fl trust Flashcards
trust: basics
A trust is a management device.
Key feature: A bifurcated transfer (i.e., transfer that separates legal and equitable interests)
The trustee owns legal title and manages the property for the benefit of the beneficiary.
principal: Original trust property and any increase in its value
income: Money invested by the trust
Revocable trust can be revoked at any time during the settlor life
Settlor: person who creates the trust.
Irrevocable trust cannot be revoked by the settlor
In Florida! A trust is presumed to be revocable, unless the trust documents say otherwise.
* A settlor may revoke or amend a revocable trust by substantial compliance with any method provided in the terms of the trust. But if the terms of the trust do not provide a method, revocation may occur by:
* a later will or codicil that expressly refers to the trust or specifically devises property that would otherwise have passed according to the terms of the trust or
* any other method manifesting clear and convincing evidence of the settlor’s intent.
* If the trust is revoked, then the trustee must distribute the property as directed by the settlor.
Mandatory Trust: Trustee MUST make distributions from the trust
Discretionary Trust: Trustee may make distributions in her discretion
Remedial Trust: Is a remedy created by operation of law
* Often called a “passive trust”
* Trustee only has one power – to transfer the property
Rule Against Perpetuities:
Applies to trusts
Majority apply a “wait and see” approach
* Wait and see if interest vests in the vesting period to determine its validity
* Florida has a 1,000-year vesting period for trusts.
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The person who creates trust is the settlor.
The person who manages the trust is the trustee.
* Holds legal title to the property
* Has power to manage the property (i.e., sell, transfer, invest)
* Can be an individual, a bank, or a trust company
* A trust will not fail for lack of a trustee
The person who receives the benefit of the trust is the beneficiary.
* Holds equitable title to the property
* Has power to enforce the trust instrument
* Can have multiple classes of beneficiaries
express trusts
Express trust
Owner expressly indicates the intent to create a trust
May be private or charitable
private express trust
threshold matter
you need a settlor with legal capacity.
What is legal capacity?
* Focused at the creation of the trust
* Revocable Trust: 18 years old and of sound mind (same basic requirements to make a
will in Florida)
* Irrevocable Trust: Same capacity as needed to make an inter-vivos. (higher standard than revocable trust)
intent
Settlor must have the present intent to transfer ownership of property to a trustee who has duties to perform.
“Trust words” create a presumption of a trust (e.g., “in trust,” “for the benefit of”).
Oral trusts are valid.
Exceptions
When a trust must be in writing:
* statute of Frauds (e.g., conveying real property)
* A devise (e.g., a trust created in a will)
* Property not transferred by the will, but rather by the trust
* Trust must be in existence at the time the will was made or created simultaneously
* Trust avoids probate
Watch out for precatory language:
- Language that expresses donor’s hope or wish that the donee use property in a certain way
- Does not create a trust
- precatory language
- distinguishing between trust and gift
trust property (res)
There is no trust unless there is some piece of property in it.
* can be any full or fractional proprty interest, including future interests (whether vested or contingent) and future earnings
empty trust: A trust without property
Exceptions:
* pour-over trust
Trust terms must be in writing at time will is executed
Property need not be in trust at time will is executed
* Life insurance trust
Beneficiary receives the right to the settlor’s death benefit
trust purpose
Valid if not illegal or Contrary to public policy.
trustee
Trustee holds legal title to trust property
there can be more than one trustee
a named trustee can decline
Trustee can resign with 30 days’ notice.
If there is a vacancy in a trusteeship, it need not be filled unless the terms of the trust require otherwise or there is no remaining trustee.
The trust will note fail without a trustee.
Who replaces a trustee? Will come from either:
* trust documents name the successor;
* beneficiaries unanimously agree on a successor or
* court appoints a successor.
Who doesn’t have capacity?
* Kids;
* Prisoners;
* People without legal capacity.
