Trust Creation

Question 1

Express Trust Definition

Answer 1

1. Express Trust –Settlor intentionally transfers property in such a manner that splits title into legal and equitable interests creating a fiduciary duty on the legal title holder (trustee) to manage the property for the benefit of the equitable title holder (beneficiary).

Question 2

Types of Express Trusts

Answer 2

1. Private Trusts – trusts created for non-charitable beneficiaries.
2. Charitable Trusts – trusts created for charitable purposes.

Question 3

Requirements for an Express Trust

Answer 3

1. Trust intent – the settlor intends to split legal and equitable title and impose fiduciary duties on the trustee for the benefit of the beneficiary.
2. Capacity – settlor has capacity to make the conveyance.
3. Compliance w Statute of Frauds – sometimes intent must be in written form.
4. Purpose – purpose of trust can’t be illegal or against public policy
5. Property – the trust must have and continue to hold property
6. Trustee & Beneficiary – there must be a trustee and beneficiary.
7. Rule Against Perpetuities Compliance – duration of trust can’t violate RAP.

Question 4

Trust Intent -

1. General Rule
2. Terminology?
3. Identification of Property and Parties
4. Precatory Language

Answer 4

1. General Rule - “A trust is created only if the settlor manifests an intention to create a trust.” (see TTC 112.002). Intent is shown if the settlor:
   
   1. divides title into legal and equitable components; and
   2. imposes fiduciary obligations on the holder of the legal title for the benefit of the equitable title.
2. Terminology - no particular words or conduct is necessary to establish intent.
3. Identification of Property and Parties - declaration of trust needs to reasonably identify trust property, beneficiaries, and manner of trust administration.
4. Precatory Language - A nonbinding wish or suggestion that does not alone create a trust.
   
   1. Effect – Courts look to other provisions within the four corners of the trust instrument in determining whether the settlor intended the provision to be precatory.

Question 5

1. Can someone holding a power of attorney create a trust for their principal?
2. Can someone holding a Power of Attorney act on behalf of a Trustee?

Answer 5

1. Agent Creating a Trust -
   
   1. Old POA Act - no.
   2. New POA Act - yes, but only if durable power of attorney expressly grants such a power to the agent.
2. Agent Acting on Behalf of Trustee - If a Trustee becomes incapacited, a person holding their POA can’t act on their behalf as Trustee.
   
   1. Trust document (or court) will provide for a successor trustee to act when the current trustee is incapacitated

Question 6

Is consideration required to make a trust?

Answer 6

1. No, a trust is not a contract, so no Consideration is required for the creation of a trust (see TTC 112.003).
   
   1. Exception - a promise to make a trust in the future is enforceable only if it meets the requiremetns for an enforceable contract.

Question 7

If a will is found to be invalid, what happens to teh testamentary trust?

Answer 7

1. If the will is invalid, so too is the trust in the will.
2. But, just because the will is valid, does not mean the trust will also be.

Question 8

Satisfaction of Statute of Frauds -

1. General Rule
2. Revocation/Amendment
3. Exceptions

Answer 8

TTC 112.004 - General Rule – a trust in personal or real property must be in a writing that contains:

1. Evidence of the terms of the trust:
2. Identify the beneficiaries, the property, and how the property is to be used
3. Signature of settlor or the settlor’s authorized agent (but doesn’t have to witnessed)

Revocation, Modification, or Amendment of Written Trust - “if the trust was created by a written instrument, a revocation, modification, or amendment of the trust must be in writing.” (see TTC 112.051(c)).

Exceptions -

1. Oral Declaration -
   
   1. 100% personal property
   2. trustee is not settlor or beneficiary; and
   3. settlor shows prior or present intent to create a trust.
2. Written declaration by owner/trustee
   
   1. 100% personal property; and
   2. written declaration by settlor that property is held in trust for 3d party and settlor or just for 3d party.
   3. No signature required.

