trusts Flashcards
who can be a beneficiary
- unincorporated association couldn’t be at common law, but now can be
- any natural or artificial person capable of taking and holding title to property
- trust can name an unborn beneficiary; unascertained beneficiaries have to be determined from the will
- RAP problems!!!
settlor
the individual who creates the trust
discretionary trust
the trustee is given discretion as to when to pay a beneficiary, whether to pay a beneficiary and how much to pay him. Also discretion on WHO to pay if multiple beneficiaries.
“trustee shall have sole and absolute discretion in determining when to pay beneficiary & how much”
resulting trust- definition and when applies
implied in fact and based upon presumed intent of the parties. if decreed, the resulting trustee will transfer the property to:
a) the settlor if he is alive or
b) the settlor’s estate if he’s dead (residuary devisees if any, or if none intestate heirs)
- private express trust ends by its own terms
- charitable trust ends or fails, and cy pres can’t be used b/c settlor didn’t have general charitable intent
- excess trust property in a private express trust- purpose satisfied but left over money/assets (support x while x is a minor and money left)
- beneficiary dead, unidentifiable, or not locatable
- semi secret trusts- will says to x to hold in trust with no named bene
- purchase money resulting trusts
purchase money resulting trust
Sale of property where Y obtains legal title from the seller, but Y did not supply the consideration, another person- X- did. Once X proves he supplied the money, a presumption arises (2 different presumptions possible depending on relationship between X and Y)
*must be consideration given to buy the property
X and Y close relatives- rebuttable presumption of gift.
X and Y not close relatives- rebuttable presumption that Y is acting as a trustee (that X would have wanted to retain a benefit and not to make a gift). Y’s only duty is to convey title to X
i) can rebut by proving X made a loan to Y
a) if title in Y’s name, then NO resulting trust
b) BUT if X loaned money to Y, and title is in X’s name, then the resulting trust is in favor of Y as beneficiary
constructive trust- requirements and examples
constructive trust is a remedy to prevent unjust enrichment.
Must be requested as a remedy and must point to specific trust property harmed or wrongfully handled. Some states require clear and convincing evidence.
Examples of when available
- when trustee of private or charitable trust engages in self dealing and profits
- fraud in the inducement of a will
- breach of fiduciary duty
- invalid oral trust of land that doesn’t satisfy SOF exceptions
- secret trust
- beneficiary of a will commits homicide of testator
- joint tenant kills another joint tenant
- theft of trust property when it is no longer in possession of thief and thief used it to buy something else
oral real estate trust (imposed because of fraud in inducing conveyance)
- from the four corners of the deed, the person seems to own the real estate
1) fraud in the inducement- A conveyed real estate to B because he promised to hold it in trust for someone else, but actually did not intend to do so
2) fiduciary relationship between A and B, and A transfers to B because B makes a promise
i) family relationship
ii) attorney-client
iii) business partners
3) detrimental reliance by B
trustee duties to beneficiaries
1) duty to administer trust in good faith, PRUDENTLY, and follow its instructions
2) duty of loyalty- may not self deal and must act impartially if more than one beneficiary
3) duty to separate and earmark trust property- no commingling with own or other clients’ assets
4) duty to perform personally
5) duty to defend trust from attack and enforce trust claims
6) duty to preserve trust property and make it productive
7) duty to account at least annually and respond to requests for info about the trust
DEAL APP
DEFEND, EARMARK, ADMINISTER, LOYALTY, ACCOUNT, PERSONALLY, PRODUCTIVITY
trustee duty of care
care, skill*, and caution a reasonably prudent person would use in investing and managing his own property
*takes special skills of trustee into account to raise the standard but lower skill level is not an excuse
NOTE: Investment decisions are evaluated pursuant to uniform prudent investor act
implied powers
power to carry out the trust purpose
if trustee commingles trust property and own assets or assets of other trusts
breach of duty to separate and earmark
if some of the property is lost, it is presumed that the property lost belonged to trustee personally and any gains go to the trust
Beneficiary remedy for trustee breach of duty of loyalty by self dealing
trace the profits from the transaction,
Set aside the transaction, or
affirm the transaction if it’s beneficial
surcharge if a loss to trust- trustee must make good the loss
example of properly earmarked property
John Smith, as trustee of ABC trust
ie either in trustee’s name noting trustee capacity, or trust
duty to perform personally
must personally perform functions that a reasonably prudent person wouldn’t delegate. DISCRETIONARY FUNCTIONS CANNOT BE DELEGATED (like who to pay and when).
