UPIA / IN Trust Code Flashcards
What does “UPIA” stand for?
Uniform Prudent Investor Act
OR
Uniform Principal and Income Act
What is the relationship between the UPIAs (both) and the trust document?
The terms of the trust document always control/trump the Acts
When does a Trustee owe a duty under the Uniform Prudent Investor Rule?
TO THE BENEFICIARIES; CAN BE ALTERED BY TRUST TERMS
(a) Except as otherwise provided in subsection (b), a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set forth in this chapter.
(b) The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provision of the trust.
IC 30-4-3.5-1
What is the Prudent Investor Rule?
a) A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
(b) A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.
(c) Among circumstances that a trustee shall consider in investing and managing trust assets are those of the following that are relevant to the trust or its beneficiaries:
(1) General economic conditions.
(2) The possible effect of inflation or deflation.
(3) The expected tax consequences of investment decisions or strategies.
(4) The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property.
(5) The expected total return from income and the appreciation of capital.
(6) Other resources of the beneficiaries.
(7) Needs for liquidity, regularity of income, and preservation or appreciation of capital.
(8) An asset’s special relationship or special value, if any, to the purposes of the trust or to one (1) or more of the beneficiaries.
(d) A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust assets.
(e) A trustee may invest in any kind of property or type of investment consistent with the standards of this chapter.
(f) A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, has a duty to use the special skills or expertise.
In layman’s terms, what is the Prudent Investor rule?
The Prudent Investor Rule, set forth in IC 30-4-3.5-2, mandates an investment approach designed to achieve optimal total return on the trust assets consistent with the trust objectives and risk tolerance.
What is the Trustee’s primary consideration in complying with the Prudent Investor Rule?
The trustee’s primary consideration is the achievement of an appropriate balance between risk and return and thus fair consideration of the interests of income and remainder beneficiaries, without being constrained by market conditions which might militate towards investment strategies emphasizing income over capital appreciation, or vice-versa, depending on the times.
How does a Trustee prove compliance with the Prudent Investor Rule?
Document that the Investment strategy must has risk and return objectives suited to each individual trust.
How does the Prudent Investor instruct on retaining illiquid or “special” assets?
CAN RETAIN, but better to draft for it.
Retention, without specific trust provisions allowing it, of illiquid family assets such as vacation residences, farms, other real estate, and closely-held family businesses interests could be justified under the language of (8) (above) but the better practice would be to specifically state that such retention is allowed in the trust document.
Are any investments “de facto” imprudent under the Prudent Investor Rule?
No.
What does the Prudent Investor Act direct as to diversification of assets?
SHALL DIVERSIFY, UNLESS…
“A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”
30-4-3.5-3
AGAIN, have the trustee document. And better to include in the document if okay not to diversify.
What is the standard for evaluating the “prudent” investor? Does everyone have to operate at a professional level?
No. It’s someone of like skill and someone of like abilities in administering the trust. Eg. a grandma is not left to the same standard as a bank.
To whom does the trustee owe the duty under the Prudent investor rule?
The beneficiaries.
What does Trustee need to understand about the trust in order to comply with prudent investment rule?
Document the file:
Who are the beneficiaries;
what is the purpose of the trust for those beneficiaries; what is to happen with the income (pay out or accumulate);
is there a minimum I should distribute?
Take all of this into consideration to determine 1) how it’s invested; 2) how payments are made, etc.
How does Trustee “prove” compliance with prudent investment rule?
Document the file/ keep records:
- When making a decision of one investment over another, document file of the factors considered to make decision.
- What did you consider? Did you look at the purpose of the trust? And who the beneficiaries are?
How soon does successor trustee need to review investments after taking over trust admin?
REASONABLE TIME (=very short time review assets and make sure the investments are proper and meeting goals of trust) "Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this chapter.
30-4-3.5-4
What is the impartiality rule under UPIA?
TRUSTEE MUST BE IMPARTIAL.
Trustee must invest for both the current income beneficiary and remainder beneficiary. Unitrust can help with this impossibility.
“If a trust has at least two (2) beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.”
30-4-3.5-6
What role does hindsight have in reviewing the actions of the trustee under UPIA?
