5. Code II: Trusts Flashcards
Trust Definition
the relationship resulting from the transfer of title to property to a person
to be administered by him as a fiduciary
for the benefit of another
Formation of Trust
no magic language, just must be clearly intended to be a trust
Revocability of Trusts
irrevocable by default
can reserve the right to modify/ make it revocable
If revoked, trust returns to ______.
Settlor
Settlor
person conveying the property (can have more than one for IVT)
Trustee
person receiving the property from the settlor as a FIDUCIARY for the benefit of a 3P (beneficiary)
- can be named OR chosen by direction of the instrument
(can have more than 1)
Testamentary Trust
= created by donation mortis causa
FORM:
- olographic
- notarial
Existence of Testamentary Trust
on date of settlor’s death
Inter Vivos Trust
one that is not testamentary
FORM:
- authentic act
- act under private signature executed in presence of two witnesses and duly acknowledged by the settlor or by affidavit of one of the attesting witnesses
Existence of IVT
at execution of the instrument
Recordation Requirement for Movables
no recordation requirement
Recordation Requirement for Immovables
must be recorded to affect 3P
unrecorded only effects immediate parties
File Requirements for Trusts
in parish where property is located file ONE of:
- trust itself
- extract of trust
- a copy of trust or extract certified by clerk of court
Settlor Capacity
- capacity to k onerous title = capacity for onerous IVT
- capacity to k gratuitous title = capacity for gratuitous IVT
- capacity for DMC = capacity for testamentary
Qualifications of Trustee
a. natural persons
b. FDIC institutions
c. financial institutions/ trust company
d. nonprofit organizations
Natural Person Trustee Requirements
- capacity to K
- US citizen or resident alien
Nonprofit Organization Trustee Requirements
- designated as income/ primary beneficiary
- for mixed and charitable purposes
Exercise of Trust
- if 2+ trustees = each must participate in administration of trust
- if 2 = unanimous
- if 3+ = majority
Acceptance by Trustee
- as part of trust instrument (join in signing) OR in separate writing within a reasonable time
- constitutes acceptance of jurisdiction
- if acceptance by appointment = relates back to creation of the trust
Vacancy in Trustee Role
does not invalidate the trust (court will appoint)
Default Powers of the Trustee
- lease trust property
- sell trust property
- mortgage trust property
- borrow money on debit of trust estate
- compromise/ arbitrate/ abandon trust claims
Duties of Trustee
FIDUCIARY
- take reasonable steps to take/ keep control/ preserve
- keep trust property separate
- in dealing with own account = deal fairly with beneficiary and communicate material facts
- refrain from LENDING property to itself/ affiliate/ family/ ER/ EE
- refrain from BUYING property to itself/ affiliate/ family/ ER/ EE
- refrain from SELLING property to itself/ affiliate/ family/ ER/ EE
Breach of Duties by Trustee
= breach of duty of trust
Termination of Trust Types
- by default
- by terms of the trust
- by the court
- by the trustee
- by divorce
Termination of Trust by Default
when settlor does not provide a term
Termination of Trust by Default: if at least one beneficiary is a natural person
at death of last natural person income beneficiary
Termination of Trust by Default: no natural person IB but settlor is
20 years from death of settlor
Termination of Trust by Default: if no IB or settlor is natural person
50 years from trust creation
Termination of Trust by Terms of the Trust: if at least 1 settlor and 1 IB natural person
CANT EXCEED death of last IB OR 20 years after death of settlor (whichever is later)
Termination of Trust by Terms of the Trust: if no settlors as natural person but 1+ IB is
CANT EXCEED death of last IB or 20 years after creation (whichever is later)
Termination of Trust by Terms of the Trust: if 1+ settlor is a natural person, no IB natural persons
CANT EXCEED 20 years after death of settlor
Termination of Trust by Terms of the Trust: no natural persons
CANT EXCEED 50 years from creation
Termination of Trust by the Court
if continuance would DEFEAT or SUBSTANTIALLY IMPEDE purpose of the trust
OR if purpose is impossible/ illegal
Termination of Trust by the Trustee
must have:
1. consent of ALL beneficiaries AND
2. market value of the trust is >$100,000
Termination of Trust by Divorce
by operation of law
Effect of Termination of Trust
principal beneficiaries entitled to trust corpus
Beneficiary
must be named in instrument (or objectively identifiable from standards IN instrument - no extrinsic evidence)
Qualifications of Beneficiary
when trust is CREATED:
- “in being” AND
- ascertainable
——–
- can be the settlor
- can have more than one
Acceptance by the Beneficiary
presumed unless:
- IVT = reject in authentic act
- testamentary trust = renunciation in the succession
Type of Beneficiary
- income
- principal
- BOTH
Income Beneficiary
one who is profiting off the trust principal property during the life of the trust
Income Beneficiary Details
- can have more than one
- settlor can name substitutes
- settlor can allow non- beneficiary trustee to allocate different amounts among beneficiaries (not for legitime in trust)
Income Distributed to Beneficiaries every ____ months
Income Distributed to Beneficiaries every 6 months
Termination of Income Beneficiary - When?
