CA Trusts

Question 1

Strategy to Approach Trusts Questions

Answer 1

1. What kind of trust is involved?
2. Is the trust valid?
3. Is the trust administered appropriately?
4. Is the trust accounted for appropriately?
5. Has any interest in the trust been transferred?
6. Have there been any changes or modifications to the trust, or has it been terminated?
7. Is there a trust by operation of law?

Question 2

What is a Trust

Answer 2

A flexible, fiduciary relationship.

• -> Often involves 3 parties: 1st party gives property/money/assets to a 2nd party, who holds the assets for the benefit of a 3rd party.
• -> Often connected w/ estate planning (wills)

Question 3

Kinds of Trusts –> Express Trusts (2 types)

Answer 3

1. Private trust
2. Charitable trust

3 key differences between private and charitable trusts:

(1) While a private trust reqs ascertainable beneficiaries, a charitable trust does not.
- –> The Attorney General or another govt’l official will enforce the charitable trust even if the intended beneficiaries are not clearly identified.
(2) To create a charitable trust, it must be created for a charitable purpose.
(3) Doctrine of cy pres only applies to charitable trusts.

Question 4

Kinds of Trusts –> Trusts Created by Operation of Law (2 types)

Answer 4

(1) Resulting trust
- –> An equitable reversion back to the person who created a trust when an express trust fails for some reason.
(2) Constructive trust
- –> An equitable remedy imposed by a ct to prevent unjust enrichment.

Question 5

Kinds of Trusts –> Principal Players in a Trust Question

Answer 5

(1) Settlor
- –> The creator of the trust; est’s the trust.

(2) Trustee
- –> Administers, manages, and owns legal title to the trust property for the life of the trust.

(3) Beneficiaries
- –> The ones who receive the benefits of the trust and have equitable title.

Question 6

Is the Trust Valid? –> Capacity

Answer 6

The settlor must have the nec capacity to est a trust.

• –> The analysis for capacity in this context is essentially the same as w/ testamentary capacity.
• –> In addition, settlor’s capacity is presumed in the absence of fraud, undue influence, or mistake.

Question 7

Is the Trust Valid? –> Intent

Answer 7

Present Intent
—> The settlor must manifest a present intent to create a trust, and he must do so concurrently w/ the transfer of trust property.

Precatory Language

• –> Does not create a trust, bc it does not clearly express intent to impose enforceable duties upon the transferee.
• –> Examples of precatory language: Language transferring property upon a “wish,” “hope,” “request,” or “desire” that the transferee use the property for the benefit of another.

Capacity
—> Settlor must be 18 and of sound mind.

Control
—> If the settlor retains too much control, a trust will not be created.

Question 8

Is the Trust Valid? –> Identifiable Trust Corpus

Answer 8

A trust must contain an existing interest in real or personal property transferred to trustee.
—> The property must be transferred to the trustee and it must be identifiable and segregated from other property owned by the trustee.

Trust Corpus or Not?

(1) An expectancy of some property interest in the future will not qualify as valid trust corpus.
(2) Future Interest can be identifiable trust corpus (vested future interest).
(3) Debt can be trust corpus but the trustee cannot be the debtor.

Question 9

Is the Trust Valid? –> Ascertainable Beneficiaries

Answer 9

Any person or entity capable of taking and holding title to property can be a beneficiary under a trust.

Private trusts must have explicitly identifiable beneficiaries; charitable trusts do not (this is the first difference between private and charitable trusts).

• –> Reason we need ascertainable beneficiaries: someone to enforce the trust.
• –> This req’ment can give rise to a class gift problem.

Class Gift Problem
If the language attempting to create the class is too indefinite the trust will fail.
—> If the trust fails, what will the court do? Impose a resulting trust:
(1) What is a resulting trust? An equitable reversion back to the settlor where an attempted express trust fails for some reason.
(2) If a resulting trust is imposed, the trust property is returned to the settlor or the settlor’s estate.

A settlor can set up a trust where a trustee is req’d to distribute income or trust corpus to a beneficiary picked by the trustee from a group; to be valid, the trustee must be req’d to select from an ascertainable, definable group.
—> If the trustee is asked to select a beneficiary from an indefinite group, this arrangement will fail as a trust, but it may be valid as a power of appointment.

Question 10

Is the Trust Valid? –> Trust Must be Created for a Proper Purpose

Answer 10

Any lawful purpose that does not involve the trustee committing a criminal/tortious act or acting contrary to public policy.

