Trusts Flashcards
(3 cards)
The Trustee violated the duty of loyalty and the duty to administer the trust with reasonable care.
A trustee owes a duty of utmost good faith and undivided loyalty to both the trust itself and to its beneficiaries. Included in this is the duty to protect trust property by properly investing its assets and managing the trust in a way that a reasonable trustee in that position would manage. Protecting trust property could include diversifying and investing trust assets, managing real property, and ensuring that the trust remains as profitable for future beneficiaries.
Application
In this case, the Trustee violated the duty of loyalty by self-dealing. A trustee, individually or through people/businesses close to him, can’t enter into any personal contracts with the trust or take money from the trust. When the Trustee leased one of the apartments to himself, he violated the duty of loyalty by engaging in self-dealing transaction. Although it seems that Trustee paid a reasonable rental value for the apartment, that is immaterial to whether he breached fiduciary duties. In addition to the self-dealing transaction, Trustee violated his duty to exercise reasonable care in managing/investing/protecting trust assets when he did not purchase fire insurance on the apartment. A trustee is obligated to exercise the same care as a reasonably prudent investor would in the circumstances. The apartment was the majority of the trust property, and a reasonable investor would have adequately insured the most valuable trust asset. Moreover, the beneficiaries are entitled to trust property, which would have been the insurance proceeds instead of the $50,000 used from the trust itself to repair the roof. Therefore, the trustee’s failure to purchase insurance to protect against damage was unreasonable.
Additionally, the Trustee failed reasonably manage trust property/assets when he took $50,000 from trust income instead of its liquid assets. Although a court will normally give Trustee’s discretion when it comes to trust management/investment, the decision to use income instead of liquid assets was unreasonable. Specifically, because Albert was expressly entitled by Testator to receive ‘all trust income’ during his lifetime and the Trustee took the $50,000 out of Albert’s income even though there were other sufficient trust assets.
In conclusion, the Trustee violated the duty of loyalty and the duty to exercise care in managing/investing and protecting the trust assets.
The trust interests should go to Betty’s husband, as devised in her will.
A trust can expressly provide for the distribution of property upon a specified event, such as a death. Some courts hold that if the person who was designated to get the remaining principle is predeceased the Testator, and there is no provision to the contrary, the trust will terminate and revert back to the Testator’s estate. However, other courts hold that being a remainder beneficiary has a future interest. In this case, Albert was the beneficiary of the trust during his life, and Betty was the remainder beneficiary, as indicated by the Trust instrument. Future trust income is transferable and devisable as long as there is no condition to the contrary in the trust instrument itself. Therefore, Betty’s husband would receive the income if the trust assets was devised in a will, and if not then it would pass through Betty’s intestate.