Question 9

Rule Against Perpetuities -

1. General Rule
2. Exception
3. Ways to Avoid

Answer 9

1. General Rule - “an interest is not good unless it must vest, if at all, not later than 21 years after some life in being at the time of the creation of the interest, plus a period of gestation.” (See TTC 112.036 and Article I, sect 26 of the Texas Constitution).
2. Exception – charitable trusts are not subject to RAP.
3. Ways to Avoid
   
   1. Savings Clause - Settlor specifically instructs how property should be disposed of in event of failure for RAP
   2. Texas Reformation Statute - court shall reform or construe an interest that violates RAP to effect general ascertainable intent of the creator of the trust.

Question 10

Trust Purposes

Answer 10

1. TTC 112.031 - “A trust may be created for any purpose that is not illegal. The terms of the trust may not require the trustee to commit a criminal or tortious act or an act that is contrary to public policy.” (see TTC 112.031)
2. Considerations -
   
   1. Look to intent of Settlor
   2. Look to how the property is used

Question 11

Settlor’s Capacity -

1. General Rule
2. Elements of Capacity

Answer 11

1. TTC 112.007 - “A person has the same capacity to create a trust by declaration, inter vivos or testamentary transfer, or appointment that the person has to transfer, will, or appoint free of trust.”
2. Elements -
   
   1. Testator must have attained eighteen years of age, be or have been lawfully married, or be a member of the military (see Estates Code 251.001), and
   2. Testator must be of sound mind

Question 12

What Powers Can a Settlor Retain?

Answer 12

TTC 112.033 – the settlor may retain:

1. Legal title (serve as trustee)
2. Life interest
3. Power to amend, modify, and revoke
4. Power to change beneficiary
5. Control over trust administration
6. Ability to add property to trust

Question 13

Trustee’s Capacity

Answer 13

1. The Trustee must have the ability to take, hold and transfer title to trust property.
2. Individual Trustees – must be of legal age and competent
3. Corporate Trustees – must be authorized to act as trustee in Texas (see Finance Code 32.001(b)(3) & 182.001(b)(3) & Estates Code 505.003(1)).
   
   1. Banks & Trust companies

Question 14

Trust Property -

1. General Rule
2. Funding the Trust
3. Legal Title
4. Testamentary Trusts
5. Homesteads

Answer 14

1. General Rule – TTC 112.005 - A valid trust cannot be created unless it’s funded with “trust property” (see TTC 112.005). Alternatively, a trust terminates when no property remains.
2. Funding the Trust –
   
   1. Adding to the Trust -TTC 112.006 - Property may be added to an existing Trust from any source in any manner unless:
      
      1. the addition is prohibited by the terms of the trust, or
      2. the property is unacceptable to the trustee.
      3. A trustee can disclaim an interest under the Texas Uniform Disclaimer of Property Interests Act (the “Texas Disclaimer Act” – Chapter 240 of the Property Code). If Trustee disclaims, the Trustee (as a fiduciary) may have an obligation to give 30 days notice to the B’s or get court approval (see Property Code Section 240.008(d)). A disclaimer must be compatible with the Trustee’s fiduciary obligations (see Prop Code 240.008(f)).
   2. Legal Title Must Reach Trustee – TTC 112.006 - It’s not enough for the Settlor to sign the trust document, legal title to the trust property must reach the hands of the trustee.
      
      1. Change deeds for real estate – new owner is Trustee
         
         1. Titled: “David White, Trustee of the XYZ Trust”
      2. For personal property, Trustee must take possession.
3. Testamentary Trusts and Probate Assets – TEC 101.001(a)(1) - title to property devised in a valid will vests immediately in the devisees (i.e., testamentary trust) at the death of the testator.
4. Homesteads – homes placed in both revocable and irrevocable trusts are eligible for ad valorem tax exemption if the beneficiary has a qualifying occupancy interest.

