Trust Administration and Trustee’s Duties

Trustee Power

Rule—trustee has powers necessary to act as reasonably prudent person in managing trust (e.g., revoke, withdraw, or modify), including implied power to contract, sell, lease, or transfer trust property

Third parties

—must act in good faith and give valuable consideration; not liable if they act without actual knowledge that such action constitutes breach of trust

Duty of loyalty and good faith - Rule

Rule—duty to administer trust in good faith (subjective standard) and to act reasonably (objective standard) when investing property and otherwise managing trust solely in best interests of beneficiaries

Duty of loyalty and good faith - Self Dealing

Rule—when trustee personally engages in transaction involving trust property, conflict of interest arises between trustee’s duties to beneficiaries and her personal interest

Self Dealing - Prohibited transactions

—buying or selling trust assets, selling property between trusts that trustee manages, borrowing from or making loans to trust, using trust assets to secure personal loan, engaging in prohibited transactions with friends or relatives, or otherwise acting for personal gain through trustee position

Self Dealing - Irrebuttable presumption

—that trustee breached duty of loyalty when self-dealing is an issue; no further inquiry into trustee’s reasonableness or good faith is required because self-dealing is per se breach

Self Dealing Exception

—even when self-dealing is authorized (by settlor, court order, or all beneficiaries), transaction must be reasonable and fair to avoid liability for breach

Conflicts of interest

—assessed under “reasonable and in good faith” standard if alleged conflict of interest cannot be characterized as self-dealing

Duty of prudence

Rule—trustee may delegate responsibilities if it would be unreasonable for settlor to require trustee to perform such tasks; however, a critical function concerning property is discretionary and not delegable

Duty of prudence - Duty to oversee decisions

Duty to oversee decisions—trustee can delegate determination of management and investment strategies but must oversee decision-making process

(Prudence) Trust investments - Prudent investor rule

—requires trustee to act as prudent investor would act when investing his own property (putting less emphasis on risk level); trustee must exercise reasonable care, caution, and skill when investing and managing trust assets

(Prudence) Prudent Investor Rule - Factors considered in determining compliance include:

• Trust’s distribution requirements

• General economic conditions

• Investment in relation to trust’s overall investment portfolio

• Trust’s need for liquidity, income regularity, and capital preservation or appreciation

(Prudence) Trust investments - Duty to diversify

—trustee must adequately diversify trust investments to spread risk of loss under total performance portfolio approach, but not if administrative costs would outweigh benefits

(Prudence) Trust investments - Duty to make property productive

—by pursuing all possible claims, deriving maximum amount of income from investments, selling assets when appropriate, securing insurance, paying expenses, and acting within reasonable period of time

(Prudence) Trust investments - Duty to be impartial

—does not require trustee to treat each beneficiary equally but does require trustee not to be influenced by favoritism or animosity

• Trustee must balance present and future beneficiaries' interests by investing property so it produces reasonable income while preserving principal for remaindermen, and sell trust property within reasonable time if failure to diversify would be inconsistent with total performance portfolio approach

Duty of Inform and account - Duty to Disclose

Duty to disclose—complete and accurate information about nature and extent of trust property, including allowing access to trust records and accounts, if trustee intends to sell significant portion of trust assets

Inform and Account - Duty to account

Duty to account—must periodically account for actions taken on behalf of trust so that trustee’s performance can be assessed against trust terms

Inform and Account - Attorney-client privilege

Attorney-client privilege—in DE, if attorney represents a trustee in her trustee capacity, only trust beneficiaries hold attorney-client privilege

Duty of prudent administrator

—duty to administer trust as prudent person; must exercise reasonable care, skill, and caution regarding trust property; includes duties to secure possession of property within reasonable time; to maintain real property; to segregate personal property from trust assets (trustee is only liable when breach of duty to segregate causes damage to trust property)

Duty of obedience

—trustees must obey all reasonable instructions in performance of any function within scope of agency

Powers of appointment

—usually given to beneficiary; enables holder to direct trustee to distribute some or all trust property without regard to provisions of trust