General Effects of Trust Creation Flashcards
Rights of the Settlor
Once a trust has been created, unless the settlor is also a trustee or a beneficiary, the settlor no longer owns the assets because they have been transferred into trust and are now owned by the trustee (legal title) and the beneficiary (equitable title).
Rights of a Trustee
A trustee has legal title.
Duties of the Trustee
A trustee is a fiduciary of the trust and is obligated to adhere to the terms of the trust with respect to the collection, preservation, enhancement, and distribution of the trust property to the beneficiaries.
Duties of the Trustee: Active Duty Requirement
A trustee must be given some active duties to direct them with respect to the trust property for the trust to be valid. A trust that is “passive” or “dry” will result in legal title passing directly to the beneficiaries (who will receive FSA through merger).
Common Duties of Trustee That Are Often Assigned or Implied
Include duties to:
- collect, protect, and preserve trust property
- to invest prudently
- to administer the trust pursuant to the settlor’s directions; and
- to exercise fairness to all beneficiaries, regardless of the nature of their interests as present (income) or future (remainder, principal)
Elements Required to Create a Trust
Include:
- a settlor, with requisite capacity who expresses a present intent to create a trust
- delivery of specific trust property
- an ascertainable beneficiary
- active duties imposed on the trustee
- a proper trust purpose; and
- a trustee
Intent to Create a Trust: Mandatory v. Precatory Language
- Mandatory language such as “shall” or “must” creates a trust.
- Precatory language such as “with the hope” will not be sufficient to create a trust unless other circumstances reflect that a duty was intended (e.g. the specificity of the surrounding language). Furthermore, if the conveyance was made in a commercial context, courts will usually find that there was intent to create a trust.
Intent to Create a Trust: Present Req.
The intent to create the trust must be a present intent.
Delivery of Specific Trust Property (Trust res)
There must be a specific trust property, or trust res. The trust res must be in existence at the time that the trust is created (a trust cannot merely give a future interest).
What Happens When a Trust States that It Will Name Beneficiaries Later
If the trust states that it will name the beneficiaries later, it is a resulting trust with title returning to the settlor.
What Happens if Settlor Does not Own the Stated Trust Property?
No trust is created unless the settlor later acquires the property and re-manifests trust intent at acquisition or there was a binding K to enforce it.
What Kind of Property Can be Subject to a Trust?
Almost all types of property can be subject to a trust except:
- mere expectation
- unearned profits
- debt owed by the trustee
Certainty Req. for Trust Property
There must be some certainty over what is the trust property (must put parties on adequate notice that the property is subject to a trust). A conveyance that one is trustee over “some” of the property is insufficient.
Ascertainable Beneficiaries
Every trust must have ascertainable beneficiaries. Must be determinable when the trust is to be distributed.
Ascertainable Beneficiaries: Obj. Standard
If the settlor provides some obj. standard by which to identify beneficiaries, then those beneficiaries are ascertainable. The criteria must provide a reasonable basis for the identification (“to A to hold the property in trust for ‘the person who provided the best health care for me before my death’”).
Proper Purposes of a Trust?
A trust can be created for any purpose that is not illegal, fraudulent, or against public policy such as:
-provisions encouraging divorce or marriage (but the latter is permissible if the beneficiary is the settlor’s spouse).
What Happens When a Trust Purpose Violates Public Policy?
- A court may:
- delete the offending language; or
- try to determine from the four corners of the instrument, what the settlor would have wanted had settlor known the provision violated public policy.
Pour Over Provisions
Wills frequently contain “pour over” provisions that direct the transfer of the decedent’s property into a trust established either by the testator during his lifetime or by another person.
Permissibility of Pour Over Provisions
Permissible under UTATA if:
- the terms of the trust are set forth in a written instrument other than the will itself that was executed before, or concurrently with, or after execution of the will.
- unless the will provides otherwise, property devised by will to a trust must be administered and disposed of in accordance with the provisions of the trust instrument, including any amendments thereto, regardless of when those amendments are made.
Totten Trust
An arrangement with a bank that allows the depositor to open a bank account in the depositor’s own name, as trustee for other parties. The only right the beneficiary has is to take whatever is left in the account when the depositor dies if they are still alive.
Limits on Trust Duration (RAP)
All private, non-charitable trusts comply with the Rule Against Perpetuities (RAP). Therefore, no interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest.
Red Flags in Conveyances that Often Suggest RAP Violations
1) age contingencies beyond age 21 that don’t refer to people already born and ascertainable
2) double contingencies
3) interests that shift upon the occurrence of things that could happen at any time
4) large class gifts (if even a single class member might clear the RAP hurdle “too late” all class members are deprived)
Modifications for RAP (Wait-and-See Doctrine)
Some jurisdictions hold that whether the rule has been violated depends upon what actually happens rather than what might happen. Some states will reduce an age requirement to 21.
Trusts that are Exempt from RAP
Completely charitable trusts. However, the rule would apply when private beneficiary interests exist in the same trust (e.g. when a private beneficiary interest is given a remainder or when a charity is given a remainder following a private beneficiary’s present possessory estate).
Types of Completely Charitable Trusts
Include those of a purely charitable purpose and charity-to-charity exemption
Example of Purely Charitable Purpose
To trustee in trust for the ethical treatment of animals.
Example of Charity-to-Charity Exemption
To trust for the Blue Cross, but should it ever close its doors, even if a thousand years from now, to the Red Cross