INVESTMENT DUTIES
common law- no delegation of investment decision
today- may delegate if a prudent trustee could properly delegate under the circumstances
trustee cannot delegate decisionmaking to another trustee
-must act by majority decision (today); at common law it was unanimity
duty to defend trust
must defend trust from legal attack, unless upon examination trustee discovers challenge is well founded
duty to account
keep and render accounts periodically (at least annually) and respond to requests for info about the trust administration
proxy for duty of loyalty- lets B’s monitor
duty to make productive / power to invest- state statutes
most states have adopted uniform principal investor act
some states still follow statutory legal list of approved investments (unsecured loans, land, and common and preferred stock are not allowed; mutual funds are)
uniform principal investor act evaluation of trustee decisions
- must act exclusively for beneficiary. must act impartially if more than one
- any type of investment ok if trustee is prudent
-expected to consider anticipated income, tax consequences, and effect of general economic conditions and inflation
-should consider value of an asset to a particular beneficiary or purpose - prudence of investments evaluated in light of whole portfolio and wisdom at time of decision
adjustment power- UPIA
if the trustee feels that by distributing the trust income to the beneficiary, he/she is not complying with the duty to treat all beneficiaries fairly, may adjust between principal and income if necessary
Factors:
Nature, purpose, duration of trust
Intent of settlor
Need for liquidity and regular income
Need to preserve capital
General economic conditions and impact of inflation on income
Trustees power to invade principal under the trust
Tax consequences
factors to consider in whether to use adjustment power
- nature, purpose, expected life of the trust
- intent of settlor
- identity and circumstances of beneficiaries
- need for liquidity, regularity of income, preservation and appreciation of capital
- nature of trust assets
- whether trust gives trustee power to invade principal
trustee liability to third parties
general rule: can only be sued as trustee and not personally.
A. tort: only sue trustee personally if at fault (ex: sue the trustee personally if he was negligent in managing land held in the trust)
B. contract: party to contract must sue in trustee capacity if he knows that the trustee is making the contract in his capacity as trustee. can sue trustee personally if trustee did not reveal he was a trustee for a trust.
Trustee can be indemnified from trust property if properly entered into and the trustee is not in breach
when can the trust be modified?
A. By settlor
- when he personally reserves the power to modify
- when settlor has reserved the power to revoke (by implication has power to modify)
B. By court
- charitable trusts and cy pres
- deviation
a) unforeseen circumstances by settlor
b) necessity to preserve the trust - trust becomes illegal
when can the trust be revoked?
A. Some states: settlor must reserve the power
B. UTC: trust is revocable unless made irrevocable.
how do you terminate an irrevocable trust?
- Settlor and all beneficiaries agree
- Beneficiaries agree and no material purpose will be frustrated
- Statute of uses- passive trustee duties
- Termination of trust by its own terms
Holder of legal title to trust property
The trustee. Holds for the benefit of beneficiaries.
