Trusts Flashcards
1
Q
Define a trust
A
is a fiduciary relationship where one party (trustee) holds legal title to property for the benefit of another who holds equitable title (benficiary). (split of legal title to benefit the one with equitable title)
2
Q
What are express trusts
What are 2 types of express trusts
A
Trusts that are created intentionally
Private and Charitable express trusts
3
Q
Distinguish private trusts and Charitable trusts
A
Private trusts are created to benefit a private beneficiary while Charitable trusts are created for a charitable purpose or for charities, and have some differences.
4
Q
What are implied Trusts
What are 2 types of implied trusts?
A
Trusts created by operation of law
Constructive and resulting
5
Q
What are constructive trusts?
A
constructive trust orders the person who would otherwise be unjustly enriched to transfer the property to the intended party.
imposed to deprive a wrongdoer from retaining improperly obtained property (Trusts imposed to fix wrong-doing)
6
Q
What are resulting trusts?
A
is an equitable reversion that arises by operation of law whenever a person has created an express intentional trust, but the express trust fails or does not completely dispose of the trust property.
trusts that are Imposed where circumstances require, irrespective of any wrongdoing. Most often arises when a settlor transfers full legal title but fails to transfer full equitable title.
7
Q
Settlor’s reversionary interest is called
A
a resulting trust
8
Q
Implied trusts are _______ remedies
A
equitable
9
Q
Every trust has three parties:
Note: More than one party can fit each role; and
Each party can fit more than one role.
A
Settlor
Trustee
Beneficiary
10
Q
The settlor is the person who?
A
sets up the trust
11
Q
The trustee is the person who has?
A
the person who has legal title to the trust who holds it for the benefit of the beneficiary
12
Q
The beneficiary is the person(s) who
A
The person who has the equitable title and who uses and enjoys the property of the trust
13
Q
Income beneficiary
remainder beneficiary
A
(1) Income beneficiary: present interest in the trust fund
(2) Remainder beneficiary: remainder interest in the trust fund
14
Q
The settlor creates the trust by
A
transferring assets to a trustee with manifest intent to create a trust relationship.
15
Q
A settlor can set up two types of trusts:
A
(1) Inter vivos trust, during his lifetime as a gift
(2) Testamentary trust aka trust in a will
16
Q
When a settlor makes himself trustee, the trust is created by declaration of trust.
(1) In some states, titled assets (i.e., assets whose ownership is reflected in a written document such as a title, deed, or stock certificate) must be retitled in the name of the settlor “as trustee” in order for the trust to be valid.
(2) The declaration can be oral unless:
A
The trust assets include real property, in which case the Statute of Frauds requires that it be written; OR
(b) or the trust is testamentary, in which case the statute of wills requires that it be written.
17
Q
the legal owner of trust property, who holds it for the benefit of the beneficiaries. Legal title to, and responsibility for, the management of the trust property resides in the trustee.
A
Trustee
18
Q
T or F A trust must have a trustee, but failure to designate or appoint a qualified trustee will not necessarily cause the trust to fail. Instead, the court will appoint one.
A
True
19
Q
Where two or more persons have been named as co-trustees, they are ordinarily considered:
A
joint tenants with regard to the legal title over the trust fund.
note: The will may override this and name a successor trustee to step in and serve instead of or along with a prior trustee.
20
Q
Co-trustees who are unable to reach a unanimous decision: may act by
A
majority decision.
21
Q
If a co-trustee has acted imprudently how may the other co-trustees protect themselves from liability down the road?
A
A co-trustee may formally dissent and:
protect himself from liability down the road if the other trustees have acted imprudently
22
Q
What happens if a trustee resigns or is removed for cause?
A
The trust will not terminate and another trustee will be appointed.
23
Q
When the trust terminates: The trustee transfers his interest to:
A
the beneficiaries and ceases to have legal authority to exert control over the property beyond what is necessary to wind up the affairs of the trust.
24
Q
T or F There must always be a beneficiary in existence who can enforce the trust against the trustee
A
True
25
EXAMPLE: Settlor directs trustee to pay the income to A and B for the next 10 years, then pay the income to John, if living. If John is not then alive, or if he is, then upon his death, distribute the property to X, Y and Z. A, B, John, X, Y, and Z are all beneficiaries of the trust. More specifically:
A and B have an equitable term of years, "A & B for the next 10 years"
John has an equitable remainder in a life estate, "income to John if living"
X, Y, and Z have an equitable remainder in fee.
