Trust Flashcards
Trust creation ∑4
∑4
(a) settlor intent to create
(b) trust property
(c) valid trust purpose
(d) identifiable beneficiary
Intent: settlor must intend to make a gift in trust. Oral OK
Trust property: must contain some property owned by settlor at the time of creation/transfer.
Trust creation: valid trust purpose
Any purpose as long as it is not illegal or against public policy. (e.g. restraints on first marriage are generally against public policy and thus void
Trust creation: Ascertainable beneficiary
beneficiary must be identifiable © Exceptions: (1) indefinite class (2) class gift (3) charitable trust (4) unborn child
Charitable trust creation
must have (a) stated charitable purpose and (b) exist for the benefit of the community or a segment of the community
Charitable purpose: poverty, education/religion, health, government, community purposes
Benefit of the community: must not have a named individual
RAP does not apply
Cy Pres doctrine
if the original charitable purpose becomes illegal, impracticable, or impossible to perform, a court may find an alternate charitable purpose
Cy Pres presumption
Presumption of a general intent: If general intent to help: court will substitute a similar charity. © If there is a specific intent to help one charity, court will not modify, and the trust becomes a resulting trust held for the settlor/estate.
Resulting trust: who gets the resulting assets?
trust vs. testamentary trust
imposed when a trust fails.
A resulting trust requires holder to return it to settlor/estate.
If a testamentary trust fails, residuary legatee takes the property interest
Trust modification: revocability–generally
Majority rule: trust is presumed to be revocable unless specified otherwise
Trust modification: Settlor’s power to terminate/modify
must expressly reserve of power to modify/terminate.
If no reservation, can terminate/modify if (a) consent of all beneficiaries and (b) proposed change will not interfere with the primary purpose of the trust.
Trust modification: automatic termination
Automatic termination: when trust purpose has been accomplished
Trust modification: Termination by consent
can terminate
(a) if settlor is dead or the trust has no remaining assets,
(b) consent of ALL beneficiaries (including potential future) and trustee.
Trust modification: Claflin doctrine
A trustee can block termination by beneficiaries if the trust has an unfulfilled material purpose.
(e.g. a trust providing for successive interest has an unfulfilled material purpose, discretionary trusts, support trusts, age-dependent trusts, spendthrift trusts)
Trust modification: doctrine of equitable deviation and exception
A court may modify trust terms without beneficiary consent
(1) due to unanticipated circs if changes would further the purpose of the trust; or
(2) terms relating to trust management/administration that would be impractical/wasteful under current terms.
© A court may not alter the rights of beneficiaries (modifying terms that would affect rights of both income and remainder beneficiaries), due to changed circumstances, but may interpret certain changes as frustrating to the trust purposes in order to make such modification.
Trust beneficiary–2 types
- Income beneficiary
2. Remainder beneficiaries
Trust beneficiary’s right to alienate:
can alienate equitable interest in the trust
© Spendthrift
Trust beneficiary’s creditors–rights to trust assets
same rights as beneficiaries.
may reach trust assets only when (1) the amounts become payable to the beneficiary or
(2) are subject to her demand
Support trust: definition and creditor’s rights
directs trustee to pay income or principal necessary to support the beneficiary
Creditor-providers of necessities can be paid by the trustee directly
Discretionary trust: definition and creditor’s rights
if trustee exercises discretion to pay, creditor can’t reach unless spendthrift restriction exist
Spendthrift trust: definition and creditor’s rights
Spendthrift restriction expressly restricts beneficiary’s power to transfer his equitable interest.
Creditors cannot reach unless money is owed for child/spousal support, tax lien, or owed to basic necessities providers
Trust distribution: allocation of principal and income
Income beneficiary takes income.
Remainder beneficiaries take trust principal upon termination of the trust
Trust distribution: allocation of receipts
General rule
Stock dividend
Principal: amount received in exchange for trust is principal;
Income: amount received for use of trust property is income © stock distribution (dividends or split) is principal
Future interest: vested remainder
A remainder is vested if the holder of the interest is ascertainable and there is no express condition precedent required before the interest becomes possessory.(i.e., no requirement to “survive”)
Future interest: UPC treatment of future interest
UPC: Future interests are contingent on the beneficiary surviving the distribution date
A trust creates a vested remainder in X and then provides that the remainder should pass to X’s child if X predeceases the LE.
what happens to the remainder when X predeceases LE?
