Trust Flashcards
Define trust
Management device featuring bifurcated transfer
Principal
Money generated in connection with conveyance of trust property
Under traditional approach, given to remainder beneficiary when trust terminated
Examples: stocks, bonds, real estate
When may revocable trust be revoked?
Any time DURING settlor’s life
Revocable vs. irrevocable trust (traditional v. UTC)
Traditional rule: Trust presumed IRREVOCABLE unless docs saying otherwise
Uniform Trust Code (UTC): trust is REVOCABLE unless docs saying otherwise
Mandatory trust
Trustee must make distributions from the trust
Discretionary trust
Trustee may make distributions at her discretion
Standard for misconduct: abuse of discretion
Remedial trust
Trust created by operation of law (passive trust, in which trustee only transfers property)
RAP and trusts
RAP applies to trusts
Jdx use ‘wait and see’ approach: wait until an interest vests to determine its validity
Settlor
Creator of trust
Trustee
Person who manages trust
Holds LEGAL title
May manage property (sell, invest, etc.)
Can be invidual, bank, or company
Will trust fail for lack of trustee
NO
Beneficiary
Person (or class) who receives benefit of trust
holds EQUITABLE title to property
Has power to enforce instrument
Are pet trusts recognized?
In majority jdx, NO
But can create trust for care of pets. Just need to direct funds to a human because animals cannot hold property
Can sole beneficiary be trustee?
No, conflict of interest.
But a beneficiary CAN be trustee if there are other beneficiaries who can hold trustee accountable
Express trust
Owner indicates intent to create a trust (either private or charitable)
Is an oral trust valid?
YES! Or even by conduct
Minority: requires writing
Private express trust: intent
Must use trust words to create presumption
“in trust” or “for the benefit of”
Exceptions for when trust must be written
-when SOF applies (real property)
-A devise (created in will–must be in existence at time of will or created simultaneously)
Does a trust avoid probate if in will?
Yes
When is a trust NOT created?
–precatory language (hope or wish for $$ to be used a certain way)
–ambiguous language that might just create a gift
Language must be clear and strong–obvious bifurcation
Empty trust
Trust without property–not a valid trust
Empty trust exception
Pour-over trust (trust that is in writing when will is executed, provides for property to pour over to will when testator dies)
Trust purpose
Valid if not illegal or contrary to public policy
RARELY: public policy violation can also cause trust to fail
Beneficiaries
Must be ascertained beneficiary (certain person or criteria to identify person–like members of a band)
Exception to ascertained beneficiary rule
Unborn children–this class will be added
Class gifts (if class is definite)
Charitable trusts
Charitable trusts’ purpose
-Relief of poverty
-advancement of religion or education
-promotion of good health
-government purposes
-any other purposes benefiting community (even small segment)
Modern charitable trust trend
In favor of charitable trust! For public good, we want to encourage or find valid whenever possible
Does RAP apply to charitable trusts?
NO
Cy pres and charitable trust
Court can modify trust purpose if the original purpose no longer possible SO LONG AS original purpose was GENERAL
Goal: make new purpose as similar as possible
UTC: presumption of general purpose
If no general purpose, property goes to resulting trust (to return to settlor)
Who has standing to enforce charitable trust
AG’s office has standing
UTC: Settlor also has standing
Creation of express trust: inter-vivos or testamentory
Inter-vivos: during settler’s life through either declaration of trust or deed of trust
Testamentory: created in will, needs to meet attested or holographic will requirements
Declaration of trust
Settler is holder of property
Settler is ALSO trustee
Deed of trust
Settlor conveys property to trustee
Settler is NOT trustee
Remedial trust definition
Not really a trust, an EQUITABLE REMEDY created by operation of law
PASSIVE in nature
1) resulting trust
2) constructive trust
Resulting trust
Used when trust fails to return payment to settlor or his estate
Goal: avoid unjust enrichment
Purchase-Money Resulting Trust
Person A buys property, but Person B its title
If Person B not natural object of bounty (close friend or relative), court will create purchase-money resulting trust
How to avoid resulting trust?
