Trustee's Powers & Responsibilities Flashcards
Sources of Trustee Power
- The trust instrument (either expressly or by implication)
- statute or implied powers in law
General Powers of Trustee (Unless Expressly Precluded in Trust Instrument)
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
Trustee’s Discretion
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).
Duty of Loyalty and Good Faith
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
Any Profits Earned from Self-Dealing with the Trust
Belongs to the trust.
Remedies for a Self-Dealing Transaction
(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
Exculpatory Clauses in a Trust
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).
Trustee’s Affirmative Duties
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.
Distribution of Receipts
Will depend on whether something is trust principal or trust income.
Distribution of Rents and Cash Dividends
Are allocated to trust income, and then are distributed to trust’s income beneficiary.
Sales Proceeds and Stock Dividends
Are allocated to principal of trust and protected for ultimate distribution.
Ordinary Expenses
Incurred in connection with the preservation of trust property, including ordinary repairs, are allocated to income.
Extraordinary Repairs
Repairs that are beyond the usual or customary kind are allocated to the principal.
Discretion in Allocation Decisions?
The UPIDA allows the trustee to exercise some discretion in allocation decisions as long as fairness to all beneficiaries is met.
Prudent Business Person Rule
- 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.
Diversification
A trustee should diversify the trust’s portfolio.
Diversification: Usually Acceptable Investments
Include: gov. or highly rated bonds, blue-chip stocks (those with national rep and solid track record), and quality mutual funds.
Diversification: Risker or Questionable Investments
Include: penny stocks, speculative stocks, commodities (fungible economic goods), and derivatives (something that is based on another source).
Decline Due to General Economic Conditions
A trustee is not liable for a decline in value due to general economic conditions.
Modern Investment Theory
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).
Delegation
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
What if a Trustee is Following the Investment Instructions of a Settlor For a Revocable Trust?
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.
Bases of Trustee Liability
- Breach of duty to beneficiaries
- Successor-trustee liability
- breach of duty of care in investing
- responsibility for other lost interests
If the Trustee Uses Trust Assets to Buy Property and the Property Increases in Value
The trustee must return both the trust property and the appreciation in value to the trust fund.
When a Trustee Breaches their Duty of Care in Investing and Trust Property Depreciates in Value
The trustee must personally recompense the trust for its losses
Successor-Trustee Liability
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
Exculpatory Clause in Trusts
Relieves trustee of liability for potentially wrongful acts.
Waiver
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.
Removal of Trustees
A trustee may be removed for cause, such as a breach of duty or trustee incapacitation.
Resignation of Trustees
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.