When will the trustee be removed? Think of this as a remedy for a breach of the trustee’s duties:
* Breach of trust; lack of cooperation; unfit, change of circumstances, etc.
beneficiaries
There must be an intended beneficiary.
Either a specific person or some criteria to determine who the person is
Exception
- unborn children
- class gits (class must be definite)
- charitable trusts
beneficiary can be individual, a group, an entity, or an animal
* But under Florida law, a trust may be created for the care of one or more animals—as long as the animals are alive during the settlor’s lifetime
* care of unborn animals “And descendants of the pet” is not permitted in fl
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creation of express trusts
inter vivor transfer
* An inter vivos private express trust is a trust created during the settlor’s lifetime
* A revocable inter vivos trust generally need not adhere to any formalities
* However, if a provision disposes of trust property upon the settlor’s death, that provision is invalid unless the trust instrument was executed with the formalities of a will (signed by two witnesses)
declaration of trust
* settlor declares herself holder of the property in trust for beneficiaries
* settlor also serves as trustee
deed of trust
* Settlor conveys property to a trustee
* Settlor is not the trustee
exercise of power of appointment in favor of trustee
testamentary transfer: Created according to the terms of a will
choice of law
Settlor can choose another state’s law to control (not Florida) if:
* There is a significant nexus between that state and the trust; and
* That law is not contrary to strong public policy of Florida.
charitable trusts & remedial trusts
charitable trusts
Must have a charitable purpose, such as:
* Relief of poverty;
* Advancement of arts, sciences, education, or religion; or
* Promotion of good health, governmental, or municipal purposes.
modern trends: to validate a charitable trust
rule against perpetuities: does not apply!
* except: If the initial gift was to a charity, but a subsequent gift-over clause makes a gift to a non-charity, RAP applies to the subsequent gift.
indefinite beneficiaries: If not a charitable entity, the intended beneficiary must be the community at large or a class of unidentifiable members.
cy pres doctrine:
Court can modify a trust if the trust’s charitable purpose is no longer possible.
to modify, you need a general charitable purpose.
The goal is to make the new purpose as close as possible to the original purpose.
If there is no general charitable purpose, the property goes to a resulting trust.
standing to enforce
Settlor, beneficiary, or state attorney general’s office has standing to enforce the terms of a
charitable trust
remedial trusts
in general
Not driven by intent
Key characteristic: Remedial trusts are passive in nature.
Trustee’s only duty is to convey the property back to the settlor or the settlor’s estate
Two Types:
resulting trust and constructive trust
resulting trusts
Used when a trust fails.
trustee must return property to settlor or settlor’s estate
Goal is to avoid unjust enrichment
purchase-money resulting trust
Person One buys the property, but title is taken in Person Two’s name.
If Person Two is not the natural object of Person One’s bounty (not a close friend or relative), a court will create a purchase-money resulting trust.
avoiding a resulting trust
create a gift-over clause
constructive trusts
A remedy used to prevent unjust enrichment if a 3rd party takes advantage of the settlor
Key characteristic: wrongful conduct (e.g., fraud, undue influence)
* Proved by clear and convincing evidence
Wrongful conduct must be conduct directed toward the settlor that caused the settlor to create the trust
look for
* fraud
* duress
* undue influence
* breach of a duty
* detrimental reliance by a third party
beneficiary’s interest
forfeiture
Killer’s Interest: A person who intentionally and unlawfully kills the settlor forfeits an interest in the trust.
Divorce/Annulment: In a revocable trust, any provision in favor of an ex-spouse is forfeited upon divorce or annulment.
anti-lapse
baseline
To take a future interest, a beneficiary must survive (i.e., be alive) at the distribution
date.
anti-lapse
Florida has an anti-lapse statute, which applies to Trusts including gifts to (i) a grandparent of the settlor, or (ii) a lineal descendant of the grandparent of the settlor (e.g., a parent).
* If the intended beneficiary is (i) covered by anti-lapse and (ii) survived by a descendant, then the gift will not lapse.
