TBE TRUSTS--Quick & Dirty Rules

Question 1

Formal Requirements of Trust

Definitions

Answer 1

Definitions

1) The trustee holds legal title and has the burden of
ownership.

2) Beneficiaries hold equitable title and have the benefits of ownership.

Question 2

General Rule

Names of Parties. How to create a trust?

What Must Settlor have? What must occur? What must it be? [Three Things]

Answer 2

General Rule

A trust forms when a settlor, also known as the grantor,
delivers res to a trustee for the benefit of beneficiaries, with the intent to create a trust with a lawful purpose.

Here:
1) The settlor must have capacity for the trust to form.

2) There must be delivery of the subject matter with intent to convey legal title to the trustee.
3) And the corpus, the principal, the subject matter of the trust, must be certain and identifiable.

Question 3

What must trustee have? 
Who can be a Trustee? 
Requirements? 
Who/What can't be a trustee?
What does trustee owe?
How can trustee accept?

Answer 3

The trustee, whom the res is delivered to, must have legal capacity to contract and execute a deed.

Individuals must post a fiduciary bond, and a trust never fails for a lack of trustee.

To have legal capacity, the trustee has to be over 18.

Also, an unincorporated association CANNOT be a trustee. Only banks and trust companies given trust powers in their charters and charities, as to charitable trusts, can serve as trustees.

No one can be compelled to accept fiduciary responsibilities and duties, but the trustee must owe fiduciary duties to someone.

Also, the trustee can accept by signature or by conduct.

If the named trustee has no powers or active duties to perform, then no trust arises.

Question 4

How can a trustee resign (2 req.)?

What’s an accounting?

Answer 4

A trustee may resign from serving as trustee by:

1) Obtaining court approval upon a showing that he can no longer appropriately serve as trustee,
2) And making an accounting to the court.

Here, an accounting includes:

a) Property initially received,
b) Receipts and disbursements,
c) And property now on hand and liabilities.

Question 5

What is delivered for the benefit of whom?

Answer 5

As mentioned above, the res is delivered for the benefit of beneficiaries, thus let’s look at beneficiaries.

Private or noncharitable trust has definite and ascertainable beneficiaries, and their interest must vest.
However, the interest may not vest as a result of Rule Against Perpetuities, which means that no interest is good unless it vests no later than 21 years after some death of last identifiable individual living at the time the interest was created.

The purpose of this rule is to limit the duration of private
trusts and to place a check on attempts to tie up property
through the creation of perpetual trusts.

However, this rule DOES NOT apply to charities.

Question 6

WTF is a Resulting Trust v. Trust?

Answer 6

Furthermore, a RESULTING TRUST is not a trust. Instead, it is an equity remedy courts employ when a trust fails for some reason, and the trustee then holds money for the benefit of whoever takes.

Example: Money from a residuary estate.

Parole evidence is not admissible to identify beneficiaries.

Question 7

How to show intent to create a trust?

What kind of language doesn’t qualify?

What can be missing?

What is an impermissible purpose for a trust?

When must trust be in writing? Exceptions?

Answer 7

Next, to show the intent to create a trust, the language must impose enforceable obligations that are not merely precatory.

This means that language cannot be non-binding.

Precatory language include words and phrases such as:
–Wish and desire
–Request
–Hope
–I would like
Again, these are not enough to create a trust.

On the other hand, the language does not need to have trust or trustee. The concern here is a question of intent.

Words should indicate that the res is used for the benefit of another.

On Exam: There must be a lawful purpose to create a trust. The purpose is usually unlawful where there is a condition that is against the public policy.

Lastly, trusts must usually be in writing.

Except, a transfer of personal property, such as stocks and bonds, to the trustee, other than the settlor or beneficiary trustee, coupled with a declaration of intent to create a trust simultaneously with or prior to the transfer, does not need writing. Nevertheless, a trust for land must be in writing.

Question 8

Revocable Trusts and Other Arrangements

General Rule: are they revocable? By whom? Exception?