"upon John's death, distribute the property to X,Y, Z"
26
A settlor can be the trustee so long as there is a
beneficiary in existence who can enforce the trust against the trustee.
27
T or F The settlor may also be the beneficiary of the trust.
True
EXAMPLE: A gives his property to Mike as trustee and Mike shall hold the property and pay the income to A for the rest of his life. A is the settlor and the beneficiary, and this works.
EXAMPLE: A transfers in trust to trustees B and C to hold for the benefit of C for the rest of his life. C can’t sue himself, but can enforce the trust against B, and this works.
28
If a sole trustee is the sole beneficiary, the trust will collapse because
the interests will merge. (must have separation of equitable and legal title)
29
Once a trust has been created, unless the settlor is also a trustee or a beneficiary: the settlor no longer
no longer owns the assets because they have been transferred into the trust.
30
What are the rights and duties of the trustee
The trustee has legal title to the assets and is obligated to adhere to the terms of the trust with respect to the preservation, enhancement, and distribution of the trust property to the beneficiaries.
(1) A trustee is a fiduciary of the trust.
(2) A trustee must be given some active duties to direct him with respect to the trust property in order for the trust to be valid. Duties vary by trust and don't have to be spelled out
(a) The court just must be able to reasonably interpret what is to be done
31
If the trustee does not have active duties: The trust is considered "passive" or "dry" and title to the trust assets will
pass directly to the beneficiaries.
32
Trustee Duties commonly assigned by statute or legally implied include the obligations to:
1) preserve property
2) invest prudently
3) administer the trust according to the settlor's directions;
4) to exercise fairness with respect to all beneficiaries, regardless of the nature of their interests.
33
Rights of Beneficiaries
The beneficiaries are the equitable, beneficial owners of the trust assets,
beneficiaries cannot ordinarily affect or alter the dispositive or administrative provisions of the trust.
beneficiaries must wait for the property to be distributed to them before being able to exercise full control over the property, free of the trust.
34
What are the required elements of a valid trust?
A valid trust requires:
a. A settlor, with the requisite capacity, express a present intent to create a trust (ie. to create the trust now, not some time in the future)
b. Delivery of specific trust property
c. to An ascertainable beneficiary
d. Active duties imposed on the trustee
e. A proper trust purpose; and
f. A trustee
note: a. No special words (trust) or actions are necessary to manifest the settlor's intent to create a trust.
35
Mandatory language
Precatory language
"shall" "must" creates a trust
"with the hope" will not be sufficient to create a trust unless other circumstances reflect that a duty was intended.
36
The intent to create the trust must be a ________ intent to create the trust.
present
37
EXAMPLE: “I will put $5000 in trust for Terry next week” Does this language create a trust why or why not?
No a trust was not created as, It is a mere promise not supported by consideration. There must be a present intent not a future intent to create a trust
38
If the trust states that it will name the beneficiaries later, it is a _________ trust.
common situations
resulting
(1) The trustee has legal title but he has not been told what to do with the equitable interest.
(2) The settlor still holds the equitable title; trustee passes legal title back to the settlor or trustor
39
T or F property must be transferred to the trustee and it must be an intent to do it right now, not in the future.
True
40
Almost everything can be subject to a trust.
| (1) EXCEPTIONS
(a) mere expectation
(b) unearned profits
EXAMPLE: A will give all of the profits he will earn from his sales of IBM and ATT stock in trust. A still owns the stock, so there are no profits. When the stock is sold, those profits are not in trust.
(c) debt owed by the trustee
41
There must be some certainty over what is the trust property.
Are the following examples valid trusts?
1. EXAMPLE: If A declares himself trustee over some of the stocks he owns.
2. EXAMPLE: If A declares himself trustee over all the stocks he owns in his E-trade account.
3. EXAMPLE: A could declare himself the trustee over 40% of Blackacre. If he owns the whole thing, he is trustee over 40% and will be tenant in common with himself.
example 1. not a valid trust
example 2: valid he does not have to identify the stocks because he has identified where they are.
42
Every trust must have ascertainable beneficiaries.