* Except: Anti-lapse does not apply if the words of the trust state a contrary intent.
transfers and creditor access
Rule 1: Alienability = Accessibility
* A beneficiary’s equitable interest in trust property is freely alienable.
* If freely alienable, then creditors can reach the beneficiary’s equitable interest
Rule 2: Limited beneficiary= limited creditor
A creditor cannot reach trust principal or income until such amounts become payable to the beneficiary, or if the beneficiary can demand it.
rule 3:
A TRUSTEE’s creditor are unable to reach assets of trust– regardless of revocability unless trustee is the SETTLOR OR BENEFICIARY of the trust
(1) Spendthrift Provision
* Trust expressly restricts the beneficiary’s power to transfer her interest
* protects the beneficiary from the BENEFICIARY’S creditors
* thus: Creditors cannot reach trust property until the trustee makes a payment.
Creditor exceptions: The following creditors can still reach trust property:
* Spousal or child support;
* Claims by judgment creditor who provided services for the protection of a beneficiary’s
trust interest;
* Claims of the federal government or the State of Florida.
A judgment creditor who has provided services for the protection of a beneficiary’s interest in a spendthrift trust may attach future distributions to that beneficiary if the creditor establishes that traditional methods of enforcing the claim are insufficient (i.e., beneficiary has no other assets).
* if the beneficiary has other assets, the claimant must first seek to satisfy the claim from those assets.
(2) discretionary trust
* Trustee has discretion to make payments (for support, education, etc.)
* Creditors cannot reach trust property, because the beneficiary cannot
demand payment.
Creditors can reach trust property when the trustee makes a payment.
trust modification and termination
Terminate = End
Modify = Change, redirect, prohibit certain transactions, etc.
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general rules
A trust will automatically terminate by the following methods:
Expiration: The trust expires at the end of a stated term;
Revocation: It is revoked by the settlor; or
Satisfaction: The trust has been terminated.
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revocable trust
A settlor may revoke or terminate a revocable trust.
If the trust was created after July 1, 2007, the trust is presumed revocable, unless the terms of the trust say otherwise.
(1) methods
substantial compliance with a method outlined in the trust documents; or
If the trust is siler, then:
* Later will or codicil expressly refers to the trust or passes trust property; or
* Any other method manifesting clear and convincing evidence of the settlor’s intent.
(2) multiple settlors
If there is more than one settlor, then a single settlor’s revocation/amendment applies to that settlor’s portion of the trust.
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irrevocable trust
Upon application of a trustee or any qualified beneficiary, a court may modify or terminate a trust if the court determines that the value of the trust property is insufficient to justify the cost of administration.
If the court approves termination of the trust, the trustee must distribute the trust property in a manner consistent with the purposes of the trust.
Material purpose
* a trust with a spendthrift provision has a material purpose
* Say the settlor is no longer alive, the beneficiaries want to terminate the trust prematurely, and the trustee opposes termination:
* Rule: A trustee can block premature termination if the trust is still serving some material purpose, such as:
1. Discretionary trusts;
2. support trusts;
3. Age-dependent trusts
irrevocable trust: an irrevocable trust can be terminated by the consent of all beneficiaries, as long as the trust has no material purpose that would be violated by termination or amendment of the trus
Beneficiaries and settlor: If the settlor and beneficiaries all agree, then a trust serving a material purpose can be revoked or amended.
Dead settlors: If the settlor is dead, the beneficiaries can agree to modify or terminate an irrevocable trust.
Spendthrift: A spendthrift trust can be modified but not terminated.
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judicial modification/termination
Inconsistent with purpose: At any time, a trustee or beneficiary may move the court to modify the trust if the purpose of the trust:
* The purpose of the trust has been fulfilled;
* The purpose of the trust has become illegal, impracticable, or impossible to fill; or
* A material purpose no longer exists.
