Fiduciary Powers and Responsibiltiies

Fiduciary Powers and Responsibiltiies

1. Fiduciary Powers

   1. General = fiduciaries have very broad powers–whatever an indiv. has over own assets subject to fid. duties

      1. ie. can buy/sell assets, borrow/lend money, insure assets, manage assets, sign K, conduct litigation, etc

   2. ALWAYS READ GOVERNING INSTRUMENT to see if it places any restrictions on fiduciary’s powers

2. Fiduciary Duties

   1. Arise for:

      1. Estate (will/intestate: probate estate) – PR will owe fiduciary duties to devisees or heirs of estate

      2. Revocable Trust – Trustee (other than Settlor) will owe fiduciary duties to Settlor/Remainder BFYs

      3. Irrevocable Trust – Trustee will owe fiduciary duties to beneficiaries

   2. Preliminary Management Responsibilities

      1. Marshal assets –needs Letters from judge to transfer assets to PR’s name in his fiduciary capacity

      2. Pay bills- that were outstanding at time of T’s death

      3. Notify creditors– creditors have ONLY 4 months after notice in which to submit a creditor claim

         1. PR’s job to evaluate claim’s validity; Paid off top: heirs disclaim, 1st secured, unsecured> pro rata

      4. Get Employer ID # (EIN) from IRS for estate – estate is its own, separable income-taxable entity

      5. Inventory assets – lists all assets held in estate & estimates value of those assets as of date of death

         1. Determine what D owned (may need appraisals: value of business, real estate, etc.)

         2. Determine which assets are held in RT and which assets are not held in RT
            

            Filed with court (No need w/Trusts, BFY designations, JT)

            1. Probate Referees (CA): additional complexity–before submitting inventory must be approved by probate referee who independently values all assets

   3. On-going Management Responsibilities

      1. Pay taxes – PR needs to file three sets of returns

         1. Personal Income Tax Returns – Form 1040– final personal income tax returns of decedent (any that have not yet been filed—e.g., previous tax year if not yet filed and final tax year) (RT- alter ego when living)

            1. Due 4/15 of year after year when D died (income D had during calendar year prior to death)

         2. Fiduciary Income Tax Returns–Form 1041–for any income earned frm estate assets after Ds death (Trustee of Irr Trust, PR of estate for income generated from that estate, successor of RT once settlor dies)

            1. All income of estate are accounted for on one fiduciary income tax return regardless of whether assets are held in revocable trust or in probate estate (consolidated)

            2. Filed every year until assets are distributed to BFYs

            3. NOTE: 1041 Form for Irr Trusts: as soon its created, trustee must start filing 1041 for income generated

         3. Estate Tax Returns–Form 706–estate tax return for any estate taxes due; all paid before distribution

            1. ONLY if estate + taxable gifts is larger than tax return minimum = $5mil>$1mil

         4. Gift Tax Return – Form 709 – Must report any taxable gifts made during lifetime (this gets done during lifetime of Testator) (and taxable gifts reduce dollar for dollar the $5mil estate tax exemption)

      2. Accountings – PR needs to file accountings with court and provide them to BFYs

         1. Accounting = statement of all that’s happened financially in estate during accounting period

            1. Start at: Assets & liabilities of trust/estate as of beginning of the period – beginning balance

            2. + Income Items that came during accounting period

            3. – all expenses throughout period

            4. – Distributions to BFYs throughout accounting period

            5. = Closing Balance = Assets and liabilities of trust/estate as of the end of accounting period

      3. Prudently preserve and manage/sale/invest assets – properly manage real estate, keep real prop insured/preserved, pay prop taxes, investments/assets (e.g., property, stock portfolio, etc.) need to be diversified, ensure sufficient liquidity in asset portfolio to pay taxes, expenses, distributions, etc.

      4. Keep beneficiaries fully informed with activities of trust/estate give copies of trust)

         1. Annual accountings

         2. Notice of other items – anything else that would affect beneficiary’s interests (e.g., lawsuit)

      5. Keep appropriate records

      6. Segregate assets–keep trust/estate assets separate & apart from Fdcy’s own assets – NEVER comingle

      7. Make distributions to beneficiaries

3. Post-Mortem Trust Administrator (RT) Successor trustee simply steps in&starts managing trust prop

   1. Duties–all of above duties PLUS duty to send notice to BFYs of what’s going on; give opp. to object

      1. Thus, similar notice to that required by probate still happens – just without court involvement

      2. Objections, if any, can still be filed in probate court

      3. UT – does not require that notice be given as well to intestate heirs (but this is a good idea regardless)

      4. CA – § 16061.7 – requires notice to be given as well to intestate heirs

   2. Additional Duties

      1. Duty to Creditors – similar to duty to beneficiaries (only have for months to object)

         1. Creditors: paid off-top before BFYs, so creditors, not BFYs may get anything if estate=really small

            1. EXCEPTION to getting paid off the top = family protection statutes

      2. Duty of Loyalty – NO self-dealing with trust/estate assets  all transactions with trust/estate forbidden—e.g., lend/borrow money or buy/sell property from/to trust/estate)

         1. Duty runs to beneficiaries and creditors

         2. CA: for probate estate no transaction btwn PR & estate is permitted w/o crt approval-even w/full IAEA

         3. UT: any transaction btwn fiduciary & estate is voidable–can be set aside by BFYs (even if it’s fair)

         4. NOTE: always look for more subtle situations where there could be a duty of loyalty problem

            1. E.g., trustee owns car dlrship in own individual capacity & becomes trustee of trust that owns competing dealership  merely serving as trustee would likely be a breach of duty of loyalty

         5. Remedies for Breach of Duty of Loyalty

            1. Beneficiaries can seek damages (aka surcharges)

            2. Trustee/PR could be denied trustee fees or trustee fees could be reduced

            3. Trustee/PR could be removed from office

            4. Injunctive relief – e.g., specific performance

6. 
   
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