Powers of the Trustee

Terms:

Trustee:
The trustee is the person or entity (e.g., a bank or other corporation) who holds legal title to the trust property.

Discretionary acts:
Those acts that have no preconceived course of conduct that one must or must not take, thereby requiring the judgment and choice of the person performing the act.

Imperative acts:
Those acts that are required to be done.

The term “power” in this context refers to authority the trustee may exercise or the acts the trustee may perform that do not violate the law or terms of the trust.

Generally

As previously noted, the trustee’s powers generally come from the trust agreement itself, supplemented by any applicable state statutes or relevant judicial precedents (which may imply by law certain “necessary or appropriate” procedures, if not otherwise forbidden by the trust agreement itself).

Most trust powers are permissive or “discretionary.” Specifically, the trustee is expected to use her own judgment to determine whether an activity should be undertaken. Required acts are considered “imperative” and must be done, unless the trustee is given grounds for deviating from this obligation.

Example: Chloë is the trustee for her late sister’s trust. The trust agreement states she is to distribute $500 (each) per month to her two nephews. This is an example of a power that is imperative.

Given the mandatory nature of imperative powers, if the trustee fails to perform, the interested beneficiary can petition the court to force the trustee to act. Conversely, with discretionary powers, there is often less judicial review.

Yet, a court will review the trustee’s exercise of her duties (or failure to exercise) to ascertain whether the trustee has abused her discretion in making the decision to act or not. See, e.g., Watling v. Watling, 27 F.2d 193 (6th Cir. 1928); Wiedenmeyer v. Johnson, 254 A.2d 534 (N.J. 1969). When evaluating the trustee’s decision-making prowess, the court will not substitute its judgment for that of the trustee, unless there is an abuse of discretion on the trustee’s part.

When two or more persons act as co-trustees, unique problems can develop. For example, if all the trustees do not agree to a sale of trust property, no title passes. See, e.g., Coxe v. Kriebel, 185 A. 770 (Pa. 1936). In addition, the requirement of unanimity may create deadlocks. In this case, the court could step in to facilitate agreement. If it is a recurring problem, the court could even appoint a different trustee.

Moreover, the trustee also has the power to delegate to others. See, e.g., Vigdor v. Nelson, 79 N.E.2d 288 (Mass. 1948). Where delegation is appropriate, the trustee must select, contract with, supervise and instruct these chosen agents with care to maintain the overall standard of fiduciary conduct.

Incur reasonable expenses

In the absence of an express provision in the trust agreement to the contrary, a court will generally infer that a trustee has the power to incur reasonable expenses for the administration of the trust estate. These expenses often encompass making repairs or hiring agents or employees to perform services that the trustee is unable to perform.

Example: Paige’s will left her three rental properties in trust for her sister’s children. They were to receive the net rental income for 10 years before the properties were turned over to them, in equal shares. A year after the trust’s creation, one of the buildings needed a new boiler. The trustee sought approval to spend trust funds on the boiler’s replacement. This type of expense would be permitted, since it was necessary for the continued productive functioning of the property.

Generally, the power to borrow is not a suitable implied power for a trustee. Yet, an exception might be made under emergency conditions. In this instance, the trustee would be wise to get prior approval from the court before undertaking this action.

Yet, in the absence of a trust provision or statute granting the power, a trustee has no power to invade the principal of the trust for the benefit of a life income beneficiary, even if the beneficiary’s changed circumstances (e.g. the beneficiary falling on hard financial times) support this modification.


Power to lease

Where the trust agreement does not expressly contain a provision giving the trustee the power to lease trust assets, courts will imply a power to lease properties of the trust estate. Rental terms and periods must be reasonable and appropriate to the settlor’s purpose for the trust itself.

The appropriate lease term would depend on whether the trust itself had a fixed term or perpetual duration. If the trust has a fixed term, it would probably be inappropriate for the trust to lease the property for a period beyond the trust’s termination. Conversely, if the trust has no specific termination date, leasing property for a long period of time probably would not disrupt the settlor’s original purpose for the trust.

Example: Orlando created a trust for the lifetime of his brother, Thomas, who was 60 years old at the time of the proposed lease. To be conservative, the trustee gives the tenant a five-year lease on the property (well within Thomas’s life expectancy). Unfortunately, Thomas dies six months after the lease starts. Despite Thomas’s untimely death, the lease is still valid and the trustee is not considered negligent for granting the lease in the first place.

Power to sell

Where the trust agreement does not specifically address the trustee having a power to sell trust property, most courts today will quite readily imply such a power. Usually, this applies to selling personal property versus real estate or unique chattels. The appropriateness of an implied power of sale will also depend on whether there is any indication in the trust document that the particular assets are to be turned over to the remainder beneficiaries when the trust terminates.

Example: Harriett established a trust that directed the trustee “to divide and distribute” the trust res among 72 different beneficiaries, but gave him no explicit power of sale. In this case, the court concluded that the trustee had power to sell trust assets, inasmuch as the settlor would not likely have intended the properties themselves to be distributed to so many beneficiaries. See, e.g., Smith v. Mooney, 139 A. 513 (N.J. 1927).

Power concerning claims

Where appropriate to the trust purpose, the trustee may compromise, abandon or submit to arbitration claims affecting the trust property.

Example: Tatum bequeaths to Derek (as trustee) all of his property in trust for Hannibal. Among the assets Derek receives is a promissory note for $2,000 signed by Kerry, who is insolvent and thus judgment proof, in addition to being threatened with involuntary bankruptcy by his other creditors. As a compromise, Derek accepts $1,000 from Kerry and returns the note to Kerry marked paid in full. Derek’s actions are within his power as trustee. He secured at least a partial payment of the claim that can be used for Hannibal’s benefit.

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