Best interest of the beneficiaries: A court may modify an irrevocable trust if is not in the best interests of the beneficiaries.
Other reasons to modify/terminate: unanticipated changes, uneconomic trust, correct mistakes, and tax objectives.
The Gist: Trusts are about flexibility within the settlor’s intent. This is equitable law trying to improve circumstances for settlors and beneficiaries.
self-settled trust
self-settled trust: an irrevocable trust in which the settlor is also a beneficiary
a settlor’s creditor may reach (garnish) the MAXIMUM amount that can be distributed to the settlor or for the settlor’s benefit, even though the trust is subject to a spendthrift provision.
HOWEVER, if it is an irrevocable trust in which the SETTLOR IS NOT THE BENEFICIARY, then the settlor’s creditors are unable to reach the assets
the trustee
Starting point is always start with trust documents, which may:
* Outline the expectations for trustee; and/or
* Cabin trustee’s authority.
Remember: Trustee has legal title. Act as if Trustee owns the property.
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types of powers
Mandatory: Powers that the trustee must exercise (trustee must pay my daughter’s medical bills)
Discretionary: Powers that the trustee can decide to exercise or not (trustee should support my daughter’s adventurous lifestyle as the trustee sees fit)
If there are multiple trustees, their decisions must be unanimous, unless the trust says otherwise.
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Duties
Remember: A trustee is a fiduciary.
Good Faith: Upon appointment, a trustee must act in good faith.
Loyalty: A trustee must administer trust solely in the interests of the beneficiaries.
* No Self-Dealing: Trustee cannot do business with the trust.
* TRUSTEE CANNOT BUY TRUST PROPERTY UNLESS SETTLOR CONSENTS IN WRITING WHILE TRUST IS REVOCABLE, PRESUME IT IS JUST WRONG IF YOU SEE IT
* Test: Self-dealing is akin to a strict liability breach; governed by the “no further inquiry” rule.
Conflicts: Trustee cannot act where she has a conflict of interest.
Impartiality: Trustee has a duty to balance the competing interests of present and future beneficiaries; Because present and future beneficiaries want different things.
Old Rule:
* Life beneficiary entitled to income;
* Remainder holder entitled to principal.
Modern Rule: The Uniform Principal and Income Act (UPAIA)
* The allocation between income and principal must be balanced to treat life tenants and remainder holders fairly.
* Look at the total return.
* Trustee can reallocate as long as it is fulfilling the trust purpose.
* Must be reasonable.
* Trustee cannot make adjustments to principal and income if the trustee is also a beneficiary, or if trustee benefits in some other way.
* Trustee must account for transactions and maintain receipts.
care and prudence
trustee must administer as prudent person would; must act as if it is trustee’s own property
Special skills: If the trustee has special skills (e.g., investing/finance) the trustee
must use those skills in administering the trust.
Investments
* Traditionally, trustees were confined to a certain list of allowable investments with trust property.
* Modern Rule (in Florida): Prudent investor standard
Must use reasonable caution, care, and skill
Assess the health of the trust by looking at the whole portfolio.
* “Whole portfolio”: Look at the performance of the trust overall, rather than specific investments in isolation.
Assets: Trustee should diversity assets.
Delegation: Trustee may delegate to an expert, but has duty to monitor the expert’s actions
Duty to Inform and Account
Trustee must reasonably inform the beneficiaries of the health and status of the trust.
On an annual (at least) basis, trustee must make an accounting of the trust.
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liabilities
(1) to beneficiary
When trustee violates a duty owed to the beneficiary, court may:
* Compel trustee to perform duties or correct breach;
* Enjoin further action;
* Order an accounting; or
* Appoint a special fiduciary.
damages for breach: trustee responsible for the larger of:
* Amount required to restore trust value that would have occurred without breach; or
* Trustee’s profit because of the breach. (use this if the breaching trustee already returned what he took back to the trust)
* a trustee who receives the benefit from the breach is NOT netitled to contribution from another trustee to the extent of the benefit received
Timing: Beneficiary must bring claim against trustee within four years of the breach.