Question 15

Trustees Generally

1. Trustee Required?
2. Trust Liability for 3d Party Claims Against Trustee
3. Successor Trustees

Answer 15

1. Trustee Required –
   
   1. There must be a Trustee (holds legal title & has fiduciary duties)
   2. However, the Settlor does not have to name a trustee.
      
      1. If settlor doesn’t name trustee, then court will appoint one.
2. Claims by 3d Parties Against Trustee - If Trustee is an independent 3^rd party, Trustee’s legal title cannot be reached by trustee’s “personal creditors”;
   
   1. Exception – acting as trustee when “bad event” occurred
3. Successor Trustee –
   
   1. If original trustee does not serve, then named successor trustee has right to serve.
   2. If there is no named successor trustee or all successor trustees fail to accept, then court will appoint a trustee. (See TTC 112.009(c))

Question 16

Trustee Acceptance -

1. Liability?
2. Methods of Acceptance

Answer 16

1. Trustee doesn’t have liability unless accepts Trusteeship.
   
   1. Merely naming a person as trustee trust instrument isn’t enough
   2. Can’t force legal title and fiduciary duties on a unwilling person
      
      1. Can’t breach a fiduciary duty if not a Trustee
2. Methods of Acceptance - unless the will expressly provides otherwise, the default methods of acceptance include:
   
   1. Act as Trustee – If exercises power or performs duties under the trust, then presumed to have accepted trusteeship.
      
      1. Exceptions -
         
         1. Acting to preserve trust property;
         2. inspecting and investigating trust peroperty
   2. Signs Trust Instrument (or other Doc) – The signature of person named as trustee on the trust document or on a separate written acceptance is conclusive evidence that person accepted trusteeship. (see TTC 112.009(a)).

Question 17

Trustee Bond -

1. General Rule
2. Exceptions

Answer 17

1. General Rule – Trustee must provide bond to secure “faithful performance” of trustee’s duties (see TTC 113.058)
   
   1. Court sets bond amount
   2. Trustee obtains bond from surety company
      
      1. Trustee pays premiums in exchange for surety company’s promise to pay for damages resulting from Trustee’s breaches of fiduciary duty
2. Bond Exceptions – No bond required if:
   
   1. Trust document waives bond requirement, or
   2. Corporate trustee.

Question 18

Trustee Removal or Resignation

Answer 18

1. Trustee May Resign – not obligated to serve forever (see TTC 113.081).
   
   1. Petition court to resign (court “may” accept), or
   2. Resign in accordance with terms of instrument
      
      1. But can’t just walk away – have to hand over assets to successor (no gap).
2. Removal of Trustee (see TTC 113.082 - Trustee may be removed (by interested party):
   
   1. In accordance with the trust instrument; or
   2. By petitioning Court for removal for good cause.
      
      1. Ill will or hostility between a Trustee and the beneficiary, standing alone, is generally insufficient grounds for removal of Trustee.

Question 19

Multiple Trustees -

1. manner of performance
2. vacancy
3. delegation of performance
4. absence or illness
5. Liability of co-trustees

Answer 19

1. Manner of Performance - Co-trustees may act by majority decision
2. Vacancies - If a vacancy occurs, the remaining co-trustees may act
   
   1. Court will not fill vacant trusteeship as long as one co-trustee remains
   2. Vacancy is also not replaced by remaining co-trustees (unless trust allows).
3. Delegation of Performance - A trustee may delegate to a co-trustee the performance of a Trustee’s function (unless the Settlor directs otherwise).
   
   1. Co-trustee my revoke delegation (unless irrevocable)
4. Absence or Illness - If a co-trustee is unavailable to participate in the performance of a Trustee’s function because of absence, illness, etc, and prompt action is necessary to achieve the efficient administration or purposes of the trust or to avoid injury to the trust property or a beneficiary, the remaining co-trustee or a majority of the remaining co-trustees may act for the Trust.
5. Liability of Co-Trustees -
   
   1. General Rule - If your co-trustee(s) commit a “serious breach of trust”, the innocent co-trustee that does not join in the action is liable for the co-trustee(s) action(s), unless the innocent Trustee exercises reasonable care to:
      
      1. Prevent the co-trustee(s) from committing the serious breach of Trust; AND
      2. Compel the co-trustee(s) to redress the serious breach of trust.
   2. Safe Harbor - A dissenting Trustee who joins in an action at the direction of the majority of the Trustees and who has notified any co-trustee of the dissent in writing at or before the time of the action is not liable for the action

Question 20

Trustee’s Fiduciary Duties - what is the full list?