Second difference between private and charitable trusts:
—> A charitable trust must be created expressly (it will not be implied by law).

Question 11

Is the Trust Valid? –> Mechanics of Trust Creation: Declaration

Answer 11

A settlor declares that she hold property in trust for certain beneficiaries.

• –> In this situation, the settlor and the trustee are the same person.
• –> The settlor must identify and separate the trust property from her other property in order for trust to take effect.

Question 12

Is the Trust Valid? –> Mechanics of Trust Creation: Inter Vivos Transfer - Generally

Answer 12

The SoF reqs that a trust of real property be evidenced by a WRITING that is SIGNED by the person who, at the time of the transfer, had the power to create a trust upon that property.
—> The majority rule (also the CA rule) does not req a writing if the trust involves only personal property.

If settlor fails to DESIGNATE A TRUSTEE, there can be no transfer of legal title to a trustee where the settlor fails to designate that trustee.

• –> But, a trust will not fail for lack of a trustee: a ct can appoint one.
• –> Exception: The settlor specifies that the existence of the trust is dependent on acceptance by the named trustee.

If settlor designates a trustee who lacks capacity or has capacity but refuses to serve as a trustee: Not a fatal flaw; the court can appoint a replacement trustee unless settlor specifies existence of the trust is dependent upon a specific person being trustee.

Question 13

Is the Trust Valid? –> Mechanics of Trust Creation: Inter Vivos Transfer - Testamentary Transfer

Answer 13

A trust can be created through a will.

• –> The will must be in writing.
• –> If the will fails to designate a trustee or if the designated trustee lacks capacity or refuses, the probate ct will appoint one.
• –> A valid testamentary trust must be ascertainable from the will or other docs properly incorporated, or from facts which have significance apart from their effect upon the disposition of the property.

Secret Trust
Occurs when a testator wants to create a trust but doesn’t want its terms to be in the public record; the language of the will looks like the testator is devising cash to a beneficiary.
—> But the testator and the beneficiary have previously agreed that the beneficiary will really act as a trustee for a 3rd party who is not named in the will.
—> The face of the will gives no indication that a trust exists.
—> Prevailing rule: Extrinsic evidence is allowed to
est the existence of the trust.

Semi-secret trust
The face of the will indicates the existence of a trust but it fails to spell out all of the necessary terms (often, the beneficiary is missing).
—> Prevailing rule: Extrinsic evidence is barred and the trust fails.

Pour over will
A testator uses his will to fund a trust that was created at some point prior to his death.
—> Uniform Testamentary Addition to Trusts Act: if a trust existed before the execution of the will or comes into existence afterwards or is amended afterwards, it does not matter—the pour over provision is still valid.

Question 14

Is the Trust Administered Appropriately? –> Trustee’s Powers - Express v. Implied

Answer 14

Express: Spelled out in the trust agreement.

Implied: The trustee has the power to do what is nec or approp to carry out the terms of the trust.

Question 15

Is the Trust Administered Appropriately? –> Trustee’s Powers - How are the Trustee’s Powers Exercised?

Answer 15

If the trustee is unsure if he has certain power, the trustee should ask the ct.

Mult Trustees
If there are multiple trustees, how do they decide to act? —> Generally there has to be unanimous agreement if there are 3 or more co-trustees.
—> If they can’t reach a unanimous decision, then they may act by majority rule.

Question 16

Is the Trust Administered Appropriately? –> Trustee’s Powers - Resignation and Delegation

Answer 16

Resignation
Once a trustee has accepted, he may resign if one of the following is satisfied:
(1) The trust instrument allows;
(2) Permission of the court; or
—> A petition for removal will not be granted if removal is not in the best interests of the beneficiaries;
(3) Consent of all beneficiaries.

Delegation
If the trust agreement does not explicitly grant the trustee authority to delegate his powers, the trustee may not delegate the performance of his duties of others.
—> EXCEPTION: Duties that are purely administrative and do not constitute the entire administration of the trust may be delegated by the trustee.