NONE
“Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.”
30-4-3.5-8
See Cochran
May trustee delegate her investment duties?
Yes, Sect. 9, but might be better to use directed trustee terms. Trustee RETAINS LIABILITY for actions of agent.
(a) A trustee may delegate investment and management functions that a prudent trustee
of comparable skills could properly delegate under the circumstances. The trustee shall exercise
reasonable care, skill, and caution in:
(1) selecting an agent;
(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of
the trust; and
(3) reviewing the agent’s actions periodically in order to monitor the agent’s performance and compliance with the terms of the delegation.
(b) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care.
(c) By accepting the delegation of a trust function from the trustee of a trust that is subject to the
law of Indiana, an agent submits to the jurisdiction of the courts of Indiana.
How does trustee protect itself if it wants to retain a non-diverse asset?
In the absence of a trust provision stating certain assets can be retained, the trustee may want to seek the consent of all beneficiaries, or even court instructions, if the trustee is unsure about the propriety of not diversifying or selling illiquid assets that comprise a large part of the trust property.
Can a trust term relieve a trustee of liability?
Yes, to a point. I.C. 30-4-3-32(b) states:
A provision in the trust instrument is not effective to relieve the trustee of liability for breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of the beneficiary, or of liability for any profit that the trustee has derived from a breach of trust.
What does case law show regarding the Prudent Investor Act?
Good records showing why the trustee made its decisions are protective of the trustee.
This Uniform Prudent Investor Act has not historically been the reason trustees have been found guilty of fiduciary breach.
Does the Uniform Prudent Investor Act apply to estates?
No, only trusts.
Does the Uniform Principal and Income Act apply to estates
Yes, estates and trusts.
What is the Uniform Principal and Income Act?
44 subsections concerning the application of the
statute, various detailed accounting rules for specific situations, and rules of construction; all about the balance between principal and income.
Is the Uniform Principal and Income Act mandatory?
No, discretionary. Trustee has the discretion to do these different things. However, still subject to DUTY OF IMPARTIALITY.
What does the Uniform Principal and Income Act require in terms of impartiality?
Whenever there are two or more beneficiaries, a
trustee is under a duty to deal impartially with them. This rule applies whether the beneficiaries’ interests in the trust are concurrent or successive.
If the terms of the trust give the trustee discretion to favor one beneficiary over another, a court will not control the exercise of such discretion except to prevent the trustee from abusing it.
Does the court have power to review a fiduciary’s discretionary powers?
Generally, no. The general rule is that if a discretionary power is conferred upon a trustee, the exercise of that power is not subject to control by a court except to
prevent an abuse of discretion.
Where is an asset allocated if there is no other term or law?
Allocate receipts and disbursements to principal when there is no provision for a different allocation in the terms of the trust, the will, or the Act,
If there is a lopsided growth (say huge principal growth and little income), what does trustee have discretionary power to do to make things fair/equal (impartiality standard)?
Power to adjust.
The trustee MAY adjust b/n principal and income to the extent the trustee considers NECESSARY.
Eg., distribute principal to income beneficiary, OR income to principal beneficary
How does trustee protect itself under Uniform Principal and Income Act?
Again, document and explain its decisionmaking process.
OR, move to a unitrust.
How does power to adjust under Uniform Principal and Income Act fit with Prudent Investor Act?
The power to adjust dovetails with the Prudent Investor Act which requires the trustee to invest for total returns without necessarily focusing on income or growth, but rather reacting to markets and balancing investment strategy to maximize return.
Under the UPIA how and when can a Trustee make an adjustment b/n principal and income?
An adjustment may be made under IC 30-2-14-15(a) if the trustee is:
a. Acting as a prudent investor;
b. The terms of the trust describe the amount that may or must be distributed by referring to trust income, and
c. The trustee must determine, after applying the rules in IC 30-2-14-14(a), that he is unable to comply with IC 30-2-14-14(b), which requires that the trust be administered in a manner that is fair and reasonable to all beneficiaries taking into account duty of impartiality to all beneficiaries
absent such an adjustment (extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries).
