Fiduciary Liability of Trustees and Personal Representatives (Portfolio 853)

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Tax Management Portfolio, Fiduciary Liability of Trustees and Personal Representatives, No. 853, addresses breaches by trustees and by personal representatives, such as executors and administrators, of their fiduciary duties. 

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Tax Management Portfolio, Fiduciary Liability of Trustees and Personal Representatives, No. 853, addresses breaches by trustees and by personal representatives, such as executors and administrators, of their fiduciary duties. For purposes of this Portfolio, liability is not a synonym for duty. Rather it is a synonym for exposure, in this case exposure to judicial sanction occasioned by the breach of a fiduciary duty to those possessing the equitable or beneficial interests in the trust property or in the probate estate, as the case may be. These are internal duties.
A trustee or personal representative, however, also may be subject to liability to third parties for contracts made and torts committed while in office, and to the state for running afoul of its tax, securities, and banking laws. These are external, non-fiduciary duties. While the subject of this Portfolio is internal liability, the matter of external liability cannot be avoided altogether, as external liability can bring with it internal liability. A failure to pay estimated taxes on trust income is an example of the breach of an external duty with internal ramifications.
In the interest of efficiency, the author has preceded a detailed discussion of breaches of fiduciary duty with a detailed discussion of remedies and defenses. The Portfolio concludes with brief discussions of external liabilities and of insuring fiduciaries against external and internal liabilities.
There are approximately 70 practice comments sprinkled throughout the Detailed Analysis. The Portfolio also contains an assortment of detailed practice-oriented checklists. These checklists are intended to help trustees and personal representatives avoid breaches of fiduciary duty that can lead to fiduciary liability.
This Portfolio may be cited as Rounds, T.M., Fiduciary Liability of Trustees and Personal Representatives.


Charles E. Rounds, Jr.

Charles E. Rounds, Jr., B.A.; Columbia University (1969); J.D., Suffolk University Law School (1976); Member of Bar of Massachusetts (1976); Lawyer, Office of Trust Counsel and Office of General Counsel, The First National Bank of Boston (1977-1983); Adjunct Instructor (1978), Associate Professor of Law (1983-1986), Professor of Law (since 1986) Suffolk University Law School; Counsel to The Franklin Foundation, by statute sole managing agent of a 200-year accumulation trust established under the will of Benjamin Franklin (1990-1993); Member, Board of Editors, Massachusetts Lawyers Weekly; Author, Loring, A Trustee's Handbook (Aspen 2004) and nine prior editions; Academic Fellow, American College of Trust and Estate Counsel; Reporter, 4th Edition, ACTEC Commentaries on the Model Rules of Professional Conduct.
The author especially wishes to thank his lead research assistants, Brian C. McManus and Polyxeny Angeliki Konandreas, for their help in organizing the Portfolio. He also acknowledges the contributions of law students Alexis C. Brooks, Mark Iacono, Derek M. Massey, Nicolle Miville, Peter Riordan, Shannon Sprinkel, Jennifer L. Thompson, and Kristin Tyler.

