TRUSTEE POWERS AND DUTIES

Question 1

Issues:

Answer 1

Trustee powers
Trustee duties owed to the beneficiary and remedies
Trustee duties owed to third persons

Question 2

Trustee Powers

Answer 2

[A] Trustee has all enumerated powers.
[B] Trustee has all implied powers, too.

Question 3

Implied Trustee Powers

Answer 3

1. Power to sell trust property
2. The power to incur expenses
3. Power to lease
4. Power to borrow

Question 4

Trustee Duties Owed to Beneficiaries

Answer 4

1. Duty of Loyalty
2. Duty to Invest
3. Duty to Earmark

Question 5

Duty of Loyalty
[1] Definition:

Answer 5

Requires that the trustee administer the trust for the
benefit of the beneficiaries (implicitly, trustee must be
impartial), having no other consideration in mind.

No Self-Dealing by the Trusteee

Question 6

Examples of self-dealing:

Answer 6

[a] Trustee prefers one beneficiary, his child, over the other beneficiaries
[b] Trustee sells trust property to trustee’s spouse
[c] Trustee-lawyer hires himself

Question 7

Consequences of finding breach of the duty of loyalty or selfdealing:

Answer 7

[a] If there is a loss, the trustee is “surcharged,” meaning that the trustee has to make good the loss.
[b] If the trustee makes a personal profit, then with respect to those ill-gotten profits, the trustee is a constructive
trustee: must turn over those profits to the intended
beneficiary.

Question 8

Duty to Invest: Split of authority: There are three alternative rules of
the duty to invest. Discuss all three on the bar exam.

Answer 8

1. State lists:
2. Common law prudent person test:
3. Uniform Prudent Investor Act:

Question 9

State Lists

Answer 9

Some states have lists which trustee must follow in
the absence of directions in the trust. Good investments in these jurisdictions are:

1. Federal Government Bonds
2. Federally Insured Certificates of Deposit
3. First Deeds of Trust in Real-estate
4. Sometimes stocks of publicly traded corporations
5. Never invest in a new business.
6. Never invest in second deeds of trust in real estate.

Question 10

Common law prudent person test:

Answer 10

The duty to invest requires the trustee to act as reasonably prudent person investing hisown property, trying to maximize income while preserving
corpus. If the trustee holds himself out as having greater skill, he is held to that higher standard.
[a] Key: Each individual investment is scrutinized.

Question 11

Good investments under the common law test:

Answer 11

1. Federal Government Bonds
2. First Deeds of Trust in Real-estate
3. Federally Insured Certificates of Deposit
4. Blue Chip Stocks
5. Mutual Funds
6. Never invest in a new business.
7. Never invest in second deeds of trust in real estate.

Question 12

Uniform Prudent Investor Act:

Answer 12

Adopted by most states: The act simply provides that the trustee must invest as a “prudent investor.”

[a] Key: Unlike the rules above (the state lists approach and the common law prudent person test), each individual investment is not scrutinized, but, rather, performance is measured in the context of the entire trust portfolio.

Thus, any investment is not per se invalid. Consequently, even derivatives or futures contracts (investments absolutely prohibited under state lists standard or the common law reasonably prudent person standard) may be appropriate in the context of an entire portfolio.

Question 13

Miscellaneous rules regarding the duty to invest:

Answer 13

1. Under any standard, the trustee has a duty to diversify
2. Under the first two rules (state lists and the common law prudent person test), no speculating allowed.

Question 14

What if trustee breaches the duty to invest?

Answer 14

In any jurisdiction, trustee must make good the loss. If there is a profit, the beneficiaries affirm the transaction. If the trustee makes two investments that breach the duty to
invest, one makes money and the other loses money, the
trustee is surcharged for the loss while the beneficiaries
affirm the transaction that made money. No netting
allowed by the trustee.

Question 15

Duty to Earmark
[1] Defined:

Answer 15

This requires the trustee label trust property as property

Question 16

Consequences of trustee breaching the duty to earmark:
[a] Common law approach:

Answer 16

If trustee breaches the duty to earmark and there is a loss, the trustee is held personally liable. No causal relationship required between failure to earmark and a loss.

