Fiduciary Relationship

IL

Fiduciary Relationships

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ESTATES

A. Definition

1. Legal entity arising at the death of an individual

2. Owns the property owned by the deceased individual at the time of death

B. Types

1. Testate: With a will

a. Executor carries out the terms of the will.

b. Distributions according to terms of the will

2. Intestate: Without a will

a. Administrator settles claims and distributes assets.

b. Distributions according to state laws; typically, to spouse and children

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Testate---with a will

Intestate---without a will

Fiduciary Relationships

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C. Distribution Terms

1. Per Capita: By the head equally

2. Per Stripes: By representation

Example 1: Distribution Terms

Grandparent dies leaving an estate to the heirs. Grandparent had children A, B, and C.

A and B each had 2 children. C had 1 child. A, B, and C die before the grandparent.

Per Capita

Each one of the grandchildren would take 1/5 of the grandparent ’s estate.

Per Stirpes

Each one of the grandchildren would take their respective parent ’s share of the

grandparent’s estate. A’s two children each would get half of 1/3, or 1/6, of the

grandparent’s estate. B’s two children each would get 1/6 of the grandparent’s estate.

C’s one child would get 1/3 of the grandparent ’s estate.

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Per Capita

Per Stirpes

Fiduciary Relationships

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TRUST ELEMENTS

A. Grantor (Settler): One who establishes trust by giving legal title to property to a

trustee who uese the property to benefit beneficiaries.

Can’t revoke unless grantor reserves right to do so.

B. Corpus (res): Trust property

No trust created until trustee gets legal title to property.

C. Trustee: One who holds legal title to trust property for the benefit of beneficiaries

1. Trust never fails for lack of trustee. (Court appoints one, if needed.)

2. Fiduciary

3. Manages property for benefit of beneficiaries

a. Duty is to preserve corpus ( not produce income)

b. Secondary role to produce income

4. Liable if there is negligence, fraud, commingling of funds, or breach of

fiduciary duty.

D. Beneficiary: One who holds equitable title to trust property

1. Income Beneficiary: Receives current income from trust and is charged with

current expenses

2. Remainderman: Receives corpus upon termination of trust

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Revocable-----Irrevocable

Fiduciary Relationships

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TRUST TYPES

A. Inter Vivos Trust: Created during grantor’s life

B. Testamentary Trust: Created by a will and comes into effect at grantor ’s death

(need writing)

C. Revocable: May be ended by grantor

D. Irrevocable: May not be ended by grantor

All testamentary trusts

E. Simple: All current income must be distributed annually

F. Complex: Current income may be distributed annually or accumulated

G. Grantor

1. Grantor is income beneficiary

2. Heir is remainderman

H. Generation-Skipping

1. Skips a generation

2. Tax implications

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Fiduciary Relationships

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ALLOCATION &TERMINATION

A. Allocation

1. Income Beneficiary: Charged with ordinary expenses and credited with

ordinary income

2. Remainderman: Charged with extraordinary expenses and credited with

changes in corpus

3. Annuities: Credited to both income beneficiary and remainderman

4. Trustee’s Fees: Charged to both income beneficiary and remainderman

B. Termination

1. End of term specified

2. Fulfillment of purpose

3. Trustee becomes sole beneficiary (merger)

4. Trust becomes illegal or impossible to perform

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Fiduciary Relationships

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OVERVIEW

A. Agency: Consensual relationship whereby one party agrees to act on behalf of

another (principal)

B. Agent: Anyone authorized to act on behalf of another

1. Agent acts on behalf of the principal in dealing with third parties.

2. Examples: Partners, corporate officers, corporate directors, employees, etc.

3. Employee: Often used interchangeably with agent. A principal (employer)

has some degree of control over an agent (employee).

C. Independent Contractors: Not agents-not subject to the same degree of control as

agents or employees.

D. Consideration: Not required to establish an agency agreement

E. Written Agreement

1. Not necessarily required

2. Statute of Frauds

a. Agency agreement cannot be fulfilled within one year.

b. Agent is authorized to sell real estate.

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Agent

Independent Contractor

Statute of Fraud

Fiduciary Relationships

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AUTHORITY

A. Express Authority: Principal tells agent that he or she is authorized.

B. Implied Authority: Acts reasonably necessary and proper to carry out express

authority.

C. Apparent Authority (Agency by Estoppel): The principal, by words or conduct,

leads a third party to believe that a person may act on principal ’s behalf.

