Trusts

Question 1

What is a trust

Answer 1

A trust is a fiduciary relationship with respect to enforceable equitable rights of the beneficiary. The creator of the trust is the settlor, who must have had the intent to create the trust. The trust must have a valid trust purpose and trust property. No consideration is required.

Question 2

6 purposes and uses of trust

Answer 2

1. Providing for and protecting trust beneficiaries
2. Flexibility of asset distribution
   If in trust, settlor can provide for any type of distribution plan he or she desires, within legal bounds such as spreading benefits over time; giving trustee discretion as to who and how much to pay, and setting standards for distribution such as only for health, education, maintenance, or support.
3. protection against settlor’s incompetence
   Better than an expensive and embarrassing guardianship.

Note: another estate planning technique which may avoid guardianship is durable power of attorney in which the principal names a person (agent) to manage the owner’s property with the authority either (1) beginning immediately, or (2) springing into effect upon the owner’s incapacity.

4. professional management of property
5. probate avoidance
6. tax benefits
   Income, gift, and estate tax savings are possible.

Question 3

Basic classifications of trusts

Answer 3

express (private, charitable), and by op of law (resulting, constructive)

Question 4

five elements of a valid trust

Answer 4

1. intent
   (a) split legal and equitable title + imposes enforceable duties on holder of legal title
   (b) present intent
   (c) sole trustee is not sole beneficiary
2. identifiable corpus
   (a) ascertainable with certainty
   (b) sufficient trust property - owns and can transfer
   (c) insufficient trust property - can’t transfer or don’t own yet
3. ascertainable bs
   (a) private trusts to bs with capacity; class gifts okay
   (b) charitable trusts - for b of community rather than ind
   (c) honorary purpose trusts for non-human, non-charitable purposes okay so long as they don’t go against public policy
4. proper purpose
   (a) settlor may create trust for any purpose
   (b) EXCEPT illegal purpose or that which requires trustee to commit a crime or tort
   (c) EXCEPT purpose contrary to public policy
5. mechanics and formalities
   (8; see later)

Question 5

5th requirement for valid trust - mechanics and formalities. What are the 8 categories and rules for each?

Answer 5

1. Creation Methods
   (a) intervivos or living trusts (created while settlor still alive)
   (b) testamentary trust - created in settlor’s valid will.
2. designate a trustee
   (a) capacity of trustee will be to take hold and manage property
   (b) court will fill vacancy if trust is silent or trustee dies, resigns, is removed
3. transfer of property to trustee (“funding”)
   (a) declaration of trust - personal property conveyed must be identified and separated
   (b) conveyance of trust - settlor must convey property to trustee (deed, physical delivery, written assignment)
4. SOF - must be in writing if it involves real property or contained in will UNLESS holder of legal title does part performance
5. Pour over wills (will containing gift to inter vivos trust)
   (a) gov of prop - goes into trust as trust exists at t’s death; if trust revoked, gift fails
   (b) pour over property can be initial trust funding if will identifies trust and trust is executed before t’s death.
6. Testamentary Secret Trusts (test gift is silent about trust nature of transfer)
   (a) court will permit the alleged b of trust to seek constructive trust against the will b who should be serving as trustee if appropriate facts are proven
7. Testamentary Semi-Secret Trusts (test gift is “in trust” but will not indicate bs or terms).
   (a) trust fails and property passes to successors or estate.
8. Inter Vivos Secret Trusts (grant of property looks outright on face but there is oral ev that grantee promised to use property for another person’s b).
   (a) grantee is not bound unless alleged b can show abuse of conf relationship, fraud, undue influence, wrongdoing.

Question 6

transfer of bs’ interests - voluntary and involuntary transfers

Answer 6

1. Voluntary Transfers – Gifts and Sales
   Unless trust provides otherwise (as is usually the case), bs may transfer their equitable interests just like they may transfer any other property they own.
2. Involuntary Transfer – Creditors
   Unless the trust provides otherwise (as is usually the case), the b’s creditors may reach the b’s interest in the trust.

Question 7

discretionary trust

Answer 7

Trustee determines how much, if anything, the b receives.
1. Beneficiary has nothing to transfer

2. Nothing for creditor to reach
   Until trustee elects to make a payment, b has no interest to transfer and no interest for creditors to attach. Beneficiary merely as an expectancy to be the beneficiary of a power of appointment placed into the trust.

Question 8

spendthrift trust - characteristics, limitations on enforcement

Answer 8

1. Characteristics
   a. beneficiary may not transfer interest in trust
   Any attempt by b to transfer is ineffective. Of course, once trustee pays the b, the beneficiary may transfer the property received.

b. creditors cannot attach b’s trust interest
Of course, once trustee pays the beneficiary, the b’s creditors may reach the property.

