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Sources of Express Trustee Power
(1) the trust instrument; (2) state law; and (3) court decree
Sources of Trustee Implied Powers
A trustee has all powers that are necessary and appropriate to carry out the terms of the trust if those powers are not expressly forbidden by the instrument. Normally, a trustee has no implied power to borrow money or to mortgage or otherwise encumber the property. The UTC expressly confers these powers
Implied Trustee Powers examples
(1) sell trust property; (2) lease trust property; (3) incur reasonable expenses; (4) hire agents; (5) mortgage trust property; and (6) repair.
Joint Trustee Powers
Under the traditional view, joint trustees must exercise their power by unanimous agreement. In nearly half of states, any power vested in three or more trustees may be exercised by a majority of them
Imperative (Mandatory) Powers
A power is “imperative” if the trust instrument requires its exercise. If a trustee fails or refuses to perform under an imperative power, a court will, upon petition, order the trustee to exercise the power as required by the instrument (provided this would not violate law or public policy)
Trustee Discretionary Powers
Discretionary powers are ones that the trustee may or may not perform according to their judgment. The trustee must exercise a discretionary power in good faith
Trustee Liability for Abuse/Failure to Exercise Discretionary Powers
Exercise of a discretionary power is subject to judicial review for abuse of discretion. The court will also intervene if a trustee has completely failed to exercise judgment with regard to a discretionary power
Reviewability of Grant of Trustee Absolute Discretion
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: To Whom
Trustees owe their fiduciary duties to the beneficiaries of the trust. In some states, a trustee of a revocable trust owes duties only to the settlor
Duty to Administer Trust
Once the trustee accepts the position, the trustee is bound to follow the terms of the trust and will be liable for noncompliance
Duty of loyalty
Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which the trustee is dealing with the trust in their individual capacity. A trustee owes a duty of undivided loyalty to the trust and its beneficiaries
Extensions of Duty of Loyalty
(1) a trustee cannot buy or sell trust assets, even if the price is a fair one; (2) a trustee may not sell property of one trust to another trust of which they are also trustee; (3) a trustee may not borrow trust funds or loan their personal funds (except to protect the trust), and any interest paid on such a loan must be returned to the trust; (4) a trustee cannot use trust assets to secure a loan; (5) a trustee cannot personally gain through their position as trustee beyond their trustee fee; (6) a corporate trustee cannot invest in its own stock as a trust investment (but it can retain its stock if it was part of the original res and doing so complies with the prudent investor standard); and (7) self-employment can constitute a form of prohibited dealings. If the trustee renders extraordinary services to the trust, the trustee may be entitled to additional compensation
Trustee Indirect Self-Dealing
Self-dealing rules also apply to sales or loans to a trustee’s relatives and business associates, and to corporations of which a trustee is a director, officer, or principal shareholder
Trustee Duty to Account
The trustee must keep accurate records of all trust transactions and render accountings to the the beneficiaries or the court upon demand
Beneficiary’s Rights in Case of Prohibited Transaction
If a prohibited transaction takes place, the beneficiary may: (1) set aside the transaction; (2) recover any profit made by the trustee; or (3) affirm the transaction
Trustee General Standard of Care
The trustee must exercise the degree of care, skill, and caution that would be exercised by a reasonably prudent person in managing their own property. If the trustee has greater or special skill, they will be held to that higher standard
Duty to Separate and Earmark Trust Property
A trustee must keep trust assets physically separate from other assets. Trust property must be titled in the trustee as trustee for a specific trust. If commingling occurs and some property is lost or destroyed, it is presumed that the destroyed stuff was the trustee’s personal property. If commingling occurs and some assets increase in value and others decrease, it is presumed that the trust assets increased and the trustee’s personal assets decreased.
Trustee’s Duty to Perform Personally
A trustee may only delegate acts that would be unreasonable to require them to perform personally; the trustee may never delegate the entire administration of a trust or discretionary functions. Traditionally, a trustee could not delegate investment decisions, but under the Uniform Prudent Investor Act, a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate
Remedy for Trustee Failure to Perform Personally
If the trustee fails the duty to perform personally and improperly limits or surrenders their control, the trustee becomes a guarantor of the fund and is responsible for actual losses, no matter the cause
Trustee’s Duty to Defend the Trust
A trustee owes a duty to defend the trust from legal attack unless examination reveals that the challenge is well-founded
Trustee Duty to Preserve Trust Property and Make it Productive
The power to invest is normally implied from the duty to make trust property productive. The trustee is expected to, for example, lease land, collect claims, and invest money. The measure of damages for failure of this duty is the amount of income that would normally accrue from proper investments.
Uniform Prudent Investor Act (UPIA)
A trustee must exercise reasonable car, skill, and caution when investing and managing trust assets. Investment decisions must be evaluated in the context of the entire trust portfolio and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust. Any type of investment is permitted.
