Day 2 - Administration of Trusts PDF

TRUST INSTITUTE FOUNDATION OF THE PHILIPPINES, INC. ONE-YEAR COURSE ON TRUST OPERATIONS AND INVESTMENT MANAGEMENT  ADMINISTRATION OF TRUSTS 1. General principles A. Prudent man rule 2. Duties of trustee A. Loyalty B. Non-delegati...

TRUST INSTITUTE FOUNDATION OF THE PHILIPPINES, INC. ONE-YEAR COURSE ON TRUST OPERATIONS AND INVESTMENT MANAGEMENT  ADMINISTRATION OF TRUSTS 1. General principles A. Prudent man rule 2. Duties of trustee A. Loyalty B. Non-delegation C. Duty to account D. Duty to preserve E. Duty to make productive 3. Powers of trustee  FIDUCIARY PRINCIPLE A fiduciary principle is a fundamental doctrine governing the conduct of a fiduciary. A principle does not change except as the common law itself changes, and then only by slow imperceptible evolution. A fiduciary policy is an attitude or a course of action adopted by the fiduciary for the performance of the requisite function. It is changeable at the will of the fiduciary. (Stephenson: estates & trusts).  TRUST PRINCIPLES & POLICIES Art. 1442. The principles of the general law of trusts, insofar as they are not in conflict with this code, the code of commerce, the rules of court and special laws are hereby adopted. (NCC). Sec. 401. Statement of principles. The cardinal principle common to all trust and other fiduciary relationships is fidelity. Policies predicated upon this principle are directed towards confidentiality, scrupulous care, safety and prudent management of property including reasonable probability of income with proper accounting and appropriate reporting thereon. (Manual of Regulations for Banks). Sec. 412. Responsibilities of administration. A. The board of directors shall be responsible for the proper administration and management of the trust and other fiduciary business. Xxx it shall determine and formulate general policies xxx (MORB).  THE PRUDENT MAN RULE Sec. 80 Conduct of Trust Business. A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims. (General Banking Law of 2000, R.A.8791)  LIMITATIONS UPON INVESTMENTS UNDER PRUDENT MAN RULE Speculative Junior liens Investments. Real Estate outside the Lacking seasoned state performance as to Unproductive property safety or yield. Personal loans without Enterprise that trustee security has interest. Wasting property Sole proprietorship/partners hip. (Stephenson: Estates and Quickies. Trusts)  PRUDENT STANDARD OF CARE HAS TWO QUALITIES: The element of initiative or effort includes such acts as seeking qualified professional assistance where necessary for proper and efficient administration of trust; Element of skill or judgment: the existence of a higher skill imposes a duty to exercise it. Trustee in accord with this rule is not responsible for error of judgment.  INVESTMENT LIMITATIONS OF A TRUST ENTITY Sec. 88. Unless otherwise directed by the instrument creating the trust, the lending and investment of funds xxx shall be limited to loans and investments as may be prescribed by law, the Monetary Board or any court of competent jurisdiction. (General Banking Law R.A.8791) Sec. 413 Lending and Investment Disposition. xxx shall be administered in accordance with the terms of the instrument creating the trust xxx. When the trustee is granted discretionary powers in the investment disposition of the trust xxx funds and unless otherwise specifically enumerated by the agreement and directed in writing by the client, court of competent jurisdiction, or other competent authority, loans and investments shall be limited to: xxx. (MORB)  MINIMUM DOC REQS Order of the court or other competent authority (if created by the court) Business organizations - written agreement and Board Resolution Individuals – written agreement Title or nature of agreement in noticeable print Legal capacity of parties in noticeable print Purposes & objectives Funds and/or properties subject of the trust Distribution of funds/properties  Duties and powers of trustee Liabilities of trustee Reports to client Termination and succession Statement in noticeable print - not covered by PDIC Disclosure requirements  PRINCIPLES COMMON TO ALL FIDUCIARIES 1.That the fiduciary is under a duty to act for the benefit of the other party to the relation as to the matters within the scope of the relation; 2. That ordinarily he is under a duty not to delegate to a third person the performance of his own duties as fiduciary; 3. That as to matters within the scope of the relation he is under a duty not to profit at the expense of the other party to the relation; 4. That, if he enters into a transaction with the other party to the relation, he is under a duty to make a full disclosure of all circumstances known to him affecting the transaction and, if the transaction is unfair to the other party, the latter can set it aside. (Scott, Trusts)  LOYALTY TO BENEFICIARIES- MOST FUNDAMENTAL DUTY Duty of Loyalty: To administer the affairs of the Trust solely in the interest of the beneficiary & exclude from consideration his own advantages & the welfare of 3rd persons. 