at death OR expiration of period of enjoyment set by settlor
Effect of Termination of Income Beneficiary
- absent substitute, SOLE IB termination = principal beneficiaries become income beneficiaries
- absent substitute, multiple income beneficiaries take on the share
Principal Beneficiary
one who is entitled to the distribution of principal property CORPUS
Principal Beneficiary Details
- can have more than 1 (concurrent)
- NO substitutions (no successive)
Termination of Principal Beneficiary - When?
at death
Effect of Termination of Principal Beneficiary
- if PB is descendant/sibling of settlor and PB dies before trust comes into existence, they take their place
- if PB died during trust, interest vests in his succession
Exceptions when Substitute is Allowed for Principal Beneficiary
- irrevocable = substitute is descendant of PB OR PB has no descendants
- revocable = sub happens before trust is irrevocable
- settlor can some one of his own descendants as sub
Types of Trusts
- Spendthrift Trust
- Class Trust
- Charitable Trust
Spendthrift Trust
= alienation by beneficiary of an interest in income/ principal is restricted to the full extent permitted by trust code
a declaration in instrument that it is a spendthrift trust is sufficient
Effect of Spendthrift Trust
interest is not alienable voluntarily or not (even for legitime in trust)
EXCEPTIONS
Spendthrift Trust: Creditors
restraint upon involuntary alienation by a beneficiary is subject to limitations prescribed in the Louisiana Trust Code
despite any stipulation in the trust instrument to the contrary, the proper court may permit seizure of a beneficiary’s interest in trust in its discretion and as may be just if the claim is based upon a judgment for:
(1) alimony or maintenance of a person whom the beneficiary is obligated to support;
(2) necessary services rendered or necessary supplies furnished to the beneficiary or a person whom the beneficiary is obligated to support; OR
(3) damages arising from a felony criminal offense committed by the beneficiary which results in a conviction or a guilty plea
Class Trust
one created to benefit a class of people set by settlor
Beneficiary of Class Trust
must be related to settlor by BLOOD or ADOPTION or relative of settlor’s spouse (current/ex/predeceased)
- no great-greats
- ONLY ONE MEMBER NEED BE “IN BEING” AT CREATION OF TRUST
Interest of Beneficiary of Class Trust
if all by same degree = by ROOT
otherwise, by HEAD
Death of Class Member: If Member Dies BEFORE Creation
his descendants are members by representation
Death of Class Member: Member Dies DURING Trust
heirs/ legatee succeed to the interest
EXCEPTIONS when settlor can substitute
Death of Class Member: Member Dies DURING Trust
EXCEPTIONS when settlor can substitute
- if member’s interest is legitime in trust = sub with other members IF he died intestate and without descendants
- not legitime in trust = sub with descendants of dead member if died without descendants
Closing of a Class
absent designation, at the time when it is no longer possible to have another member
Termination of Class Trust
when last member dies
Charitable Trust
one established for relief of poverty, advancement of education/ religion, promotion of health, gov/ municipal purposes, or otherwise beneficial to society
Duration of Charitable Trust
perpetual unless provided otherwise
Legitime in Trust
forced heir is both the income AND principal beneficiary of same interest
(possible exception: burdened with income interest/ usufruct in favor of surviving spouse)
Forced Heir’s Interest
generally cannot be subject to charges/ conditions
Distribution of Income for Legitime in Trust
YEARLY as needed for health/ education/ support/ maintenance of the forced heir
As beneficiary, forced heir can require _____ to ___________________.
as beneficiary, forced heir can require trustee (as fiduciary) to make assets productive.
