Trustee Powers and Duties

Question 1

Sources of Trustee’s Power

Answer 1

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)

Question 2

Duty of Loyalty

Answer 2

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)

Question 3

Surcharge

Answer 3

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

Question 4

Duty to Invest

Answer 4

Three rules to discuss on bar and discuss all three. Governed by either UPIA or lists

Question 5

State Lists

Answer 5

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

Question 6

Common Law Prudent Person Test

Answer 6

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

Question 7

Uniform Prudent Investor Act

Answer 7

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.

Question 8

Duty to Diversify

Answer 8

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

Question 9

Speculation

Answer 9

Under state lists and common law prudent person test, no speculating is allowed. Can speculate under UPIA

Question 10

breach of Duty to invest

Answer 10

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!!!

Question 11

Factors considered when making investment decisions

Answer 11

(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

Question 12

Duty to Earmark

Answer 12

Trustee must label trust property as trust property

Question 13

Breach of Duty to Earmark

Answer 13

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

Question 14

Duty to Segregate

Answer 14

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

Question 15

Duty not to delegate

Answer 15

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

Question 16

Duty to Account

Answer 16

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

Question 17

Duty of Due Care

Answer 17

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.

Question 18

Remedies of beneficiary for breach of duty

Answer 18

Damages, constructive trust, tracing and equitable lien on property, ratify transaction if good for beneficiary, REMOVE TRUSTEE

Question 19

Trustee’s liability in contracts

Answer 19

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

Question 20

Trustee’s liability in tort

Answer 20

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

Question 21

Agent Liability

Answer 21

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

Question 22

Income Receipts

Answer 22

(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

Question 23

Principal Receipts

Answer 23

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

Question 24

Expenses paid from Income

Answer 24

(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

Question 25

Expenses paid from Principal

Answer 25

(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

Question 26

Power to Adjust

Answer 26

Trustee can disregard all rules regarding allocation of income and principal if a different allocation is necessary to administer the trust FAIRLY

Question 27

Duty to preserve trust and make it productive

Answer 27

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

Question 28

Third party liability

Answer 28

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

Question 29

Co-trustee liability

Answer 29

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)

Question 30

Way to remember duties

Answer 30

PAIDD SCALE

second A is unnecessary

Question 31

Duties in Revocable and Irrevocable Trusts

Answer 31

Revocable: Trustee’s duties are owed EXCLUSIVELY to the settlor

Irrevocable: Trustee’s duties are owed solely to the TRUST BENEFICIARIES