Nonprobate and Trusts

Question 1

what are our two key nonprobate points?

Answer 1

o rule: non-probate transfers are NOT subject to Wills Act formalities – plain and simple

 if a beneficiary of a non-probate transfer predeceases the decedent, anti-lapse will not apply, thus the transfer will go to D’s estate even if the beneficiary had living issue

 there is no automatic revocation on divorce

o rule: assets in a non-probate account will NOT be part of the probate estate

Question 2

three key points for revocable IV trusts

Answer 2

o functions much like a will
o **the beneficiary of the trust has no standing to challenge the trust during the settlor’s lifetime
o **any assets within this trust when the settlor dies are not subject to probate

Question 3

5 types of nonprobate transfers

Answer 3

• revocable IV trusts
• life insurance
• transfer or pay on death accounts
• pension/retirement plans
• transfer of real ppty

Question 4

key point for POD accounts

Answer 4

POD contracts, though transparently testamentary, will be deemed non-testamentary and accepted as valid even without Wills Act formalities

Question 5

key points for joint ownership of land

Answer 5

(1) tenancy in common
- presumption under the law
- each tenant has an undivided, fractional interest

(2) joint tenancy (w right of survivorship)
- each tenant has an undivided, fractional interest
- when one dies, that person’s interest is removed, and the other automatically becomes the sole owner of the ppty

(3) tenancy by the entirety
- only available for married couples
- similar to joint tenancy: each tenant has an undivided right to use and possess the whole property, AND a right of survivorship
- cannot be severed unilaterally – can only be ended by death, divorce, or the agreement of both spouses
- the benefit: allows holders to partially shield their assets from creditors

Question 6

what is an express trust and what are the common types?

Answer 6

o private express trusts: a legally enforceable device by which a fiduciary (trustee) manages ppty for one or more beneficiaries
o title to trust ppty is bifurcated
 legal title to trustee
 equitable title to beneficiaries
o types of express trusts
 inter vivos
• deed of trust (other trustee assigned)
• declaration of trust (settlor and trustee are same person)
 testamentary
• must be deed of trust b/c T is deceased

Question 7

what are the rules regarding the same person being settlor, trustee, and beneficiary?

Answer 7

o **note: it is totally okay for the sole trustee to be one of the beneficiaries
 also, one person can even serve in all three roles, so long as the trust has at least one beneficiary who is not the sole trustee
• ex – S to S, as trustee for the benefit of S, remainder to C (good)
• ex – S to S, as trustee for the benefit of S (invalid)
o invalid because S, as trustee, owes fiduciary duties only to himself – where the sole trustee and sole beneficiary are the same person, the legal and equitable titles merge and S holds the ppty in FSA
• **your estate is equal to YOU, so doesn’t count as a separate beneficiary

Question 8

what are the 8 elements to keep in mind for express trusts? what is the key thing to remember?

Answer 8

• *remember, only refer to the ones that are relevant to the given situation
  (1) valid purpose
  (2) capacity of settlor
  (3) intent to create a trust
  (4) delivery of the assets
  (5) presence of property in the trust
  (6) ascertainable beneficiaries
  (7) in writing
  (8) competent trustee who follows his duties

Question 9

what counts as a valid purpose for a trust?

Answer 9

 (1) trust must have a valid purpose

• anything for the benefit of beneficiaries so long as it is by law and not against public policy (can’t be criminal)

Question 10

what level of capacity is required to set up a trust?

Answer 10

 (2) settlor must have capacity to grant a trust
• the capacity required to create, amend, revoke, or add ppty to a revocable inter vivos trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will
• for irrevocable inter vivos trusts, the settlor must have capacity during the lifetime to transfer the ppty free of trust – contract level capacity (higher standard)

Question 11

what is the test for settlor’s intent to create a trust? what are examples of precatory language that will not create a trust?

Answer 11

 (3) settlor must have intent to create a trust
• the test: did the grantor manifest an intent to create a trust relationship (a relationship in which one person holds and manages the ppty for another)?
o we are looking for specific words
• use of the word “trust” or “trustee” is not required

Precatory Language

• desire
• hope
• request (on the line)

Question 12

what are the rules for delivery of assets under a deed of trust and under a declaration of trust?