Create GIFT OVER clause
(naming another person if gift fails)
Constructive trusts
Remedy to avoid unjust enrichment when third party takes advantage of settlor
Key characteristic: WRONGFUL CONDUCT (fraud, duress, undue influence, breach of duty, detrimental reliance)
Is a trustee who commits wrongdoing still trustee of constructive trust?
YES, because it is passive, the wrongdoing remains constructive trustee who holds property until it is conveyed to correct party
Three types of distributions
1) Mandatory (no discretion for trustee–e.g. all x payments or y/month)
2) Discretionary (complete discretion for trustee–eg. for education or health)
3) Support trusts (to support beneficiary’s living, health, or child support)
Alienability of trust property
Beneficiary’s equitable interest is FREELY ALIENABLE unless instrument or statute limits right
Creditors CAN reach equitable interest
Creditor’s rights to trust distributions
Creditors CANNOT reach trust principal or income until it becomes AVAILABLE to beneficiary or beneficiary can DEMAND it
Asset protection shields: goal
Protect beneficiaries from creditor claims
Support trust and discretionary trust asset protection
Creditors cannot reach trust property because beneficiaries cannot demand payment
But they CAN reach property when a payment is made
Spendthrift trust
Trust expressly restricts beneficiary’s ability to alienate interest
Creditors cannot reach trust property until trustee makes payment
Exception: Which creditors CAN reach trust property?
1) spousal/child support
2) those providing basic necessities to beneficiary
3) holders of federal or state tax liens
Trust expiration
Trust can expire at end of stated term OR if trust purpose has been satisfied (e.g. graduation from school)
Claflin doctrine (unfulfilled material purpose)
If beneficiary wants to terminate prematurely and trustee opposes, a TRUSTEE can block premature termination if trust still serving MATERIAL PURPOSE
Common with: discretionary trusts, support trusts, age-dependent trust
Settlor ability to modify or terminate trust
Can unilaterally modify or terminate trust, UNLESS it is irrevocable
If irrevocable, can terminate or modify if all beneficiaries consent
How to modify trust if settlor is dead
1) all beneficiaries agree to modification consistent with MATERIAL PURPOSE of trust or
2) An unforeseen event has frustrated purpose of trust (i.e. equitable deviation)
On exam, be careful to identify purpose to evaluate if unforeseen circumstances align
Removal of trustee
When trustee has breached fiduciary duty OR grossly mismanaged property
Removal likely if:
-trustee became incapable of performing
-material breach
-conflict of interest
-conflict between trustee and beneficiary
-trust performs poorly under trustee’s supervision
May a trustee resign?
Yes, with written notice, if settlor is alive, to co-trustees and beneficiaires
Principal + income: old vs. modern rule
Old rule: life beneficiary gets INCOME, remainder holder gets PRINCIPAL
Modern approach: more holistic, governed by Uniform Principal and Income Act
–Trustee to focus on TOTAL RETURN, and can reasonably reallocate items as necessary
Modern approach to principal + income: factors for trustee
-intent of settler and language
-nature, duration, and purpose of trust
-circumstances of beneficiaries
-anticipated effect of economic conditions
-anticipated tax consequences
Source of trustee’s powers
ALWAYS look to document first
If document is silent, apply statute and common law
Modern trend of trustee powers
Grant all powers necessary to act as reasonably prudent person, including:
-sell/transfer
-lease property
-pay taxes
-sever/consolidate property
Trustee duties
1) loyalty (objective reasonableness standard)
2) care (subjective good faith standard)
ANY beneficiary may enforce
Trustee duty of loyalty: self-dealing
–NO self-dealing (governed by ‘no further inquiry’ rule: no need to inquire about good faith if self-dealing is established, context doesn’t matter)
–Always a per-se breach of loyalty
–even when trust docs DO allow self-dealing, transaction must be reasonable and fair to avoid liability
trustee duty of loyalty: no conflict of interest
Conflicts of interest are non-self-dealing transactions that may still be breach of duty of loyalty
–presumption can be rebutted under “reasonable and good faith” test
Duty of care: defined
Must use care of a person of ordinary prudence + treat property as if it was your own
