Trust Administration: Trustee Powers, Duties, Liabilities

Question 1

NY Fiduciary Powers Act (FPA)

Answer 1

sets out powers that can be exercised by a trustee w/o court order and w/o express authorization in the trust. Also controls what an executor or administrator of a decedent’s estate can do.

Question 2

Trustee can do almost anything w/ some clearly defined specific exceptions. Examples of what he CAN do are . . .

Answer 2

• sell property
• mortgage property
• lease property
• make ordinary repairs
• contest, compromise, or settle claims
• almost anything to manage the corpus of the trust

Question 3

Trustee’s Investment Powers

Answer 3

• NY UNIFORM PRUDENT INVESTOR ACT (UPIA) gives broad latitude to trustees to choose investments
• trustee can pursue what UPIA calls the MODERN PORTFOLIO theory of investment, where the trustee creates a CUSTOM-TAILORED investment strategy for this particular trust.
• trustee must consider the role each investment plays w/in the overall portfolio
• trustee must consider the expected total return from income and capital gain
• trustee does not have to justify the prudence of each individual investment– can balance risk w/ a diversified portfolio
• prudence is not measured by hindsight
• key to the UPIA is flexibility to shape the investment strategy for MAXIMUM TOTAL RETURN

Question 4

Trustee CANNOT

Answer 4

• 1- borrow money from the trust (never)
• 2- continue a business (trustee liable for losses incurred UNLESS has ct approval to continue the business)
• 3- engage in self-dealing (never; no defenses)
  4- abandon or demolish property (unless trust or court authorizes)
  5- delegate authority, employ agents, etc. (unless trust or court authorizes)

Question 5

5 Prohibitions against self-dealing

Answer 5

1- trustee cannot buy or sell trust assets to himself (absolute rule)
2- cannot borrow trust funds (absolute rule)
3- cannot lend money to the trust (absolute rule)
4- cannot profit from serving as trustee (except for appropriate trustee fees)
5- corporate trustee cannot buy its own stock as a trust investment

Question 6

2 Affirmative Duties Re: Self-Dealing

Answer 6

1- duty to segregate trust assets from personal assets –> violate remedies = if commingled funds are used to buy an asset and the asset goes down in value, there is a conclusive presumption that personal funds were used; if asset goes up in value, there is a conclusive presumption that trust funds were used

2- duty to earmark trust assets by titling them in trustee’s name as a trustee

Question 7

Remedies fro breach of fiduciary responsibilities

Answer 7

1- beneficiary can sue to remove the trustee
2- beneficiary can ratify the transaction and waive the breach
3- beneficiary can sue for any loss (action is called a surcharge)

Question 8

No Further Inquiry Rule

Answer 8

breach of a fid duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made. Good faith and reasonableness are not defenses

Question 9

Actions against third party when trustee engages in self-dealing

Answer 9

• Beneficiary cannot sue the purchaser of property from the trustee if that purchaser was a BFP for value w/o notice
• To keep the purchaser from being a BFP and thus making them liable, the purchaser not only has to know that she was dealing w/ a trustee, but that the trustee was engaged in self-dealing

Question 10

Indirect self-dealing

Answer 10

self-dealing rules also apply to loans or sales to a relative of the trustee, or to a business of which he is an officer/employee/partner/principal shareholder

Question 11

Exculpatory Clauses

Answer 11

• cannot shield trustees from liability for breach of fid duty in a TESTAMENTARY TRUST (void against pubpol)
• Can protect against negligence in a INTER VIVOS TRUST