Rule Statements Flashcards
Express Trusts - Intent
A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries. The settlor must intend to make a gift orally, in writing or by conduct, and manifestation of intent must occur prior to or simultaneously with the transfer of property.
Express Trusts - Trust Property
The trust must be funded with identifiable trust property (res), but if a trust that is invalid for lack of assets is later funded, a trust arises if the settlor re-manifests the intent to create a trust. In addition, the trust property must be identifiable and segregated, and the property must be described with reasonable certainty.
Express Trusts - Valid Trust Purpose
A trust can be created for any purpose as long as it isn’t illegal or contrary to public policy, but if the terms violate public policy, alternative terms will be honored or the term will be stricken, unless removal of the term proves fatal.
Express Trusts - Ascertainable Beneficiaries
Beneficiaries must be identifiable by name so that the equitable interest can be transferred automatically by operation of law and directly benefit the person, and the settlor may refer to acts of independent significance to identify beneficiaries.
Types of PRIVATE EXPRESS TRUSTS:
Inter vivos - Pour-over trust, Totten trust
Testamentary - “Secret” trust, “Semi-secret” trust
Express Trusts - Charitable Trusts
For a trust to be considered charitable, it must have a stated charitable purpose, which can include the relief of poverty, advancement of education/religion, good health, governmental purposes, and other purposes benefiting the community at large (i.e. indefinite beneficiaries).
Remedial Trust
Remedial trusts are passive in that the sole duty of the trustee is to convey the trust property to the beneficiary. After this has been accomplished, the trust terminates.
Resulting Trust
When a trust fails, court will create a resulting trust requiring the holder of the property to return it to the settlor or his estate to prevent unjust enrichment. The purpose of a resulting trust is to achieve the settlor’s likely intent in attempting to create the trust.
Constructive Trust
Constructive trusts are used to prevent unjust enrichment if the settlor causes fraud, duress, undue influence, breach of duty, or detrimental reliance by a 3rd party on a false representation. In addition, there must have been wrongful conduct in order to impose a constructive trust.
Termination
A trust terminates automatically only when the trust purpose has been accomplished, by consent if the settlor is deceased or has no remaining interest and all the beneficiaries and trustee consent, or by court if the purpose has been achieved or becomes illegal, impracticable or impossible.
Allocating Principal & Income
Generally, life beneficiaries are entitled to the trust income and remaindermen are entitled to the trust principal. Under the modern approach, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument.
Trustee’s Powers
A trustee has the powers necessary to act as a reasonably prudent person in managing the trust (e.g. revoke, withdraw, or modify), including the implied power to contract, sell, lease, or transfer the trust property.
Duty of Loyalty and Good Faith
A trustee has a duty to administer the trust in good faith (subjective standard) and to act reasonably (objective standard) when investing property and otherwise managing the trust solely in the best interests of the beneficiaries.
Self-Dealing
When a trustee personally engages in a transaction involving the trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and her own personal interest. When self-dealing is an issue, an irrefutable presumption is created that the trustee breached the duty of loyalty.
Duty of Prudence
A trustee may delegate responsibilities if it would be unreasonable for the settlor to require the trustee to perform such tasks, but if it is a critical function concerning the property, then the function is discretionary and not delegable.
Prudent Investor Rule
The Prudent Investor Rule requires the trustee to act as a prudent investor would when investing his own property (putting less emphasis on risk level), and the trustee must exercise reasonable care, caution, and skill when investing and managing trust assets.
Other DUTIES to consider:
Duty to diversify Duty to make property productive Duty to be impartial Duty to disclose Duty to account Other duties—to secure possession of property w/in reasonable time, to maintain real property, and to segregate personal property from trust assets trustee’s liabilities
Spendthrift Trust
A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest. Spendthrift provisions are often inserted into trusts to protect beneficiaries from their own imprudence. A beneficiary’s creditors usually cannot reach the beneficiary’s trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting a beneficiary’s creditors from attaching the beneficiary’s interest.
While spendthrift clauses are generally valid, most states allow certain classes of creditors to reach a beneficiary’s assets, notwithstanding the spendthrift clause. The spendthrift clause exception applies to: i) children and spouses entitled to support; ii) those providing basic necessities to the beneficiary; and iii) holders of federal or state tax liens.
Trustee’s Fiduciary Duties
The trustee is charged with safeguarding the trust property, and following the settlor’s instructions. He acts as a fiduciary, and has all of the powers set forth in the trust, and all powers necessary to act as a reasonably prudent person in managing the trust. The trustee has a duty to administer the trust in good faith, in accordance with its terms and purposes, and in the interests of the beneficiaries. He must exercise good judgment, and any decision he makes based exclusively on personal reasons unrelated to the settlor’s goals can be overturned.
Termination by Consent
A trust may be terminated by consent if the settlor is deceased or has no remaining interest in the trust, and if all of the beneficiaries and the trustee consent to the termination. If the beneficiaries wish to terminate but the trustee objects, the trustee can likely block the termination if he can show the termination would violate the settlor’s intent. Termination will violate the settlor’s intent if the trust has an unfulfilled material purpose. Spendthrift trusts intrinsically have an unfulfilled material purpose.
