pt 2, WT trusts OL (except charitable trusts)

What is the modern approach regarding trustee's powers?

Trustees have all the powers an unmarried individual would have over their own property, limited only by the trust language or fiduciary duties.

What assumption can a third party make when dealing with a trustee?

The third party is allowed to assume the trustee has the power to act and has no obligation to inquire about the scope of that power.

What is a directed trust?

A trust where the instrument requires the trustee to follow the directions of a specified third party.

What is the 'no further inquiry' rule regarding the duty of loyalty?

A rule where courts do not consider whether a transaction was fair or if there was bad faith; if a trustee engages in self-dealing, the transaction is void regardless of fairness. trustee may have to disgorge profits resulting from transaction

What are four situations where a trustee may engage in a conflict of interest transaction?

1) Authorized by the settlor, 2) consented to by the beneficiary in advance, 3) approved by the court in advance, or 4) a structural conflict created by the trust itself (eg, trustee also = beneficiary)

What are the potential consequences for a trustee who breaches the duty of loyalty?

Liability for compensatory damages, disgorgement of profits, removal from the position, and denial of compensation.

What does the duty of prudence require of a trustee?

The trustee must manage the trust as a reasonably prudent person would, exercising sound judgment and making reasonable inquiries.

Are exculpatory clauses in a trust always enforceable?

No. They are invalid if the trustee acted in bad faith, with willful neglect, or intentional misconduct, or if the trustee was the drafter of the trust.

Why are clauses granting 'sole, absolute and uncontrolled discretion' often unenforceable?

Because they negate the essential component of a trust and prevent necessary judicial review.

What is the 'prudent investor standard'?

The modern requirement that a trustee exercise reasonable care, skill, and caution in making investments, considering the entire portfolio strategy.

What factors should a prudent investor consider when making investments?

The purpose, terms, and distribution requirements of the trust, as well as the needs of the beneficiaries.

Is a trustee generally required to diversify investments?

Yes, to safeguard against downturns in a particular investment sector, unless special circumstances exist.

When might a trustee be excused from the duty to diversify?

If the only trust asset is a family vacation home used by beneficiaries, or if diversification would cause immediate negative tax consequences.

What is the expectation for a professional trustee regarding investment management?

They are expected to have a formal investment policy and plan, and to periodically review the portfolio for compliance.

What are 'statutory legal lists' for investments?

Lists provided by some jurisdictions that set forth approved investments; however, trustees must not follow them blindly and must still act as prudent investors.

What is the trustee's duty regarding the protection of trust property?

The trustee must gather and safeguard property from damage, loss, or theft, including maintaining insurance.

What is the duty to earmark trust property?

designate trust property as such and hold it separately

The requirement that trust property must be held in the name of the trustee, specifically as a trustee for that particular trust.

What is the liability of a trustee who follows the directions of a 'director' in a directed trust?

Liability depends on the Jx; some exempt the trustee, while others hold them liable if they acted unreasonably or engaged in willful misconduct.

What is the scope of the prohibition on self-dealing?

The trustee cannot engage in transactions with themselves, their relatives, or their business entities, such as hiring family or borrowing from the trust.

What must a trustee do upon assuming responsibility for trust assets?

They must bring the assets into compliance with the prudent investor standard within a reasonable period of time.

What is the legal presumption if a trustee commingles trust assets with personal property and loss occurs? (old and new view)

OLD RULE - trustee SL for losses even if they wouldve occurred naturally

MODERN RULE - trustee is liable only if the loss resulted from the failure to earmark or the act of commingling

• It is presumed that the remaining property belongs to the trust, and all losses are attributable to the trustee's personal property.

How are gains treated when a trustee invests commingled funds?

Any increase is attributed to the trust property, while any decline is attributed to the personal property of the trustee.

Why is a trustee required to maintain detailed records of trust transactions?

allow beneficiaries to track trust assets (beneficiary oversight), to protect the trustee from claims by documenting their decision-making process, and help w duty to account

What is the trustee's duty regarding claims against or by the trust?

The trustee must defend the trust against attacks and assert claims held by the trust against third parties, AS LONG AS its in beneficiaries’ best interests and litigation costs are reasonable (depends on nature of the claim)

When does the duty to act impartially not apply to a trustee?

When the trust is still revocable (+ settlor still alive) and the settlor is the trustee and income beneficiary → in such cases, duty owed exclusively to settlor

What is the primary purpose of the Uniform Principal and Income Act (UPIA)?

To guide trustees in allocating income and expenses bw principal and income beneficiaries → gives the trustee discretion to adjust returns and characterize them as principal or income if necessary to carry out the trust purpose

How are cash dividends of stock, rents, and interest generally allocated in a trust?

They are typically allocated to income.

How are proceeds from the sale of trust property and stock dividends generally allocated?

They are allocated to the principal.

How are ordinary expenses like interest on loans, insurance premiums and repairs charged in a trust?

They are charged entirely against the income account (NOT principal)

What information must a trustee disclose to beneficiaries after accepting the position?

w/in 60 days, must disclose the trustee's name, address, and phone number.

Can a trust instrument waive the trustee's duty to provide accountings?

Yes, but it cannot prevent beneficiaries from obtaining information necessary to enforce the trust.

Under what conditions may a trustee delegate administrative acts?

When a prudent trustee would delegate to others capable of performing those acts.

What are the three requirements for a trustee when delegating responsibilities?

Exercising reasonable care in selecting the agent, establishing the scope of delegation/instructing agent, and monitoring the agent's actions.

Do inter vivos trusts require the same execution formalities as a will?

No, they do not require the same formalities; eg, no witnesses

What are the three essential requirements for a valid gift?

Intent to make a gift, delivery (manual, constructive, or symbolic), and acceptance.

What is the defining characteristic of a joint tenancy?

It is a form of co-ownership with a right of survivorship, where the survivor succeeds to the entirety of the property.

How does a 'payable on death' account differ from a joint tenancy bank account?

A payable on death account is in the name of one party, with instructions to pay the funds to a third party upon the account holder's death.

What is the nature of life insurance as a nonprobate asset?

It is a contract-based asset where the policyholder designates a beneficiary to receive a death benefit.

What is the trustee's obligation regarding the creation of an irrevocable trust?

The trustee must notify the beneficiaries within 60 days of the trust's creation or the conversion of a revocable trust into an irrevocable one.

What is the trustee's duty regarding changes in compensation?

The trustee must notify the beneficiaries if there is any change in the method or rate of the trustee's compensation.

Are default rules for wills, such as the 'slayer rule,' applicable to inter vivos trusts?

It depends on the state; some states apply these default rules to inter vivos trusts and other nonprobate assets.

How are general administration expenses generally split bw income and principal accounts?

They are generally split equally between the income and principal accounts.