(1) beneficiaries must be determinable when the trust is to be distributed.
Give examples
EXAMPLE: S gives income to A for life, remainder to A’s children. When A dies, we will be able to ascertain who his children are.
EXAMPLE: Income to A for life, remainder to those students who graduate from XYZ Law School in the year 2010. We will know by the time A dies, who graduated in 2010.
43
"To my friends" is language that is considered too ____ to identify beneficiaries
" To my family" vague but?
vague
“To my family” is also vague, but the courts will interpret it to mean heirs.
NOTE; If the settlor provides some objective standard by which to identify beneficiaries, then those beneficiaries are ascertainable.
EXAMPLE: Hold the property in trust for “the person who provided the best health care for me before my death.”
44
The court will defer to the trustee’s discretion unless:
| It is
arbitrary, capricious, or used in bad faith.
NOTE: A trust may give the trustee the right to invade the trust corpus for the benefit of the beneficiary, subject to his discretion. The trust may give partial or total discretion
45
A trustee must have active duties and know what to do with the trust. If he does not, it will be
a dry or passive trust, and he will transfer his title to the person who holds equitable title, ending the trust.
46
A trust can be created for any purpose except those that are:
illegal, fraudulent and against public policy
47
A purpose that is against public policy may include:
(a) provisions designed to encourage divorce
(b) provisions designed to prevent marriage
NOTE: You must determine the intent of the settlor.
48
When there is a trust purpose that violates public policy: Delete the offending language and
(2) Try to determine from the four corners of the instrument, what the settlor would have wanted to have happened had he known the provision violated public policy.
49
Creation of an _______ _______ trust requires present intent.
a. The trust property has to be placed into the trust for it to exist.
Inter vivos
50
A __________ trust is created by the testator's valid will.
testamentary trust
51
EXAMPLE: A will devises Blackacre to Tom as trustee. There are no other provisions in the will relating to that trust nor is there any document that can be incorporated by reference into the will that relates to the trust. What are the problems? and what will happen?
The trust must fail. Blackacre will pass through the residue. If the residuary estate had been left to Tom as trustee, it would result in intestacy.
52
what do pour over” provisions in a will do?
direct the transfer of the decedent’s property into a trust established either by the testator during his lifetime or by another person.
53
What is a totten trust and what are the beneficiary's rights ?
An arrangement with a bank that allows the depositor to open a bank account in his own name, as trustee for other parties.
(1) The only right the beneficiary has is:
To take whatever is left in the account when the depositor dies if they are still alive.
54
T or F All private, non-charitable trusts must comply with the Rule Against Perpetuities.
What is the wait and see doctrine?
True
A modification to the common law RAP, The court's determination of whether the rule has been violated depends upon what actually happened rather than what might have happened.
Note: RAP does not apply to charitable trusts
55
A trustee’s powers arise from:
a. the trust instrument (either expressly or by implication) and
b. granted by statute or implied in law as necessary or appropriate to accomplish the trust's purposes.
56
Unless expressly precluded by the trust instrument, a trustee has the power, inter alia, to:
(a) settle or abandon trust claims
(b) borrow money
(c) sell or lease trust assets
(d) incur reasonable expenses, including the purchase of insurance, that are necessary to maintain trust property.
57
The trustee has no implied power to invade trust principal for a beneficiary who has merely the right to receive income from the trust unless
specifically authorized by the trust.
58
A trustee’s actions pertaining to matters within his discretion are not subject to attack, unless he has abused his discretion in undertaking the conduct in question. A trustee’s discretion is generally subject to the standard of:
(HEMS)
The beneficiary's Health, Education, Maintenance, and Support (HEMS)
59
What duties does a trustee owe to the beneficiaries in carrying out her obligations under the trust?
The duties of utmost loyalty and good faith
60
A trustee is prohibited from:
a. self-dealing, in any manner (even if done in good faith) with trust assets
b. obtaining any personal benefit other than the agreed upon or statutory fees as a consequence of his position.
c. interacting with his beneficiaries and cannot have business transactions with them. This will only be allowed if: All the facts are disclosed to the beneficiary; and The transaction is fair
d. obtaining any personal benefit from a third party with respect to dealings involving the trust estate; and
e. permitting himself to be in an apparent conflict of interest with respect to the trust and third parties.