Answer 8

Revocable Trusts and Other Arrangements

General Rule

All trusts are revocable and amendable by the settlor UNLESS he expressly made it irrevocable and unamendable. Any revocation or amendment must be in writing, even if it is done to an oral trust of personal property.

If the settlor becomes incapacitated, only Court can revoke the trust. Here, not even a guardian can revoke the trust.

Question 9

How to amend a trust? What’s needed/not needed?

Answer 9

Amendments to Trust

No witnesses are needed. Amendments only need to be in writing.

Also, trust law controls, not wills law.

Question 10

What is an Unfunded Revocable Life Insurance Trust?

Who gets it?

Answer 10

3) Unfunded Revocable Life Insurance Trust

When there is an unfunded revocable life insurance trust that names the trustee as the trustee beneficiary, by statute, the payment of such employee death benefits or life insurance go to either the trustee of inter vivos trust or the trustee named in a will.

Question 11

What is a Pour-Over Will?

Answer 11

4) Pour-Over Will

Pour-over will is a testamentary device that, when the writer of a will creates a trust, he decrees in the will that the property in his estate at the time of his death should be placed in the trust.

It is valid even if trust is subject to revocation and
amendment, and it is also valid even if it is unfunded trust.

To have the pour-over will, the trust does not need to be in existence before or executed concurrently with the will and can be created after the will is signed.

Question 12

Joint Bank Accounts?

How to create right of survivorship in joint account?
Validity?
If btw spouses?

Answer 12

Joint Bank Accounts

When there are Joint Bank Accounts, there must be an explicit language of right of survivorship.

Also, the signature card controls, and no extrinsic evidence is allowed to rebut.

If the parties to the joint account wish to create a right of
survivorship, they must use the required statutory language:
a) With right of survivorship
b) Or on the death of one party, all sums in the account shall vest in and belong to the surviving party.

The right of survivorship language in a joint account is valid if the signature card was signed by the party who died, even if the survivor did not sign.

If the joint bank account was between a husband and wife and funded with community property, then both spouses must sign the signature card.

Question 13

Durable power of Attorney? Requirements?
Agents authority?

3 Facts re: durable power of atty?

Answer 13

Durable Power of Attorney

Lastly, the Durable Power of Attorney must be signed and acknowledged before a notary, and it authorizes another person to act on behalf of the principal.

An agent’s authority is not affected by principal incapacity if it says so.

There are three facts about the durable power of attorney:
1) The principal can grant a springing durable power of
attorney that becomes effective upon disability or incapacity.
2) Third parties that act in reliance of durable power of
attorney are protected, and it is terminated upon spouses divorcing, not upon bankruptcy.
3) Appointment of a guardian of the estate, in probate,
terminates the durable power of attorney.

Question 14

Charitable and Honorary Trusts

Subject to RAP?

Requirements?

Who may/must they benefit?

Answer 14

Charitable and Honorary Trust

General Rules

Charitable trusts are not subject to Rule Against Perpetuities, and it may be perpetual.

They must have a charitable purpose and confer a substantial amount of social benefit.

They also must be in favor of a reasonably large segment of public at large, and cannot benefit only limited identifiable individuals.

Question 15

What is doctrine of cy pres?
What kind of trust does it apply to?
Who can initiate?

What if charitable trust is challenged?

Who can enforce a trust?

Answer 15

Doctrine of Cy Pres

When a specific charitable purpose can no longer be
accomplished, a charitable trust’s purpose may be reformed by judicial proceedings under the doctrine of cy pres. However, this cannot be done by a trustee.

If a will or trust violates the Rule Against Perpetuities, the
instrument should be reformed or construed so as to carry out the settlor’s general intent as far as possible.

This reform of specific direction or general charitable intent through Cy Pres type construction applies only to charitable trusts.

Now, if a charitable trust is challenged, a certified copy of
the petition must be sent to the attorney general. But if it is not, the judgment is voidable by the attorney general.

Only the attorney general can enforce a trust, and if the named charitable beneficiary under a trust ceases to exist, the trustee can name a new charity as beneficiary without any court proceedings.