Payment of Principal in Legitime in Trust
a trustee may not pay principal to an IB if the payment would deprive another beneficiary all or part of the legitime
Substitution in Legitime in Trust
only substitution allowed if PB dies intestate without decendants
Duration of Legitime in Trust
may not exceed the life of the forced heir
(CAN if subject to a usufruct or income interest in surviving spouse)
Effect of Termination of Legitime in Trust
principal shall be delivered to the forced heir or his heirs/ legatees/ assignees FREE of trust, upon termination of the portion of the trust that affects the legitime
Portions of Trust Instrument Incompatible with Legitime in Trust
any portion incompatible with the legitime in trust but be reformatted to comply
Substantive Requirements for Formation of Trust
- it must clearly appear that a trust has been created
- settlor must designate an identifiable beneficiary
- settlor must identify the trust property
Testamentary dispositions committed to the choice of a third person are null, except as expressly provided by law.
What is the exception?
The law expressly provides that a testator may delegate to his executor the authority to allocate a legacy to one or more entities or trustees of trusts organized for educational, charitable, religious, or other philanthropic purposes
entities or trusts may be designated by the testator or, when authorized to do so, by the executor in his discretion
Income Distributions for Trusts
In the absence of a contrary stipulation, income shall be distributed to the designated beneficiary at least every six months.
When does interest in income beneficiary terminate in a trust?
upon the death of the designated beneficiary
OR at the expiration of the period of his enjoyment if the interest is for a period less than life
Effect of Termination of Trust
Any accumulated or undistributed income that has been or is required to be allocated to the beneficiary shall be paid to the beneficiary or his heirs, legatees, assignees, or legal representatives.
As to any other income, the termination of the interest of the sole income beneficiary prior to the termination of the trust causes each principal beneficiary to become a beneficiary of income in an amount proportionate to his interest in the principal.
What happens if principal beneficiary dies?
Upon a principal beneficiary’s death, his interest vests in his heirs or legatees; however, the trust instrument may stipulate otherwise to the extent permitted under the Trust Code.
Principal Beneficiary Dies without Descendants …
Except as to the legitime in trust, the trust instrument MAY provide that the interest of a principal beneficiary who dies without descendants during the term of the trust vests in some other person(s).
Trustee acts as witness for the testament in which The Trust was established . . .
does not invalidate the provision naming her as trustee.
The law only invalidates a legacy to a witness and moreover, clearly provides that the designation of a trustee is not legacy.
The designation of a trustee is _______ legacy
The designation of a trustee is NOT a legacy
Revocation of Trustee
Revocation of a legacy or other testamentary provision occurs when (among situations not applicable here) the testator so declares in one of the forms prescribed for testaments, makes a subsequent incompatible testamentary provision, or clearly revokes the provi- sion by a signed writing on the testament itself.
If the Settlor does not indicate which type of beneficiary she is naming,
the beneficiaries will be both principal and income beneficiaries.
When a Principal Beneficiary Predeceases the Trust
A beneficiary must be “in being” on the date of the creation of the trust.
When a testamentary trust designates as principal beneficiary a person who is a descendant, sibling, or a descendant of a sibling of the testator, and that person does not survive the settlor, the descendants by roots of that person will be principal beneficiaries in his place, unless the trust instrument provides otherwise.
Beneficiary’s Rights Over Interest in the Trust
The general rule is that a beneficiary may transfer the whole or any part of his interest, but the law provides that he may not do so if the trust instrument provides to the contrary.
In other words, the trust instrument may provide that the interest of a beneficiary shall not be subject to voluntary alienation by a beneficiary, and such a restraint upon voluntary alienation is valid. [spendthrift trust]
“A declaration in a trust instrument that the interest of a beneficiary shall be held to a ‘spendthrift trust’ is sufficient to _________________________________________________________________________________” by the Trust Code.