Question 17

Is the Trust Administered Appropriately? –> Liability Issues: Liability of Trustee to Beneficiaries - Breach of Trustee’s Duties

Answer 17

(1) General duty: to act with due care as explained by the prudent investor rule.
—> Prudent investor rule: A trustee should act like a reasonable and prudent investor in how she manages assets of the trust.
(2) Trustee must follow all instructions from the settlor.
—> If the trustee follows those instructions, it will be a shield from liability, unless it is obvious to a reasonable person that the instructions should not be followed.
(3) Diversify assets
(4) Trustee must closely supervise any A who is
delegated duties by the trustee.
(5) Earmark assets
—> Trust property must be kept separate from the trustee’s own property.
—> The trustee must take title to trust property in a way that makes its identity as trust property readily apparent.
(6) Avoid self-dealing
—> There can be no personal benefit to the trustee or the trustee’s spouse apart from compensation for efforts as determined by statute.
(7) Accounting
—> The trustee must provide the ct w/ an accounting of all transactions entered into on behalf of the trust when req’d by statute or when requested by the ct or the beneficiaries in a ct action.

Question 18

Is the Trust Administered Appropriately? –> Liability Issues: Liability of Trustee to Beneficiaries - Defenses

Answer 18

(1) Offset profits
When a trustee tries to offset a loss on one investment with a gain in a different investment in an attempt to negate liability.
—> This is not allowed (will be an unsuccessful defense).

(2) Exculpatory clause
Relieves the trustee from liability associated with her neg conduct.
—> It will not relieve liability for intentional or reckless conduct.

(3) Consent
Consent by a legally competent beneficiary with all relevant info, will shield the trustee from liability to that beneficiary.
—> Non-consenting beneficiaries may still sue the trustee.

(4) Laches or the SoL.
(5) If there are multiple trustees acting by majority vote the dissenting trustee will not be held liable as long as she expresses her dissent in writing to the co-trustees.

Question 19

Is the Trust Administered Appropriately? –> Liability Issues: Liability of Trustee to Beneficiaries - Remedies

Answer 19

If the trustee has breached one of his duties, what remedies may be available against him?

(1) Surcharging the trustee
The trustee can be sued for damages in the amount of actual loss and potential lost profit.

(2) Rescission
Of any improper transaction that the trustee has entered into.
—> An improper transaction is one that breaches a duty of the trustee.

(3) Seek an injunction
To stop improper action by the trustee or to compel the trustee to perform duties.

(4) Removal of trustee
Can occur according to the terms of the trust agreement or by seeking a ct order to have the trustee removed.

Question 20

Is the Trust Administered Appropriately? –> Liability Issues: Liability of Trustee to Third Persons

Answer 20

If sued for breach of K and 3rd party prevails, the trustee must pay the 3rd party.

• –> If the trustee is sued for K damages, the trustee is entitled to indemnification or reimbursement from trust assets if 2 conditions exist:
  (1) A K that was properly entered into; and
  (2) Breach of the K was not a result of trustee’s breach of duty.

If the trustee is sued in tort and the trustee was personally at fault, the trustee must pay the damages.
—> If the trustee is not personally at fault, trustee must pay the damages but is entitled to indemnification or reimbursement from trust assets.

Question 21

Is the Trust Administered Appropriately? –> Liability Issues: Liability of Third Parties to the Trust

Answer 21

The trustee sues on behalf of the trust.

Three exceptions when beneficiaries can sue on behalf of the trust:

(1) If the trustee fails to file suit or refuses to do so.
(2) If the trustee knowingly participates w/ the 3rd party in causing the loss to the trust.
(3) If the trustee has abandoned the trust and no successor-trustee has been appointed yet.

Question 22

Is the Trust Accounted for Appropriately? –> Generally

Answer 22

When does an accounting become an issue?
—> Only when there are multiple beneficiaries.

Main theme when dealing w/ an accounting in a trust problem:
—> The trustee must treat all beneficiaries fairly.

Question 23

Is the Trust Accounted for Appropriately? –> Income: Dividends - Two Types

Answer 23

Cash dividends are treated as income and go to the income beneficiary.

Stock dividends are treated as principal and go to the remaindermen.

Question 24

Is the Trust Accounted for Appropriately? –> Income: Non-Productive Asset

Answer 24

If an asset is non-productive, it is not benefiting the income beneficiary and is only benefiting the remainderman.

Trustee’s duty when managing a non-productive asset:
—> Sell the property and invest in income producing property to benefit both types of beneficiary, unless the trust agreement states otherwise.

Question 25

Is the Trust Accounted for Appropriately? –> Income: Wasting Asset

Answer 25

A trust asset that is slowly depleted over time.

—> If the trust agreement states otherwise, the trustee must set aside income for the remaindermen.