Question 16

Whats an honorary trust gift?

If fails, what happens?

Answer 16

Honorary Trust Gift

Lastly, the Honorary Trust Gift is a type of gift in which an
animal or object is the beneficiary.

Cats, castles and cars cannot file lawsuits, because to be a trust, the trustee must owe enforceable duties to a person. Animals or objects do not qualify.

A gift of income to be paid for the care of a cat is an honorary trust gift.

Here, the trustee is on his honor to perform. If he does not, it fails and there is a RESULTING TRUST in favor of the residuary estate or beneficiary.

Question 17

1) Resulting and Constructive Trusts
- -What doesnt apply?

2) Whats a Resulting Trust (type)?
3) Whats a Constructive Trust (objective)?

4) What happens if beneficiary kills insured (life insurance)?
- -What doesnt apply (from Wills)?

Answer 17

1) Trust Code

First, TRUST CODE does not apply to either RESULTING or CONSTRUCTIVE trust.

2) Resulting Trust

Second, the Resulting Trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it, and then is implied to have held the property for benefit of another person.

The purchase money resulting trust is where the buyer pays for land but gets it in another person’s name.

The purchase money resulting trust presumption can compel reconveyance at any time.

Here, evidence is admissible to show whether the land is in another’s name as a gift or a loan of purchase price.

3) Constructive Trust

Third, Constructive Trust is not a trust. It is an EQUITABLE REMEDY whose objective is to disgorge unjust enrichment from a defendant’s wrongful conduct.

It also enables an injured party to recover the property in
dispute.

4) Primary Beneficiary Kills Insured

And lastly, when the primary beneficiary kills the insured under a life insurance contract, by statute, proceeds are distributed as though the killer predeceased the insured victim.

If no alternative beneficiary is named, then the proceeds go to the insured’s estate.

Anti-lapse does not apply in life insurance because it is not a will.

Question 18

Creditor Rights and Spendthrifts

1) Whats a spendthrift clause (protections; items not protected)?
2) What happens after income distributed?
3) What about Fraudulent transfers?
4) What about Support Trust?

Answer 18

Creditor Rights and Spendthrift Trusts

1) Spendthrift Clause

First, the Spendthrift Clause is given full effect in Texas.

With spendthrift clause, a judgment creditor cannot reach the beneficiary’s interest by garnishment or attachment.

Spendthrift clause protects a beneficiary’s interest from
creditors by prohibiting voluntary assignment or involuntary transfer of his interest.

Also, the trust must be irrevocable in type.

However, the following items can still be reached by the
creditors.
a) Contracts for necessaries, including creditors for medical, food, or rent.
b) Child support obligations.
c) Any interest retained by the settlor because the trust is a revocable trust.
d) And federal tax liens: The quote “this shall be a spendthrift trust” is valid because the Trust Code so provides.

2) After Income Distributed

It is no longer subject to the trust or its spendthrift clause.
However, a creditor would have to file a suit every time he tries to reach distributed income.

The spendthrift clause removes a creditor’s efficient remedies.

3) Fraudulent Transfers

Any time when the transfer is made with intent to defeat, delay, or defraud creditors, the principal can be reached.

4) Support Trust

The trustee provides for the beneficiary’s necessaries.
The creditor who furnishes necessaries can reach the principal of a support trust.

Basically, if the beneficiary could compel a distribution, then the creditor can get to it.

Question 19

Trust Administration Issues

Who has jurisdiction?

Where is Venue proper?

Answer 19

Trust Administration Issues

1) Jurisdiction

District courts and probate courts have jurisdiction over inter vivos trusts, and statutory probate courts have exclusive jurisdiction over testamentary trusts.

2) Venue
The venue of an individual trustee is either:
a) The county of his residence, Or
b) the county in which the principal office of trust has been maintained.

When there are two or more trustees, the venue is at the county of situs where the trust has been maintained.

Question 20

Trust Admin Issues

3) Who, what where why how RE: an Accounting?