Table of Contents

Detailed Analysis

I. Foundation

A. Scope of Portfolio

B. Introduction

C. Framework

D. Typical Terms

1. Timing of Distributions

2. Control and Investment Risk

3. Method of Distribution

a. Life Annuities

(1) Single Life Annuities

(2) Joint-and-Survivor Annuities

(3) Multiple Annuities

b. Term Certain

c. Refund Annuities

d. Specified Period

4. Frequency of Contributions

5. Death Benefit or Survivor Benefit

II. Federal Estate Tax

Introductory Material

A. Section 2039(a): Includible Interests

1. Statutory Text

2. Legislative Background

3. Congressional Intent

4. Components

a. Gross Estate

b. An Annuity or Other Payment

c. Receivable by Any Beneficiary

d. By Reason of Surviving the Decedent

e. Under Any Form of Contract or Agreement

f. Entered into After March 3, 1931

g. Other than as Insurance Under Policies on the Life of the Decedent

(1) Before DEFRA

(2) DEFRA: Section 7702

h. An Annuity Payable to the Decedent

(1) The Contract or Agreement

(2) Annuity or Other Payment

(3) The Decedent's Interest in His or Her Annuity

(4) Joint, etc., Interests

(5) The Duration of the Decedent's Annuity

B. Section 2039(b): Amount Includible

1. Value of Beneficiary's Annuity

2. Includible Portion

a. Computation

b. Source of Contributions

C. Former Special Treatment of Annuities Under Statutory Retirement Arrangements

1. Identity of the Decedent

2. Nonexcludibility of Benefits Payable to Executor

3. The Enumerated Arrangements

4. Source of the Benefit

5. Contribution Base

6. Retreat from the Original Exclusion; Grandfather Provisions

D. Applicability of Estate Tax Provisions Other than § 2039

1. Section 2032: Alternate Valuation

2. Section 2033: Property in Which the Decedent Had an Interest

3. Section 2036: Transfers with Retained Life Estate

4. Section 2037: Transfers Taking Effect at Death

5. Section 2038: Revocable Transfers

6. Section 2043: Transfers for Insufficient Consideration

7. Section 2053: Expenses, Indebtedness, and Taxes

8. Section 2056: Bequests, etc., to Surviving Spouse

a. In General

b. Power of Appointment Annuity

c. Annuities as Qualified Terminable Interest Property

(1) Qualifying Income Interest for Life

(a) In General

(b) Annuities Arising Under Employee Benefit Plans

(2) Survivor Annuities

(3) Charitable Remainder Trusts

9. Former Additional Estate Tax on Excess Retirement Accumulations

III. Income Tax Considerations

A. Section 72: Annuities

B. Section 83: Property Transferred in Connection with Performance of Services

C. Former § 101(b): Death Benefits

D. Sections 691, 1014: Income in Respect of a Decedent; Basis

E. Former § 4980A: Tax on Excess Distributions from Qualified Retirement Plans

IV. Federal Gift Tax

A. General Rule

B. Annual Exclusion

C. Marital Deduction

D. Disclaimers

E. Valuation

F. Former Law: Gifts of Statutory Plan Interests

G. Section 2012: Credit for Gift Tax

V. Generation-Skipping Transfer Tax

VI. Planning Considerations

Introductory Material

A. Cash Flow

B. Federal and State Income Tax

1. High Income Tax Liability

2. Income Tax Deferred Growth: Variable Annuities

3. Rate of Income Tax

C. Types of Annuities

1. Immediate Annuities

2. Fixed Annuities

3. Variable Annuities

a. Common Situations

b. Diversification

4. Joint and Survivor Annuities

D. Other Options

E. Charges, Sales Loads, Fees, Expenses, and Penalties

1. Charges

2. Expenses, Sales Loads, and Fees

3. Penalties

F. Time Horizon

G. Contractual Guarantees

H. Basis

I. Exchanges: § 1035

J. Asset Protection

1. Medicaid

2. Bankruptcy

3. State Law

4. IRS Levy

5. State Guaranty

K. Mode of Distribution

L. Health Status

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Excerpts from H.R. Rep. No. 1337, 83d Cong., 2d Sess. (1954) Section 2039, Annuities

Worksheet 2 Excerpts from S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) Section 2039, Annuities

Worksheet 3 Excerpt from S. Rep. No. 1983, 85th Cong., 2d Sess. (1958) 1958-3 C.B. 1074, Estate Tax Exclusion

Worksheet 4 Excerpt from H.R. Rep. No. 1118, 89th Cong., 1st Sess. (1966) 1966-1 C.B. 435, Estate Tax Exclusion

Worksheet 5 Excerpts from H.R. Rep. No. 783, 92d Cong., 2d Sess. (1972) Estate Tax Treatment of Annuities in Community Property States

Worksheet 6 Excerpts from H.R. Rep. No. 298, 93d Cong., 1st Sess. (1973) Tax Treatment of Survivor Benefit Plans of the Uniformed Services

Worksheet 7 Excerpt from H.R. Rep. No. 1380, 94th Cong., 2d Sess. (1976) Changes Relating to Certain Retirement Benefits

Worksheet 8 Excerpt from S. Rep. No. 938 (Pt. 2), 94th Cong., 2d Sess. (1976) Gift Tax Treatment of Certain Annuities

Worksheet 9 Excerpt from H.R. Rep. No. 1515, 94th Cong., 2d Sess. (1976) Estate and Gift Tax Exclusions for Qualified Retirement Benefits (Conf. Rep.)

Worksheet 10 Excerpt from S. Rep. No. 1263, 95th Cong., 2d Sess. (1978) Employee Stock Ownership Plans

Worksheet 11 Excerpt from H.R. Rep. No. 1800, 95th Cong., 2d Sess. (1978) Certain Lump Sum Distributions Excluded from Gross Estate

Worksheet 12 Excerpt from General Explanation of the Tax Reform Act of 1976 Prepared by the Staff of the Joint Committee on Taxation (Dec. 29, 1976) Changes Relating to Certain Retirement Benefits

Worksheet 13 Excerpt from General Explanation of the Revenue Act of 1978 Prepared by the Staff of the Joint Committee on Taxation (March 2, 1979) Estate Tax Exclusion for Certain Lump Sum Distributions

Worksheet 14 Sen. Prt. 169, 98th Cong., 2d Sess., Vol. 1, 312 (1984) Repeal of $100,000 Estate Tax Exclusion for Annuity Interests Created under Qualified Plans

Worksheet 15 H.R. Rep. No. 795, 100th Cong., 2d Sess. 521–522 (1988) Treatment of Joint and Survivor Annuities

Worksheet 16 Comprehensive Example of the Application of Rev. Rul. 2002-62, 2002-42 I.R.B. 710




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