Answer 20

1. duty of loyalty
2. duty of competence
3. reasonably exercise discretion
4. duty of full disclosure

Question 21

Trustee’s Fiduciary Duties - Duty of Loyalty

Answer 21

1. No Self Dealing – presumption of unfairness if Trustee benefits
2. Impartiality – take into account interests of all Bs (see TTC 117.007 & 8)

Question 22

Trustee’s Fiduciary Duty of Competence - list of general duties

Answer 22

1. General Rule - trustee must Administer Trust in good faith according to Trust’s terms (see TTC 113.051) utilizing reasonable care, skill & prudence which an ordinary, capable & careful person would use in own affairs
2. No Delegation – Can’t delegate fundamental trustee decisions
   
   1. Exceptions – lacks expertise – attorneys, accountants, investment agents, etc (see TTC 117.001 & 113.018)
3. Duty not to co-mingle funds – separate Trust property
4. Duty to enforce claims, defend & preserve Trust property
5. Duties @ inception of trust – take and control trust property, review trust assets – bring assets into compliance w/ purpose, terms, and distribution requirements (see TTC 117.006).
6. Investing – Prudent Investor Rule

Question 23

Trustee’s Fiduciary Duty to Reasonably Exercise Discretion

1. General Rule
2. What if Trustee is Also B?

Answer 23

1. Trustees must exercise discretionary power in good faith (reasonably), in accordance with the trust terms, and in the interest of the Bs.
2. If Trustee is also B, cannot exceed ascertainable standard (e.g., health, education, maintenance, support (HEMS))

Question 24

Trustee’s Duty of Full Disclosure

Answer 24

1. Duty to let B’s know of existence of Irrev Trust if B is 25+yrs old
2. Affirmative duty to fully & accurately disclose all material facts necessary for B’s to protect their interest
3. Duty to keep full and accurate records
4. Must allow B’s to inspect books and records (see Shannon v Frost Bank, 533 SW2nd 389 (1975))
5. Accountings – B’s may request – Trustee has 90 days to provide (see TTC 113.151)

Question 25

Beneficiary -

1. Definition -
2. Can settlor or trsutee be beneficiary?
3. form of ownership interest in trust?
4. Identifying beneficiaries

Answer 25

1. Beneficiary – “a person for whose benefit property is held in trust, regardless of the nature of the interest.” (See TTC 111.004(2))
   
   1. Any person, corporation, partnership, association, governmental unit, or legal entity can be a beneficiary.
2. Settlor may be the Beneficiary of his/her own trust. A trustee may also be the beneficiary of a trust as long as the sole beneficiary is not the sole Trustee (see TTC 112.008)
3. Ownership Interest - Beneficiary owns equitable interest.
4. Identifying Beneficiaries - Settlor must designate the Beneficiaries so that their identity is definitively stated or clearly ascertainable.
   
   1. Exception is charitable Trusts.

Question 26

Beneficiary -

1. Acceptance
2. Disclaimer
   
   1. Effect of Disclaimer
   2. Disclaimer revocable?

Answer 26

1. Acceptance by a Beneficiary is presumed.
2. Disclaimer - a Beneficiary may formally disclaim their equitable interest (in whole or in part) i_f they have not exercised dominion/control or accepted any benefits_
   
   1. If properly disclaimed, property passes as though beneficiary failed to survive the vesting of their equitable interest.
   2. Disclaimers are irrevocable and unconditional

Question 27

Pet Trusts/Beneficiary

1. Main issue
2. Majority Rule
3. Texas rule
   
   1. Requirements
   2. Termination
   3. Enforcement
   4. Reduction of value

Answer 27

1. Main Issue - Trusts for animals sometimes violated the RAP because the measuring life was not human.
2. Majority Rule - Most states recognize statutory pet Trusts
3. Texas Rule - texas statute amended to allow pet trusts.
   