* except fraud: statute does not start running until the plaintiff discovers the fraud
(2) to third parties
contract: A trustee is not personally liable on contracts entered into on behalf of the trust.
* Trustee may be sued in fiduciary capacity for suits against the trust.
* If there is a breach, trust estate is liable.
tort: A trustee is liable in tort only if the trustee is personally liable.
will substitutes and power of attorney
Will substitutes
revocable trusts Avoids probate because it is an inter-vivos transfer
pour-over trust Trust created by will; the assets transfer into the trust at the testator’s death
* Pour-over trusts must be created before or at the same time as the will.
* A pour-over trust is an exception to the trust res requirement.
life insurance trust exists so beneficiary has a right to settlor’s life insurance proceeds
uniform transfers to minors account (UTMA) Set up for a minor, where a custodian manages the property for the benefit of the minor
* it sounds like a trust but is not, because the custodian does not have legal title to the account.
* Terminates when the minor turns 21.
* If the minor dies before 21, the account goes to the minor’s estate.
totten trust Bank account where depositor (called trustee) names the beneficiary of the account
* Named after a case from 1904
* there is no separation of legal and equitable title to the property.
* A Totten trust is subject to the rules of a “pay-on-death” (POD) bank account.
* Under these rules, the balance will be distributed equally among the SURVIVING beneficiaries (not their heirs) upon the last account holder’s death.
pay on death account Jointly held account with a right of survivorship
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power of attorney
A grant of authority from principal to another person(i.e., the agent) to act on behalf of the principal
Creation: Must be signed by the principal and at least 2 witnesses
durable power of attorney Permits the agent to act on behalf of the principal even though the principal is unable to act on her own behalf.
* In Florida, to create a durable power of attorney, you must use the words “this durable power of attorney is not terminated by the subsequent incapacity of the principal except as provided in Chapter 709, Florida Statutes,” or words to that effect.
* A power of attorney does not become a durable power of attorney if the principal becomes incapacitated.
(1) agent requirements
Must be at least 18 years old.
Can also be a financial institution with a place of business in Florida.
(2) agent duties and authority
Agent is a fiduciary.
Agent may only exercise authority specifically granted by the power, or any authority reasonably necessary to give effect to the express grant.
(3) termination and revocation
Agent’s authority terminates when:
* agent dies, becomes incapacitated, resigns, or is removed;
* Dissolution of agent and principal’s marriage; or
* Power of attorney terminates.
Power of attorney terminates when:
* Principal dies;
* Principal revokes;
* Power provides it terminates at a certain point;
* Purpose of power is accomplished; o
* Agent’s authority terminates and a replacement agent is not identified.
Revocation: Requires a subsequently executed power of attorney or other writing by the principal
trustee power
generally includes all of the powers of an owner of property, including power to buy, sell, invest, mortgage, or pledge trust property
* except as limited by terms of trust
also has power to sue, defend, or compromise lawsuits
trustee compensation and reimbursement
generally entitled to reasonable compensation
entitled to be reimbursed for reasonable expenses properly incurred in administration of trust
honorary trust
florida recognizes honorary trusts as legally enforceable.
An honorary trust made for a general, noncharitable purpose does not require definite or ascertainable beneficiaries.
An honorary trust is enforced by a person appointed in the terms of the trust, or if no person is appointed, by a person appointed by the court.
example: testator devises to nephew 50k to be distributed over the following year to individuals of his choosing in amounts not exceeding 1k per individual
exculpatory clause
a trust may contain an exculpatory clause—i.e., a term that relieves the trustee of liability for a breach of trust.
But such a clause is unenforceable to the extent that it
* attempts to relieve the trustee of liability for a breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries, or
* Was inserted into the trust instrument as the result of an abuse by the trustee of a fiduciary or confidential relationship with the settlor.