61
EXAMPLE: The trust needs cash to pay expenses and doesn’t want to sell any assets, so the trustee decides he will lend $100,000 to the trust and charge only 1% interest. All of the banks will only lend at 3% interest. Is this a breach? why?
Yes because This is a breach of fiduciary duty since he is getting a 1% return.
NOTE: Any profits earned from self-dealing with the trust belong to the trust.
62
T or F Trusts may contain exculpatory clauses that may allow the trustee to compete without running afoul of their fiduciary duties. Still cannot breach the fair-dealing standard.
True
63
A trustee has an affirmative duty to preserve and enhance trust property. What is the Prudent Business Person Rule:
trustee as a business person must use the degree of skill, care, and prudence that would be reasonably used by a business person in his own personal affairs.
64
Where a trustee possesses superior business expertise or is a professional fiduciary:
A higher standard is applied. He will be held to
the skill, care, and prudence of an individual or entity possessing those capabilities.
65
A trustee should diversify the trust’s portfolio.
(1) Acceptable items include?
(2) Investments that will be questioned include
1. government or highly rated bonds, blue-chip stocks, and quality mutual funds.
2. penny stocks, speculative stocks, commodities, and derivatives.
66
generally a trustee cannot delegate his duties. However, what is an exception?
What duties are owed with respect to selecting and advisor?
A trustee may (and if he lacks the necessary background to make a reasonably competent decision, must) delegate investment functions.
The trustee must be diligent in selecting his advisor. A trustee must inform the beneficiaries of the delegation.
67
Where a trustee breaches his duty to the beneficiaries, he will always be liable for the results of his breach.
a. If the trustee uses trust assets to buy property and it increases in value, he must
return both the trust property and the appreciation in value.
68
When a trustee breaches his duty of care in investing:
| The trustee must
personally recompense the trust for its losses. He cannot offset money lost by money earned. Note: also responsible for lost interest
69
A trustee ordinarily has no liability for breaches of duty by the trustee whom he succeeds, except where the successor-trustee:
a. knew or should have known of the prior trustee's breach; and
b. and failed to act appropriately to minimize the on-going loss or pursue the appropriate remedies on behalf of the beneficiaries.
70
what is an exculpatory clause?
An exculpatory clause is a provision in the trust instrument that relieves the trustee of liability for potentially wrongful acts.
71
Where a beneficiary has full knowledge of the material facts and expressly approves of the complained-of action by the trustee: He may be deemed to have
waived the trustee's breach or be estopped from asserting an action.
72
In the absence of a restrictive provision to the contrary: A trust beneficiary may freely assign (gratuitously or for consideration) his right to
receive income or principal from a trust.
73
Support Interests
Discretionary Interests
interests Based on the beneficiary's needs
Trustee in his discretion pays as much income as he believes desirable or appropriate. A creditor of the beneficiary could attack the trust and get a lien, but the trustee would never have to pay out.
74
what is a spendthrift provision?
A spendthrift provision is one that says the beneficiary cannot voluntarily transfer his property and a creditor cannot attack it. Makes it inalienable.
75
spendthrift clauses are not absolute and cannot be used to defeat a claim of:
(1) alimony or child support
(2) someone who is furnishing necessities to the beneficiary
(3) Government claims against the beneficiary
76
Settlor’s Interests
1. A settlor has no interest in the trust unless he has reserved it or has made himself a beneficiary of the trust.
a. A settlor cannot make his interest subject to a spendthrift provision.
2. Settlors often reserve the right to revoke the trust.
a. A creditor cannot force him to exercise this right to revoke, but a bankruptcy court can.
77
A settlor may terminate an irrevocable trust: only with
only with consent of all the beneficiaries who must be living at the time.
78
If a sole trustee becomes the only beneficiary: what happens to the trust?
The trust ceases to exist and he (personally) becomes the owner of the trust assets.
79
A trust is terminated by operation of law where:
a. the trust res (property) has been consumed, destroyed, or lost; or
b. the trust's purposes have been fully accomplished
c. accomplishment of the material purposes of the trust have become illegal, impossible, or impractical.
80
A trust will be irrevocable unless the terms of a trust expressly provide that
the settlor may revoke or amend the trust.
Note: The Uniform Trust Code reverses this presumption. Under the UTC, unless the terms of the trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust after the effective date of the Code.
