Trust Administration- Trustee Powers and Duties

Question 1

*Jurisdiction

Answer 1

District courts and and statutory probate courts = concurrent jx

Question 2

*Venue

Answer 2

Individual trustee: county of trustee’s residence or county in which situs (principal office) is located

Two or more individual trustees: county in which situs of trust has been maintained

Corporate Trustee: county in which principal office of trust has been maintained

If settlor is deceased and an estate administration is pending, action involving inter vivos trust created by settlor or testamentary trust created by his will lmay be brought under the rules above or in county which estate administration is pending.

Question 3

*Parties (non-charitable) under the Trust Code

Answer 3

May be brought by any interested party

Only required parties are persons named in trust instrument and persons receiving distributions from trust at time judicial proceeding was filed.

Question 4

Texas Trust Code

Answer 4

Applies to all kinds of trusts in Texas (except resulting and constructive “trusts”) unless settlor limits or expands trustee’s powers and duties.

Gives the trustee broad fiduciary powers, except he can’t (a) engage in self-dealing or (b) make an imprudent investment.

Question 5

General powers of the trustee

Answer 5

Sell the property at public or private sale

Lease property for appropriate terms

Give a mortgage

Make improvements

Make repairs

Give mineral leases

Partition and subdivide the property

Question 6

*Duty to Account

Answer 6

Absent a contrary provision, trust beneficiaries must make an account, no sooner than 12 months after the trust was created, only if trust beneficiaries demand one.

Settlor can’t restrict the primary beneficiary’s right to demand an accounting, but can restrict right of any another beneficiary (e.g. holding contingent remainder interest) to do so

Question 7

Trustee’s Decanting Power

Answer 7

In certain limited circumstances (e.g. correct drafting error, conform to changes in law, transfer to “special needs” trust to qualify beneficiary for Medicaid), trustee can transfer trust assets to new trust with different terms.

Cannot impair beneficiaries’ interests or name new beneficiaries;

*only trustee’s administration powers can be changed

Trustee’s fiduciary duties cannot be lessened

Can’t modify RAP period set out in original trust

Court approval not required

Question 8

*Prohibited Self-Dealing by Trustee

Answer 8

(concerned with duty of loyalty)

Can’t buy or sell trust assets to itself;

Can’t borrow trust funds or make loans to trust;

Cannot use trust assets to secure personal loans;

Cannot purchase own stock as a trust asset (but can retain stock when received in trust, if it’s a prudent investment);

Can’t personally gain (except compensation);

Indirect self-dealing: can’t sale or loan to trustee’s relative and biz associates, or corporation of which trustee is director, officer, or principal shareholder.

Question 9

Duty to Insure trust assets

Answer 9

Trustee has to duty to insure trust assets if a prudent person would do so

Question 10

What are beneficiary’s options if trustee breaches (imprudent investment; self dealing)

Answer 10

Waive the breach
Surcharge action for resulting loss (if show engage in self-dealing, no defense; “no further inquiry” rule)

If trustee still has possession of the property, beneficiary can petition for constructive trust

*No action against bona fide purchaser (for value + without notice)

Question 11

Statute of Limitations (trustee, executor, guardian)

Answer 11

4 years; starts running when:

(i) trustee repudiates the trust (denies the existence of the trust with respect to the property),
(ii) trustee gives accounting that fully discloses facts of cause of action, or
(iii) trustee dies or resigns.

Question 12

*Trustee’s Investment Power- UPIA (“prudent investor”)

Answer 12

UPIA: prudence measured by conduct when investment decision is made, not outcome or performance; measured by looking at whole portfolio

Trustee must establish and maintain custom-tailored investment strategy to effectuate settlor’s intent as to the purpose of the trust; general duty to diversify

Factors: role each investment plays within overall trust portfolio, expected total return, need for liquidity, general economic conditions

Question 13

Trustee’s Adjustment Power

Answer 13

If trustee determines that by distributing only trust’s income he is unable to treat all beneficiaries fairly, the trustee can adjust total return between principal allocate capital gains (proceeds of sale; usually goes to corpus of trust) and principal to income to the extent necessary.

Factors: intent of settlor with respect to beneficiaries, amount of income/capital gain available for allocation, decrease/increase in trust’s assets, whether the trust gives trustee power to distribute principal (no adjustment power needed if so)

Question 14

*Trust Code rules Settlor can’t Waive (can ordinarily waive most)

Answer 14

Can’t limit requirement that trust be created for legal purpose, or require trustee to commit a criminal/tortious/contrary to public policy act
- *Can’t release trustee from liability for a breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of beneficiaries (but mere negligence okay)
- *Can’t limit statute of limitations
*Can’t limit trustee’s duty to respond to a demand for accounting
Can’t limit court’s power to exercise jx, modify/terminate trust, remove a trustee, require a fiduciary bond, or deny a trustee’s compensation

Question 15

Who must sue third party on behalf of trust?

Answer 15

Only the trustee can bring action because he holds legal title to property

Exceptions: (i) trustee unwilling or unable to bring the action or (ii) third party participated with trustee in committing the breach of trust

Question 16

• examples of self-dealing

Answer 16

• interest free loan from the trust
• commission from the sale of property under the trust
• purchasing stock from bank where

Question 17

*If there is self-dealing (e.g. breach of loyalty), does the “prudent investor rule” apply?

Answer 17

The prudent investor rule does not apply if there is self-dealing.

But, settlor can waive the rules against self-dealing in the trust instrument if done properly.

Question 18

• remedies for breach of trustee’s fiduciary duties (e.g. duty of loyalty, care)

Answer 18

• beneficiary can institute suit to revoke or suspend the trustee
• plain damages for misuse and misappropriation of trust assets
• trustee reimburse trustee all or part of compensation he was given while acting as trustee so he wouldn’t be unjustly enriched
• ratify actions that were done if beneficial to beneficiary (e.g. self-dealing resulted in income to trust)
• compel trustee to perform duties
• constructive trust
• any other appropriate relief

Question 19

• calculating damages for breach of fiduciary duties

Answer 19

if breach benefitted trust (e.g. stock purchased and went up): increase attributable to trust income

if breach harmed trust (e.g. stock purchased and went down): decrease attributable to trustee and he must reimburse trust

if trustee otherwise benefitted from breach (e.g. received compensation for sale, he must pay that back unless ratified

Question 20

• “no further inquiry” rule

Answer 20

all beneficiary has to do is show that trustee has engaged in self-dealing that was not authorized by settlor or court.

No further inquiry required- only question is the amount of damages.

settlor’s good faith or benefit to trust is irrelevant

Question 21

*Who has standing to bring a lawsuit against trustee because of breach of duties?

Answer 21

• settlor

- beneficiary (even if minor)

Question 22

*What duties does trustee owe to settlor and beneficiaries?

Answer 22

• loyalty (no self-dealing)
• prudent investing
• care
• good faith

Question 23

• How do duties work when trustee is also one beneficiary?

Answer 23

trustee still owes all of the same duties to the other beneficiaries