Answer 12

 (4) settlor must deliver the assets to the trustee (usually)
• for a deed of trust: assets must be delivered to the trust and placed in the trustee’s name for such assets to be in the trust
• for a declaration of trust: a manifestation of intent by the settlor to hold certain items of his ppty, over which he already has legal title, in trust for one or more beneficiaries is sufficient for the ppty to be in trust – no further document transferring title to the ppty is required
o i.e. just need to clearly ID it as trust ppty

Question 13

what are the rules regarding the need to have property in the trust? what are the exceptions? how does this look for IV trusts? testamentary trusts?

Answer 13

 (5) trust must have ppty (res, corpus)

• **can’t be expectancy of future earnings…if it is, you need to wait until the trust has that ppty and then reaffirm the trust
o ex) a settlor’s own promissory note does not qualify as a trust (you can’t sue yourself to pay the trust)
o however, if the beneficiary has any sort of future interest in the ppty but does not currently possess it, that is sufficient
 ex) if you are to inherit ppty from someone that you want to put in trust, you need to wait until that person dies so you have an active interest in the probate estate (even if the probate process is still pending)

• **doesn’t require that all the ppty be there, just some

• quasi-exceptions
  o pour over wills/trusts
  o life insurance trusts
• for inter vivos trusts: must be funded with specifically identifiable ppty during the settlor’s lifetime to be valid
• for testamentary trusts: funded at the settlor’s death from probate assets

Question 14

purchase money resulting trust

Answer 14

o purchase money resulting trust: if ppty is purchased by one party but titled in a second party’s name and that second pty is not a natural object of the first pty’s bounty, there is a rebuttable presumption that the second pty holds the ppty for the first pty as a resulting trust
 **but if the second pty is a natural object of the person’s bounty (likely to make a gift to), there is a rebuttable presumption that the first pty made a gift of the ppty to the second pty

Question 15

what is a “definite” beneficiary? are they required for trusts? what are the exceptions?

Answer 15

 (6) trust must have ascertainable beneficiaries
• the trust must have a definite beneficiary unless it is:
 a charitable trust
 a trust for the care of an animal, or
 a trust for a noncharitable purpose
• a beneficiary is definite if the beneficiary can be ascertained now or in the future, subject to any rule against perpetuities

Question 16

when must a trust be in writing? how do oral trusts factor in?

Answer 16

 (7) trust must be in writing (usually)
• in a majority of juris, the following trusts must be evidence by a writing signed by the settlor:
o an inter vivos trust in which part or all of the ppty is real estate
o all testamentary trusts

• evidence of oral trust (equitable doctrine)
o except as required by a statute other than this chapter, a trust need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence
o oral trust of land for a 3p
o oral trust of land for grantor

Question 17

what are semi-secret and secret trusts?

Answer 17

• secret and semi-secret trusts
o semi-secret trusts: naming someone as trustee but not explicitly naming the beneficiaries
 not a valid express trust, and because of the patent ambiguity, extrinsic evidence is inadmissible to prove parameters of the trust

o secret trusts: no express language of a trust at all
 not a valid express trust, but because of the latent ambiguity, extrinsic evidence is admissible to prove the existence of the trust

Question 18

where there is ambiguity, is a trust presumed revocable or irrevocable?

Answer 18

o rule: in the case of ambiguity, the UTC presumes revocable

Question 19

what are the key inquiries for types of trusts?

Answer 19

o **key inquiry – what are the rights of the beneficiary and the beneficiary’s creditors?

Question 20

how do discretionary trusts function? when can they be challenged? what are the creditors’ rights here?

Answer 20

o (1) discretionary trusts: trustee is given full discretionary authority to decide when and what funds (such as principal or income) are given to which beneficiaries
 trustee can only be compelled to make certain distributions if the trustee abuses her discretion or fails to comply with the standard for distribution
• if it is a revocable trust though, beneficiaries don’t have standing to challenge at all
 creditor rights: beneficiary’s creditors cannot compel the trustee to make distributions (unless the beneficiary is a spouse or child)
• applies to irrevocable and revocable trusts
• however, these creditors can make use of a “cutting off” power

Question 21

what is a support trust? what category does it fall under? when can it be challenged?

Answer 21

support trusts: “in such amounts as A determines in A’s discretion are necessary for B’s support, education, and maintenance.”

• subset of discretionary trusts

• **here, the beneficiary can challenge for violation of ascertainable standard or bad faith (better chance at a successful challenge)

Question 22

how do mandatory income trusts function? who can compel payment?

