VI. TRUST ADMINISTRATION ISSUES Flashcards
Jurisdiction
venue
Jurisdiction: [Feb. 2006] District Courts, Statutory Probate Courts have concurrent jurisdiction over all proceedings regarding inter vivos trusts and testamentary trusts.
venue: [Feb. 1996, Feb. 1999] If an individual trustee, (i) county of trustee’s residence or (ii) county in which situs [principal office] of trust has been maintained.
Two or more individual trustees: county in which situs of trust has been maintained.
Corporate trustee: county in which situs [principal office] of trust has been maintained.
[2011 statute:] If settlor is deceased and an estate administration is pending, action involving inter vivos trust created by the settlor or a testamentary trust created by his will may be brought under above rules or in the county in which estate administration is pending.
Accounting
Accounting [Feb. 2014] Trust beneficiaries are entitled to an accounting, on demand, no sooner than __12___ months after trust was created; and to successive accountings on demand at same intervals.
trustee has to keep record, but accounting on demand
Settlor cannot restrict or eliminate the right to demand an accounting by primary beneficiaries— beneficiaries who at the time of the demand (i) are entitled or permitted to receive distributions from the trust, or (ii) who would receive a distribution if the trust terminated then. However, the right of any other (contingent)beneficiary to demand an accounting can be restricted or eliminated.
***decanting power
***[2013 statute] Trustee has decanting power (like pouring wine from an old bottle to a new one): A limited power to transfer trust assets to a new trust with different provisions. Decanting power cannot be exercised so as to impair beneficiaries’ interests or name new beneficiaries; new trust must have same beneficiaries and same distribution powers; trustee’s fiduciary duties cannot be lessened; cannot modify the Rule Against Perpetuities period set out in original trust. Essentially, only trustee’s administration powers can be changed (e.g., to correct ambiguity, change trustee investment power, transfer to “special needs” trust to qualify beneficiary for Medicaid). Court approval is not required as long as notice is given to current beneficiaries and remaindermen.
[Feb. 1999] Can a Texas trustee give a valid 99-year lease, when the lease is likely to outlast the term of the trust?
Can a trustee sell real property to a third party in exchange for the purchaser’s unsecured promissory note?
model answer for
yes;
Texas Trustee Powers Act: if a fee simple owner can do it, so does the trustee
Model answer: “The Texas Trust Code, which applies to all trusts in Texas except to the extent the trustee’s powers are expanded or limited by the settlor, gives broad fiduciary powers to trustee. Specifically, the Trust Code expressly authorizes a trustee to [do whatever the question involves]”
Exception: There are two situations where the answer is “NO, the trustee DOESN’T have the power to do this.”
1, self dealing
2, imprudent investment
42.
[Feb. 1988] List six powers a trustee may exercise in managing real property held in trust.
remember same as what a fee simple owner can do
(1) Sell the property at public or private sale; (2) lease the property for any term the trustee deems appropriate; (3) give a mortgage; (4) make improvements; (5) make repairs; (6) give mineral leases; (7) partition and subdivide the property.
- Trust names friend Hubie Gates as trustee. Hobie borrows $100,000 from the trust, giving the trust a six-month note at 6% interest. Hobie uses the borrowed funds to buy an oil well. Six months later Hobie sells the oil well to Hazel for $1 million. He repays the $100,000 (plus interest) to the trust. What action, if any, can the beneficiary bring against Hobie?
3. [Feb. 1991] Trustee cannot loan funds to the trust, and any interest earned on such a loan must be returned to the trust. [Feb. 1991:] Any security received in connection with such a loan is invalid.
Concern of the “no self-dealing” rules is not that the trustee will cheat or steal, but rather that trustee’s personal interest in the transaction may taint his judgment, which under the duty of loyalty is to act solely in the interest of beneficiaries.