4) What is the Texas Trustee Power Act (also prohibitions: hint: 6)?
- -What are the remedies for impermissible action (4)?

Answer 20

3) Accounting

Trust beneficiaries have the right to get an accounting on
demand, although no sooner than 12 months after the trust was created.

The same applies to successive accountings on demand at the same intervals.

4) Texas Trustee Power Act

Texas Trustee Power Act dictates that a Texas trustee has the same power as a fee simple owner except when the trustee self deals or makes imprudent investment.

Also under the Texas Trustee Power Act, the trustee cannot:
a) Borrow trust funds.
b) Buy or sell assets to himself.
c) Loan funds to the trust. Any interest earned must be
returned.
d) Profit from serving as the trustee, because the trustee
can only be compensated.
e) Buy its own stock as trust asset when the trustee is a
corporation.
f) Commingle funds. The trustee must segregate trust funds because there is a duty to earmark trust assets.

In addition to action for REMOVAL, beneficiaries have the
following options when a trustee breaches the trust:
a) Beneficiaries can ratify the transaction and waive the breach.
b) Beneficiaries can sue for the resulting loss. If the trustee breaches by self-dealing, then it is strict liability.
c) Or beneficiaries can petition for imposition of constructive trust.

If the investment trustee made during breach went up in value, beneficiaries can trace the profits.

Question 21

Trust Admin Issues

5) Trustee self deals, now what?

SoL (time limit and 3 possible)?

Answer 21

5) Self Dealing by Trustee

The fifth trust administration issue is that the statute of
limitations for a breach of the trustee’s fiduciary duty is 4
years, and it does not run until trustee:
a) Repudiates the trust,
b) Dies or resigns,
c) Or gives an accounting with full disclosure of facts upon which cause of action is based.

Question 22

Trust Admin Issues

6) Bona fide purchaser from asshole trustee? Who can sue whom?
7) Trustee Loan to Beneficiary?
8) Suit on behalf of minor beneficiary (test)?
9) What about multiple beneficiary’s (who rules)?

Answer 22

6) Bona Fide Purchasers

Bona fide purchasers are protected if they buy from the trustee without knowledge.

A beneficiary cannot sue a bona fide purchaser because a bona fide purchaser cuts off equitable title unless the bona fide purchaser was the fiduciary’s relative.

7) Trustee’s Loan to Beneficiary

When there is self dealing by a trustee, the self dealing rules apply to:
a) Loans or sales to a relative
b) And to a business entity of which trustee is an officer,
director, partner, employee or principal shareholder.

8) Suit On Behalf of Minor Beneficiary

Trustee can loan to a beneficiary, but it is also subject to the general test of prudence, which means the trustee has to act like a reasonable prudent person.

When there is a suit on behalf of a minor beneficiary, only the minor’s guardian or personal representative may bring action to challenge a trustee’s alleged breach of duty, not his parents.

9) Multiple Beneficiary’s

When there are multiple trustees, and one believes the others are breaching their duty, majority rules.

However, each co-trustee has duty to prevent a breach by not participating in the transaction and giving express dissent in writing.

Question 23

Trust Admin issues

What is the uniform Prudent Investor Act (how measured; how established; what factors [8])?

Answer 23

11) Uniform Prudent Investor Act

The trustee should invest for total return, taking into account the appreciation and capital gain, as well as ordinary income.

Prudence is measured by conduct at the time investment decision is made, not by the hindsight based on outcome or performance.

The Uniform Prudent Investor Act investment strategy must establish and maintain a custom tailored investment strategy that will effectuate the settlor’s intent as to the purposes of the particular trust, taking into account such factors as:
a) The role that each investment plays within the overall
trust portfolio.
b) The expected total return from income and capital gain.
c) General economic conditions.
d) Possible effect of inflation or deflation.
e) Expected tax consequences of investment decisions or
strategies
f) Needs for liquidity.
g) An asset’s special relationship or value to the purposes
of the trust or a beneficiary.
h) Any differing interests of the income beneficiaries
and the remaindermen.