Answer 22

o (2) mandatory income trusts: the trustee has no discretion and has to pay the funds in accordance with the trust documents
 beneficiaries can compel payment
 creditor rights: beneficiary’s creditors can compel payment

Question 23

how does a spendthrift trust function? who can compel the trustee? where are these usually found?

Answer 23

o (3) spendthrift trusts: contains the following clause – “each beneficiary hereunder is restrained from alienating, anticipating, assigning, or encumbering his or her interest, either in principal or income, nor shall such estate be subject to his or her obligations, judgments, creditors, or bankruptcy proceedings”
 **essentially protects a beneficiary against a creditor attaching prior debts against the beneficiary’s inheritance as well as preventing the beneficiary from acquiring debt based on the future inheritance (not to be used to protect against the settlor’s creditors)
• **beneficiaries reassigning interests is not allowed except for the creditors below
• creditors that can compel: beneficiary’s spouse; former spouse with a judgment or court order against the beneficiary for support/maintenance; children; IRS
• however, another creditor can reach a mandatory distribution, including a distribution upon termination, if the trustee has failed to make the payment within a reasonable time after the designated distribution date (super rare)
 **very common – usually this clause is tacked on to a discretionary trust
 trustee can be compelled to make distributions to beneficiaries

Question 24

what is the difference between termination and revocation of a trust?

Answer 24

o termination: ending the trust and making the payout to the beneficiaries
o revocation: ending the trust and giving the payout back to the settlor

Question 25

when is termination allowed for revocable trusts? for irrevocable/testamentary trusts?

Answer 25

o revocable inter vivos trusts
 UTC treats these the same as will – beneficiary has no standing until settlor dies
 can be modified/revoked/termed at any time

o irrevocable/testamentary trusts
 termination: a court will term the trust if the settlor and all beneficiaries are competent and agree to terminate
• if the settlor is unavailable (dead) or unwilling to consent, the court will not term a trust, even if all the beneficiaries and agree to term **IF the term would be contrary to a material purpose of the trust (Claflin doctrine)

**REMEMBER MATERIAL PURPOSE POINT

Question 26

what are the three key points for powers of a trustee?

Answer 26

 rule: a trustee presumptively has comprehensive powers to manage the trust estate and otherwise to carry out the terms and purpose of the trust, but that all powers held in the capacity of trustee must be exercised, or not exercised, in accordance with the trustee’s fiduciary obligations and duties, as outlined below

• **the powers and duties of an executor/administrator of an estate are nearly identical to those of a trustee
 **if the trust agreement is silent, we assume that the trustee has the same powers as the grantor: buy/sell the ppty; deposit the money in a bank account; borrow money for the trust; mortgage or pledge trust ppty; least trust ppty; etc.

• in accordance with his duties, as outlined below
 **note: it is completely okay to vest power in a trustee to select a beneficiary from an indefinite class
• ex) “to my trustee to distribute to such persons as my trustee shall select”
• however, if the power is not exercised within a reasonable time, the power fails, and the ppty subject to the power passes to the persons who would have taken the ppty had the power not been conferred

Question 27

general rule of duty of a trustee

Answer 27

 general rule: a trustee owes a fiduciary duty to a trust’s beneficiaries and is obligated to carry out the trust according to its terms and to act with the highest degrees of fidelity and utmost good faith
• **a person has no obligation to accept the duties of a trustee (a trust will not fail for want of a trustee, you just appoint a new one)
o however, once you accept it, its difficult to get out

Question 28

what is the duty to administer? how does one accept a trusteeship?

Answer 28

 duty to administer: upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its term and purposes and the interests of the beneficiaries
• a person accepts the trusteeship:
o (1) by substantially complying with a method of acceptance provided in the terms of the trust, or
o (2) if the terms of the trust do not provide a method or the method by provided in the terms is not expressly made exclusive, by accepting delivery of the trust ppty, exercising powers, or performing duties as trustee, or otherwise indicating acceptance of the trusteeship

Question 29

duty of loyalty; no-further-inquiry rule; 5 exceptions

Answer 29

 duty of loyalty: a trustee shall administer the trust solely in the interests of the beneficiaries
• no-further-inquiry rule: the trustee’s self-dealing transactions can be set aside regardless of whether the trustee acted reasonably or in good faith
o i.e. there is no defense or inquiry into self-serving actions, the assets will be taken away from the trustee as a breach of loyalty via unjust enrichment
o exceptions:
 the transaction is authorized by the terms of the trust,
 the transaction was approved by the court,
 the beneficiary did not commence a judicial proceeding within the time allotted by Section 1005,
 the beneficiary consented to the trustee’s conduct, ratified the transaction, or released the transaction, OR
• absent unanimous consent, the proper consent of some beneficiaries serves to estop those who consented but will not impair the rights of the non-consenting beneficiaries
 the transaction involves a contract entered into or claim acquired by the trustee before the person became or contemplated becoming trustee

