Trust Administration and Trustee's Duties

Question 1

How must a trustee safeguard the trust property?

Answer 1

1. Purchasing insurance
2. earmarking assets
3. recording deeds
4. identifying and locating beneficiaries, and
5. following settlor’s instructions

Question 2

If there are multiple trustees, how can they make a decision?

Answer 2

• However the trust document says they can OR
• failing that, there must be a majority vote.

Question 3

What powers does the trustee have?

Answer 3

1. All powers expressly authorized in the trust instrument;
2. All powers that an unmarried individual would have over his property;
3. All powers reasonably necessary to administer the trust;
4. All powers necessary to act as a reasonably prudent person in managing the trust (must and likely will be granted by the court); AND
5. all other powers granted by the Uniform Trust Act
   
   1. hold and invest assets
   2. operate a business
   3. transfer or encumber assets
   4. insure assets AND
   5. prosecute and defend actions

Question 4

How can a trustee get additional powers that are not already included?

Answer 4

By petitioning a court to obtain the powers not expressly authorized in the trust instrument. The court will grant all powers necessary to act as a reasonably prudent person in managing the trust.

Question 5

What is the general duty of the trustee?

Answer 5

To act in the best interest of the beneficiaries.

Question 6

Who has standing against a trustee?

Answer 6

Any beneficiary whose interests were violated.

Question 7

What can a beneficiary demand if the trustee violated his interests?

Answer 7

• Set aside the transaction OR
• ratify the transaction and recover any profits.

Question 8

What does the duty of loyalty and good faith entail?

Answer 8

The trustee must

1. honor the settlor’s intent,
2. act reasonably (objective), AND
3. act in good faith (subjective)
4. to serve the interests of the beneficiaries

Question 9

What are self-dealings?

Answer 9

Things that automatically lead to a finding that the trustee breached the duty of loyalty.

1. Personally buying or selling trust assets (even at fair value)
2. Selling property of one trust to another trust that the trustee manages (unless objectively fair to all beneficiaries)
3. Borrowing from or making loans to the trust
   
   1. EXCEPT you can advance your own personal funds to the trust if you’re a real dummy
4. Using trust assets to secure a personal loan
5. Engaging in prohibited transactions with friends or relatives
6. Otherwise acting for personal gain through the trustee position.

Question 10

Can self-dealing be excused?

Answer 10

Yes, by authorization by a settlor under trust terms, by court order, or by all beneficiaries, AS LONG AS the transaction is reasonable and fair.

Question 11

Can the settlor include clauses that exculpate the trustee from all liability?

Answer 11

Nope. Limited clauses are allowed, as long as the transaction was reasonable and made in good faith.

Question 12

Are co-trustees liable to one another?

Answer 12

They are jointly liable in most circumstances, including

• consenting to the action that constitutes the breach
• Negligently failing to act to prevent the breach
• Concealing the breach or failing to compel rederss of the breach
• Impropertly delegating authority to a co-trustee.

A co-trustee will not be liable if only one trustee acted in bad faith or benefitted personally.

Question 13

What standard of care is owed by trustees?

Answer 13

That which a person of ordinary prudence would practice in the care of their own estate, UNLESS the trustee has special skill, which will also be considered.

Professional or corporate trustees are presumed to have greater expertise and therefore are held to a higher standard.

Question 14

What duties are encompassed by the duty of prudence?

Answer 14

1. The duty to make decisions
2. The duty regarding investment decisions
3. The duty to make property productive
4. The duty to be impartial
5. The duty to disclose and account
6. The duty to secure possession of trust property within a reasonable time
7. The duty to maintain real property
8. The duty to segregate

Question 15

What does the duty to make decisions entail?

Answer 15

1. Trustee must oversee the decisionmaking process for management and investment strategies
   
   1. But can delegate this if it would be unreasonable for the settlor to expect the trustee to perform such tasks.

Question 16

When is a duty to make decisions delegable?

Answer 16

Only if it is ministerial. In other words, it is NOT delegable if the responsibility is a critical function concerning the trust property (discretionary).

Question 17

What governs the duty regarding investment decisions in Pennsylvania?

Answer 17

The Prudent Invester Rule

Question 18

What does the Prudent Investor Rule stipulate?

Answer 18

1. A fiduciary shall follow the express commands of the trust instrument;
2. A fiduciary shall invest and manage property held in trust as a prudent investor would.

Question 19

What constitutes how a prudent investor would act?

Answer 19

The fiduciary will consider the

1. purposes,
2. terms, AND
3. other circumstances of the trust AND
4. will pursue an overall investment strategy reasonably suited to the trust.

Question 20

What factors must a fiduciary consider to act as a prudent investor?

Answer 20

1. The size of the trust
2. The nature and duration of the fiduciary relationship
3. Liquidity and distribution requirements
4. Expected tax consequences
5. The role that each investment plays in the overall investment strategy
6. An asset’s special relationship or value to the purposes of the trust or beneficiaries
7. The needs of the beneficiaries, AND
8. the income and resources of the beneficiaries and related trusts (if known to the fiduciary).

Question 21

Does trustee have a duty to diversify?

Answer 21

Yes, unless the trust purposes are better served without diversification OR the administrative costs of doing so outweigh the benefits.

• A mutual fund may be sufficient if that fund is sufficiently diverse.

Question 22

What theory of investing must a trustee follow?

Answer 22

Any that is reasonable. Not limited to the modern portfolio theory.

Question 23

To what extent to exculpatory clauses protect trustees who make bad investments?

Answer 23

If

1. the exculpatory clause expressly authorizes all investments;
2. the trustee did not act in bad faith or recklessly

This gives trustees more room for minor lapses in judgment.

Question 24

What does the duty to make property productive entail?

Answer 24

The trustee must work to preserve trust property and make it productive by

1. pursuing all possible claims,
2. maximizing income,
3. selling assets when appropriate,
4. securing insurance,
5. paying expenses, AND
6. acting in a timely fashion.

Question 25

What does the duty to be impartial entail?

Answer 25

The trustee must balance the interests of both present and future beneficiaries by:

1. investing the property so that it produces reasonable income while preserving the principal for the remaindermen AND
2. selling trust property within a reasonable time if failure to do so would be inconsistent with the modern portfolio approach.
   
   1. DOES THIS APPLY IN PA???
   2. Failure to do so will create a duty to reallocate sale proceeds to beneficiaries adversely affected by the delay.

Question 26

What does the duty to disclose and account entail?

Answer 26

The trustee must

1. disclose to the beneficiaries complete and accurate information about the nature and extent of the trust property
2. provide acces to trust records and accounts
3. identify and promptly disclose possible breaches
4. notify beneficiaries of intended sales of significant portions of trust assets UNLESS such notification would be severely detrimental to the beneficiaries
5. periodically account for actions taken on behalf of the trust (to assess the performance against the instrument)

Question 27

To whom must the trustee account?

Answer 27

To the probate court if it is a testamentary trust OR to the settlor (I guess?).

Question 28

Can the duty to report be waived?

Answer 28

Yes, by either the settlor or the beneficiaries, though this does not relieve a trustee from liability for misconduct.

Question 29

What does the duty to secure possession of trust property within a reasonable time entail?

Answer 29

What it sounds like. If it’s a testamentary trust, then the trustee must monitor the executor’s actions to make sure the trust receives all the property to which it is entitled.

Question 30

What does the duty to maintain real property entail?

Answer 30

Taking steps an ordinary owner would take, like insuring, repairing, or otherwise maintaining the property.

Question 31

What does the duty to segregate entail?

Answer 31

Must separate trust assets from personal assets UNLESS a trustee invests in bearer bonds.