Trust Administration_Trustee Liability Flashcards
LAW GOVERNING TRUSTEES POWER
What body of law determines the scope of a trustee’s pwr?
New York Fiduicary Pwrs Act (FPA) sets out pwrs that can be exercised by a trustee without ct order AND without express authorization in the trust
FPA cntrls not only WHAT a TRUSTEE CAN DO, BUT ALSO what an EXECUTOR or ADMINISTRATOR of the a decedent’s estate can do
TRUSTEE POWERS
What are 6 specific pwrs that a trustee has?
Generally: a trustee can do ALMOST ANYTHING, like…
1) SELL any real or personal PROPERTY
2) MORTGAGE property
3) LEASE property
4) MAKE ordinary REPAIRS
5) CONTEST, COMPROMISE or SETTLE CLAIMS
6) Do ALMOST ANYTHING TO MANAGE the corpus of the trust
PROHIBITIONS FOR TRUSTEES
What are 3 key prohibitions for trustees?
TRUSTEES MAY NOT
1) Engage in self-dealing
2) Borrow money
3) Continue a business
IF A TRUSTEE CONTINUES A BUSINESS THEN THE TRUSTEE is liable for losses incurred by the business UNLESS trustee has ct approval to continue the business
SELF DEALING PROHIBITIONS
What are 5 key self-dealing prohibitions for trustees?
HIGHLY TESTED MATERIAL!!!!!**
THE FIVE (5) PROHIBITIONS ON SELF-DEALING:
1) Trustee (absolutely) cannot BUY/SELL trust assets to himself
2) Trustee (absolutely) cannot BORROW trust funds
3) Trustee (absolutely) cannot LEND money to the trust Interest earned on any such loan must be returned to the trust, and any security given to the loan is invalid
4) Trustee cannot PROFIT from serving as a trustee (EXCEPT for appropriate trustee fees)
Can’t take advantage of confidential information received while trustee
5) Corporate trustee cannot buy its OWN STOCK as a trust investment
———— IF ANY OF THE ABOVE OCCUR ————
No Further Inquiry Rule = a breach of a fiduciary duty by engaging in SELF-DEALING is an AUTOMATIC wrong and no further inquiry need be made
Good faith is NOT a defense
Reasonableness is NOT a defense
IT DOESN’T MATTER HOW GOOD THE DEAL IS TO THE TRUST!!!
TWO (2) THINGS A TRUSTEE MUST DO
What are 2 affirmative duties for trustees re: self-dealing?
HIGHLY TESTED MATERIAL!!!!!**
The two (2) affirmative duties on self-dealing:
1) Duty to SEGREGATE TRUST ASSETS from personal assets
VIOLATION = if commingled funds are used to buy an asset:
(i) and the asset goes DOWN in value, there is a conclusive presumption that PERSONAL funds were used (trustee SUFFERS ALL of the LOSS);
(ii) and the asset goes UP in value, there is a conclusive presumption that TRUST funds were used
(trust GETS ALL the PROFIT)
2) Duty to earmark trust assets by titling them in trustee’s name AS TRUSTEE (i.e. “John Jones, as trustee”)
REMEDIES FOR BREACH OF FIDUCIARY DUTY
What are 3 remedies for breach of a trustee’s fiduciary duty?
HIGHLY TESTED MATERIAL!!!!!**
REMEDIES FOR BREACH OF FIDUCIARY RESPONSIBILITIES:
1) Beneficiary can SUE to REMOVE the TRUSTEE
2) Beneficiary can RATIFY the TRANSACTION and WAIVE the breach (i.e. if it’s in the beneficiary’s interest)
3) Beneficiary can SUE for ANY LOSS (i.e. a “surcharge” action)
What are remedies against 3rd parties implicated in a trustee’s self-dealing?
HIGHLY TESTED MATERIAL!!!!!**
ACTIONS AGAINST A THIRD PARTY WHEN TRUSTEE
ENGAGES IN SELF DEALING:
If trustee engages in a prohibited trxn, such a self-dealing, and sells trust property to a 3d party, the beneficiary CANNOT sue the 3d party purchaser IF he was a BFP for value
NOT A BFP IF:
(i) knows that she was dealing with a trustee; AND
(ii) knows that the trustee was engaged in self-dealing
Do self-dealing rules apply to the associates of the trustee?
HIGHLY TESTED MATERIAL!!!!!**
YES!