Question 24

Trust Admin Issues

What is the Uniform Principle & Income Act (8 factors)?

Answer 24

12) Uniform Principle & Income Act

A trustee can exercise adjustment power in favor of income beneficiary where appropriate, and he can allocate capital gains to income.

There are factors to be considered in exercising adjustment power, such as the power to adjust total return between income and principal, and allocate capital gain to income.

These factors are:
a) Intent of the settlor as to respective interests of the
beneficiaries.
b) Net amount of ordinary income and capital gain available for allocation.
c) Any increase or decrease in value of the trust assets.
d) Whether the trust gives the trustee a power to distribute principal.
e) Purpose and expected duration of the trust.
f) Circumstances of the beneficiaries.
g) Need for liquidity, regularity of income, and
preservation and appreciation of capital.
h) Effect of economic conditions and effects of
inflation and deflation.

Furthermore, under the Uniform Principle and Income Act, allocation is deemed to be equitable if allocation follows the federal income tax depletion allowance.

Question 25

Trust Admin issues

13) Who pays for Trust’s expenses? How? What kind paid from where?
14) Trustee’s delegation of investment? standard?

15) Provisions of the Trust code? When do they apply?
- -What can settor NOT authorize corporate trustee to do (2)?

Answer 25

13) Expenses

For the trustee’s commissions, expenses for accounting, and judicial proceedings, half is charged against income, while the other half is charged against principal.

Ordinary expenses are charged against income. These include Property taxes, casualty insurance payments, ordinary repairs, and mortgage interest payments.

And capital expenditures are charged against principal, which include capital improvements, expenses relating to environmental matters, estate taxes, and mortgage principal payments.

14) Delegation of Investment

A trustee may delegate but should exercise due care in selection.

15) Provisions of Texas Trust Code

All provisions of Texas Trust Code are default rules, where Texas Trust Code should be applied absent contrary provision by the settler, the settlor cannot authorize a corporate trustee to:

a) Buy or sell assets to itself,
b) Or borrow trust funds.

Question 26

Trust Admin Issues

16) Trustee Personal Liability?
17) Suing Third Party That Inures Trust?

Answer 26

16) Trustee Personal Liability

A trustee is not personally liable on a contract unless he fails to disclose his representative capacity.

However, a trustee is liable for torts committed by himself or his agents. Here, the trustee is entitled to reimbursement if his act is within the scope of representation and incident to proper business acts.

In addition, the lawsuit must name the trustee and not the trust.

Also, exculpatory clauses will relieve a trustee from
negligence, but the clause are strictly construed and read
narrowly.

17) Suing Third Party That Inures Trust

A beneficiary cannot sue the third party that inures trust,
because generally, the trustee holds legal title and is the one who should sue unless the trustee is unable or unwilling to sue or the third party participated with the trustee in committing the breach of trust.

Question 27

Judicial Modification and Termination of Trusts

1) Trust Termination? Two ways, generally.
2) After Termination? Trustee can continue for only two reasons.

Answer 27

Judicial Modification and Termination of Trusts

1) Trust Termination

First, a trust can be terminated automatically, according to its terms.

Second, a trust can be terminated on petition of the trustee or beneficiary, if the court finds that:

a) Purposes of the trust or any provision have been fulfilled or have become illegal or impossible to fulfill
b) Or there are circumstances not known or anticipated by the settler, where compliance with trust terms would defeat or substantially impair accomplishment of trust purposes.

When there are unanticipated circumstances, modification or early termination must be done by Court after hearing.

This means that there cannot be extra-judicial agreement by parties.

Nevertheless, for tax purposes, division of 1 into 2 trusts or merger of 2 into 1 trust outside of court is valid.

In Texas, spendthrift clause is only one of the factors for the trustee to consider whether a trust should be terminated due to changed circumstances.

2) After Termination

The trustee may continue to exercise trust powers for a
reasonable time needed to:
a) Wind-up trust affairs,
b) And make distributions to the beneficiaries.