1. Customary practices

2. Appearances

3. Reasonableness

4. Statements or writing

5. Disregard secret instruction unless known to third party.

6. It is not what the agent says or does that establishes the agency, but always

what the principal says or does

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Fiduciary Relationships

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DUTIES&LIABILITIES

A. Agent owes to principal

1. Loyalty

Principal does not owe to agent

2. Care

B. Principal owes to agent

1. Compensation

2. May fire agent and sue for profits resulting from breach of fiduciary duty

C. Principal’s Liability

1. Liable for all authorized acts

2. Not liable for unauthorized acts, unless principal ratifies

a. Undisclosed principals cannot ratify.

b. To ratify, principal must have knowledge of all the material facts.

c. Express or Implied: If principal accepts the benefits with knowledge of the

facts, principal has impliedly ratified.

d. A principal may ratify a contract made by an agent that did not possess

the authority to make the contract. To ratiry, the principal must have had

legal capacity at the time agent acted.

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Principal's Liability

Fiduciary Relationships

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D. Agent’s Liability

1. Liable for all unauthorized acts

2. Not liable for authorized acts, unless acting for an undisclosed principal

E. Undisclosed Principal

1. Agent makes a contract in agent’s own name while really acting for a secret

principal.

Typically, real estate deal

2. If there is a breach, both principal and agent are liable.

3. Third party cannot get out of deal because of an undisclosed principal.

4. Once third party finds out about undisclosed principal, third party can sue

both agent and undisclosed principal.

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Undisclosed Principal

Fiduciary Relationships

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RESPONDEAT SUPERIOR

A. Torts: Principal is vicariously liable for all torts of principal’s agents done while

acting in the actual or apparent scope of their agency.

1. Negligent agents are also liable.

2. Employees injured in the scope of their employment can collect worker’s

compensation even if negligent.

B. Crimes: Principal is not responsible for the agent’s crimes unless

1. Principal participated

2. By statute (for example, sale of alcohol to minors)

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Agent's crimes

Fiduciary Relationships

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TERMINATION

A. Most Agencies Terminable at Will: If you break the contract, you are still liable for

damages.

1. Power to Terminate

2. Right to Terminate

B. Exception : Agency coupled with an interest (principal transfers property interest

to an agent to pay off a debt that the principal owes to the agent)

1. Principal cannot terminate this agency.

2. Death does not end this agency.

C. Death or Insanity of Either Party: Ends most agencies immediately

D. Bankruptcy

1. Principal: Ends the agency

2. Agent: Does not necessarily end the agency

E. Notice: Principal must give

1. Actual notice to old customers

2. Constructive notice (publication in newspaper ) to potential custmers

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Death or Insanity

Constructive notice

Fiduciary Relationships

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MULTIPLE CHOICE QUESTIONS

1. A will provided that an estate was to bedistributed “per stirpes” to the deceased’s heirs. The only possible heirs are two daughters, who each have three children, and two children of a predeceased son. What fraction of the estate will each child of the predeceased son receive?

a. 0b. 1/8c. 1/6d. 1/4

(6858)

2. A personal representative of an estatewould breach fiduciary duties if the personal representative

a. Combined persoal funds with funds ofthe estate so that both could purchasetreasury bills

b. Represented the estate in a lawsuitbrought against it by a disgruntledrelative of the decedent

c. Distributed property in satisfaction ofthe decedent’s debts

d. Engaged a non-CPA to prepare therecords for the estate’s finalaccounting

(8044)

3. Which of the following parties isnecessary to create an express trust?

A remainderman A successor

trustee

a. Yes Yes b. Yes No c. No Yes d. No No

(6504)

4. If not expressly granted, which of thefollowing implied powers would a trustee have?

I. Power to sell trust property II. Power to borrow from the trustIII. Power to pay trust expenses

a. I and IIb. I and IIIc. II and IIId. I, II, and III

(3089)

5. Arno plans to establish a spendthrifttrust naming Ford and Sims as life income beneficiaries, Trip residuary beneficiary, and Bing as trustee. Arno plans to fund the trust with an office building. For the trust to be enforceable, Arno must

a. Execute a written trust instrumentb. Provide for Bing’s trustee feesc. Designate a successor trusteed. Deed the property to Bing as trustee

(8046)

6. Which of the following expendituresresulting from a trust’s ownership of commercial real estate should be allocated to the trust’s principal?

a. Building management feesb. Insurance premiumsc. Sidewalk assessmentsd. Depreciation

(4771)

1/3 x 1/2 = 1/6

Deed

Fiduciary Relationships

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7. Gardner, a U.S. citizen and the soleincome beneficiary of a simple trust, is entitled to receive current distributions of the trust income. During the year, the trust reported:

Interest income from corporate bonds $5,000

Fiduciary fees allocable to income 750

Net long-term capital gain allocable to corpus 2,000

What amount of the trust income is includible in Gardner’s gross income?

a. $7,000b. $5,000c. $4,250d. $0

(7651)

8. On January 1, Year 3, Dix transferredcertain assets into a trust. The assets consisted of Lux Corp. bonds with a face amount of $500,000 and an interest rate of 12%. The trust instrument named Dix as trustee, Dix’s child as life beneficiary, and Dix’s grandchild as remainderman. Interest on the bonds is payable semiannually on May 1 and November 1. Dix had purchased the bonds at their face amount. As of January 1 ,Year 3, the bonds had a fair market value of $600,000. The accounting period selected for the trust is a calendar year. The trust instrument is silent as to whether Dix may revoke the trust. Assuming the trust is valid, how should the amount of interest received in Year 3 allocated between principal and income if the trust instrument is otherwise silent?

principal Imcome

a. $0 $60,000

b. $0 $72,000

c. $10,000 $50,000

d. $12,000 $60,000

(8047)

9. Absent specific directions, which of thefollowing parties will ordinarily receive the assets of a terminated trust?

a. Income beneficiariesb. Remaindermenc. Grantord. Trustee

(5348)

10. Generally, an estate is liable forwhich debts owed by the decedent at the time of death?

a. All of the decedent’s debtsb. Only debts secured by the decedent’s

propertyc. Only debts covered by the Statute of

Fraudsd. None of the decedent’s debts

(0862)

11. On the death of the grantor, which ofthe following testamentary trusts would fail?

a. A trust created to promote the publicwelfare

b. A trust created to provide for aspouse’s health care

c. A trust created to benefit a charityd. A trust created to benefit a childless

person’s grandchildren(5344)

12. a distinguishing feature between themaking of an inter vivos gift and the creation of a trust is that

a. A gift may be made orally whereas atrust must be in a signed writing.

b. Generally, a gift is irrevocablewhereas a trust may be revoked incertain cases.

c. In order to create a valid trust, thecreator must receive some form ofconsideration.

d. The beneficiary of a trust must benotified of the trust’s creation.

(8045)

5,000 - 750 = 4,250

RegulationFAR

Fiduciary Relationships

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13. In a written trust containing nospecific powers, the trustee will have all of the following implied powers except

a. Sell trust propertyb. Pay management expensesc. Accumulate incomed. Employ a CPA to prepare trust tax

returns(4772)

14. Cord’s will created a trust to takeeffect on Cord’s death. The will named Cord’s spouse as both the trustee and personal representative (executor) of the estate. The will provided that all of Cord’s securities were to be transferred to the trust and named Cord’s child as the beneficiary of the trust. Under the circumstances,

a. Cord has created an inter vivos trust.b. Cord has created a testamentary trust.c. The trust is invalid because it will not

become effective until Cord’s death.d. Cord’s spouse may not serve as both

the trustee and personal representative because of theinherent conflict of interest.

(5349)

15. Which of the following wouldordinarily be distributed to a trust income beneficiary?

I. Royalties II. Stock received in a stock splitIII. Cash dividendsIV. Settlements of claims for damages to

trust property

a. I and IIb. I and IIIc. II and IIId. II and IV

(3092)

16. A principal and agent relationshiprequires a

a. Written agreementb. Power of attorneyc. Meeting of the minds and consent to

actd. Specified consideration

(2819)

17. Which of the following statementsrepresent(s) a principal’s duty to an agent who works on a commission basis?

I. The principal is required to maintain pertinent records, account to the agent, and pay the agent according to the terms of their agreement.

II. The principal is required to reimbursethe agent for all authorized expensesincurred unless the agreement callsfor the agent to pay expenses out ofthe commission.

a. I onlyb. II onlyc. Both I and IId. Neither I nor II

(6259)

18. Blue, a used car dealer, appointedGage as an agent to sell Blue’s cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a subagent. To whom does Vond owe a fiduciary duty?

a. Gage onlyb. Blue onlyc. Both Blue and Gaged. Neither Blue nor Gage

(7041) Income beneficiary

Remaindermen

Fiduciary Relationships

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19. North, Inc. hired Sutter as apurchasing agent. North gave Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than 300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter’s written authorization. Which of the following statements is correct?

a. Sutter will be liable to Orr becauseSutter’s actual authority wasexceeded.

b. Sutter will not be liable to reimburseNorth if North is liable to Orr.

c. North will be liable to Orr because ofSutter’s actual and apparent authority.

d. North will not be liable to Orr becauseSutter’s actual authority wasexceeded.