UPIA Factors Considered in Investment Decisions
The trustee must consider the following: (1) general economic conditions; (2) inflation or deflation potential; (3) expected tax consequences; (4) the role each investment plays in the overall portfolio; (5) the expected total return from income and expected appreciation of capital; (6) other resources of the beneficiaries; (7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and (8) an asset’s special relationship or value to the purposes of the trust or to one or more of the trust beneficiaries
UPIA Diversification
A trustee must diversify the investment of the trust unless they reasonably determine that the purposes of the trust are better served without diversification
Reviewing Compliance with UPIA
Compliance is determined in light of the fact and circumstances existing at the time of the trustee’s decision or action. A trustee who acts in substantial compliance will not be held liable
UPIA: Trustee with Special Skills or Expertise
Trustees with special skills or expertise, or who represent themselves as having such knowledge, have a duty to use their skills and expertise. A professional trustee or attorney may be held to a higher standard
UPIA: Trustee with Lower skills
A trustee cannot excuse a breach by proving the trustee is an idiot
Trustee Duty to Review Trust Property
When the trustee assumes office, the trustee must review the trust assets to bring them into compliance with the prudent investor rule. If imprudent investments are discovered by a successor trustee, the successor may need to sue the predecessor for breach of duty
Trustee Loyalty and Social Investing
Social investing may conflict with the duty to act solely for the beneficiary when investing, especially if the returns are lower than other investments.
Trustee Impartiality
If there is more than one beneficiary, the trustee must act impartially and not favor one beneficiary over another
UPIA: Delegation of Investment and Management Functions
A trustee may delegate investment and management functions, but only if a prudent trustee of comparable skills could properly delegate. The trustee must act prudently in: (1) selecting an agent; (2) establishing the scope and terms of the delegation; and (3) periodically reviewing the agent’s actions.
Summary of Trustee Fiduciary Obligations
(1) Was the act one that the trustee was authorized to perform by the instrument, by state law, or by implication? If so, (2) did the trustee perform the act with appropriate care, skill, and caution
Enforcement by Beneficiaries
The beneficiaries may seek to have the trustee surcharged (pay damages suffered by the trust) or removed from office if the trustee breaches. The settlor may sue if they are also a beneficiary, but outsiders cannot enforce the trust. Prior to actual breach, a court of equity will compel the trustee to perform their duties and enjoin the trustee from committing breach
Money Damages Liability of Trustee in General
The trustee is liable for money damages resulting from loss to the trust estate resulting from breach and for any profit that would have been accrued but for the breach, as well as any profit made by the trustee as a result of their breach.
Trustee Defense: Equity
Equity will not enforce the trust if the beneficiaries consented to or joined in the breach of the trust. The beneficiary must sue within a reasonable time or they will be estopped by the doctrine of laches. Mere failure to object at the time of breach does not constitute consent
Virtual Representation in Suing Trustee
In any action in which beneficiaries are parties, a minor, incapacitated, or unborn beneficiary may be represented by another beneficiary having a substantially identical interest, but only to the extent that there is no conflict of interest
Trustee Offsetting Breach Liability
A trustee is not permitted to offset loss from one breach by gain that resulted from another breach
Removal of Trustee
Absent instructions in the trust instrument, the beneficiaries need to go to court. A court may remove a trustee if their continuation in office would be detrimental to the trust, taking into consideration the settlor’s intent and the interests of the beneficiaries
Grounds for Removal of Trustee
(1) legal or practical incapacity to administer the trust; (2) unfitness; (3) commission of a serious breach; (4) serious conflict of interest; (4) trustee insolvency; (5) extreme friction or hostility with beneficiaries that interferes with proper administration; (6) refusal to post any required bond; and (7) refusal to account
Trustee Liability for Agents
A trustee will be liable for the acts of their agents if the trustee: (1) directs, permits, or acquiesces in the act, conceals the act, or fails to compel the agent to redress their wrong; (2) improperly selects or improperly delegates; or (3) fails to exercise reasonable supervision
Trustee Liability for Co-Trustees
A trustee is liable for the acts of a co-trustee if the trustee: (1) approved, acquiesced, or participated in the breach or negligently disregarded their own duties; (2) concealed the breach or failed to take steps to compel redress; or (3) improperly delegated authority to the co-trustee
Trustee Liability for Predecessor Trustees
A trustee will be liable for a predecessor’s breach if the trustee: (1) knew or should have known of the breach and failed to compel redress; or (2) was negligent in determining what property should have been delivered to them
Trustee liability to Successor trustees
Successor trustees can maintain the same actions as the original trustee
Effect of Exculpatory Clause on Trustee Liability
Clauses attempting to relieve a trustee of liability for breach of trust generally are strictly construed, but are enforceable where: (1) no bad faith, intentional breach, or recklessness is involved; or (2) the clauses were not inserted in the trust as a result of abuse of the trustee’s confidential relationship with the setllor. Clauses absolving the trustee from ALL liability are void
Trustee Contact Liability to 3Ps
Unless the contract specifically provides otherwise, a trustee is personally liable to 3Ps on contracts made in the course of trust administration. A trustee is entitled to reimbursement from the trust if the contract was within their powers and the trustee acted with reasonable prudence
Trustee Tort Liability to 3Ps
A trustee is personally liable for torts committed in the course of trust administration, even those committed by the trustee’s agents. There is indemnification only if the trustee was not personally at fault and the tort occurred as a normal incident to an activity in which the trustee was properly engaged. If the trustee is indemnified, creditors of the trustee can reach trust assets to satisfy claims.