Self-dealing rules ALSO apply to loans or sales to…. (i) a relative
(ii) a business of which the trustee is an officer, emp, partner or SH
Can a trustee use an exculpatory cl to shield itself from liability?
Depends…
1) An exculpatory cl CANNOT be used to shield a trustee from liability for breach of a fiduciary duty in a TESTAMENTARY trust (NOT ALLOWED)
b/c relieving an executor or testamentary trustee from liability for negl is VOID against public policy
2) An exculpatory cl CAN be used in a LIFETIME (inter vivos) trust
PERSONAL LIABILITY FOR A TRUSTEE
When can atrustee be PERSONALLY liable in K?
PERSONAL LIABILITY OF TRUSTEE IN CONTRACT:
1) If TRUSTEE signed ONLY on BEHALF of the the TRUST, then there is NO personal liability
NOT LIABLE = “Jonathan Jones Trust, by Mary Jones, Trustee”
NOT LIABLE = “Mary Jones, as Trustee of the Jonathan Jones Trust and not individually”
2) HOWEVER, if TRUSTEE signed PERSONALLY and MERELY MENTIONED the trust, then trustee ISpersonally liable
LIABLE =”Mary Jones, Trustee of the Jonathan Jones Trust”
REIMBURSEMENT TO TRUSTEE FOR LIABILITY IN CONTRACT
When can a trustee be reimbursed for personal liability in K?
EVEN IF there is PERSONAL LIABILITY the trustee will be REIMBURSED IF Two things must be satisfied…
1) The K must be w/in the pwrs of the trustee; AND
2) The trustee was acting in the course of proper administration of the trust
TRUSTEE’s PERSONAL LIABILITY IN TORT
When can a trustee be personally liable for tort?
A Trustee is personally liable for all torts by
(i) the trustee; AND
(ii) the trustee’s employees
ABSOLUTE RULE – NO EXCEPTIONS
Liability can be dealt with by using liability insurance (charged to the cost of the trust)
REIMBURSEMENT TO TRUSTEE FOR LIABILITY IN TORT
When can a trustee be reimbursed for liability in tort?
Trustee can get reimbursement from the trust for any tort
claims if two (2) requirements are satisfied:
1) Trustee must have been acting w/ the trustee’s pwrs at the the commission of the tort; AND
2) Trustee was NOT personally at fault
For the trustee NOT to be personally at fault this usually means that it is the trustee’s employees that commit the tort and the trustee is held vicariously liable. Then the TRUSTEE WILL still be eligible for reimbursement
Example:
Tommy Trustee’s employee was negligently driving a truck carrying trust files to a storage facility when the truck collided with plaintiff’s vehicle. Plaintiff was seriously injured. Plaintiff sued Tommy Trustee for the negligence of his employee and received a judgment of $1 million. Can Tommy Trustee get reimbursement from the trust for this judgment?
Apply two-part test:
- Was the trustee acting within his powers when the tort was committed? — YES, trust files were being taken to storage.
- Was trustee personally at fault? — NO, the negligence was by trustee’s employee.
So is reimbursement justified?
Answer: Yes, B/c both rqmts were satisfied and thus the trustee can get reimbursement from the trust for the liability.
TRUSTEE’S INVESTMENT POWER:
What body of lawgoverns the trustee’s investment decision making pwr?
TRUSTEE’S INVESTMENT POWER:
- Trustee must manage the property of the trust on behalf of the beneficiary, and this means the investment of the corpus of the trust
- Trustee must manage the property of the trust on behalf of the beneficiary, and this means the investment of the corpus of the trust
- Trustee can pursue what UPIA calls the “modern portfolio theory of investment” (MPT), where the trustee creates a custom-tailored investment strategy for this particular trust
- Two (2) key factors to remember:
(i) Must consider role each investment plays w/in overall trust portfolio
(ii) Must consider the expected total return from income & capital gain - No need to justify prudence of each investment by itself - can balance risky w/ safe
- Specific things to remember:
(i) If investment prudent at the time it was made in context of overall strategy then okay (hindsight performance doesn’t matter)
(ii) Trustee can exercise adjustment power & allocate capital gains to income (if nec. to protect income beneficiary) - The key to the UPIA is flexibility to shape the investment strategy for MAXIMUM TOTAL RETURN, along with the FLEXIBILITY to adjust income between the
income and remainder beneficiaries to be FAIR to each of them