81
Claflin Trusts
After the settlor’s death, the trust cannot be terminated before the time specified by the settlor, even if all of the beneficiaries agree, if the material purpose of the trust has not yet been accomplished.
82
A material purpose of the trust may include:
(1) Staggered distribution of the trust property
(2) Discretionary trusts (where trustees have discretion)
(3) Spendthrift clauses ("no voluntary alienation of the fund")
83
Administrative Deviations
Where exact compliance with the administrative provisions of the trust would, as a result of unforeseen circumstances, frustrate or substantially impair a material purpose sought to be accomplished by the trust, the court, on petition of the trustee, may allow deviance from those administrative provisions as necessary to accomplish the settlor’s purposes.
The administrative deviance doctrine may not, however, be used to change the beneficial interests in the trust
84
Natural Expiration
Where the trust was to be in operation for a specified number of years or until the occurrence of a prescribed event, and that period of time has elapsed or the incident has occurred, the trust ordinarily terminates in accordance with the instrument’s terms.
85
Resulting trusts arise when:
An express trust makes an incomplete disposition of assets or fails after property has been conveyed to the trustee.
86
Any time a resulting or constructive trust arises, it means the trust will
end because there is a trustee but no named beneficiaries and no duties imposed on the trustee. Then the trustee will transfer legal title to those with equitable rights, the rights will merge, and they will own the property free of trust. The only person left holding the equitable interest is the settlor, and he does so in resulting trust.
87
Purchase Money Resulting Trusts
If a party pays the original purchase price of property, but directs that title to the asset be placed in another’s name, then there is a rebuttable presumption that the grantee holds the property in a resulting trust for the payor. ( eg. parent purchases a car for their son)
88
typically a question of whether a gift was intended.
(1) When title goes to a close relative:
a gift is _______.
(2) When title goes to a stranger: a gift is
1. Presumed
| 2. not presumed and it is a purchase money resulting trust.
89
A constructive trust is an equitable remedy, whereby a trust is erected on the holder of specific property to
redress wrongdoing or prevent unjust enrichment.
90
The purpose of a constructive trust is to oblige the holder of property to
divest himself of it and transfer it to the person entitled to that asset.
91
Distinguishing characteristics of Charitable Trusts
1. A charitable trust cannot have ascertainable beneficiaries, unless charitable organizations
2. is not subject to the Rule Against Perpetuities.
3. The trust may not end when the trust purpose has been accomplished or has become impracticable or impossible:
A court could allow the trust to continue with a similar charitable purpose under the cy pres doctrine.
4. beneficiaries must be indefinite
92
A charitable trust must have a charitable purpose. The major categories of charitable purposes are:
NOTE: A charitable purpose can be broad as long as the trustee is constrained to use the trust exclusively for that objective.
(1) the relief of poverty;
(2) the advancement of education;
(3) the advancement of religion;
(4) the promotion of health;
(5) the performance of governmental and municipal purposes; and
(6) other purposes beneficial to the community.
93
What are examples of purposes that will not be sufficient for a charitable trust?
(1) Merely helping others will not qualify as a charitable trust.
(2) Transferring the property to named family members simply to “help ease their financial burden” will not qualify as a charitable trust.
94
T or F The fact that there are a limited number of persons actually receiving funds does not cause a charitable trust to fail if the recipients are to be chosen from a sufficiently large and indefinite group.
True
95
Doctrine of Cy Pres
If the settlor’s exact charitable purpose cannot be carried out, the court may direct the application of the trust property to another charitable purpose that approximates the settlor’s intention.
96
Cy pres may be applied where: the settlor's specific charitable purpose with respect to a valid charitable trust becomes:
impossible, impracticable, or illegal to carry out; and
the settlor had, in addition to this specific charitable purpose, a general charitable intent (i.e. the settlor's specific charitable purpose was not intended to be exclusive.)
97
If the settlor has provided for a “gift over” in the event that the charitable purpose cannot be accomplished, this is ordinarily viewed as an indication that the settlor lacked
a general charitable intent.
98
A non-charitable gift-over will likely fail as violating the Rule Against Perpetuities. unless:
it comes back to the settlor as a resulting trust, it is vested at its inception and will not violate the Rule Against Perpetuities.
