Trust Administration: Fiduciary Duties Flashcards
Duty to Faithfully Carry out Terms of Trust
A trustee has a duty to administer the trust according to the terms of the trust and, when not inconsistent, trust law
- Strict compliance with all mandatory trust terms.
- For discretionary provisions: not exceeding the scope of trustee’s discretion.
- Bottom line: Do what the trust says. No less, no more
Duty of Loyalty
The trustee must act in an unselfish and undivided way to the beneficiaries of the trust.
The Duty of Loyalty encompasses:
1. Duty to Avoid Self-Dealing; and
2. Duty to Avoid Conflicts of Interest.
Duty to Avoid Self Dealing
UNDER THE DUTY OF LOYALTY
1. Trustee may not derive any personal gain from administering the trust (e.g., selling their property to the trust, borrowing money from the trust)
- If the trustee performs an act that breaches the duty to avoid self-dealing, there is no further inquiry: Trustee is liable regardless of motives, honesty or good faith.
- Remedy for breach: Trustee must give the trust any profit earned or reimburse the trust for any losses incurred
EXCEPTIONS where self-dealing is permitted:
1. The trust document authorizes self-dealing.
2. All affected beneficiaries consent before the transaction takes place, after full disclosure by the trustee.
3. The court approves the self-dealing before the transaction occurs
BUT the court can review the transaction to determine if it was fair to the beneficiary.
Duty to Avoid Conflicts of Interest
UNDER THE DUTY OF LOYALTY
TWO KINDS:
1. Trustee personally benefits from the CoI
2. Transaction involves the trustee choosing one beneficiary over another beneficiary
There is a good faith defense here (unlike for Self-Dealing):
* If the trustee claims good faith, the court will look at the trustee’s motives and whether trustee’s behavior was reasonable in the transaction.
Duty of Care
A trustee has a duty to perform such acts as a reasonably prudent business person would do to protect trust property.
Examples:
Recording any type of trust document necessary to
protect the trust’s interest.
Safeguarding trust assets (i.e., depositing any valuables
or documents regarding negotiable securities in a safe and secure location).
Depositing cash and other liquid assets in accredited financial institutions, with FDIC insurance.
Insurance: Obtaining fire & liability insurance on trust assets.
Make such repairs to building on trust property as necessary to prevent deterioration
Duty to Properly Title
UNDER DUTY OF CARE
A trustee should put trust assets in the trust’s name, or in the trustee’s name to reflect that the trustee has legal title to the asset.
Guards against the duty not to comingle assets by ensuring legal title is in your name, in your capacity as trustee (not an individual).
This should be done for all assets, including real property, stock certificates, stock and other financial accounts.
Common form of title: “Tom Smith as Trustee of the April Cunningham Trust dated November 16, 2017”
Duty Not to Comingle
A trustee shall not comingle his/her personal assets with trust assets.
- The trustee’s personal property must be separate from trust property.
- This rule goes hand-in-hand with the duty to properly title trust assets.
If this duty is breached, the trustee is personally liable for breach of fiduciary duty
Prudent Investor Rule
Manage trust assets as a prudent investor would:
- Trust portfolio evaluated as a whole, having risk/return objectives reasonably suited to the Trust
- Duty to Diversify
Common Trustee Duties
The trustee is personally liable for the breach of these duties:
- Duty of loyalty
- Duty to avoid self-dealing
- Duty to avoid conflict of interest
Duty of care- trust assets
- Duty to properly title
- Duty not to commingle trust assets
Duty to not delegate (discretionary positions)
Duty to make trust assets productive
- Duty to properly invest trust assets
Duty of impartiality
Duty to keep & render accounts; allocate principal
The Duty of Impartiality
The trustee has a duty to be fair (impartial) to all beneficiaries, whether income or principal.
The trust property must produce a reasonable income while being preserved for the remainderman
The Duty of Impartiality overlaps with other fiduciary duties (i.e., the duty to properly handle trust assets).
Impartiality does NOT necessarily mean equally
The Duty to Keep and Render Accounts
The trustee has a duty to account to beneficiaries annually. The accounting must include:
- Principal assets at beginning of year
- Monies dispersed on behalf of beneficiary (expenses,
agents, accountants, pmts. to beneficiary, etc.)
- Monies paid to the trust during the year, and
- Assets at the end of the year
If a beneficiary does not reject an accounting once received, it is deemed approved. BUT a beneficiary can always object later if they determine the accounting was based on misinformation.
Duty Not to Delegate
Trustee cannot delegate away those responsibilities that the Trustor is vesting in the Trustee
The trustee CAN delegate ministerial acts (An act that assists the trustee but does not require the judgment of the trustee. Examples:
1. Record keeping
2. Secretarial duties
3. Collection of income on behalf of trustee
4. Stockbrokers and investment bankers, etc.
investing (buying/selling stocks/bonds) trust assets
on a day-to-day basis
A trustee CANNOT delegate discretionary acts (i.e., an act requiring the judgment of the Trustee). Examples:
1. Buying and selling property (can hire someone to assist to find property, but trustee’s decision to ultimately buy/sell)
2. Distributing income & principal to beneficiary
3. Borrowing or lending money from/to trust
4. Spending money on behalf of trust
5. Overseeing the investment of trust assets
HYPO: When the trust’s assets includes a rental property, how is a trustee allowed/not allowed to delegate their responsibilities?
Trustee can hire a management company to assist in running property (collecting rent, making minor repairs).
However, the trustee must decide when to raise rent, install expensive repairs, etc.
The Duty to Make Trust Assets Productive
The trustee has a duty to invest the trust assets properly.
OLD RULE – Prudent Investor Standard: The trustee is required to adhere to a standard of good faith, reasonably prudence, sound discretion and care in making trust investments.
MODERN RULE– The Uniform Prudent Investment Act (Rest. 3d)
* “Modern portfolio theory”: Using an appropriate level of volatility and risk to establish a total return for the whole portfolio; AND
* Looks at these factors for determining whether the trustee properly invested trust assets:
- Duty to diversify
- Duty to obtain reasonable yield
- Right to invest in all asset types (while using caution, due diligence)
- Right to offset gains & losses in trust portfolio
- Must look at who beneficiary is & appropriately plan for volatility & risk of investments
Choosing a Trustee
- Individual Trustees
- Corporate Trustee (Banks, Financial Institutions)
- Trust Companies
- CA only has 8 - Private Professional Fiduciaries
- Regulated by the Professional Fiduciaries Bureau under the California Department of Consumer Affairs
