What are the main sources of a Trustee’s Powers?
The trustee can properly exercise only such powers as are expressly or impliedly conferred upon them. These include:
- Powers expressly conferred upon her by the terms of the trust
- All powers that an unmarried individual has over her own property unless limited by the trust’s terms
- Those powers that are appropriate to achieve the proper investment, management, and distribution of the trust property and that are not forbidden by the terms of the trust
- Powers conferred upon her by the UTC unless limited by the terms of the trust.
What is an Imperative (Mandatory) Power?
A power is “imperative” (a “mandatory” power) if the trust instrument requires its exercise.
What is a Discretionary Power?
Discretionary powers are ones that the trustee may or may not perform, as the trustee determines in their judgment to be the most appropriate.
- The trustee must exercise a discretionary power in good faith.
- Even if the settlor grants the trustee absolute or uncontrolled discretion, the trustee’s acts are still reviewable by the court.
What are the main Duties of the Trustee?
- Duty to Administer Trust: The trustee has a duty to personally administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries.
- Duty of Loyalty — No Self-Dealing: Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which the trustee is dealing with the trust in their individual capacity. A trustee owes a duty of undivided loyalty to the trust and its beneficiaries.
- Duty to Report — A trustee must: a) Respond to beneficiaries requests AND b) Provide an annual accounting of the trust
- Duty to Separate Trust Property and Keep Records — No Commingling: A trustee may not commingle trust property with their own property or that of another trust. The trustee must also “earmark” trust property by labeling it as trust, rather than individually owned, property.
- Duty to Keep Records — The trustee must keep records of the trust’s administration.
- Duty to Enforce Claims and Defend Trust from Attack: The trustee has a duty to enforce claims of the trust and to defend the trust.
- Duty to Preserve & Make Trust Productive — The trustee must use reasonable care to: a) Invest the property (prudent investor rule); b) Collect claims due; and c) Lease or manage land
What are the beneficiaries rights when a trustee has violated their Duty of Loyalty?
A transaction involving trustee self-dealing is voidable by the beneficiary affected by the transaction UNLESS:
- A court or the terms of the trust approved it
- The beneficiary failed to bring suit within the prescribed time period;
- The beneficiary gave their consent, ratification, or release
- It involves a contract or claim arising before the trustee became trustee.
What is the standard of care for investments under the Uniform Prudent Investor Act (the default rule)?
A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets. This is also known as acting as a prudent investor.
Any Type of Investment Permitted: The UPIA permits a trustee to invest in any kind of property or any type of investment provided the trustee acts prudently. Thus, no particular type of investment is inherently imprudent.
What is the Portfolio Approach?
Each investment decision must be evaluated, not in isolation, but in the context of the entire trust portfolio (corpus) AND as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust
What factors is a trustee permitted to consider in making investment decisions?
The following circumstances are relevant and must be considered by the trustee in making investment decisions:
- General economic conditions
- The possible effect of inflation or deflation
- The expected tax consequences of investment decisions or strategies
- The role that each investment plays within the overall trust portfolio
- The expected total return from income and the expected appreciation of capital
- Other resources of the beneficiaries
- Needs for liquidity, regularity of income, and preservation or appreciation of capital
- An asset’s special relationship or value to the purposes of the trust or to one or more of the beneficiaries (for example, a family home or heirloom)
What are the main remedies for Breach of Trust?
If the trustee commits, or is about to commit, a breach of trust duties, the court may:
- Enforce specific performance of the trustee’s duties
- Enjoin the trustee from committing a breach of trust
- Compel the trustee to pay money or restore property
- Suspend or remove the trustee
What are the main remedies for Self-Dealing?
Beneficiary may have a choice of the following remedies:
- Affirm the transaction if the trust profited
- Set aside the transaction if the trust lost money
- Trace profits from the trustee if the trustee profited
When will a Trustee NOT be liable for Breaches?
A trustee is not liable to a beneficiary for a breach of trust if:
- The trustee acted in reasonable reliance on the terms of the trust
- The beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.
What are the usual grounds for the removal of a trustee?
- Commission of a serious breach of trust
- Lack of cooperation among co-trustees that substantially impairs trust administration
- Unfitness, unwillingness, or persistent failure to administer the trust
- Substantial change of circumstances so that removal is in the best interest of ALL beneficiaries
What happens when the trustee deals with a non-bona fide purchaser?
The trustee’s transactions with third parties that constitute a breach of trust can be set aside by a beneficiary or successor trustee, provided it does not result in taking property from a bona fide purchaser.
What happens when the trustee deals with a bona-fide purchaser?
A third party who acquires the legal title to trust property for value and without notice of the trust (a BFP) takes the property free of the equitable interests of the beneficiaries.
What is Adjustment Power?
If the trust calls for distribution of trust income to a beneficiary, the trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc., to the beneficiary.
- If the resulting distribution effectuates the settlor’s intent and the purposes of the trust, then nothing further needs to be done.
- If, however, the trustee determines that by distributing only the trust’s income the trustee is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may adjust between principal and income to the extent necessary.
What are the factors to consider when determing whether to exercise the Adjustment Power?
In deciding whether and to what extent to exercise the adjustment power, the trustee must consider the following factors:
- The nature, purpose, and expected duration of the trust
- The intent of the settlor
- The identity and circumstances of the beneficiaries
- The needs for liquidity, regularity of income, and preservation and appreciation of capital
- The nature of the trust’s assets
- The net amount allocated to income under the other sections of this Act and the increase or decrease in the value of the principal assets
- Whether and to what extent the trust gives or denies the trustee the power to invade principal or accumulate income
- The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation
- The anticipated tax consequences of an adjustment.
With Allocation of Expenses, what expenses are charged to Income?
- One-half of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee
- One-half of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests
- The entire cost of ordinary expenses
- Insurance premiums covering the loss of a principal asset.
With Allocation of Expenses, what expenses are charged to Principal?
- The remaining one-half of the compensation of the trustee and any person providing investment advisory or custodial services to the trustee
- The remaining one-half of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests
- Payments on the principal of a trust debt
- Expenses of a proceeding that concerns primarily an interest in principal
- Estate taxes
- Disbursements related to environmental matters.