“A declaration in a trust instrument that the interest of a beneficiary shall be held to a ‘spendthrift trust’ is sufficient to restrain alienation by a beneficiary of the interest to the maximum extent permitted” by the Trust Code.
If a trust instrument stipulates a term, a trust shall terminate at the death of the last surviving income beneficiary or the expiration of twenty years from the death of the settlor last to die, whichever last occurs, if at least one settlor and one income beneficiary are natural persons.
What about heirs?
neither the heir, legatee, or assignee of a designated beneficiary, nor a beneficiary by reason of substitution. . . is considered a beneficiary for the purpose of fixing the maximum allowable term of the trust
Can the settlor of the trust stipulate time and frequency of the trust income?
The settlor of a trust may stipulate that the trustee has discretion to determine the time and frequency of distribution of income.
[When there are no forced heirs, the special rules governing distribution of income from the legitime in trust are not applicable.]
Once a trust terminates, the property in trust . . .
automatically passes to the beneficiary by operation of law.
Appointment of an Invalid Trustee . . . What Happens?
- does not invalidate the trust
- court will appoint a trustee
“[N]either failure of the trust instrument to so provide nor disqualification or removal of the trustee for any reason, incompetence or unwillingness to act of the person so designated or chosen shall invalidate the trust.”
Trustee Predeceases Trust . . . What Happens?
Trust is not invalid because the trustee predeceased the settlor.
The court will choose a trustee.
“When a testamentary trust designates as principal beneficiary a person who is a descendant, a sibling, or a descendant of a sibling of the settlor, and that person does not survive the settlor, . . .
the descendants by roots of that person will be principal beneficiaries in his place, unless the trust instrument provides otherwise.”
In the absence of a contrary stipulation, income shall
be distributed to the designated beneficiary at least every _____ months.
In the absence of a contrary stipulation, income shall
be distributed to the designated beneficiary at least every 6 months.
Death of the Designated Beneficiary
An interest in income terminates upon the death of the designated beneficiary or at the expiration of the period of his enjoyment if the interest is for a period less than life.
Upon beneficiary’s death, her income interest in the Trust terminates.
Any accumulated or undistributed income that has been or is required to be allocated to the beneficiary shall be paid to the beneficiary or his heirs, legatees, assignees, or legal representatives.
So any accumulated or undistributed income allocated to the beneficiary would be paid, upon her death, to her heirs, legatees, assignees, or legal representatives.
As to any other income, the termination of the interest of the sole income beneficiary prior to the termination of the trust causes each principal beneficiary to become a beneficiary of income in an amount proportionate to his interest in the principal.
If a trust instrument stipulates a term, a trust shall terminate at . . .
the death of the last surviving income beneficiary or the expiration of twenty years from the death of the settlor last to die, whichever last occurs, if at least one settlor and one income beneficiary are natural persons.
A trust instrument that stipulates a longer term than is permitted shall . . .
be enforced as though the maximum allowable term had been stipulated.
For a testamentary trust, the proper court is the . . .
district court of the parish having jurisdiction over the settlor’s succession.
Under certain scenarios, a trustee may invade the principal of the trust for the benefit of an income beneficiary. This may happen in one of two ways.
- First, the settlor could, in the trust instrument, direct or permit an invasion of the principal for the income beneficiary’s support, maintenance, education, or medical expenses, or, pursuant to an objective standard, for any other purpose, and if the same person is both income and principal beneficiary, the settlor can direct or permit the trustee to do so in his complete discretion.
- Second, the Louisiana Trust Code provides: “The proper court may direct or permit a trustee to pay income or principal from the trust property for the necessary support, maintenance, education, medical expenses, or welfare of a beneficiary before the time he is entitled to the enjoyment of that income or principal, if the interest of no other beneficiary of the trust is impaired thereby.”
“[a] transfer or an encumbrance by a beneficiary of his interest shall be by . . .
authentic act or by act under private signature executed in the presence of two witnesses and duly acknowledged by the beneficiary or by the affidavit of one of the attesting witnesses.”
The transfer or encumbrance is not effective as to a trustee until . . .
a copy of the authentic act or a copy of the acknowledged act is received by him.
