Trustee's Powers & Responsibilities

Question 1

Sources of Trustee Power

Answer 1

• The trust instrument (either expressly or by implication)

- statute or implied powers in law

Question 2

General Powers of Trustee (Unless Expressly Precluded in Trust Instrument)

Answer 2

Include the power to:

• settle or abandon trust claims
• borrow money
• sell or lease trust assets; and
• incur reasonable expenses, including the purchase of insurance, that are necessary to maintain trust property

Question 3

Trustee’s Discretion

Answer 3

A trustee’s actions pertaining to matters within the trustee’s discretion are not subject to attack, unless the trustee has abused their discretion in undertaking the conduct in question. A trustee’s discretion is often subject to the standard of the beneficiary’s health, education, maintenance, and support (HEMS).

Question 4

Duty of Loyalty and Good Faith

Answer 4

A trustee owes a duty of utmost loyalty and good faith to the beneficiaries in carrying out her obligations under the trust. Prohibits:

• self-dealing with trust assets, in any manner (even that for good outcome for the trust)
• obtaining personal benefit other than the agreed upon or statutory fees from the trustee’s position
• interacting with beneficiaries and having business transactions with them (only allowed if all facts are disclosed to the beneficiary and the transaction is fair)
• obtaining any personal benefit from a third party with respect to dealings involving the trust estate; and
• permitting self to be in even an apparent conflict of interest regarding the trust and third parties

Question 5

Any Profits Earned from Self-Dealing with the Trust

Answer 5

Belongs to the trust.

Question 6

Remedies for a Self-Dealing Transaction

Answer 6

(Rescission from transaction)- trust property is returned, amount paid is refunded by trust

(Damages)- FMV of trust assets at time of sale - amount paid by trustee

Question 7

Exculpatory Clauses in a Trust

Answer 7

Trusts may contain exculpatory clauses that may allow the trustee to compete without running afoul of fiduciary duties (but one still cannot breach good faith and fair dealing standard).

Question 8

Trustee’s Affirmative Duties

Answer 8

A trustee has an affirmative duty to preserve and enhance trust property. This duty includes considering the best interests of all beneficiaries, both present and future, lifetime and remaindermen.

Question 9

Distribution of Receipts

Answer 9

Will depend on whether something is trust principal or trust income.

Question 10

Distribution of Rents and Cash Dividends

Answer 10

Are allocated to trust income, and then are distributed to trust’s income beneficiary.

Question 11

Sales Proceeds and Stock Dividends

Answer 11

Are allocated to principal of trust and protected for ultimate distribution.

Question 12

Ordinary Expenses

Answer 12

Incurred in connection with the preservation of trust property, including ordinary repairs, are allocated to income.

Question 13

Extraordinary Repairs

Answer 13

Repairs that are beyond the usual or customary kind are allocated to the principal.

Question 14

Discretion in Allocation Decisions?

Answer 14

The UPIDA allows the trustee to exercise some discretion in allocation decisions as long as fairness to all beneficiaries is met.

Question 15

Prudent Business Person Rule

Answer 15

• In investing, trustees must use the degree of skill, care, and prudence that would be reasonably used by a business person in their own personal affairs.
• But when a trustee possesses superior business expertise or is a professional fiduciary –> the trustee will be held to the care, skill, and prudence of an individual or entity possessing those capabilities.

Question 16

Diversification

Answer 16

A trustee should diversify the trust’s portfolio.

Question 17

Diversification: Usually Acceptable Investments

Answer 17

Include: gov. or highly rated bonds, blue-chip stocks (those with national rep and solid track record), and quality mutual funds.

Question 18

Diversification: Risker or Questionable Investments

Answer 18

Include: penny stocks, speculative stocks, commodities (fungible economic goods), and derivatives (something that is based on another source).

Question 19

Decline Due to General Economic Conditions

Answer 19

A trustee is not liable for a decline in value due to general economic conditions.

Question 20

Modern Investment Theory

Answer 20

Permits trustees to make investment determinations based on the total trust fund portfolio in light of risk and return. (Therefore, a few risky investments alone will not be enough).

Question 21

Delegation

Answer 21

A trustee generally may not delegate duties. However, a trustee may (and if lacking the necessary background to make a reasonably competent decision, must) delegate investment functions and:

• the trustee must be diligent in selecting and supervising the advisor
• the trustee must inform the beneficiaries of the delegation

Question 22

What if a Trustee is Following the Investment Instructions of a Settlor For a Revocable Trust?

Answer 22

A revocable trust with a settlor as beneficiary with the right to revoke makes the settlor the owner and may relieve a trustee of liability if duty of care is questioned. The trustee will be shielded from liability for following instructions unless a reasonable person would realize it was not prudent to do so.

Question 23

Bases of Trustee Liability

Answer 23

• Breach of duty to beneficiaries
• Successor-trustee liability
• breach of duty of care in investing
• responsibility for other lost interests

Question 24

If the Trustee Uses Trust Assets to Buy Property and the Property Increases in Value

Answer 24

The trustee must return both the trust property and the appreciation in value to the trust fund.

Question 25

When a Trustee Breaches their Duty of Care in Investing and Trust Property Depreciates in Value

Answer 25

The trustee must personally recompense the trust for its losses

Question 26

Successor-Trustee Liability

Answer 26

Is present if the successor trustee:

• knew or should have known of prior trustee’s breach; and
• failed to take appropriate action to minimize effects/pursue appropriate remedies

Question 27

Exculpatory Clause in Trusts

Answer 27

Relieves trustee of liability for potentially wrongful acts.

Question 28

Waiver

Answer 28

When beneficiary has full knowledge of the material facts and expressly approves of the complained of action by the trustee, the beneficiary may be deemed to have waived the breach or be estopped from asserting an action.

Question 29

Removal of Trustees

Answer 29

A trustee may be removed for cause, such as a breach of duty or trustee incapacitation.

Question 30

Resignation of Trustees

Answer 30

Once a trustee has accepted the appointment to the position, the trustee can resign at any time. A successor trustee has all the rights and duties of the predecessor.