Thus, if the stock market crashes and
there is a loss, trustee is held personally liable, even
though the failure to earmark did not cause the loss (the
market would have crashed even if the trustee had
earmarked).

Question 17

Consequences of trustee breaching the duty to earmark:
[a]Modern Approach

Answer 17

If there is a failure to earmark and
there is a loss, the trustee is held personally liable only if
the loss was caused by the failure to earmark. Thus, for
example: If trustee fails to earmark and she holds the
trust property in her own name and her own personal
creditors subsequently attach and end up keeping that
asset, then the failure to earmark caused the loss and
under either the common law or modern approach, the
trustee would be held personally liable.

Question 18

Duty to Segregate

Answer 18

The trustee cannot commingle his own personal funds with trust funds

Moreover, the duty to segregate also requires that the trustee not comingle the funds of Trust A with the funds of Trust B.

If trustee breaches the duty to segregate, the trustee can be removed and be held liable for any loss.

Question 19

Duty Not to Delegate

Answer 19

The trustee can rely on professional advisors in
reaching a decision, but the trustee cannot delegate decisionmaking authority to these advisors.

Under the common law, a trustee could not delegate the duty to invest to a professional money manager.

Modernly, a trustee can delegate this duty (e.g. to a
manager of a mutual fund).

Moreover, while a trustee cannot delegate to a third person, the trustee also cannot delegate to another trustee.

Under the common law, in the absence of a contrary provision in the trust instrument, trustees must act unanimously.

Modernly, trustees can act by majority decision.

Question 20

Duty to Account

Answer 20

This requires the trustee on a regular basis to give the beneficiaries a statement of income and expenses of the trust

If the trustee fails to render an accounting to the
beneficiaries, the beneficiaries would file an action for an
accounting.

Question 21

Duty of Due Care

Answer 21

The trustee must act as a reasonably prudent person dealing with his own affairs

Always discuss in relation to breachof fiduciary duty

Question 22

Remedies of beneficiary for breach of duty or duties:

Answer 22

[1] Damages.
[2] Constructive trust remedy.
[3] Tracing and equitable lien on property
[4] Ratify the transaction if good for beneficiary.
[5] Remove trustee.

Question 23

Liability of Trustee to Third Persons in Contract - CL Rule

Answer 23

[a] Trustee is sued in his personal capacity. Consequently, the trustee’s personal assets are at stake. But the trustee can get indemnification from trust assets if the trustee acted within his or her powers and was not personally at fault.

[b] The only time the trustee would be sued in his
representative capacity (i.e., trustee’s personal assets are not at risk) is if the contract itself provided that in the
event of a breach by the trustee, the trustee is to be sued in his representative capacity. It was not enough under the common law that the trustee signed the contract, “John Smith, as trustee of the ABC Trust.”

Question 24

Liability of Trustee to Third Persons in Contract - Modern Rule

Answer 24

[a] If the other person to the contract, the promisee, knows that the trustee is entering into the contract in his
representative capacity, then the trustee must be sued in
his representative capacity. Thus, the trustee’s personal
assets are not at stake.

[b] Thus, if the trustee signs the contract, “John Smith, as
trustee of the ABC Trust,” under the modern rule, the
trustee must be sued in his representative capacity.

Question 25

Liability of Trustee to Third Persons in Tort - CL Rule

Answer 25

[a] The trustee is sued in his personal capacity.
[b] If the trustee was without personal fault, however, the
trustee can get indemnification from trust assets. Thus, if
an agent committed the negligent act, or if this is a case
of strict liability, then the trustee can obtain
indemnification.

Question 26

Liability of Trustee to Third Persons in Tort - Modern Rule

Answer 26

The trustee is sued in his individual capacity and is
personally liable for torts only if the trustee is personally
at fault (i.e. acted negligently or otherwise committed a
tort). Thus, if an agent committed the negligent act or if
this is a case of strict liability, the trustee is sued in his
representative capacity.