Trusts - Trust Administration Flashcards
Sources of Trustee’s Power
Express Powers:
those created by the trust instrument, state law, or court decree
Implied Powers: Those necessary or appropriate to carry out the terms of the trust if those powers are not expressly forbidden by the trust instrument.
Joint Powers
Under traditional view, joint trustees must exercise their power by UNANIMOUS agreement.
Today, in half the states, any power vested in 3 or more trustees may be exercised by a MAJORITY.
Discretionary Powers
Discretionary powers are ones that the trustee may or may not perform, as the trustee determines in their judgment what is most appropriate. Must exercise these powers in good faith.
Liability for Failure or Abuse: exercise of discretionary power is subject to judicial review for abuse of discretion. Court will also intervene if a trustee has completely failed to exercise judgment with regard to a discretionary power.
Grant of absolute discretion subject to court review: even if the settlor grants the trustee absolute or uncontrolled discretion with regard to some matter, the trustee’s acts are still reviewable by the court.
Duties of the Trustee
Trustees owe fiduciary duties. Just because you’re named as trustee doesn’t mean you’re obliged to be one though. But if you decide to do it, then you’ll be bound.
Duty to Administer Trust: once trustee accepts position of trustee, the trustee is bound to follow the terms and will be liable for noncompliance
Duty of Loyalty:
absent court approval or express waiver, trustee can’t enter into any transaction in their personal capacity. NO SELF DEALING.
- Can’t buy or sell trust assets even if fair price.
- Can’t sell property of one trust to another trust
- Can’t borrow from trust
Good faith is IRRELEVANT!
Duty to Keep Accurate Records and Render Accountings
Must keep records of all transactions and render accountings to court or beneficiaries on demand.
Best to provide them on regular basis even if not required and keep all records in best accounting form right at the start.
Duty to Use Skill and Care of Reasonable Person
Trustee must use skill and care of reasonable person. Must PROTECT and INSULATE the trust property. Trust property must be earmarked as being trust property. Don’t want it getting confused with trustee’s own property. If trustee dies, don’t want heirs or beneficiaries being able to latch onto property that actually belongs to the trust. AND trust property must be SEGREGATED from the trustee’s property and the property of other trusts. NO COMMINGLING. Corporate trustees however can often create common trust funds where they put the funds together for higher diversification and rates of return.
Standard of Care for Investing
Majority Rule is the “Prudent Investor Rule”. it’s the default rule but settlor can change it.
Must consider these factors:
1) purpose of trust
2) terms of trust
3) distribution requirements
Prudent measured as to portfolio as a whole – not individual investments.
DIVERSIFICATION IS REQUIRED unless for some special reason it would be better not to diversify. The family farm may be permitted without diversification. The best practice is ask the client and provide those instructions in the trust.
Trustee with Special Skills or Expertise
Trustee will be bound by higher standard.
Taking Over as New Trustee
Must review the investments when you take over as a new trustee and make sure they comply with the prudent investor rule to ensure continued compliance
if not in compliance, need to sell it or due something to make it comply. Maybe also need to sue the prior trustee for breach of duty. If you don’t bring an action for breach of duty, that may be a breach of duty ON YOU.
Duty of Loyalty in Investing
Must invest in sole interest of beneficiaries. Can’t consider factors other than monetary factors. Can’t consider social influences or politically correct factors (I bet they all do that anyway lmao). It’s fine though if trust instrument allows social investing or the beneficiaries agree to it.
Duty of Impartiality
Must not favor one beneficiary over another.
Delegation of Investment Responsibilities
If you’re a trustee without the ability to make prudent investments and can’t comply with all this shit, you can delegate. If you use the proper care, you won’t be responsible if the agent to whom you delegated the investment actions does something wrong.
Delegation Duties: trustee must:
1) use reasonable care in selecting agent
2) establish scope of delegation
3) periodically review agent’s work
Surcharge
Action against trustee for money damages that come out of the trustee’s own pocket.
Damages Beneficiaries Seek:
1) Lost profits (that would have been earned if trust not breached)
2) Depreciation or losses to trust property
3) Profits trustee earned by breach
Nonmonetary Remedy: REMOVAL (see below)
Removal of Trustee
Absent instructions in the trust instrument, the beneficiaries need to go to court to remove a trustee. Court may remove if the trustee’s continuation in office would be detrimental to the trust. There are numerous grounds on which a trustee may be removed.
Just because a beneficiary is being greedy doesn’t mean the court will remove the trustee (like if beneficiary says I wanna buy a Tesla and trustee says no go buy a VW and trustee sues, court probs won’t remove if it’s a spendthrift trust.
Grounds for Removal:
1) Dispute that interferes with proper administration of the trust
2) Refusal to post a bond
3) Refusal to account
Liability to 3rd Parties
Contract Plaintiffs: when trustee signs K, they are typically personally liable under general rule. so they’ll put express provision in K excluding the trustee’s liability. Courts often say if they include “as trustee” after signature then that creates rebuttable presumption they aren’t signing as trustee. If they do end up personally responsible, the trustee can get money back from trust as long as it was a proper K entered into by trust and the trustee wasn’t breaching the K in a way to breach fiduciary duties. The trust may lack funds to indemnify/reimburse the trustee though.
Tort Plaintiffs: under CL, trustee was liable for trustee’s own acts and also all acts of employees and agents via respondeat superior. So trustee became liable for lots of things. Modern law, including UTC, says trustee is liable for employees and agents ONLY IF YOU CAN TRACE PERSONAL FAULT on the basis of the trustee.
