Trustee Powers and Duties Flashcards
Sources of Trustee’s Power
Those powers expressly conferred by the trust instrument, state law, and court decree, plus implied powers necessary or appropriate to accomplish trust purposes
Ex: power to sell trust property, power to incur expenses, power to lease, power to borrow money (NOTE: latter is a UTC rule only)
Duty of Loyalty
requires that the trustee administer the trust IMPARTIALLY for the benefit of the beneficiaries
NO SELF DEALING (preferring a beneficiary over another, selling property to one’s spouse, trustee-lawyer hiring himself)
Surcharge
if breach of duty of loyalty or self dealing leads to a loss, trustee is “surcharged” – must make good on the loss
NOTE: if profit, becomes a constructive trustee and must turn profits over to intended beneficiaries
Duty to Invest
Three rules to discuss on bar and discuss all three. Governed by either UPIA or lists
State Lists
Duty to invest: Some states have lists which the trustee must follow in the absence of directions in the trust. If a “mandatory” list, trustee commits breach of trust if he invests in properties outside of the list.
Good investments in these J* are: (1) federal government bonds; (2) federally insured CoD’s, (3) first deeds of trust in real estate, (4) stocks of publicly traded companies depending on the J*
New businesses and second deeds of trust are NEVER good investments under state lists
Common Law Prudent Person Test
requires trustee to act as a reasonably prudent PERSON investing his own property, trying to maximize income while preserving the corpus. If trustee has higher skill, higher standard.
Look at EACH INDIVIDUAL INVESTMENT to determine if a breach has occurred
Good investments in these J* are: (1) federal government bonds; (2) federally insured CoD’s, (3) first deeds of trust in real estate, (4) BLUE-CHIP stocks; (5) mutual funds depending on the J*
New businesses and second deeds of trust are NEVER good investments under state lists
Uniform Prudent Investor Act
adopted in most states. Provides that a trustee must invest as a PRUDENT INVESTOR
Don’t look to individual investments. Instead, performance is measured in the context of the ENTIRE PORTFOLIO. No one investment is per se invalid.
Duty to Diversify
Duty present in all investment approaches. Trustee must diversify the investment unless if she reasonably determines that the purposes of the trust are better served without diversification
Speculation
Under state lists and common law prudent person test, no speculating is allowed. Can speculate under UPIA
breach of Duty to invest
If loss, trustee must make good on the loss. if profit, beneficiaries affirm the transaction.
If loss and profit, trustee is surcharged for the loss while beneficiaries affirm transaction that made money. NO NETTING ALLOWED!!!
Factors considered when making investment decisions
(1) general economic conditions; (2) possible effect of inflation or deflation; (3) expected tax consequences of investment decisions; (4) role that each investment plays within the overall portfolio; (5) expected total return from income; (6) other resources of the beneficiaries; (7) needs for liquidity; and (8) asset’s special value to the purposes of the trust or beneficiaries
Duty to Earmark
Trustee must label trust property as trust property
Breach of Duty to Earmark
Common law: if loss, trustee is held personally liable if did not earmark at all. NO CAUSAL RELATIONSHIP REQUIRED between failure to earmark and a loss. (almost like SL)
Modern approach: requires a causal connection between the failure to earmark and the loss to hold trustee personally liable
Duty to Segregate
Trustee cannot commingle personal funds with trust funds, or funds of other trusts
If loss occurs, presumed that the property lost was the trustee’s and the property still on hand belongs to the trust.
If assets increase in value, presumed that trust’s assets increased in value, not commingled assets
Duty not to delegate
Trustee may only delegate acts that would be UNREASONABLE for her to perform personally
Can never delegate the entire administration of a trust or discretionary functions.
Investment and management decisions: historically could not be delegated. Under UPIA, however, can delegate investment and management functions if reasonable and prudent
Duty to Account
On a regular basis, trustee must give beneficiaries a statement of income and interest of the trust
if trustee fails to render an accounting, beneficiaries may file an action for an accounting
Duty of Due Care
Trustee must act as a reasonably prudent person dealing with his own affairs
ESSAY: always discuss this duty when there is a breach of fiduciary duty. Catch all.
Remedies of beneficiary for breach of duty
Damages, constructive trust, tracing and equitable lien on property, ratify transaction if good for beneficiary, REMOVE TRUSTEE
Trustee’s liability in contracts
Common law: Trustee sued in personal capacity therefore personal assets are at stake, but trustee could be indemnified if she acted within her powers and not personally at fault
Modern rule: if other party tot he K KNOWS that the trustee is entering into the K in his representative capacity, then sued only in his representative capacity (personal assets not at stake)
If K signed as “John Smith, as trustee of ABC trust,” then representative capacity
Trustee’s liability in tort
Common law: trustee sued in his personal capacity, but could be indemnified if no fault
Modern Law: trustee sued in his individual capacity and is personally liable ONLY if personally at fault (acted negligently). Thus, if Trustee’s agent committed the negligent act or if there is strict liability, trustee is sued in his representative capacity
Agent Liability
Generally, trustee liable for acts of her agents if she (1) directs, permits, acquiesces to the act, (2) improperly selects or improperly delegates, or (3) fails to exercise reasonable supervision over the agent
NOTE: co-trustees liable for co-trustees as well
Income Receipts
(1) ordinary receipts from use or investment of trust property (rents, interest), (2) cash dividends, (3) proceeds from contract, (4) 10% of payment from a pension, (5) 10% of proceeds from a liquidating (diminishing) asset (e.g. patents, copyrights), (6) 10% of proceeds form a working interest (oil and gas
Principal Receipts
Extraordinary receipts (proceeds from sale of trust asset; (2) stock dividends; (3) proceeds from life insurance policy; (4) 90% of payment from pension pan, liquidating asset, working interest
Expenses paid from Income
(1) 50% of trustee compensation and any person providing services; (2) 50% of all expenses for accountings, judicial proceedings, and other matters; (3) ordinary expenses; (4) insurance premiums
Expenses paid from Principal
(1) (1) 50% of trustee compensation and any person providing services; (2) 50% of all expenses for accountings, judicial proceedings, and other matters; (3) expenses of a proceeding that concerns a principal interest; (4) payments on the principal of a trust debt; (5) estate taxes; (6) environmental disbursements
Power to Adjust
Trustee can disregard all rules regarding allocation of income and principal if a different allocation is necessary to administer the trust FAIRLY
Duty to preserve trust and make it productive
Basic duty to preserve and protect trust property. Encompasses duty to invest
Must invest funds within a REASONABLE TIME and REVIEW investments
If breach this duty, trustee is liable for the amount of income that would normally accrue from appropriate investments
Third party liability
A Third party who KNOWINGLY participates in a breach of trust is liable for the resulting loss to the trust estate
One who innocently participates is generally not liable, except to the extent he is obligated to return property transferred to him
Co-trustee liability
Liable if co-trustee APPROVES, ACQUIESCES, or PARTICIPATES in a breach or NEGLIGENTLY disregards own duties
Can also be liable for IMPROPER DELEGATION (total delegation of administering the trust to the other co-trustee would be improper)
Way to remember duties
PAIDD SCALE
second A is unnecessary
Duties in Revocable and Irrevocable Trusts
Revocable: Trustee’s duties are owed EXCLUSIVELY to the settlor
Irrevocable: Trustee’s duties are owed solely to the TRUST BENEFICIARIES