Holder of equitable title to trust property
Beneficiary
Requirements for valid trust
*Legal capacity
*Testamentary capacity (for testamentary trust)
*Intent - present intent to immediately create trust relationship and split legal and equitable title
*Property- ascertainable and settlor has right to convey it
*Valid purpose
*Proper formalities
Writing if required by statute of frauds
Presumption regarding language like i desire the property to be used for / with the hope that
Presumed not to intend to create a trust. Rebuttable by evidence of
Directions to a fiduciary
Clear and definite directions
Settlor providing previous support to the beneficiary
If no trust is imposed a close relative will take nothing
Proper trustee
Sole trustee cannot be the same as the sole beneficiary, or two trustees cannot be the only two beneficiaries
The settlor can be a trustee during their life as long as they designate a successor
Beneficiaries requirements
Must be ascertainable at the time they are to benefit (ex: to my children is ok but to my friends is not) and able to hold title
Must be ascertainable or first line remainderman
Anti lapse statute application to trusts
Most states only apply to wills
The utc states apply them to future interests created in trusts if an alternate taker is not specified, even if the provision requires the beneficiary to survive
Effect of divorce on provisions of trust
Appointing an ex spouse as a beneficiary or trustee will be revoked under the utc and laws of many states
Some states even invalidate gifts to ex spouse relatives (step children, siblings and parents of spouse)
Trust purposes
Cannot be
Illegal (can’t encourage people to commit crimes)
Against public policy (to A so long as she is not married could be against public policy of promoting marriage or it could be consistent with appropriate policy of providing support for someone who is unmarried)
To defraud creditors
Impossible to achieve
Generally if it’s illegal the court will treat it as valid and eliminate the problematic condition unless there’s evidence the settlor would not have wanted the gift to still be valid
Trustee death or resignation - impact on trust validity
Does not invalidate the trust. The court can appoint one unless there is evidence that the settlor only wanted the trust to exist while a specific person was trustee
Lack of duties of trustee
Court will imply duties as long as other formalities are satisfied (intent, trustee, beneficiary, trust property)
Ways to transfer property to trustee
Declaration of trust - declaration itself is enough to convey personal property. Must prove oral by clear and convincing evidence. Real property should be transferred from settlor as an individual to settlor as trustee
Conveyance in trust- a deed transferring from settlor to trustee, or personal property by physical delivery or written assignment
Gift in a will - pours property over from the will to a trust that is identified clearly in the will, even if the trust is revocable or has not been signed when the will is signed, as long as the trust is executed before the settlor dies
Testamentary trusts- where the trust intent, trust property, trustee, and beneficiaries are all identified in the will or a document incorporated into the will by reference
Class of beneficiaries
Trustee must be able to identify. At common law this means it has to be reasonably definite. The utc allows trustee to select members of indefinite class
Inter vivos trust
Settlor during their life conveys property to themselves or someone else as trustee for benefit of another person or declares that they are trustee for another person
Statute of frauds and trusts
Writing required for trusts of land
Part performance exception applies
Secret trust
Transfer in a will of property to a beneficiary without mentioning in the will that it is to be held in trust. Gift must have been made in reliance on promise to hold in trust.
Extrinsic evidence is allowed and must prove by clear and convincing evidence that this was the intent. Court will impose constructive trust
Semi secret trust
To A to be held in trust
Fails and results in resulting trust
Beneficiaries attempts to transfer or creditors attach the beneficial interest- valid normally?
Creditors can reach the interest
Beneficiaries can transfer the interest
If there is a discretionary trust can a creditor of the beneficiary reach the interest?
A creditor can attach the interest with notice to the trustee
Creditor cannot force trustee to make payment to beneficiary because the trustee has discretion on when and how to make distributions, so until they do the beneficiary has no concrete right and just has an expectancy
The only exception is a trustee can be forced to make a payment to satisfy child and spousal support judgments
Spendthrift trust - assignability and creditors
The beneficiary is prohibited from assigning and the creditors are not able to reach the interest until beneficiary is paid
Still will not work to prevent child support and spousal support and other government creditors from reaching the interest
A trustee can but is not required to honor claims from assignees and creditors
Can settlor be beneficiary of a spendthrift trust?
Some states will allow settlor to be beneficiary but most won’t
Support trust
A trust directing the trustee to pay beneficiaries only so much of the income as is necessary for support
Standard of support is lifestyle the beneficiary is accustomed to
Support trust- can assignees and creditors force trustee to pay them ?
No the beneficial interest is not assignable until payment is made
Revocability of and ability to modify trusts
Some states treat them as revocable and able to be modified unless it says irrevocable
Other states treat them as irrevocable unless it says revocable and in this case will allow revocation or modification with all beneficiaries consent
Modification of trusts by settlor
Settlor can modify without beneficiary consent if irrevocable
Termination of a trust
All beneficiaries must consent and has to be revocable, no material purpose can be frustrated
Court can also order same way as modification
Trustee must distribute as agreed by beneficiaries
In some states- trust property less than 50k and cost of admin too high
Material purposes of trust so that it can’t be modified
Support trust
Spendthrift provision
Payment at certain ages or on certain events
Discretionary trust
If there is a mistake in the trust can a court modify to fix it?
