Today’s class
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We conclude our discussion of the trustee’s
fiduciary duties by considering
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Duty of impartiality
Duty to inform
With brief review of
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Duty to collect and protect trust property
Duty to earmark trust property
Duty not to mingle trust funds
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Duty of impartiality
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If a trust has two or more beneficiaries, the
trustee shall act impartially in investing,
managing, and distributing the trust
property, giving due regard to the
beneficiaries’ respective interests.


Uniform Trust Code § 803
Thus, impartiality does not require
equivalent treatment, only fair treatment
2
Howard v. Howard
Howard v.
Howard
156 P.3d 89 (Or. App. 2007), p. 726
First
wife
Leo
Marcene
(Co-Tr)
Coy
(Co-Tr)
Trust income to
Marcene for life,
remainder to
Leo’s children
When investing the trust
principal, should the trustee
favor production of income or
growth of principal?
3
The trustees’ duty according to
Coy

Coy and Marcene should take into account the
other resources of Marcene in deciding how much
income the trust should generate.


If they did not consider her other resources, she would
be able to save income from the trust for her own
children, and that would have frustrated Leo’s intent
that the remainder pass to his children.
Leo and Marcene divided their assets in a way such
that 60 percent would go to Leo’s three children and
40 percent to Marcene’s two children. That way, each
child would receive an equal share.
4
Trustees not required to take into
account other resources of Marcene



A provision in the trust instrument stated that “my
spouse’s support, comfort, companionship, enjoyment
and desires shall be preferred over the rights of the
remaindermen.”
There was no provision in the trust directing the
trustees to take into account the needs of, or other
financial resources available to, Marcene (and recall
that the trust would pay her all of the income rather
than income as needed).
There were provisions in the trust instrument
instructing the trustees to take into account the needs
and other resources of other beneficiaries.
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Drafting lesson from Howard

If Leo really did want to ensure equality between
his line of descent and Marcene’s line, he should
have included language in the trust agreement
instructing the trustee to take into account the
other resources of Marcene in allocating
investments between generation of income and
growth of principal (note 1, page 729)
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Impecunious surviving spouse,
note 2, page 729

Will the more contemporary modification
statutes make courts more receptive to
petitions on behalf of surviving spouses?

“The court may modify the administrative or
dispositive terms of a trust if, because of
circumstances not anticipated by the settlor,
modification or termination will further the
purposes of the trust. To the extent practicable,
the modification must be made in accordance
with the settlor's probable intention.”

Ind. Code 30-4-3-24.4(a)
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Uniform Principal and Income Act:
Reallocation between income and
principal

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Trust 1: $100,000 in bonds with a 4 percent
interest rate. Each year, $4,000 in income is
generated, and principal remains at $100,000.
Trust 2: $100,000 in stock with an 8 percent
appreciation but no dividends. Each year, the
principal grows by $8,000 or more, but no income.
If the trustee splits the increase in trust value
between income and principal, both income and
principal beneficiaries are better off. (Income starts
at $4,000, then $4,160, etc.)

Ind. Code § 30-2-14
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Uniform Principal and Income Act
and the unitrust provisions

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The UPIA allows trustees to focus on total return without
worrying whether the return takes the form of income or
principal, but trustees still have to decide how much of the
income to allocate to “income” and how much to “principal.”
The unitrust provisions allow for a specified percentage of
the trust’s assets to be treated as “income”—it can be a
fixed percentage (4%), it can be tied to inflation, or it can
be based on prevailing interest rates

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When the settlor chooses the unitrust, the settlor determines the
percentage
When trustees convert a trust to a unitrust, as in Heller, the statute
sets the percentage (usually 3-5 percent) (3-5 percent in Indiana,
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with a presumption in favor of 4 percent, § 30-2-15-15).
In re Matter of Heller
In re Matter of
Heller
849 N.E.2d 262 (N.Y. 2007), p. 731
First
Wife
Jacob
Remainder
Alan
Herbert Suzanne
Bertha
First
Husband
Income
Faith
Sandra
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Unitrust conversion and interested
trustees


