a trustee be reimbursed for personal liability in contract?
Two things must be satisfied…
1) The contract must be within the pwrs of the trustee; AND
2) The trustee was acting in the course of proper administration of the trust
When can a trustee be personally liabile for tort?
Trustee is personally liable for all torts by
(i) the trustee; AND (ii) the trustee's employees
- Absolute rule, no exceptions
- Liability can be dealt with by using liability insurance (charged to the cost of the trust)
When can a trustee be reimbursed for liability in tort?
Two requirements…
1) Trustee must have been acting within the trustee’s powers at the time of the commission of the tort; AND
2) Trustee was not PERSONALLY at fault
NOTE: the trustee’s employee CAN be at fault and the trustee still be eligible for reimbursement
What body of lawgoverns the trustee’s invesment decision making power?
Uniform Prudent Investor Act (UPIA) gives broad latitude to trustees to choose investments
** Can pursue the “modern portfolio theory of investment, where the trustee creates a custom-tailored investment strategy for this particular trust
** Must consider role each investment plays w/in overall trust portfolio
** Must consider the expected total return from income & capital gain
** No need to justify prudence of each investment by itself - can balance risky with safe
** If investment prudent at the time it was made in context of overall strategy then okay (hindsight performance doesn’t matter)
** Trustee can exercise adjustment power & allocate capital gains to income (if necessary to protect income beneficiary)
** End goal is fairness to all beneficiaries and maximizing the TOTAL return