In some states yes but must be shown by clear and convincing evidence
Powers of trustee
Powers granted by the trust instrument
Powers a competent person would have over their property (sell, invest, lease etc)
Powers under utc
-collect and hold trust assets
-operate a business
-invest assets
-pay taxes
-buy, sell, lease, encumber assets (and get loans)
-make distribution
-bring and defend lawsuits
Other powers necessary to carry out trust powers granted by trust or law
Co trustees
Act by majority decision unless one is ill or unable to serve- then the others may act
If one does not cooperate the others can seek court order to remove
Court review of trustee exercise of discretionary power
Even if the trust says he has absolute discretion the court will review the way it’s exercised or decisions not to act for abuse of discretion
Social investing
If this is the only basis for the decision (ex: environmentally friendly corporate policy or black or woman owned company) it will not be prudent. Have to consider income generating potential and risk level
Reasons to remove trustee
Court can order on its own or the beneficiaries, settlor, or another trustee can seek an order
Lack of capacity
Serious breach of duty
Persistent failure to administer trust per its terms
Addiction making them unfit
Conviction if a crime
Refusal to account
Lack of cooperation among trustees
Tort claims against the trust
Brought against the trustee in their fiduciary capacity. And individually if they are personally at fault
If a trustee improperly transfers property to a third party what are the beficiaries rights?
They can sue the third person
If the third person is a bfp they cannot be forced to convey it back
If the third person did not pay for it and did not know it was trust property, they must either restore it or pay money or property of equal value to the trust
If a third party damages trust property what are the beneficiaries able to do?
Sue the trustee to force them to sue third party for damage (ex: tenant in lease damages property)
Can sue directly if the trustee leaves the jurisdiction without appointing a successor or the trustee participated in a breach of trust
Manner of distributions
Generally income beneficiary must receive income and principal beneficiary must receive principal
Uniform prudent investor act gives the trustee an adjustment power to pay income to a principal beneficiary if it would be unfair to that beneficiary not to do so and it wouldn’t carry out the intent of the settlor
Is real property rent allocated to income or principal ?
Income
Unique types of income and how allocated among principal and income
Proceeds from sale of an asset- principal
Rents and interest- income
Minerals and oil leases - 10% income 90% profit
Royalties and other liquidating assets- 10% income and 90% principal
Pensions and deferred compensation- 10% income and 90% principal
Stock dividends- principal
Cash dividends- income
Life Insurance policy proceeds- principal
Other insurance policy proceeds- income
Expenses allocation
Ordinary repairs of property - income
Capital major repairs like roofs - principal
Income tax- income
Capital gains tax- principal
Cost of accountings, lawsuits regarding income assets, trustee compensation are split equally
Cost of proceeding involving a principal asset are allocated to principal
Payment of principal on trust debt allocated to principal
Charitable trust
Trust that has indefinite beneficiaries and can be perpetual
Must have a charitable purpose like relief of poverty, religion, or promoting education, parks and museums
Beneficiary can be a specific charitable entity or a small class of people just cannot be only family
What can a court do when a charity doesn’t exist or a purpose becomes illegal or is impractical ?
1 Apply Cy pres if there is general charitable intent or it’s a utc jurisdiction
Court will reform the trust to come as close as possible to achieving settlor intent
To apply the doctrine the settlor must have a general charitable intent and must not have expressed an intent only to give to a particular charity
Under the UTC the general charitable intent is conclusively presumed
2 impose a resulting trust if cy pres inapplicable
Honorary trust
A trust that does not have a human, identifiable beneficiary or charitable purpose
Care of pets (last only as long as animal lives) or maintenance of a grave
People with rights to enforce it may be specified in a utc jurisdiction
At common law there is no way to enforce it
UTC allows it to last for 21 years, some states apply general RAP rules
When x provides the consideration to acquire property and title is taken in Y’s name how does the law treat this?
Presumes this is a purchase money resulting trust if X proved by clear and convincing evidence that x paid the consideration before or when Y took title. If only part of consideration was supplied they only get a pro data interest in the property.