Question 30

remedies for breach of loyalty of a trustee

Answer 30

o remedies:
 compensatory damages (difference btw sale price and FMV at time of sale)
 equitable relief (order requiring the trustee to transfer the ppty back to the trust)
• **not available if the ppty has been acquired by a bona fide purchaser
 **restitution (order requiring the trustee to disgorge any profits she made back to the trust)
 seek removal of trustee (the court may award costs and attny’s fees)

Question 31

what are presumptively void transactions

Answer 31

• presumptively void transactions: a sale, encumbrance, or other transaction involving the investment or management of trust ppty is presumed to be affected by a conflict between personal and fiduciary interests if it is entered into by the trustee with:
o the trustee’s spouse,
o the trustee’s descendants/siblings/parents/parents’ spouses,
o an agent or attny of the trustee, or
o a corp/other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee’s best judgment

Question 32

what are the 5 duties of a trustee?

Answer 32

• administer
• loyalty
• prudence
• impartiality
• inform and account

Question 33

duty of prudence

Answer 33

 duty of prudence: a trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust – in satisfying this standard, the trustee shall exercise reasonable care, skill, and caution

Question 34

distribution function under duty of prudence

Answer 34

• distribution function: the trustee shall make disbursement of income and principal to the beneficiaries in accordance with the terms of the trust
o for mandatory trusts, the trustee must make the distributions specified in the trust
o for discretionary trusts, the trustee must exercise his/her discretion prudently, in good faith (generally a subjective standard), and in accordance with the terms of the trust and in light of the needs and circumstances of the beneficiary
 in a “support” trust, the trustee has a duty to inquire as to what sums are necessary to maintain the beneficiary’s standard of living and the trustee’s failure to do so constitutes an abuse of discretion

Question 35

what is the investment function? what are the duties of diversification, inception of assets, and delegation within?

Answer 35

• investment function: the trustee must review the trust assets and then make and implement an ongoing program of the investments in light of the purpose of the trust and the circumstances of the beneficiaries
o prudent investor (modern) rule: look to p. 624-625 (look at assets as a whole)
 **the prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust – a trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust
o diversification: a trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying
o inception of assets: within a reasonable time after accepting a trusteeship or receiving the trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets in order to bring the trust portfolio into compliance within the purposes, terms, distribution requirements, and other circumstances of the trust
o delegation: a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances
 the trustee shall exercise reasonable care, skill, and caution in:
• (1) selecting an agent,
• (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust, AND
• (3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation
 in performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation
 a trustee who complies with the above requirements is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated

Question 36

what are the 5 duties within the custodial and admin functions?

Answer 36

• custodial and admin functions
o duty to collect and protect trust ppty: a trustee shall take reasonable steps to take control of and protect the trust ppty
 ex) the trustee should record deeds, buy insurance, keep the ppty repaired, place valuable personalty in a safe deposit box, and register corporate securities

o duty to earmark trust ppty: a trustee shall cause the trust ppty to be designated so that the interest of the trust, to the extent feasible, appears in records maintained by a party other than a trustee or beneficiary

o duty not to commingle trust assets: a trustee shall keep trust ppty separate from the trustee’s own ppty
 the trustee faces a “heads I win, tails you lose” situation: if a portion of the commingled assets increases in value, it is presumed that such portion belongs to the trust; if a portion declines in value, it is presumed that such portion belongs to the trustee individually

o duty to keep adequate records of administration: a trustee shall keep adequate records of the administration of the trust
 if the trustee fails to keep proper accounts, he is liable for any loss or expense resulting from his failure to keep proper accounts – the BOP is upon the trustee to show that he is entitled to the credits he claims, and his failure to keep proper accounts/vouchers may result in his failure to establish the credits he claims

o duty to bring and defend claims: a trustee shall take reasonable steps to enforce claims of the trust and to defend claims against the trust

