Trusts: powers and duties of the trustee Flashcards
Powers of the trustee
The trustee has:
(1) Powers expressly granted in the trust; and
(2) Powers necessary to act as a reasonably prudent person in managing the trust, including the implied power to contract, sell, lease, or transfer the trust property.
Duty of loyalty
The trustee has a duty to administer the trust in good faith (subjective standard) and to act reasonably (objective standard) when investing property and otherwise managing the trust.
I.e., the trustee must manage the trust solely in the best interests of the beneficiaries.
Duty of loyalty: self-dealing
Beneficiaries may set aside self-dealing transactions or ratify such transactions and recover the profits.
A trustee is prohibited from:
(a) Buying or selling trust assets;
(b) Selling property between trusts that the trustee manages;
(c) Borrowing from or making loans to the trust
(d) Using trust assets to secure a personal loan;
(e) Engaging in prohibited transactions with friends or relatives; or
(f) Otherwise acting for personal gain through the trustee position.
There is an irrebutable presumption that the trustee breached her duty of loyalty when self dealing—i.e., it is a per se breach that does not require further inquiry into the trustee’s reasonableness or good faith.
Duty of loyalty: exceptions to self-dealing
Even when self-dealing is authorized—by settlor, court order, or all beneficiaries—the transaction must be fair and reasonable to avoid liability.
Duty of prudence
The trustee has a general duty to act as a reasonable prudent person and to treat the trust property as if it were her own.
She has a duty to follow the trust directions and carry them out in accordance with the trust.
Duty of prudence: prudent investor rule
The trustee must act as a prudent investor would act when investing her own property—i.e., she must exercise reasonable care, caution, and skill when investing and managing trust assets.
Uniform Prudent Investor Act:
Determinations of compliance under the UPIA are made with reference to the facts and circumstances as they existed at the time the action was made—they do not utilize hindsight.
Duty of prudence: duty to diversity
Total performance portfolio approach:
The trustee must adequately diversify the trust investments in order to spread the risk of loss—but not if administrative costs would outweigh the benefits.
Investing in one mutual fund may be sufficient if the fund is sufficiently diversified.
Duty of prudence: duty to make property productive
The trustee must:
(a) Pursue all possible claims;
(b) Derive the maximum amount of income from investments;
(c) Sell assets when appropriate;
(d) Secure insurance;
(e) Pay expenses; and
(f) Act with a reasonable period of time in all matters.
Duty of impartiality
(1) Among present beneficiaries:
The trustee must balance the interests of present beneficiaries, unless the trust provides for favoring one present beneficiary over another.
(2) Between present and future beneficiaries:
The trustee must balance their interests by investing property so that it produces a reasonable income for the income beneficiaries while preserving the principal for the remainder beneficiaries.
Duty to disclose
The trustee must disclose complete and accurate information about the nature and extent of the trust property, including by allowing access to trust records and accounts.
Duty to account
The trustee must periodically account for actions taken on behalf of the trust so that the trustee’s performance can be assessed against the terms of the trust.
Remedies for breach of the trustee’s duties
The trustee is responsible for lost profits, interest, and other losses resulting from a breach of trust.
Beneficiaries may sue the trustee and seek damages—or removal of the trustee—for breach of duties.
Duty of prudence: compliance with the prudent investor rule
In assessing whether a trustee has breached this duty, the Uniform Prudent Investor Act requires consideration of multiple factors, including:
(a) The distribution requirements of the trust;
(b) The general economic conditions;
(c) The role that the investment plays in the relationship to the trust’s overall investment portfolio; and
(d) The trust’s need for liquidity, regularity of income, and preservation of capital.