   1. Pet must be alive during settlor’s lifetime – A Trust may be created to provide for the care of animals alive during the settlor’s lifetime.
   2. Trust must terminate on the death of the animal(s).
   3. Trust enforcement – may be enforced by person named in Trust instrument or by person appointed by court.
   4. Reduction of Value Permitted - If value of Trust exceeds the amount required, court may reduce pet Trust’s size and give excess $ to Settlor or Settlor’s beneficiaries under their will

Question 28

Beneficiary Transfer of Interest - General Rule and Exception

Answer 28

1. General rule - A Beneficiary may transfer or assign his/her interest to the same extent the Beneficiary can transfer non-trust interest.
   
   1. Can gift interest
   2. Can sell interest
2. Exception
   
   1. Spendthrift provision – prohibits beneficiaries from transferring or assigning interest

Question 29

Spendthrift Trusts -

1. Purpose
2. Who Can Make?
3. How Created?
4. Exceptions
5. Rule on Merger
6. Termination of Spendthrift Protection

Answer 29

1. Purpose - B can’t transfer interest during B’s life and B’s creditors can’t get at trust.
2. How Created? - The trust instrument says:
   
   1. “spendthrift”; or
   2. the terms of the trust say B can’t voluntarily or involuntarily transfer interest in trust.
3. Exceptions
   
   1. Self-Settled Trust - Settlor is also a beneficiary.
      
      1. invalid only as against the settlor’s creditors.
   2. Child Support
      
      1. if trust paymetn mandatory - full trust disbursement can be reached
      2. if trust paymetn is discretionary - court limited to income disbursements.
   3. Federal Taxes
   4. Creditors who furnish necessities
   5. Creditors of the trust itself can always reach trust assets
4. Rule on Merger - if merger doctrine could apply to a spendthrift trust where the settlor isn’t a beneficiary, the court will step in and name a new trustee
5. Termination of Spendthrift Protection -
   
   1. Any amounts distributed to the B.
   2. When the trust terminates.

Question 30

Conflicts Between Terms and Statute -

1. General Rule
2. Exceptions

Answer 30

1. General Rule - The terms of a trust document generally prevail over TTC provisions,
2. Exceptions -
   
   1. Illegality - Can’t dictate an illegal purpose – commit a criminal or tortuous act or an act that is against public policy;
   2. Exculpation of Trustee - Can’t exculpate trustee for breach of trust committed in bad faith, intentionally, or with reckless indifference; or from profit from breach of trust;
   3. Court Action - Can’t limit the commencement of a judicial proceeding;
   4. Trustee Duties - Can’t limit a trustee’s duty:
      
      1. To act on a Beneficiary’s demand for accounting for irrevocable trust under TTC 113.151 if a current bene
         
         1. OK to restrict for contingent/remainder benes and revocable trust
      2. To act in good faith and in accordance with trust purpose
      3. To keep a beneficiary of an irrevocable trust who is 25 years of age or older informed at any time during with the beneficiary:
         
         1. Is entitled or permitted to receive distributions from the trust; or
         2. Would receive a distribution from the trust if the trust were terminated. (see TTC 111.0035(c)).
   5. Court’s Powers - Can’t restrict the power of a court:
      
      1. To modify, terminate, or take other actions under TTC 112.054
      2. To remove a trustee under TTC 113.082
      3. To exercise jurisdiction under TTC 115.001
      4. To require, dispense with, modify, or terminate a trustee’s bond; or
      5. To adjust or deny a trustee’s compensation if the trustee commits a breach of trust.
   6. Forfeiture Clauses - Can’t cause forfeiture of or void an interest for bringing a court action if:
      
