Trust Validity Flashcards
Main Elements of a Valid Trust
1 - intent
2 - identifiable corpus
3 - ascertainable beneficiaries
4 - proper purpose
5 - mechanics and formalities
Required Elements for an Express Trust
1) settlor w/ capacity to convey
2) present intent to create a trust relationship
3) competent trustee with duties
4) definite beneficiary
5) same person is not the sole trustee and the sole beneficiary
6) present disposition in trust of specific property then owned by the settlor
7) trust must have a valid trust purpose
- consideration not required
Settlor Capacity
- capacity required to create an inter vivos trust = same to make an inter vivos gift
- capacity required for testamentary trust = same as required for will
- settlor’s lack of legal capacity to convey, inter vivos or at death, prevents trust from arising
-> undue influence, fraud, or duress renders the trust unenforceable
Intent - Requirements
- settlor must intend to split legal and equitable title and to impose enforceable duties on the holder of the legal title
- intent must be manifested while settlor owns property and prior to conveyance
- communication of intent to beneficiary NOT required
Manner in Which Settlor May Manifest Intent
- may be manifested by written or spoken words or by conduct of settlor
-> UNLESS Statute of Wills or Statute of Frauds applies - no formal words are required
- settlor does not even have to call the arrangement a trust
Temporal Component of Intent
- settlor must intend that trust take effect immediately, not at some future time
- a future interest can be a trust property though
- promise to create a trust in the future is not enforceable unless the promise is a binding contract (i.e. supported by consideration)
Trusts and Completed Gifts
- if you’ve already made a gift (i.e. the property has already been transferred) you can’t go back later and claim the transfer was really one in trust
Precatory Expressions
- settlor’s expression of a hope, wish or mere suggestion that property be used a certain way is called precatory language
- usual inference is that precatory expressions do NOT create a trust b/c settlor must impose a legal obligation on the transferee, not merely moral one
Overcoming Inference of No Trust Where There’s Precatory Intent
The inference against trust formation can be overcome by:
- definite and precise directions
- directions addressed to a fiduciary (ex: executor under a will)
- resulting “unnatural” disposition of property if no trust imposed (ex: close relative will otherwise take nothing) OR
- extrinsic ev showing that settlor previously supported the intended beneficiary
Requirement of Split of Title
- any split of title is sufficient so long as sole trustee is not sole beneficiary (can share w/ another trustee or another beneficiary)
- if sole trustee and sole beneficiary are the same individual, the equitable and legal titles merge and the trust terminates
Requirement of Identifiable Corpus
- need trust property, + it must be ascertainable w/ certainty
-> where no trust property, the trust fails b/c trustee has no property to manage - must be existing property that settlor has the power to convey
Sufficient Trust Property
- trust property must be an existing interest in existing property
- future interest may be held in trust
-> BUT can’t hold an interest not yet in legal existence in trust - future profits from an existing contract can be a trust res
- includes intangibles in which settlor has an assignable interest
Insufficient Trust Property
- property the settlor can’t transfer or does not yet own
- an unenforceable gratuitous promise can’t be the subject of a trust
Segregating Trust Res from Other Property
- trust property must be identifiable + segregated
- BUT it can be a fractional or undivided interest in specific property
Debtors + Trusts
- debtor cannot hold own debt in trust
- debtor can declare themself trustee of particular property from which the debt is to be paid
- debt can be held in trust by another person
Qualified Beneficiary
A beneficiary who, on the date qualification is determined is:
1) a current beneficiary or
2) a first-line remainderman (somebody who’d become eligible to receive distributions if a particular triggering event were to occur on the qualification date)
Beneficiaries - Capacity
- any person or entity capable of taking + holding title to property can be a beneficiary of a private trust
- beneficiary need not be competent
Beneficiary - Notice and Acceptance
- notice to beneficiary is not essential to validity of a trust
-> lack of such notice may indicate though no trust was intended - acceptance by beneficiary is required, but can take place after a valid trust is created
-> acceptance can be express or implied
-> acceptance generally presumed
Beneficiaries - Disclaimer
- beneficiary may disclaim an interest by filing written instrument w/ trustee (or probate court if created by will)
- if valid disclaimer made, trust read as though disclaimant was deceased as of the relevant date
- many states require disclaimer w/in 9 months (pauses if under 21)
Disclaimer and Estoppel
- beneficiary may be estopped from making a disclaimer if they have exercised any dominion or control over the interest or accepted any benefits under the trust
Disclaimant’s Creditors
- under most state disclaimer statutes, disclaimer relates back to the date of the transfer for all purposes
- in these states, disclaimer by an insolvent beneficiary can be used to defeat creditors’ claims but not a federal tax lien
Anti-Lapse Statutes
- in most states, these apply only to wills + come into play only if a will beneficiary within a certain degree of relationship predeceases the testator
- several states and UPC apply anti-lapse statute to future interests created in trusts (even to future interests expressly made contingent on survival) unless trust makes an alternate gift in case of a beneficiary’s nonsurvival
Divorce
- final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse
- UPC and several states have extended the “divorce revokes” rule to beneficiary designations of individuals who are related to the former spouse but not the settlor
- governing instrument read as though the former spouse is deceased
Definiteness of Beneficiaries Under a Private Trust
- private trust requires definite beneficiaries
- can technically be definite even if not yet ascertained -> need to be ascertainable by the time their interests are to come into enjoyment (ex: unborn children)
Trusts + Class Gifts
- beneficiaries may be designated by generic descriptions such as “children”
- may be UNascertainable when the trust is created as long as they are ascertainable when they are to benefit (ex: to my children and upon their death, to my then surviving grandchildren)
- trustee must be able to determine who belongs to the class
Definiteness of Class Beneficiaries - Common Law vs. UTC
- common law: class must be reasonably definite
-> as long as that class is reasonably definite, the trust can also give the trustee power to exercise discretion in choosing which members of the class are benefited, or may provide that only those who meet certain reqs will benefit - UTC: trustee may select from indefinite class
-> failure to exercise the power gives rise to a resulting trust in favor of settlor or their successors
What happens if no beneficiary?
- trust can fail for lack of a beneficiary (ex: if the beneficiaries are not ascertainable)
- if this happens, a resulting trust in favor of the settlor or their successors is presumed
Trust Purpose - General Rule
- settlor may create a trust for any purpose
Invalid if:
- illegal
- contrary to pub pol
- impossible to achieve
- intended to defraud the settlor’s creditors or based on illegal consideration
Trust Purpose - Public Policy
Pub pol violated if purpose of trust is to:
- induce others to engage in criminal or tortious acts
- encourage immorality
- induce a person to neglect parental, familial or civi duties
What happens if a condition attached to an interest is against public policy?
- settlor’s alternative desire controls if expressed
- if the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid
- if the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there’s evidence that the settlor’s wish would be to void beneficiary’s interest altogether if the condition is unenforceable
Trusts and Rule Against Perpetuities
- growing number of states have abolished RAP as it applies to trusts -> permits creation of “dynasty” trusts
