Trusts and Fiduciary Administration
Trust fundamentals
A trust requires a settlor with capacity and intent, trust property, a trustee, and identifiable beneficiaries. Know the distinction between revocable and irrevocable trusts, inter vivos and testamentary trusts, and the roles of trustee, beneficiary, and remainderman. The trustee owes fiduciary duties: loyalty, impartiality between income and remainder beneficiaries, prudent investment, accounting, and avoidance of self-dealing.
Administration concepts
Candidates should understand the principal and income distinction (receipts allocated between income beneficiaries and remaindermen), the prudent investor rule (portfolio-wide risk management rather than asset-by-asset), and the trustee's power to invade principal for a beneficiary's health, education, maintenance, or support. Know the difference between a mandatory distribution and a discretionary one, and how spendthrift provisions protect trust assets from beneficiaries' creditors.
Traps
- A trustee's discretion is not unlimited; it must be exercised in good faith consistent with the trust's terms.
- Impartiality means favoring neither income nor remainder beneficiaries.
- Commingling trust and personal funds is a breach even absent loss.
- A beneficiary who is also trustee can create self-dealing issues, especially with discretionary distributions.
Worked example
A trust directs the trustee to pay income to A for life, remainder to B. The trustee invests heavily in growth stocks that produce little income. This may breach impartiality toward A; the prudent approach balances income and growth for both beneficiaries.