Liability for Property Improperly Transferred to a Non-BFP
A beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a BFP
Liability for transfer to BFP
Transfer to a BFP cuts off the beneficiaries’ interests. A 3P is a BFP if they acquire the property for value and without notice of the trust. Inquiry notice applies. An innocent donee of trust property is not liable for damages but must restore the property, its value, or its substitute to the trust
Liability for 3P Participating in Breach of Trust
A knowing participant in a breach of trust is liable for the resulting loss
Direct Suits By Beneficiaries Against 3Ps
Direct suits by beneficiaries are not permitted against 3Ps who damage trust property: only the trustee can sue. The beneficiaries can bring a suit to compel the trustee to sue.
Exceptions allowing beneficiaries to sue 3Ps directly
Direct actions by beneficiaries against 3Ps are permitted where the trustee: (1) participated in the breach; (2) has left the Jx and no successor trustee is appointed; or (3) fails to sue a third person liable in tort or contract
Allocations of Receipts: Universal Principal and Income Act (UPAIA)
Unless the instrument specifies otherwise, the UPAIA gives the trustee or personal representative an adjustment power to reallocate investment portfolio return. The trustee is under a duty to administer the trust impartially, except to the extent that the trust or will manifests a contrary intent.
UPAIA Adjustment Power
If the trust calls for distribution of trust income to the beneficiary, the trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc. to the beneficiary. If the trustee determines that by distributing only the trust’s income the trustee is unable to comply with impartiality, the trustee may adjust between principal and income to the extent necessary
Factors to Consider for Adjustment Power
(1) the nature, purpose, and expected duration of the trust; (2) intent of the settlor; (3) identity and circumstances of the beneficiary; (4) the needs for liquidity, regularity of income, and preservation and appreciation of capital; (5) the nature of the trust’s assets; (6) the net amount allocated to income under other sections of the act and the increase/decrease of the principal assets; (7) whether and to what extent the trust gives the power to invade principal or accumulate income; (8) the actual and anticipated effect of economic conditions on principal and income and effects of inflation or deflation; and (9) the anticipated tax consequences of an adjustment
UPAIA Adjustment Tax Consequences
The trustee may not make an an adjustment if the trustee is a beneficiary of the trust, since this would make trust assets taxable in the state. An adjustment cannot be made if the adjustment power would disqualify the trust for a federal estate tax marital or charitable deduction
Allocation of Receipts: From Entity
Money received from an entity is characterized as income unless the money is characterized as a capital gain for federal income tax purposes, or is received in partial or total liquidation of the entity. All property other than money received from an entity is characterized as principal
Characterization of Net Rental Income
Trust income
Characterization of the Proceeds of Sale of Trust Asset
Considered to be part of the principal
Receipts from Insurance Polices and Other contracts
Allocated to principal. If a contract insures the trustee against a type of loss, the proceeds are allocated to income. Dividends on an insurance policy are allocated to the account from which the premiums are paid
Deferred Compensation Rule
Ten Percent rule. For period receipts from a deferred compensation plan, the receipt is income to the extent characterized by the payor as income, and the balance is principal. If no part of the payment is characterized as income or dividend, 10% of the payment is income and the balance is principal
Liquidating Assets Assignment of Receipts
A liquidating asset is an asset whose value will diminish over time because the asset is expected to produce receipts over a limited period. Proceeds from such assets are allocated 10% to income and 90% to principal
Assignment of Receipts: Mineral Interests
10% to income 90% to principal
Assignment of Receipts: Unproductive Property
Under former law, if a particular trust asset produced little or no income, on the asset’s sale the income beneficiary was entitled to a portion of the sale. Because the UPIA looks to the total return from the overall portfolio, the unproductive property rule was repealed except for certain trusts that are intended to qualify for the estate tax marital deduction
Allocation of Expenses: Expenses Charged to Income
50% of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee; 50% of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests; the entire cost of ordinary expenses; and insurance premiums covering the loss of the principal asset
Allocation of Expenses: Expenses Charged to Principal
50% of compensation of the trustee and any person providing investment advisory or custodial services; 50% of accountings, judicial proceedings, and other matters affecting both income and remainder interests; payment on the principal of a trust debt; expenses of a proceeding that concerns primarily an interest in principal; estate taxes; and disbursements related to environmental matters