Trust Administration- Trustee Powers and Duties Flashcards
*Jurisdiction
District courts and and statutory probate courts = concurrent jx
*Venue
Individual trustee: county of trustee’s residence or county in which situs (principal office) is located
Two or more individual trustees: county in which situs of trust has been maintained
Corporate Trustee: county in which principal office of trust has been maintained
If settlor is deceased and an estate administration is pending, action involving inter vivos trust created by settlor or testamentary trust created by his will lmay be brought under the rules above or in county which estate administration is pending.
*Parties (non-charitable) under the Trust Code
May be brought by any interested party
Only required parties are persons named in trust instrument and persons receiving distributions from trust at time judicial proceeding was filed.
Texas Trust Code
Applies to all kinds of trusts in Texas (except resulting and constructive “trusts”) unless settlor limits or expands trustee’s powers and duties.
Gives the trustee broad fiduciary powers, except he can’t (a) engage in self-dealing or (b) make an imprudent investment.
General powers of the trustee
Sell the property at public or private sale
Lease property for appropriate terms
Give a mortgage
Make improvements
Make repairs
Give mineral leases
Partition and subdivide the property
*Duty to Account
Absent a contrary provision, trust beneficiaries must make an account, no sooner than 12 months after the trust was created, only if trust beneficiaries demand one.
Settlor can’t restrict the primary beneficiary’s right to demand an accounting, but can restrict right of any another beneficiary (e.g. holding contingent remainder interest) to do so
Trustee’s Decanting Power
In certain limited circumstances (e.g. correct drafting error, conform to changes in law, transfer to “special needs” trust to qualify beneficiary for Medicaid), trustee can transfer trust assets to new trust with different terms.
Cannot impair beneficiaries’ interests or name new beneficiaries;
*only trustee’s administration powers can be changed
Trustee’s fiduciary duties cannot be lessened
Can’t modify RAP period set out in original trust
Court approval not required
*Prohibited Self-Dealing by Trustee
(concerned with duty of loyalty)
Can’t buy or sell trust assets to itself;
Can’t borrow trust funds or make loans to trust;
Cannot use trust assets to secure personal loans;
Cannot purchase own stock as a trust asset (but can retain stock when received in trust, if it’s a prudent investment);
Can’t personally gain (except compensation);
Indirect self-dealing: can’t sale or loan to trustee’s relative and biz associates, or corporation of which trustee is director, officer, or principal shareholder.
Duty to Insure trust assets
Trustee has to duty to insure trust assets if a prudent person would do so
What are beneficiary’s options if trustee breaches (imprudent investment; self dealing)
Waive the breach
Surcharge action for resulting loss (if show engage in self-dealing, no defense; “no further inquiry” rule)
If trustee still has possession of the property, beneficiary can petition for constructive trust
*No action against bona fide purchaser (for value + without notice)
Statute of Limitations (trustee, executor, guardian)
4 years; starts running when:
(i) trustee repudiates the trust (denies the existence of the trust with respect to the property),
(ii) trustee gives accounting that fully discloses facts of cause of action, or
(iii) trustee dies or resigns.
*Trustee’s Investment Power- UPIA (“prudent investor”)
UPIA: prudence measured by conduct when investment decision is made, not outcome or performance; measured by looking at whole portfolio
Trustee must establish and maintain custom-tailored investment strategy to effectuate settlor’s intent as to the purpose of the trust; general duty to diversify
Factors: role each investment plays within overall trust portfolio, expected total return, need for liquidity, general economic conditions
Trustee’s Adjustment Power
If trustee determines that by distributing only trust’s income he is unable to treat all beneficiaries fairly, the trustee can adjust total return between principal allocate capital gains (proceeds of sale; usually goes to corpus of trust) and principal to income to the extent necessary.
Factors: intent of settlor with respect to beneficiaries, amount of income/capital gain available for allocation, decrease/increase in trust’s assets, whether the trust gives trustee power to distribute principal (no adjustment power needed if so)
*Trust Code rules Settlor can’t Waive (can ordinarily waive most)
Can’t limit requirement that trust be created for legal purpose, or require trustee to commit a criminal/tortious/contrary to public policy act
- *Can’t release trustee from liability for a breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of beneficiaries (but mere negligence okay)
- *Can’t limit statute of limitations
*Can’t limit trustee’s duty to respond to a demand for accounting
Can’t limit court’s power to exercise jx, modify/terminate trust, remove a trustee, require a fiduciary bond, or deny a trustee’s compensation
Who must sue third party on behalf of trust?
Only the trustee can bring action because he holds legal title to property
Exceptions: (i) trustee unwilling or unable to bring the action or (ii) third party participated with trustee in committing the breach of trust
- examples of self-dealing
- interest free loan from the trust
- commission from the sale of property under the trust
- purchasing stock from bank where
*If there is self-dealing (e.g. breach of loyalty), does the “prudent investor rule” apply?
The prudent investor rule does not apply if there is self-dealing.
But, settlor can waive the rules against self-dealing in the trust instrument if done properly.
- remedies for breach of trustee’s fiduciary duties (e.g. duty of loyalty, care)
- beneficiary can institute suit to revoke or suspend the trustee
- plain damages for misuse and misappropriation of trust assets
- trustee reimburse trustee all or part of compensation he was given while acting as trustee so he wouldn’t be unjustly enriched
- ratify actions that were done if beneficial to beneficiary (e.g. self-dealing resulted in income to trust)
- compel trustee to perform duties
- constructive trust
- any other appropriate relief
- calculating damages for breach of fiduciary duties
if breach benefitted trust (e.g. stock purchased and went up): increase attributable to trust income
if breach harmed trust (e.g. stock purchased and went down): decrease attributable to trustee and he must reimburse trust
if trustee otherwise benefitted from breach (e.g. received compensation for sale, he must pay that back unless ratified
- “no further inquiry” rule
all beneficiary has to do is show that trustee has engaged in self-dealing that was not authorized by settlor or court.
No further inquiry required- only question is the amount of damages.
settlor’s good faith or benefit to trust is irrelevant
*Who has standing to bring a lawsuit against trustee because of breach of duties?
- settlor
- beneficiary (even if minor)
*What duties does trustee owe to settlor and beneficiaries?
- loyalty (no self-dealing)
- prudent investing
- care
- good faith
- How do duties work when trustee is also one beneficiary?
trustee still owes all of the same duties to the other beneficiaries