(4312)

20. Trent was retained, in writting, to actas Post’s agent for the sale of Post’s memorabilia collection. Which of the following statements is correct?

I. To be an agent, Trent must be at least 21 years of age.

II. Post would be liable to Trent if thecollection was destroyed beforeTrent found a purchase.

a. I onlyb. II onlyc. Both I and IId. Neither I nor II

(5340)

21. Noll gives Carr a written power ofattorney. Which of the following statements is correct regarding this power of attorney?

a. It must be signed by both Noll andCarr.

b. It must be for a definite period oftime.

c. It may continue in existence afterNoll’s death.

d. It may limit Carr’s authority to specifictransactions.

(4308)

22. Which of the following acts, ifcommitted by an agent, will cause a pricipal to be liable to a thrid party?

a. A negligent act committed by anindependent contractor, inperformance of the contract, whichresults in injury to a third party

b. An intentional tort committed by anemployee outside the scope ofemployment, which results in injury toa third party

c. An employee’s failure to notify theemployer of a dangerous conditionthat results in injury to a third party

d. A negligent act committed by anemployee outside the scope ofemployment that results in injury to athird party

(7868)

23. Which of the following rights will athird party be entitled to after validly contracting with an agent representing an undisclosed principal?

a. Disclosure of the principal by theagent

b. Ratification of the contractt by theprincipal

c. Performance of the contract by theagent

d. Election to void the contract afterdisclosure of the principal

(4311)

Apparent

Fiduciary Relationships

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24. When a valid contract is entered intoby an agent on the principal’s behalf, in a nondisclosed principal situation, which of the following statements concerning the principal’s liability is correct?

The principal may be held liable once disclosed

The principal must ratify the contract to be

held liable

a. Yes Yes b. Yes No c. No Yes d.

No No (5342)

25. Which of the following is(are)available to a principal when an agent fraudulently breaches a fiduciary duty?

Termination of the agency

Constructive trust

a. Yes Yes

b. Yes No

c. No Yes d.

No No (6968)

26. Bolt Corp. dismissed Act as itsgeneral sales agent and notified all of Ace’s known customers by letter. Young Copr., a retail outlet located outside of Ace’s previously assigned sales territory, had never dealt with Ace. Young knew of Ace’s previously assigned sales territory, had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20% of the purchase price. It was not unusual for an agent in Ace’s previous position to receive cash deposits. In an action by Young against Bolt on the sales contract, Young will

a. Lose, because Ace lacked any impliedauthority to make the contract

b. Lose, because Ace lacked anyexpress authority to make the contract

c. Win, because Bolt’s notice wasinadequate to terminate Ace’sapparent authority

d. Win, because a principal is an insurerof an agent’s acts

(5194)

27. Young Corp. hired Wilson as a salesrepresentative for six months at a salary of $5,000 per month plus 6% of sales. Which of the following statements is correct?

a. Young does not have the power todismiss Wilson during the six-monthperiod without cause.

b. Wilson is obligated to act solely inYoung’s interest in matters concerningYoung’s business.

c. The agreement between Young andWilson is not enforceable unless it is inwriting and signed by Wilson.

d. The agreement between Young andWilson formed an agency coupled withan interst.

(5343)

Apparent

At your will

Fiduciary Relationships

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28. Pine, an employee of GlobalMessenger Co., was hired to deliver highly secret corporate documents for Global’s clients throughout the world. Unknown to Global, Pine carried a concealed pistol. While Pine was making a delivery, he suspected an attempt was being made to steal the package, drew his gun and shot Kent, an innocent passerby. Kent will not recover damages from Global if

a. Global discovered that Pine carried aweapon and did nothing about it.

b. Global instructed its messengers notto carry weapons.

c. Pine was correct and an attempt wasbeing made to steal the package.

d. Pine’s weapon was unlicensed andillegal.

(0651)

29. Easy Corp. is a real estate developerand regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names whithout disclosing Easy’s identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy’s behalf,

a. The broker will have the same actualauthority as if Easy’s identity had beendisclosed.

b. Easy will be bound by the contractbecause of the broker’s apparentauthority

c. Easy will not be liable for anynegligent acts committed by thebroker while acting on Easy’s behalf.

d. The broker will not be personallybound by the contract because thebroker has express authority to act.

(5195)

30. Generally, an agency relationship isterminated by operation of law in all the following situations except the

a. Principal’s deathb. Principal’s incapacityc. Agent’s renunciation of the agencyd. Agent’s failure to acquire a necessary

business license

(0650)

Crime

Operation of law