Y can rebut this by producing evidence that the intent was this was a gift, a loan that Y would repay, or repayment of a loan that Y made to X
If x and y are close relatives the presumption is a gift, which is rebuttable
Resulting trust situations- when it’s inapplicable
Trust created for illegal purpose
The trust has an alternative way of disposing of property when a gift fails or the trust is invalid
When cy pres applies
When the settlor is also the beneficiary of a purchase money resulting trust bc they provided consideration for purchase of the property
When settlor otherwise got consideration for trust transfer
Trustee of resulting trust or constructive trust responsibilities
Convey legal title to the beneficiary
Account for profits received during the resulting or constructive trust
When a trustee is not liable for breach of duty
Reasonably relied on trust terms in taking action
Beneficiaries consented to the conduct or released him from liability
Beneficiary refusing to accept a gift
Not required to accept the gift, they can disclaim within 9 months of the creation of their interest (date of death for revocable and date of creation of trust for irrevocable)
Disclaiming beneficiary will be treated as predeceasing the settlor
beneficiary remedy for breach of duties other than loyalty
specific performance of duties
injunction to stop trustee from breaching duties
damages that are the greater of: a) amount necessary to restore the trust property and distributions to what they would have been without the breach; b) profits earned by the trustee from the breach
examples of breach of duty of loyalty by self dealing
*buying or selling trust assets
*selling property to another trust or company they are affiliated with
*borrowing trust money
*securing a personal loan with trust property
*corporate trustee investing its own stock- can only keep any of its own stock in the portfolio at the time the trust was created if it is prudent to do so
*indirect self dealing like transaction between trustee on behalf of the trust and trustee’s relative, spouse, attorney, or corporation
limits on trustee discretionary powers
must exercise them or choose not to in good faith
can be reviewed for abuse of discretion by a court- found to abuse if act in bad faith or dishonestly
duty to administer the trust
duty to carry out the mandatory provisions, and carry out all terms of the trust in good faith, impartially, and prudently
Are clauses relieving a trustee of liability valid?
exculpatory clauses are ok but cannot relieve trustee of reckless behavior or bad faith behavior and
cannot have been inserted by a trustee who abused a confidential relationship with the settlor
Delegating trust management
- may delegate investment functions but must be prudent in:
i) choosing the agent
ii) establishing scope and terms of delegation
iii) periodically reviewing agent’s actions
Does a trustee breach any duties by not having a diverse portfolio?
- trustee must diversify UNLESS trust says not to or there is a reasonable justification not to based on trust purposes
Modification of trusts by beneficiaries
Material purpose frustrated- need settlor and all beneficiaries to consent
Material purpose not frustrated- all beneficiaries must consent
Trustee must distribute as agreed
Modification of trust with court order
If not all beneficiaries consent or material purpose frustrated
Under utc with a court order determining
A) modification would have been possible with consent of all beneficiaries and the beneficiary who didn’t consent would be adequately protected
B) unanticipated circumstances have arisen and threatened trust purposes
C) impracticable or wasteful to continue with existing trust terms
D) not enough money in trust to pay costs of administration
who does a trustee owe fiduciaries to?
if the trust is revocable, they only owe duties to the settlor
if the trust is irrevocable the duties are owed to all beneficiaries
What is the remedy if the trustee does not perform personally?
If the delegation should not have been made at all, the trustee is liable for all losses resulting from the improper delegation
if a class gift future interest (for example, one following a life estate) has a survival condition can the holder of the interest pass it to their heirs?
normally future interests are devisable and thus if the person in the class dies they can pass their interest to their heirs
if there is a survival condition, however, the interest is not devisable or descendable
is the trustee liable for losses when he has properly delegated investment functions?
No, he will be protected as long as delegation was proper (prudent in selection, setting terms and scope of delegation, and reviewing periodically)
is a trustee liable for the acts of a co-trustee?
no, if he did not participate AND exercised reasonable care in preventing a breach of trust or compelling the co-trustee to redress a breach of trust
remedies for breach of trust (i.e. breach of trust duties)
- Suspend or remove trustee
- Obtain injunction to force to perform trust duties or to prevent from committing a breach of trust
- Compel trustee to pay money (greater of the profits resulting from the breach or the amount necessary to restore trust property and distributions to pre breach levels)
- Compel trustee to restore property
can a trustee’s inability to self deal be waived?
yes if the settlor expressly allows self dealing in the trust instrument, as long as trustee does not act in bad faith
when does a revocable trust become irrevocable?
at the settlor’s death, unless amended to become irrevocable during life
can a trust be reformed if there is a mistake?
only in some states. in those states, the mistake must be shown by clear and convincing evidence.
