LA BAR EXAM CODE II: TRUSTS Flashcards
What is a trust and who are the players in the relationship?
A trust is the relationship resulting from the transfer of title to property by one party (the settlor) to another party (the trustee) to be administered by him as a fiduciary for the benefit of another (the beneficiary).
What can be trust property?
Any property susceptible of private ownership, and any interest property, may be transferred in trust.
How are trusts formed, what are the form requirements?
Intent to create a trust must be clear, and trusts are irrevocable, generally. A trust can be revocable only if the settlor reserves the right to modify or revoke it.
A testamentary trust is one created by a donation mortis causa (will) and must be created in a form required by law.
An inter vivos trust is one that is not testamentary and comes into existence upon execution of the trust instrument. It can be created by (i) authentic act; OR (ii) act under private signature (a) executed in the presence of two witnesses AND (b) duly acknowledged by the settlor or by affidavit of attesting witness.
The trust instrument need not be recorded unless the trust owns immovable property. If you have facts that include a trust with immovable property, scan the facts to see if it has been properly recorded. If not, it is of no effect against third parties.
The trustee’s acceptance may be done as part of the execution or in a separate writing within a reasonable time.
What are the specific types of trusts?
The three specific types of trusts are the spendthrift trust, the class trust, and a charitable trust.
What is a spendthrift trust?
Generally, a beneficiary may alienate an interest in a trust by an authentic act or act under private signature executed in the presence of witnesses and duly acknowledged by the beneficiary or by affidavit of 1 of the witnesses. Spendthrift trusts restrict a beneficiary’s alienation of their income or principal interest.
What is a class trust?
A class trust is one created to benefit the members of a class defined by the settlor. Only 1 member of the class need be in being at the time the trust is created. Beneficiaries of a class trust must be related to the settlor.
*Watch for a class trust for beneficiaries unrelated to the settlor (e.g., “children of my friend, Fred”). This is not a valid trust.
What is a charitable trust?
A charitable trust is one established for the relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, or other purposes beneficial to society. A charitable trust is perpetual unless the trust instrument provides otherwise.
What is important to remember about qualification of a trustee?
The trustee(s) can be named by the settlor in the trust instrument or chosen in a manner directed in the trust instrument. Only natural persons (U.S. citizens or resident aliens), certain financial institutions and certain non profit organizations may serve as trustee.
Watch for a fact pattern in which the named trustee is resident or citizen of a foreign country, such as Canada. May even be a close relative. Cannot be trustee of trust. A U.S. citizen who is temporarily in another country can be trustee, though.
What are the powers and duties of the trustee?
The default rules for trustee powers include, lease trust property, sell trust property, mortgage trust property, borrow money on the credit of the trust estate, and compromise, arbitrate, or abandon trust claims.
A trustee is a fiduciary who must administer the trust in the interest of the beneficiary and act as a prudent person. A trustee must administer the trust impartially based on what is fair and reasonable.
As a default rule, a trustee has the duty to:
(i) preserve trust property
(ii) keep trust property separate
(iii) deal fairly and communicate
(iv) refrain from lending funds to itself
(v) refrain from lending funds to others
(vi) refrain from buying property for itself
(vii) refrain from buying property for others
(viii) refrain from selling property to itself
(ix) refrain from selling property to others
How does a trust terminate and what is the effect of termination?
Without a term from the settlor, a trust terminates by default if:
death of the last income beneficiary
20 years from the death of the settlor
50 years from the trust creation
How does a legitime apply in a trust?
The legitime of the forced heir(s) may be put into trust, but in such a case, special rules apply.