      1. probable cause exists, and
      2. Action was brought and maintained in good faith

Question 31

Trust Distributions -

1. Standard of Care
2. Improper Distributions
   
   1. Exception
3. Repayment of Excess by Beneficiary
4. Method of Payment to Bene

Answer 31

1. Standard of Care for Distributions – Trustees are generally under an absolute and unqualified duty to make trust distributions to the correct person(s).
2. Improper Distributions - A trustee who makes an improper distribution is liable even though the trustee exercised reasonable care and made the mistake in good faith.
   
   1. Note that this duty is stricter than the standard applicable to other aspects of trust management.
   2. Mistake of Fact Exception - a trustee is not liable if they make a distribution based on a mistake of fact before actual knowledge or written notice of a fact impacting the distribution including: (see TTC 114.004)
      
      1. Divorce/marriage;
      2. Attainment of a certain age or death;
      3. Performance of distribution requirement – such as education,
3. Repayment of Excess by Beneficiary - TTC 114.031(a)(4) imposes a duty on a beneficiary to repay a distribution/disbursement in excess of that to which the beneficiary is entitled.
4. Method of Payment to Beneficiary - Unless the trust instrument says otherwise, the trustee should make trust distributions directly to the beneficiary if the beneficiary is a competent adult.
   
   1. Exceptions – if the beneficiary is a minor, incapacitated, or mentally or physically ill, TTC authorizes distributions:
      
      1. To the beneficiary directly;
      2. To the guardian of beneficiary’s person or estate;
      3. By utilizing the distribution, without the interposition of a guardian, for the HEMS of beneficiary;
      4. To a custodian for a minor under the UTMA or UGMA;
      5. By reimbursing the person who is actually taking care of the beneficiary, even though the person is not the legal guardian;
      6. By managing the distribution as a separate fund on the beneficiary’s behalf – allowing the beneficiary to withdraw at any time;

Question 32

Discretionary Trust -

1. General Rule

Answer 32

1. Generally - Settlor may give the trustee the authority to make beneficiary distribution decisions based on facts and circumstances.
   
   1. Examples:
      
      1. The trustee may distribute income or principal to my children in the trustee’s discretion;
      2. The trustee may distribute income to my children for their health, education, maintenance, and support;

Question 33

Discretionary Trust - Limitations

Answer 33

1. Trustee must act in good faith, honestly, and for the purposes stated in the trust. (see TTC 113.029(a))
2. Trustee cannot sit idly by – must use discretion in deciding to pay or not to pay.
3. Duty to Reasonably Exercise Discretion

Question 34

Discretionary Trust - Duty to Exercise Discretion Reasonably

1. Trustee is Also Bene
2. HEMS Limitation

Answer 34

1. What if Trustee is also Beneficiary? – Unless the Trust instrument says otherwise, a Trustee/Beneficiary cannot over-distribute to themselves under their discretionary powers (unless the Trustee/Beneficiary is also the Settlor or Settlor’s spouse w/ marital deduction).
2. Trustee/Beneficiary’s discretionary power is limited to an ascertainable standard relating to the person’s HEMS (health, education, maintenance, and support)
   
   1. What is “Maintenance and Support?”
      
      1. Decision to distribute funds can’t be made at a whim
      2. Trustee should base decision on factors, such as:
      3. Size of Trust
      4. Beneficiary’s age
      5. Beneficiary’s life expectancy
      6. Beneficiary’s condition in life
      7. Beneficiary’s present and future needs
      8. Other resources available to beneficiary
      9. Beneficiary’s present and future physical and mental health
   2. What’s not an ascertainable standard? – comfort, welfare, happiness, benefit, etc.