Question 26

Is the Trust Accounted for Appropriately? –> Expenses: Generally

Answer 26

Ordinary expenses involved in operating the trust (including taxes) are charged to income.

Extraordinary expenses (including taxes) are charged to the principal.

Question 27

Is the Trust Accounted for Appropriately? –> Expenses: Trust Instrument Rules

Answer 27

Trustee has to follow rules set out by the trust instrument.
—> If the trust instrument says to pay out of principal for ordinary expenses, the trustee must do so.

Question 28

Has any Interest in the Trust been Transferred? –> Transferability

Answer 28

General rule for trusts
Beneficiaries in a non-discretionary trust have a property interest in the trust and they can transfer their interests freely.

Effect on creditors
The creditor of the beneficiary can attach the beneficiary’s interest in the trust.

Question 29

Has any Interest in the Trust been Transferred? –> Discretionary Trusts

Answer 29

The trustee is given discretion to determine how much, if any, is paid to the beneficiary.
—> The trustee cannot be forced to exercise his discretion.

Effect on creditors
Since the beneficiary of a discretionary trust cannot demand payment, neither can the creditor of a beneficiary.

Question 30

Has any Interest in the Trust been Transferred? –> Spendthrift Clause

Answer 30

Often put into trusts to provide protection for the beneficiaries (default practice in CA).

• –> A spendthrift clause is usually used when a beneficiary cannot be trusted to control spending.
• –> It gives an independent trustee full authority to make all decisions about how trust funds are spent.
• –> It prohibits a beneficiary from spending or borrowing against trust funds.

Validity
In order for a spendthrift clause to be valid it must restrict both involuntary (creditors) and voluntary transfers.
—> Settlor cannot create a trust by which the settlor is the beneficiary and impose a spendthrift clause simply to avoid creditors being able to reach the settlor’s assets.

Effect
While an asset remains in the trust, neither a beneficiary nor a creditor of a beneficiary can reach it.

Special Creditors
Special creditors that can break through a spendthrift clause:
(1) Fed govt seeking payment of taxes.
(2) Spouses and children enforcing support judgments.
(3) Creditors who supply “necessaries” of life.

Question 31

Modification or Termination of Trust? –> Overview

Answer 31

Modification and termination are all about revocability.

• –> A trust is generally presumed to be revocable unless expressly made irrevocable (this is the general rule and it preserves flexibility).
• –> Any trust created by a will is irrevocable.

Question 32

Modification or Termination of Trust? –> Modification

Answer 32

A settlor can modify a trust provided it is revocable.

• –> If a settlor makes too many modifications to the trust, the settlor may be seen as retaining too much control and may destroy the trust form.
• –> W/ an irrevocable trust, the trust can still be modified by ct order if all beneficiaries agree.

A beneficiary generally cannot modify a trust.
—> Exception: If a beneficiary can show special circs where a modification does not harm/defeat a material purpose of the settlor in setting up the trust and does not harm other beneficiaries.

Question 33

Modification or Termination of Trust? –> Termination

Answer 33

The settlor can terminate a trust if the trust is revocable.

A beneficiary can terminate a trust early only if 2 factors are satisfied:

(1) Unanimous consent of all beneficiaries.
- –> But if there are undetermined remaindermen, the trust cannot be terminated because the consent of those remaindermen cannot be obtained.
(2) Early termination will not defeat a material purpose of the settlor in est’ing the trust.
- –> Whenever you’re dealing with a spendthrift clause, you can never terminate early bc doing so would be deemed to defeat a material purpose of the trust.

Question 34

Modification or Termination of Trust? –> Doctrine of Cy Pres

Answer 34

Applies only to charitable trusts (3rd difference between
private and charitable trusts).
—> If it is determined that the settlor had a general charitable purpose and the original charitable interest becomes unattainable, the ct can consider changing the charitable purpose to a different purpose to keep the trust alive.
—> A trust instrument may prohibit cy pres; in that case, remember the trust instrument will control, not the default rule.

Question 35

Is there a Trust by Operation of Law?

Answer 35

Resulting Trust
Occurs any time there is a failed express trust.
—> It is an implied trust created by operation of law.
—> When a resulting trust is implied, the ct will return the trust property back to the settlor.
—> It is imposed in a ct of equity to prevent unjust enrichment.

Constructive Trust
An equitable remedy imposed by a court to prevent unjust enrichment.

Purchase Money Resulting Trust
Transfer of assets where one party holds money in trust to undertake a particular purpose for another party.