1. Self-Dealing Transactions. Sec. 80, par. 2 of General Banking Law of 2000. Sec. 415 Transactions requiring prior authority. Manual of Regulations for Banks. 2. Self-Serving Transactions.  CONDUCT OF TRUST BUSINESS Sec. 80, par. 2 No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign or lend money or property to, or purchase debt instruments of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relatives within the first degree of consanguinity or affinity, or the related interests, of such directors, officer and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction.(General Banking Law of 2000)  TRANSACTIONS REQUIRING PRIOR AUTHORITY Sec. 413 (some examples) Invest in the equities of, or in the securities underwritten by the trustee or fiduciary or a corp. in which the trustee or fiduciary owns 50% of the subscribed capital stock; Sell, transfer, assign, or lend money or property from one trust or fiduciary account to another trust or fiduciary account except where the investment is anyone of those in Section 413 (Manual of Regulations for Banks)  UNDIVIDED LOYALTY RULE TO IMPROVE ADMINISTRATION, TO PREVENT LOSS Self-Serving Transactions: Investment in Fiduciary’s own Shares of stocks; Competition for Investments; Fiduciary’s Use of property for his own purpose; Deposit of Fiduciary Funds in Fiduciary Bank; Profits Out of Dealings with Fiduciary Property; Competition with Beneficiaries.  DUTY NOT TO DELEGATE Rule: A trustee is under a duty himself to do and not to delegate to others the doing of things which he ought personally to do. Exception: “Ministerial” powers but may not delegate “Discretionary acts” requiring use of skill or judgment.  DUTY TO PRESERVE TRUST PROPERTY In the administration of a trust, the trustee is under a duty to: Take and keep control of the property; To preserve it; To enforce claims; To defend actions;(Sec.92 GBL Exemption from Claims other than parties interested in specific trust) To keep trust properties separate(Sec.87 GBL) Separation of Trust Business and all funds. (Sec. 83.6 GBL) CTF Handle bank deposits  DUTY TO ACCOUNT A trustee is under a duty to keep and render accounts and to furnish information to the beneficiaries. Keeping: What he received, expended, gained, lost. Fee-Based vs. Spreads; Guaranty-fixity of income; Risk of loss. Rendering: Intermediate, final, as requested, as required. Information: Secrecy for 3rd parties, vs. full disclosure to beneficiaries.[Sec.55.1 (b)].  DUTY TO MAKE PRODUCTIVE Sec. 101. Generally a trustee is directed to collect and distribute income and therefore, has either expressly or impliedly, a duty to invest the trust property in income- producing assets as soon as he reasonably can. (Bogert, Trusts)  POWERS OF THE TRUSTEE Sources of Trustee Powers Powers of Administration Powers of Ownership Judicial Posture on Trustee Powers  SOURCES OF TRUSTEE POWERS Express Powers. Granted to him in the trust instrument. By Court Decree. By statute. Implied Powers. Not set forth in the trust instrument but are deemed by equity to have been intended because convenient or necessary to the accomplishment of the trust purpose.  COURT POSTURE ON POWERS Mandatory Powers -Trustee is directed to perform certain acts of administration. Discretionary Powers – Trustee authorized to do or refrained from doing a certain act, or to use his judgment as to when or how a power should be used. Courts will not upset the decision of trustee if done in good faith after consideration of the intent of the settlor as to the purpose of the trust and the circumstances of the beneficiary. Abuse of discretion. Capriciously, arbitrarily, maliciously, in bad faith, without consideration of terms. Petition for Instruction. Court will direct trustee to use his own judgment.  POWERS OF OWNERSHIP Lease for over the period of the trust must be expressly granted by law or instrument. Sell -if expressly stated; if necessary or appropriate to carry out purposes unless forbidden, or expressly to be retained. Mortgage, Pledge, or Borrow –must be expressly conferred. Compromise, arbitrate, or Abandon claim.  POWERS OF ADMINISTRATION Postpone distribution. Retain original investment. To vote shares of stock. To establish and maintain reserves. To hold property in two or more trusts undivided. To allocate and apportion receipts and expenses.  JUSTICE CARDOSO’S CLASSIC STATEMENT ON FIDUCIARIES Many forms of conduct permissible in the workaday world of those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone but the punctilio of an honor the most sensitive is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. (Meinhard v. Salman, 249 N.Y. 458, 464; 164 N.E. 545. 546.