In Heller, the trustees who elected the unitrust conversion
also were remainder beneficiaries who would benefit from
the reduced allocation of estate returns as “income” (from
$190,000 to $70,000)
The court rejected a no-further-inquiry standard for this
structural conflict and instead required close scrutiny to
ensure good faith and fairness by trustees


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NY did not prohibit unitrust conversions by conflicted trustees even
though it did prohibit UPIA adjustments that would favor a trustee
The trustees were meeting their fiduciary obligations to the other
remainder beneficiaries
In Indiana, trustees who are beneficiaries need court
approval for a unitrust conversion (Ind. Code § 30-2-15-11)11
Subrules relating to
trust property, pp. 736-738
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Duty to Collect and Protect Trust Property
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Duty to Earmark Trust Property

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Trustee must collect and protect property without
unnecessary delay (i.e., as promptly as circumstances
permit).
Trustee must designate property as trust property rather
than the trustee’s own.
Duty Not to Mingle Trust Funds

Trustees must not commingle trust funds with their
own, even if the trustees do not use the trust funds for
their own purposes.
12
UTC §813: Duty to inform
and report, p. 738
(a) A trustee shall keep the qualified beneficiaries of the trust
reasonably informed about the administration of the trust and of
the material facts necessary for them to protect their interests. …
(b) A trustee:
(1) upon request of a beneficiary, shall promptly furnish…a
copy of the trust instrument;…
(3) … shall notify the qualified beneficiaries of the trust’s
existence … .
(c) A trustee shall send to the distributees…, and to other qualified or
nonqualified beneficiaries who request it, at least annually … a
report of the trust … .
(d) A beneficiary may waive the right to a … report or other
information … required to be furnished under this section. …
13
UTC definitions
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“Beneficiary” means a person that (A) has a present or
future beneficial interest in a trust, vested or contingent; or
(B) in a capacity other than that of trustee, holds a power of
appointment over trust property
“Qualified beneficiary” means a beneficiary who, on the date
the beneficiary’s qualification is determined:
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
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(A) is a distributee or permissible distributee of trust income or
principal;
(B) would be a distributee or permissible distributee of trust income
or principal if the interests of the distributees described in
subparagraph (A) terminated on that date without causing the trust
to terminate; or
(C) would be a distributee or permissible distributee of trust income
or principal if the trust terminated on that date.
14
Fletcher v. Fletcher
Fletcher v. Fletcher
480 S.E.2d 488 (Va. 1997), p. 739
Elinor placed all of her assets
into a revocable, inter vivos
trust and then amended it to
provide for a number of
separate trusts upon her
death, including three for
James, Andrew and Emily
$50,000 to
provide “adequate
medical insurance
and medical care.”
$50,000 in such
amounts as trustees
deem advisable.
Elinor
J. North
Henry
James
Andrew
Emily
$50,000 in such
amounts as trustees
deem advisable.
15
Fletcher

As a beneficiary of Elinor’s trusts, was son, James,
entitled to information only about his individual
trust or about all of the trusts?


That is, should the court treat the arrangement as a
single trust or as many separate trusts?
According to the court, James should be treated as
a beneficiary of a single trust—there was a single
trust agreement with multiple trust provisions
rather than multiple trust agreements for the
different trusts
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Fletcher

But James didn’t really need to see the entire trust
agreement to monitor his own trust

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The court probably was sympathetic to James because
he was Elinor’s son
Even if James’ kinship motivated the court, the UTC
codified the Fletcher holding with respect to all
beneficiaries of a single trust agreement (§ (b)(1))
Drafting lesson

Elinor could have limited disclosure to James of the
terms of his individual trust in the trust agreement, or
she could have had multiple trust agreements
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