Question 35

Discretionary Trusts - Statutory Safe Harbor Discretionary Acts

Answer 35

If Trust instrument is silent, after considering the probable intention of the Settlor, a Trustee is specifically authorized under the TTC to:

1. Pay funeral expenses of a beneficiary who at the time of death was eligible to receive distributions from the trust;
2. Permit real estate held in trust to be occupied by a beneficiary who is currently eligible to receive distributions from the trust; and
3. Invest trust funds in real property to be used as a home for the Beneficiary – if it is reasonably necessary for the maintenance of a beneficiary who is currently eligible to receive distributions from the trust.
4. Trustee may prevent, abate or remedy actual or potential violation of environmental laws on Trust property (TTC 113.025(b))

Question 36

Liability of Trustee - accounting and profits

Answer 36

The trustee is accountable to a beneficiary for the trust property and for any profit made by the trustee through the administration of the trust (even if the profit does not result from a breach of trust).

1. Doesn’t generally apply to trustee fees

Question 37

Liability of Trustee - Measure of Damages for Breach

Answer 37

A trustee who commits a breach of trust is chargeable with any damages resulting from such breach of trust, including but not limited to:

1. Any loss or depreciation in value of the trust estate as a result of a breach of trust;
2. Any profit made by the trustee through the breach of trust; or
3. Any profit that would have accrued to the trust if there had been no breach of trust

Question 38

Liability of Successor Trustee

Answer 38

General Rule - TTC 113.002 states: “A successor trustee is liable for a breach of trust of a predecessor only if he knows or should know of a situation constituting a breach of trust committed by the predecessor and the successor trustee:

1. Improperly permits it to continue;
2. Fails to make a reasonable effort to compel the predecessor trustee to deliver the trust property; or
3. Fails to make a reasonable effort to compel a redress of a breach of trust committed by the predecessor.”

Question 39

Trustee’s Torts -

1. personal liability
2. liability of trust
3. Notifying Beneficiaries

Answer 39

Trustee’s Personal Liability - Trustee is personally liable for torts committed by the trustee or trustee’s agents/employees. TTC 114.083(d)

Liability of Trust for Trustee’s Torts-

1. General Rule - plaintiffs may sue the trustee in their representative capacity and recover against trust property (or trustee may be reimbursed from the trust) if:
   
   1. It’s a common incident of the business activity (trust owns grocery store -slip/fall)
   2. Trustee was not personally at fault; or
   3. Tort increased the value of the trust property (conversion)
2. Reimbursement - the trustee is entitled to reimbursement from the trust if the above are met.

Notifying Beneficiaries - It should be noted that tort (or contract) plaintiffs have an obligation to notify the beneficiary (see TTC 115.015)

Question 40

Trustee Contracts -

1. personal liability
2. liability of trust

Answer 40

Trustee’s Personal Liability - If trustee enters into contract in the performance of the trustee’s duties, the trustee is personally liable if there is a breach of contract.

1. Excluding Trustee from Personal Liability -
   
   1. If a trustee signs “trustee” or “as trustee” after the signature, this is prima facie evidence of an intent to exclude the trustee from personal liability.
      
      1. Not conclusive, just prima facie evidence.
   2. Best to add provision in contract excluding trustee from personal liability

Liability of Trust for Trustee Contracts – Third Parties can bring suit against the trustee in representative capacity and collect against trust for breach of contract if they had knowledge trustee was contracting on behalf of trust.

Question 41

Contractors Dealing with Trustees

Answer 41

1. Good Faith Third Parties Generally Not Liable –
   
   1. A person who deals with a trustee in good faith and for fair value is not liable to the trustee or the beneficiaries if the trustee has exceeded the trustee’s authority in dealing with the person.
   2. A 3^rd party that in good faith assists a former trustee, or who in good faith and for value deals with a former trustee, without knowledge that the trusteeship has terminated, is protected from liability.
2. Extent of Inquiry Into Trustee Powers - The 3^rd party is not required to inquire into the extent of the trustee’s powers if the person:
   
   1. Deals with the trustee in good faith, and
   2. Obtains a copy of the trust or a certification of trust (see TTC 114.086)