- # 1. [Feb. 2009, Feb. 2014] Trustee cannot borrow trust funds or [July 2006] use trust assets as collateral for a personal loan
- # 2. [Feb. 2011] Trustee cannot buy or sell trust assets to itself (Corporate trustee exception: can be allowed on court order). [July 1996, Feb. 2002] Settlor can waive the self-dealing rules.
If trustee breaches any fiduciary duty (commits a “breach of trust”)—self-dealing, imprudent investment—in addition to bringing an action to deny the trustee’s compensation [Feb. 2011, Feb. 2014] and remove the trustee, beneficiary has option:
(1) [Feb. 2002] He can ratify the transaction and waive the breach of trust. (E.g., if the trustee invests the entire trust in treasure-hunting company stock and it goes up in value, “Thanks for doing such a good job of investing.”)
(2) [Feb. 2011] He can bring surcharge action for the resulting loss. Moreover, if (as in #43) the case involves self-dealing, under the no further inquiry rule breach of a fiduciary duty is an automatic wrong; good faith reasonableness, is no defense. Only issue in a self-dealing case: measure of damages. (E.g., difference between what he paid for the stock and what it is worth at the time of suit.)
(3) [July 2004] If trustee still has possession of the property, beneficiary can petition for the imposition of a constructive trust.
Four-year Statute of Limitations does not begin to run on action against a fiduciary (trustee, executor, guardian) unless and until he (i) repudiates the trust [Feb. 1994]; that is, denies the existence of a trust with respect to the property; (ii) dies or resigns, or (iii) gives an accounting that makes full disclosure of the facts upon which the action is based.
Trust names friend Hubie Gates as trustee. Hobie borrows $100,000 from the trust, giving the trust a six-month note at 6% interest. Hobie uses the borrowed funds to buy an oil well. Six months later Hobie sells the oil well to Hazel for $1 million.
Does the beneficiary have an action against Hazel, who purchased the oil well from Hobie, when she knew that Hobie was a trustee?
no if Hazel was a BFP
unless Hazel knew or should have known Hobie was self dealing, she is a BFP
Trust names friend Hubie Gates as trustee. Hobie borrows $100,000 from the trust, giving the trust a six-month note at 6% interest. Hobie uses the borrowed funds to buy an oil well. Six months later Hobie sells the oil well to Hazel for $1 million.
***Does the beneficiary have an action against Hazel if Hazel was Hobie’s sister?
yes; self dealing rules apply
Self-dealing rules also apply to loans or sales to a relative [Feb. 2011; four time since 1997], and to a business entity of which trustee is an officer, director, partner, employee or principal shareholder [July 1998, Feb. 2002]—sometimes called “indirect self-dealing.”
Can the trustee loan trust funds to a beneficiary?
- [July 2000] A trustee’s duty to protect and preserve the trust’s assets includes
YES—subject to the general test of prudence (interest rate must be fair, loan must be secured, reasonable repayment schedule).
the duty to insure them against loss, if a prudent person would insure such assets.
- [Feb. 1993] Hobie Gates, Sam Slick and Lance Boyle are co-trustees. Lance consults you and says that Hobie and Sam are about to take an action Lance believes is improper. (He’s right.) What should Lance do to protect himself from liability?
Where there are two or more trustees, majority rules. However, each co-trustee has an affirmative duty to prevent a breach of trust by a co-trustee. (So, Lance should attempt to dissuade Hobie and Sam from the action. If that is unsuccessful):
(1) Do not participate in the transaction
(2) express dissent in writing
***46. Trustee’s investment power: Trust (current value $800,000) provides for income to Wife for life, remainder to Children. The trust does not authorize distributions of principal to Wife. Current investments include 6% corporate bonds ($200,000) yielding $12,000 in annual income, and common stocks listed on New York Stock Exchange ($600,000) producing cash dividends at an average of 2% ($12,000 per year). Trustee sells some common stock and invests the $200,000 sale proceeds to buy stock in an IPO (“initial public offering”) for Bodacious Inc., a three-year- old Internet start-up company that has lost money every year, has never paid dividends, and is not likely to do so for at least five years. Six months later, the Bodacious stock has declined in value to $80,000. Should the trustee be held liable for the $120,000 loss?