2. Limitations on Enforcement
   a. Ineffective if settlor is beneficiary (self-settled spendthrift trust)
   In most states, cannot use a spendthrift trust to protect your own property from your creditors

b. may be ineffective against certain creditors
- Support of b’s spouse or child
- Creditors who supplied necessary to the b
- Tort creditors as they have no opp to investigate their tortfeasor before being injured.

Question 9

support provisions

Answer 9

1. Use of trust property limited to b’s support
   Trustee may only use property for b’s health, education, maintenance, and support. Support trust may be mandatory or discretionary.
2. Impliedly spendthrift
3. Standard of Support
   If instrument is silent, it is b’s accustomed standard of living.
4. are b’s other resources considered?
   If trust is silent, courts make case-by-case determination.

Question 10

five ways for trust to end/be modified

duties of trustee after termination of irrevocable trust

Answer 10

(1) by terms of trust
(2) by settlor unless trust specifically limits it or in some states, the settlor may still revoke with written consent of all persons with vested or contingent interests.
(3) by beneficiaries if they all agree, are legally competent, and settlor’s intent not frustrated (all beneficiaries include unborn or unascertained bs - if unborn or unascertained, need “rep or guardian ad litem”)
(4) by operation of law (property is exhausted or merger of legal and equitable title)
(5) by court if trust purposes accomplished, have become illegal, or have become impossible

The trustee may continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust and must then make timely dist of trust property to bs

Question 11

what is material purpose mean for term by bs? EXAMPLES of provisions likely to prevent bs from modifying or terminating as they are considered material purposes

Answer 11

In determining whether termination would impair a material purpose, the whole instrument and surrounding circumstances will be considered.

• Support of b
• Spendthrift provision
• Payment at certain ages
• Payment at certain dates
• Discretionary trust
• protecting bs from own poor judgment

Question 12

trustee powers - 2 sources and 3 types of exercise of powers

Answer 12

sources

(1) express - granted by settlor in instrument, state statute, decreed by court
(2) implied - powers necessary or appropriate to carry out terms of the trust

exercise

(1) multiple trustees - majority can act
(2) mandatory powers
(3) discretionary powers - settlor may allow trustee to exercise some powers as he sees fit. There will be liability for abuse or failure to exercise. Grant of absolute discretion is subject to court review.

Question 13

implied powers of trustee

Answer 13

• Power to sell trust property (how else invest)
• Power to lease trust property (how else earn income)
• Incur reasonable expenses (how else carry out trust)
• Hire agents (how else carry out trust)
• Mortgage trust property (how else borrow money)
• Repair (how else keep trust property valuable)

Question 14

Trustee duty to administer according to terms of trust

Answer 14

Once trustee accepts the position of the trustee, trustee is bound to follow the terms of the trust and will be liable for noncompliance.

Question 15

Trustee duty of loyalty

Answer 15

Trustee owes the b a duty of loyalty and utmost good faith in all matters pertaining to the trust. Trustee must not engage in self-dealing.

Question 16

Trustee duty to avoid self-dealing

Answer 16

Except for compensation, trustee (and spouse, children, business associates etc.) cannot personally benefit from the position.

Question 17

Trustee duty to keep accurate records and render accountings on demand

Answer 17

Trustee must keep accurate records of all trust transactions and render accountings to the beneficiaries or the court upon demand. Beneficiaries need this information so they can enforce the trust.

Question 18

trustee general standard of care

Answer 18

Trustee has duty to use the care and kill of a prudent person with regard to trust property.
a. insulate trust property
(1) earmark trust property
Trustee must label all property as belonging to the trust. This keeps the trust property from being confused with the trustee’s own property.
(2) segregate trust property
Trustee must keep trust property separate from trustee’s own property.

Question 19

Trustee Prudent Investor Standard

Answer 19

A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets. A trustee with special skills or expertise or who has rep’d herself as having such knowledge has a duty to use such skills or expertise. Judged by entire portfolio. Factors to be considered:

a. General economic conditions
b. Possible effect of inflation or deflation
c. Tax consequences
d. Role of each investment within the portfolio
e. Income expected
f. Appreciation expected
g. Other resources of the bs
h. Need for liquidity
i. Need for regular income
j. Importance of preserving trust property
k. Importance of appreciation
l. Special relationship or value of an asset to the purposes of the trust or b (famiy home, heirloom, etc.)

DIVERSIFICATION REQUIRED unless trustee determines special circumstances

Question 20

Trustee duty to review

Answer 20

When trustee assumes office, must review assets to bring them into compliance with the prudent investor rule.

