Trust Administration: Trustee Powers and Duties Flashcards
In general, what powers do trustees have?
1) Those expressly conferred upon her by the terms of the trust;
2) Those that an unmarried individual has over her own property;
3) those that are appropriate to achieve the proper investment, management, and distribution of the trust property;
4) Those conferred by the UTC (Uniform Trust Code)
What powers does the UTC confer on trustees?
The power to:
1) operate a business;
2) acquire an undivided interest in a trust asset;
3) invest, insure, buy, sell, or encumber trust assets;
4) enter into a lease;
5) vote securities;
6) pay taxes and assessments;
7) make distributions;
8) prosecute and defend actions
What happens when co-trustees are unable to reach a unanimous decision?
Majority rules
When is a trustee power “imperative”?
When the trust requires its exercise
When are trustees liable for abuse of discretion?
Only when the trustee has acted arbitrarily and in such a way as to impair the trust purposes
When may a trustee delegate powers/duties?
Trustee are not liable for any actions taken by the agent if they exercise reasonable care, skill, and caution in:
When a prudent trustee of comparable skills could properly delegate under the circumstances
1) Selecting the agent;
2) Establishing the scope and terms of the delegation;
3) Periodically reviewing the agent’s action in order to monitor the agent’s performance
What are “legal list” investments and how do they relate to trustee liability?
Legal list investments are those prescribed by statute (e.g. obligations of state or federal government, federally insured deposits, etc).
The trustee cannot be held liable for any resulting loss from these investments
What is the standard of care for trustee investments under the Uniform Prudent Investor Act?
The trustee must exercise reasonable care, skill, and caution in investing and managing the trust assets (taking into account the trust objectives), as determined at the time the investment decision was made.
Duty of care is applied to the entire investment portfolio, not any particular investment.
When are trustees held to a higher standard of care?
When they have special skills (banks, trust companies, pro investment advisors, etc.)
Can the UPIA rule be waived?
Yes, these default rules can be waived, but only if the governing instrument 1) authorizes the trustee to make investments in its sole discretion; 2) makes express reference to the UPIA; AND 3) makes an express authorization to make speculative investments or acquire a specific asset.
Are any types of investment prohibited?
No. Depending on the objective of the trust and circumstances of the beneficiaries, the UPIA permits a trustee to invest in virtually any kind of property/investment
What considerations does the UPIA require trustees to take into account in developing a custom-tailored investment strategy?
1) generale economic conditions;
2) possible effect of inflation or deflation;
3) the expected tax consequences;
4) the role that each investment plays within the overall trust portfolio;
5) the expected total return from income and the appreciation of capital
6) needs of for liquidity, regularity of income, and preservation of capital;
7) an asset’s special relationship or value to the purposes of the trust
8) the other resources of beneficiaries.
Are trustees required to diversify investments?
Yes, unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversification
When must trustees invest collected funds?
4 months, absent a contrary provision
Generally speaking, what does they Uniform Principal and Income Act authorize trustees or personal representative to do VIA the adjustment power?
Reallocate investment return by characterizing items (such as capital gains, dividends, etc) as income if the trustee deems it appropriate or necessary to carry out the trust purposes
Must trustees administer a trust impartially?
Yes, unless the trust manifests an intent that one or more of the beneficiaries is to be favored
What factors must a trustee consider in determining whether and to what extent to exercise the adjustment power?
1) the nature, purpose, and expected duration of true trust;
2) the intent of the settlor;
3) the circumstances of the beneficiary
4) the needs for liquidity, regularity, of income, preservation and appreciation of capital;
5) the nature of the trust’s assets;
6) the net amount allocated to income and the increase or decrease in value of the principal’s assets;
7) whether the trust gives the trustee a power to distribute principal;
8) the actual and anticipated effect of economic conditions and effects of inflation/deflation;
9) anticipated tax consequences
When is an adjustment NOT permitted?
1) If the trustee is a beneficiary of the trust, as this would give him a general power of appointment for estate tax purposes and the trust assets would be taxed in the beneficiary’s estate.
2) If the adjustment would disqualify the trust for federal estate tax marital or charitable deduction
In general, the allocation rules follow traditional accounting rules, which means…
net rental income is income and the proceeds of sale of a trust asset are principal
For each of the following, designate as either income or principal:
1) Money revived from an entity (e.g. a corporation)
2) All property other than money received from an entity
3) Periodic receipts from a deferred compensation plan (e.g. a pension plan)
1) Income
2) Principal
3) Income, but only to the extent the payment is characterized by the payor as income
What happens if no part of the payment from a deferred compensation plan is characterized as income or as a dividend?
10% of the payment is income and the balance is principal
What expenses are charged against income?
1) one-half of the trustee’s commissions;
2) one-half of expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests;
3) the entire costs of ordinary expenses;
What expenses are charged to principal?
The remaining on half of the trustee’s commissions and expenses, payments on mortgage principal, estate taxes, and disbursements related to environmental matters
What is the trustee’s duty to administer the trust?
What’s an example of a breach?
Remedies?
Statute of limitations period?
The trustee must act prudently, in good faith, and impartially
Favoring some beneficiaries over others.
Injunction, fines, restoration of property, suspension, specific performance of trustee’s duties
5 years
What is the trustee’s duty of loyalty?
Remedy for breach?
Trustee cannot represent both his personal interest and the interest of the trust - in other words, no self-dealing
Beneficiary may be able to void the transaction
What is the trustee’s duty to report?
Trustee must respond to beneficiaries’ requests and provide an annual accounting
What is the trustee’s duty to separate and earmark property?
Remedy?
Trust assets must be kept physically seperate from trustee’s personal assets and assets of other trusts - no commingling
Trustee is liable for any resulting losses or profits
What is the trustee’s duty to preserve and make trust property productive?
Remedy?
The trustee must use reasonable care to invest the property (prudent investor rule), collect claims due, lease or manage land, record documents, pay taxes, and secure insurance
Liability for losses and any lost profits
When is a trustee not liable for breach of trust?
If:
1) he acted in reasonable reliance on the terms of the trust; OR
2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, provided no improper inducement
When are exculpatory clauses (relieving trustee of liability for breach of trust) void?
When they:
1) relieve the trustee of liability for breaches committed in bad faith or with reckless indifference;
2) appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor
In general, are trustee’s liable for the act’s of co-trustee’s?
No, provided that he did not join in the action and exercised reasonable care in preventing the breach of the trust or attempting to redress it.
May a trustee be sued in his representative capacity? In his personal capacity?
Yes, on contracts or in tort.
Not in contract, unless he failed to reveal his representative capacity
And not in tort unless he was personally at fault.