But doesn’t the investment’s sharp decline in value create a res ipsa case that the investment was imprudent, leading to trustee liability?
But what of the fact that the trustee knew that the IPO stock was unlikely to pay dividends; and that for a $800,000 (oops! now $680,000) trust portfolio, the ordinary income (bond interest and cash dividends) to be distributed to Wife will only be about $20,000?
Uniform Prudent Investor Act (“UPIA”) [1/1/2004], based on the modern portfolio theory of investing that looks to total return (appreciation and capital gain as well as ordinary income),
so probably not liable
Recap: Under the Uniform Prudent Investor Act, invest for total return, taking into account potential appreciation and capital gain as well as ordinary income. [July 2006] Prudence is measured by conduct at the time the investment decision is made, not by hindsight based on outcome or performance. Under the Uniform Principal & Income Act, trustee can exercise adjustment power in favor of income beneficiary where appropriate, and can allocate capital gain and principal to income.
- Trust provides for payment of “income to Ann for life, and on Ann’s death principal to Betty.” Allocate receipts from the following transactions under the Uniform Principal & Income Act
a. [Feb. 2006] interest, rental income, cash dividends on stock—allocated to. [Feb. 2006 and July 2006] eminent domain condemnation award, insurance proceeds for trust property destroyed by fire—allocated to.
b. [Five times since 1984] Trustee leased 1,000 acres of land for oil & gas and received a bonus of $40,000 for signing the lease. Trustee also received $1,000 in delay rental for the next year, and royalty income of $60,000 in the following year.
c. For pension plans, annuities and IRAs (individual retirement accounts) that name a trust as beneficiary, distributions are allocated under a
d. For receipts from “liquidating assets” (patents, copyrights, book royalties) that will decline in value over time, allocate _____________ to income and ______________ to principal.
e. All money received from an entity (corporation, partnership, etc.) is allocated to
All receipts from an entity other than money (e.g., stock dividends) are allocated to.
Expenses: Trustee’s commissions, expenses for accountings, judicial proceedings: ______________ charged against income; and ______________ charged against principal.
a. [Feb. 2006] interest, rental income, cash dividends on stock—allocated to income. [Feb. 2006 and July 2006] eminent domain condemnation award, insurance proceeds for trust property destroyed by fire—allocated to principal.
b. [Five times since 1984] Trustee leased 1,000 acres of land for oil & gas and received a bonus of $40,000 for signing the lease. Trustee also received $1,000 in delay rental for the next year, and royalty income of $60,000 in the following year.
Delay rental: _all__ allocated to income; ___0__ allocated to principal. Royalty, bonus: Allocate receipts equitably
put it in: “However, an allocation is presumed to be equitable if it follows the federal income tax depletion allowance rules.”
four percent cap rule. Distributions made in any year are allocated to income until payments equal four percent of the plan’s or IRA’s value at the beginning of the accounting period (typically, January 1); any excess over four percent is allocated to principal.
10%, 90%
income, principal
half, half
- Sam, recently retired from Dell Corporation, transfers 10,000 shares of Dell stock to Trustee of an irrevocable trust. Can Trustee retain the Dell stock without any duty to diversify?
no; Violates duty to diversify investments. Under the prudent investor rule, a trustee can’t keep or put all investment eggs in one basket (absent contrary provision).
Sam, recently retired from Dell Corporation, transfers 10,000 shares of Dell stock to Trustee of an irrevocable trust.
- ________ [July 1986] Could Sam as settlor have authorized the trustee to retain the Dell stock without any duty to diversity trust investments?
All provisions of the Texas Trust Code are “default” rules and [July 1995] apply absent contrary provision by the settlor. A settlor can “write her own rules,” and modify the otherwise applicable Trust Code provisions. The only rules the settlor cannot waive:
illegal, exculpate a trustee from liability, limit the statute of limitations, trustee’s duty to respond to a demand for an accounting