Question 21

Trustee duty of loyalty re investments

Answer 21

The trustee must invest and manage the trust solely in the interest of the bs.
- Accordingly, social investing may be problematic, especially if the returns from a “politically correct” investment are lower than from other investments. Social investment refers to the consideration of factors other than the monetary safety of the investments and their potential to earn income and appreciate in value.

Question 22

Trustee duty of impartiality

Answer 22

The trustee must act impartially and not favor one b over another.

Question 23

Trustee delegation of duties

Answer 23

The trustee may delegate investment and management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances.

The trustee must use reasonable care in:
- Selecting the agent,
- Establishing the scope and terms of the delegation, and
- Periodically reviewing the agent’s actions.
If delegation is proper, the trustee is not liable to the bs for the decisions or actions of the agent.

Question 24

remedies of beneficiaries for breach of trustee duties

Answer 24

(1) money damages - lost profits, depreciation in value of trust property, profits earned by trustee
(2) remedies of self dealing - affirm if trust gained $$, or trace profits if trustee gained $$

(3) removal of trustee - need to go to court, which will consider t’s intent. grounds:
i. Incapacity
ii. Unfit, eg convicted of crime, chemically dependent
iii. Serious breach of duty
iv. Serious conflict of interest
v. Insolvency (more likely to embezzle if in financial trouble)
vi. Extreme hostility between trustee and bs but only if it would interfere with proper trust administration
vii. Refusal to pose any required bond
viii. Refusal to account

Question 25

trustee liability to third parties

Answer 25

unless contract says otherwise, trustee is personally liable to third parties on contracts made in course of trust administration. A trustee is entitled to indemnification if the K was within powers and she acted with prudence.

A trustee is personally liable for torts committed in the course of trust admin, including torts by trustee’s agents. Indem only if trustee was not personally at fault and it was a normal activity in which the trustee was properly engaged.

Question 26

Charitable trusts 3 main rules

Answer 26

(1) no specific bs; goal is to benefit community
(2) no special necessary as long as intent is clear
(3) must be significantly altruistic in supplying benefits

Question 27

Cy Pres Doctrine

Answer 27

Cy pres (equitable approximation) allows court to alter dispositive provisions to follow settlor’s intent. Court must find that Settlor had a general charitable intent broader than the purpose which cannot now be carried out. If settlor’s intent was specific, then cy pres not available.

Question 28

Resulting trusts - definition and three types

Answer 28

Resulting trusts are implied by law or imposed by a court. They involve reversionary interests and are based on presumed intent of settlor. They arise when no valid express declaration of trust or when no trust was even intended.

(1) purchase money resulting trusts - when one pays the consideration for a transfer of property (real or personal) but has the title taken in the name of another.
(a) If the payor of the consideration is the spouse, parent, or grandparent of the grantee, presumption is gift, not PMRT.
(b) If the payor is other than the spouse, parent, or grandparent of the grantee, a PMRT is presumed.
(c) If payor expects to be reimbursed, the relationship is a loan, not a PMRT. In a PMRT, the payor expects to receive an interest in the property, not the money back.

(2) failed express trusts
- creation ineffective because (1) trust is void or unenforceable, or (2) the b is dead or can’t be located, or (3) where cy pres is inapplicable
- resulting trust implied from excess corpus

Question 29

Constructive trust - definition; 3 grounds to impose

Answer 29

Constructive trusts are implied by law or imposed by a court. They are used to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of a fiduciary duty. The constructive trustee’s only duty is to convey the property to the person who would have owned it but for the wrongful conduct. Proof of facts necessary to establish a constructive trust must be made by clear and convincing evidence. It must be requested and requires particular property.

Grounds to impose

• fraud
• abuse of conf relationship
• promises made in contemplation of death

Question 30

pour over will

Answer 30

A testator can make gifts by will to a revocable and amendable trust that was executed before, concurrently with, or within 60 days after execution of the will and is adequately identified in the will.

Question 31

resignation of trustee

Answer 31

a trust will never fail because of a trustee that fails to serve; instead the court will appoint a new trustee

Question 32

trustee’s main duties

Answer 32

(1) A trustee owes her duties exclusively to the beneficiaries.
(2) she must administer the trust in good faith and in a prudent manner
(3) exercise degree of care skill and caution that a reasonably prudent person would in managing her own property
(4) administer the trust solely in the beneficiaries’ interest and must act impartially if there is more than one b

Question 33

trustee defenses to breaches

Answer 33

Equity will not enforce a trust if the bs expressly or impliedly consented to the breach

Beneficiaries must sue within a reasonable time or they will be barred by laches

Some jurisdictions have specific statutes of limitation for breach.