Question 37

duty of impartiality

Answer 37

 duty of impartiality: if a trust has two or more beneficiaries, the trustee shall act impartially (doesn’t necessarily need to guarantee equal results) in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests

Question 38

allocation of income and expenses

Answer 38

• allocation of expenses and income (Uniform Principal and Income Act)
o (1) requires fairness to all beneficiaries
o (2) confers on the trustee the power to “adjust” traditional income and principal items so as to achieve fairness (i.e. the trustee may allocate a portion of the capital gain to income beneficiaries)

o Income
 traditionally, income beneficiaries get:
• interest
• cash dividends
• rent
• partnership cash distributions
• 10% of deferred compensation (pension; profit-sharing)
• 10% of liquidating assets (patents; copyrights)

 and remainder beneficiaries get:
• capital gain
• stock dividends
• stock splits
• insurance proceeds
• 90% of deferred compensation (pension; profit-sharing)
• 90% of liquidating assets (patents; copyrights)

 **so now, the trustee has allocation power to move items from one category to another for fairness
• however, a trustee may not make adjustments if the trustee is a beneficiary of the trust

 unproductive property: as a general rule, a trustee has a duty to sell ppty that is (or becomes) unproductive or underproductive – upon sale, the trustee must give the income beneficiary an amount representing what she would have received if the ppty had been sold as soon as the duty to sell arose
• i.e. trustee is obligated to sell and apportion btw income beneficiaries and principles

o Expenses
 traditionally income beneficiaries get:
• ½ of trustee’s and investment advisor’s compensation
• ½ of expenses for accountings/litigation
• ordinary repairs
• recurring taxes (like ppty)
• insurance premiums

 traditionally remainder beneficiaries get:
• ½ of trustee’s and investment advisor’s compensation
• ½ of expenses for accountings/litigation
• capital improvements
• estate taxes

Question 39

duty to inform and account (4 key points)

Answer 39

 duty to inform and account: except for revocable trusts, or as permissibly modified by the terms of the trust, a trustee has a duty:
• (a) promptly to inform fairly representative beneficiaries of the existence of their trust (and their status),
o i.e. must provide a copy of the trust instrument upon request

• (b) to inform beneficiaries of significant changes in their status, and

• (c) to keep fairly representative beneficiaries reasonably informed of changes involving the trusteeship and about other significant developments concerning the trust and its administration, particularly material information needed by beneficiaries for protection of their interests
o i.e. provide annual accounting upon request
• note: when a trustee makes an accounting, the beneficiaries have a duty to check the accounting and to object in a timely manner – if the beneficiaries fail to do so, they may be barred from complaining later
 exception: where the trustee files a knowingly or constructively fraudulent accounting and the beneficiaries later discovery the fraud, the beneficiaries will not be barred from reopening the accounting
• constructive fraud: when the trustee makes false representations without undertaking reasonable efforts to ascertain the accuracy of the representation (so need not be deliberate, this is essentially negligence)

Question 40

what is a charitable trust? what are the two key points?

Answer 40

o (1) what is a charitable trust?
 rule: must have a charitable purpose and the class of potential beneficiaries may not be so narrowly defined that it designates only a few individuals upon whom the settlor wishes to confer private benefits
• i.e. you can set up a trust for “whomever cures cancer,” even though that is only a single person, but it can’t be a specific family member, friend, etc. – needs to be general
 charitable purposes:
• relief of poverty
• advancement of education
• advancement of religion
• promotion of health
• governmental/municipal purposes
• other purposes beneficial to the community
 beneficiaries: remember, private trusts must have ascertainable beneficiaries

Question 41

does the RAP apply to charitable trusts?

Answer 41

o (2) does the RAP apply?

 rule: the RAP does not apply to transfers made exclusively to charities or for charitable purposes

Question 42

what is the standard for modifying a charitable trust?

Answer 42

o (3) what is the standard for modifying a charitable trust?
 rule: if a particular charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful:
• (1) the trust does not fail (in whole or in part),
• (2) the trust ppty does not revert to the settlor or his successors, and
• (3) the court may apply cy pres to modify or term the trust by directing that the trust ppty be applied or distributed, in whole or in part, in a manner consistent w the settlor’s charitable purposes
• note: courts will be generous in granting cy pres

Question 43

standard resulting trust

Answer 43

o standard resulting trust: the trust version of reversion
 ex) “S transfers ppty to T, as trustee, to pay the income to A until she dies.” – when A dies, the ppty reverts to S/S’s estate as a resulting trust