C/L: remainder interest is vested, and it is divested only if X has a child (remainder goes to child).
If X dies childless, the remainder goes to X’s estate
© UPC: X’s remainder interest is contingent on surviving LE. If X didn’t survive LE, interest does not vest and does not pass to X’s estate or X’s issue
Disclaimer of trust interest
Validity requirement
Effect
Valid if in writing within 9 months after future interest becomes vested.
If disclaimed, treated as predeceased
Acceleration of a vested remainder interest
A vested remainder accelerates into possession as soon as the preceding estate ends for any reason
Acceleration upon disclaimer: disclaimer by income beneficiary
If income beneficiary disclaims her interest, the trust principal becomes immediately distributable to the presumptive remainder beneficiaries
© C/L: If remainder is contingent (i.e. not vested when preceding estate ends), the remainder does not accelerate. Modern: abolished
Acceleration upon disclaimer: disclaimer by future interest holder
disclaimant is deemed to have predeceased the life tenant
the trust principal reverts back to the testator’s estate
Trust: class gift membership closes when
When a future interest is to a class, a class gift closes to future entrants when
(1) at least one class member is entitled to distribution. or
(2) preceding interest terminates
Class gift to children: who are the future beneficiaries?
Majority
UPC
Majority: Gift is expressly limited to transferor’s surviving children (and not their issue) at the time of distribution.
© UPC—deceased child’s surviving issue steps in the shoes of the deceased child
Trustee’s power:
powers necessary to act as a reasonably prudent person in managing the trust, including power to contract, sell, lease, or transfer the trust property
Trustee power to delegate
trustee may delegate responsibilities
© critical function concerning property is discretionary and nondelegable
Trustee’s duties—3 duties:
(1) duty of loyalty and good faith;
(2) duty of prudence;
(3) duty to inform and account
Trustee’s duty of loyalty
Trustee has a duty to administer trust in good faith and act reasonably when investing/managing property solely in the best interest of the beneficiaries
Trustee’s self-dealing
Per se breach of duty of loyalty
Self-dealing activities: personally buying/selling trust assets, selling property between trusts, borrowing from/loaning to trust, transactions with friends/family, personally gaining
Trustee’s self-dealing with authorization
Self-dealing with authorization: still must be reasonable and fair
Trustee’s conflict of interest
Presumption
How to rebut
Conflict of interest transactions are presumed to be a breach of loyalty.
Rebuttable by showing that
(1) the terms of the transactions were fair or
(2) that the transaction would’ve been made by an independent party
Trustee has a conflict of interest when
Conflict of interest transaction arises when: when trustee invests trust assets in a corporation that trustee has an interest that might affect the trustee’s judgment
Trustee’s duty of prudence—generally
4 included duties
Trustee has a duty to act as a reasonably prudent person and treat the trust property as if it were their own.
Includes 4 duties:
(1) prudent investment rule
(2) duty to diversify
(3) duty to make property productive
(4) duty to be imparti
Prudent investment rule
trustee must act as a prudent investor and invest as if he were investing his own—by exercising reasonable care, caution and skill
Duty to diversify:
Trustee must diversify to spread the risk of loss under a total performance portfolio approach
Duty to make property productive:
Trustee must derive income from investment, sell assets when appropriate
Duty to be impartial
Trustee’s duty to be impartial includes two duties:
(1) Duty to balance interests of the present beneficiaries.
(2) Duty to balance interests of present and future beneficiaries by investing property so that it produces reasonable income for the income beneficiaries while preserving the principal for the remainder beneficiaries
Remedies for trustee’s breach of duty
(1) set aside transaction
(2) ratify transaction and recover profits (difference between stock asset value and the purchase price); or
(3) sue trustee and seek damages (lost profits, interests, etc); or
(4) remove trustee