Question 42

Charitable Trusts -

1. Definition
2. Differences from Private Trust
3. Charitable Purpose

Answer 42

1. Charitable Trusts are public trusts created for the community – or for a large segment of the community
   
   1. includes any charitable gift or charitable entity, even if not a trust.
2. Differences Between Charitable Trusts and Private Trusts:
   
   1. No RAP
   2. Tax advantages
   3. Requires a sufficiently large or indefinite class of potential beneficiaries – so that the true beneficiary is the public – not a particular person or small group.
3. Charitable Purpose – a charitable trust must have a charitable purpose
   
   1. What Constitutes a Charitable Purpose? – must be open to the public and have objective criteria.
      
      1. No Bright Line Rule as to What is a Charitable Purpose
      2. Established Charitable Purposes -
         
         1. Relief of poverty
         2. Advancement of education
         3. Advancement of religion
         4. Promotion of health
         5. Governmental or municipal purposes
         6. Other purposes the accomplishment of which is beneficial to the community.
      3. Established Non-Charitable Purposes –
         
         1. Paying $ to everyone is not a charitable purpose – no public benefit (Marsh case – TTL p107 and slide 21).

Question 43

Charitable Trusts and the Attorney General -

1. Enforcement
2. Notice
3. Costs and Attorneys Fees

Answer 43

1. Enforcement - As the official representative of the public, the Texas Attorney General can bring suit to enforce or attack a charitable trust or to question its operation.
   
   1. Interested Parties – other parties can bring suit to enforce or attack a charitable trust if that party has a special interest in the performance of the trust different from the public at large.
2. Notice Required –
   
   1. Any party initiating a proceeding involving a charitable trust shall give notice to the AG.
   2. A judgment, compromise, or settlement agreement involving a charitable trust is voidable if the attorney general is not given notice of the proceeding.
3. Costs and Attorneys Fees - The AG is also permitted to recover costs and reasonable attorney fees

Question 44

Charitable Beneficiary Fails or Changes Status -

1. Default Rule
2. If Trust Instrument Silent

Answer 44

1. Examples: Charitable Beneficiary Goes Out of Business Or Loses Tax Exempt Status)
2. Default Rule – if trust instrument provides replacement charitable beneficiary, follow trust instrument.
3. Trust Instrument Silent –
   
   1. Settlor Deceased/Incapacitated - trustee may select a replacement beneficiary that has the same or similar charitable purpose as the failed charitable beneficiary.
   2. Settlor Alive & Not Incapacited – trustee shall consult with the sellor concerning the replacement.
      
      1. Must Notice AG and AG can object to replacement.

Question 45

Pour Over Wills -

1. Two Places settlor can bequeath property in will?
2. effect of revocation or termatino of trust before settlor’s death
3. time of execution?

Answer 45

1. General Rule - Testator may bequeath property in a will to a trustee of:
   
   1. An inter vivos trust established by the testator or someone else; or
      
      1. Valid even if trust is revocable, amendable, or if trust was amended after execution of the will.
   2. A testamentary trust established by the testator or someone else (if they predeceased the testator).
2. Lapse – unless testator’s will says otherwise, revocation or termination of the trust before the testator’s death causes the devise to lapse.
3. Time of Execution - A pour over will may fund a trust that was executed before, with or after the execution of testator’s will (see Estates Code 254.001)

Question 46

Life Insurance Trusts -

1. General Rule
2. Manner of Funding

Answer 46

1. General Rule - The owner of a life insurance policy may:
   
   1. Name a trust as the beneficiary of the policy, or
   2. Transfer the policy itself into the trust.
      
      1. Trust becomes the owner of the policy.
2. Automatic Funding of Life Insurance Trust - TTC 111.004(12) defines “property” as “… including a contractual right to receive death benefits as designated beneficiary under a policy of insurance ….”
   
   1. Therefore, a life insurance trust is funded even if it’s just named as a policy beneficiary.
   2. But the trust may not have $ to pay premiums