Special skills: if special skills used, trustee can be held to HEIGHTENED standard
Duty of care: delegation
old rule: trustees cannot delegate
Modern: Delegation okay
Duty of care: investments
Old rule: limited to list of acceptable investments
Now: discretion okay
Portfolio approach: measure success of portfolio AS A WHOLE
Duty of care: impartiality
Old rule: income to life beneficiary, principal to remainder
modern: trustee must treat present and future beneficiaries equally, balance allocations
Two administrative duties
1) duty to inform beneficiaries (about nature of property)
2) duty to account (for actions taken on behalf of trust + health of portfolio)
Possessory estate holder
Has right to PRESENT possession
Future interest holder
Has present right to FUTURE possession
Fee simple absolute
Largest estate
Lasts forever
NO future interest
Defeasible fee
A fee simple that can be cut short
1) determinable OR
2) condition subsequent
Fee simple determinable
Fee simple for durational period
LANGUAGE: “so long as” “while” “during which time”
Possibility of REVERTER held by GRANTOR
Fee simple subject to condition subsequent
Fee simple terminated upon happening of event or condition
LANGUAGE: “But if” “on condition that”
ELECTIVE right of entry by going to court, NOT automatic
Life estate
Present possessory estate ending at tenant’s death
REVERSION held by grantor following life estate
3 types of future interests of grantor
1) Possibility of reverter (end of FSD)
2) Right of entry (end of FSSCS, must petition court)
3) Reversion (end of life estate)
Remainder interest
Future interest of TRANSFEREE capable of becoming possessory at end of natural termination of possessory estate
Vested remainder
1) remainderman ascertained
2) no condition precedent
Vested remainder subject to open
1) there is a class of people supposed to take AND
2) at least one member of class has vested
*ID when class closes
Contingent remainder
1) Taker is ascertained OR
2) Taker is subject to condition precedent
Executory interest
Interest held by grantee that will divest a prior vested interest
Springing executory interest
Divests the GRANTOR
Shifting executory interest
Divests the GRANTEE
Do class gifts include right of survivorship?
YES
Class gift death rules: traditional vs RST 3rd
Traditional: upon death of class member, that share automatically divided among other class members
RST 3rd: Share of deceased given to his surviving issue
Three questions to approach essay
1) who has possessory interest now?
2) who has future interest?
3) when, if ever, will future interest vest?
Pour-Over Trust and Will
Will can ‘pour over’ assets into trust, even if trust is not in existence when will is executed.
Later amendments to trust also valid
Trust does NOT need same formalities as will
Is political party a charitable purpose?
NO
Honorary trust
If something fails as charitable trust, it can be an honorary trust (animal trust or noncharitable purpose trust for valid purpose)
Unanticipated changes to trust
Court can modify or terminate trust if circumstances not anticipated by settlor arise AND modification/termination would further the material purpose of the trust
Disclaimer
In most states, disclaimer not effective UNLESS within 9 months after future interest becoming “indefeasibly vested”
If present beneficiary disclaims, principal gets his $ by acceleration if it has vested
If future beneficiary disclaims, treated as if he predeceased life tenant
Gifts to surviving children
If child predeceases settlor, child would take nothing
BUT UPC has different rule
Does anti-lapse apply to trusts?
Majority: NO
UPC: Yes, it applies, and substitute gift created in descendants of deceased
Self-dealing remedy
beneficiaries can set aside transaction OR ratify transaction and recover profits
Prudent Investor Rule
Duty to act as investor would when investing his own property–with care, caution, skill
Duty to Diversify
Trustee must adequately diversify to spread risk of loss, not just in one stock
Duty to make property productive
To rent property or make investments proper
Does income or principal pay for property repairs?
Ordinary expenses: income
Extraordinary expenses: principal
Power of appointment
Trustee appointed to distribute property
General: trustee can give property to anyone
Limited: Trustee must give property to specific person (if bounds exceeded, property will go back to estate or be redistributed)
Income
Income = money generated by trust (given to income beneficiary)
Examples: dividends, interest, rent
