Trusts Flashcards
was a trust created
what it is
5 things needed
express trust:
conveyed legal title to the person as trustee of the trust for the benefit of identifiable beneficiaries with the intent to create a trust
–irrevocably transferring assets to trustee pursuant to terms in trust agreement
valid trust must have
- writing to satisfy sod
- settlor, trustee, beneficiary
- trust property delivered to trustee
- appoints trustee
- a lawful purpose
constructive trust
equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct
may be imposed where fiduciary would be unjustly enriched by his wrongful conduct
usually in a fiduciary relationship
no limit to recovering money damages
resulting trust
fiduciary relationship were agent gets/retains property in violation of fiduciary duty
one’s funds are used to get title to property but the title is taken in another’s name
(if there is no presumption of gift)
trusting the fiduciaries
fiduciary: applies to any position of peculiar confidence towards another, giving rise to duty to act primarily for benefit of other person/entity in matters connected w/their relationship
ex: law firm duty not to personally benefit/hurt firm
ex: real estate agent: act for benefit of principal in matters w/agency
breach of these duties should result in constructive trust
exculpatory Clauses
in texas, exculpatory clauses relieving trustee from liability for ordinary negligence is valid
can’t relieve trustee from liability for fraud or for actions taken in bad faith or reckless indifference to the beneficiary’s rights
doesn’t authorize self dealing (that must be in a different clause)
management trust
permits an estate to be administered under more flexible rules
corporate fiduciary is appointed, and it has the power to distribute income/principal for health, education, maintenance, support,
anything not distributed is added to principal
ends when court says that the trust is no longer in the T’s best interest or when he dies
files annual accounting
is there a problem b/c no trustee has been named?
no, fundamental principal of trust law is that no trust will ever fail b/c of lack of trustee
if the named trustee doesn’t want to or no one is named then the court will appoint a suitable person or trust as successor to carry out settlors intent
when the settlor really wants/needs to revoke an irrevocable trust
like when he is incapacitated and his guardian wants to revoke it but it’s irrevocable
–since the settlor can’t revoke it neither can his guardian
judicial termination of trust under some circumstances:
-purpose fulfilled
-illegal or impossible
circumstance not known to/anticipated to the settlor that make it so termination actually furthers the purpose
can only terminate w/o a judicial proceeding where the uneconomical trust (50K or less) is involved
does trust violate RAP
rap rule
irrevocable trust pd begins to run on the date it was made
revocable trust pd begins to run when it is made irrevocable on settlors death
invalid parts are stricken
how it might be preserved
cy pres style stat where the court may reform the interest that violates the RAP so as to carry out the grantors intent as far as possible w/in the limits of the rule
if someone is pretending to be a trustee when they aren’t
successor trustee can be appointed only by the trust or the court
but if you aren’t the successive trustee and you still do stuff with the trust you will be liable
(ex: sell stock, liable for the difference between the current value of what you bought and what you sold)
borrowing money when you aren’t the trustee could be embezzlement
if someone not the trustee uses the trust stock to pledge a loan the bank doesn’t have a valid SI b/c if it had properly investigated it would have realized what was going on
Texas Uniform Prudent Investors Act
trustee can sell stock in the trust or buy stock
look at the circumstances at the time of the investment not in hindsight to see if prudent
based on modern portfolio theory of investing that looks to the total return, including the potential for appreciation, not just ordinary income
to determine if what the trustee did was bad, ask if a prudent investor would have done it
trustee had duty to invest the trust estate so as to make it reasonably productive
–doing nothing would be negligence/gross negligence
duty to protect and preserve assets, including duty to insure if a reasonably prudent person would also insure
trustee self dealing
borrowing money from the trust is always self dealing b/c breach of trust
using shares of trust to secure personal loan is self dealing
indirect self dealing also counts: loans to relatives, etc.
settlor can waive self dealing but it must be done expressly, not just with the exculpatory clause
beneficiaries have action against the trustee to get income and any loss that may have resulted, and to remove the trustee
-damages + interest, or damages + profit
what is a third party is claiming BFP status b/c of the bad things the trustee did?
if trustee is self dealing or someone is pretending to be the trustee and uses the trust assets to secure a loan, or sell trust property, can a third party claim BFP status?
-only if the BFP didn’t know or should know and that is hard b/c the prudent lender would check
how do you know someone accepts being trustee
verbally accept it
person’s conduct is evidence of if he is willing to have accepted the position
-even if he didn’t want to, it’s considered accepted if he exercises trust powers and performs trust duties
principal or income?
uniform texas principal and income act
Income
- casualty insurance premiums charged against income
- intrest and net rental income
principal
- insurance proceeds
- proceeds from sale of trust asset
ex: selling cows b/c getting out of cow business is principal (sale of asset) but selling cows b/c thats occasionally what you do is income
if trustee is given distribution discretion
pure discretion: they can decide if/when to distribute
discretion based on something like support, comfort, health: means that it would be an abuse of discretion/trustee duty to not make a distribution if it could be shown that it was needed
-just as beneficiary could compel the money so could the creditor who provided services
if the settlor of a trust is later trying to use the trust property to secure a loan
if the trust was properly recorded
–other party would be on record notice so they won’t get valid SI
if not properly recorded: valid SI if no actual notice
when trustee is trying to profit from the trust
can’t profit from being trustee, except for reasonable compensation
like 1% of all trust corpus
standing in a trust action
generally trust beneficiaries do not have standing to bring action against third party who has caused injury to the trust property b/c only the trustee has legal title so only he can bring it
but when the trustee is unable/no party is trustee then beneficiary can
charitable trust: only attorney gen, charged w/stat duty to represent the public and all potential beneficiaries of charitable trust has standing
when trustee is being landlord of property
duties of trustee as landlord are no different from duties of regular landlord
maintain property, repair and habitable
not liable for hidden defects
landlord has no duty to insure against loss of lessee’s personal property
trust beneficiary has equitable title to land but no legal title so they can’t be sued for landlord issues
if trustee has to do legal stuff to protect estate
trustee is entitled to reimbursement from estate if he is held liable in tort from common incident of business activity in which the trustee would not normally be held liable
trustee is entitled to reimbursement from trust for any expenses incurred in defending action brought by third party b/c trustee’s duty is to protect the trust assets
spendthrift clause
prohibits beneficiary from voluntarily or involuntarily transferring his interest in the trust
can’t sell or give away his right to future income or principal and his creditors are unable to collect or attach such rights
when spendthrift is/isn’t valid
given full effect in texas, except for 3 times when they aren’t:
necessaries
doesn’t prevail against IRS for unpaid tax lien
can be reached to satisfy child support
how does spendthrift work
normally a beneficiary can assign any interest she may get in the trust income or principal
but if there is a valid spendthrift clause she can’t assign the income or the corpus
but when trust income is actually distributed it isn’t subject to the spendthrift clause anymore
–but they would have to ask for it every time it’s distributed b/c there is no turnover statute
irrevocable trust with spendthrift and the settlor kept an interest
and creditors want his share
spendthrift provision is invalid w/respect to the interest the settlor keep and the creditors can reach that interest
owner can’t place his assets in a trust, which he has an interest, interest a spendthrift and then claim that his retained interest can’t be reached by his creditors
but the creditors can’t take the whole estate if there is someone else with an interest, like the remaindermen (just take whatever the settlors interest is)
if the trust is revocable, but has a valid spendthrift
what can creditors get?
if the trust is revocable by the settlor his creditors can reach the entire trust even if the settlor didn’t reserve anything for himself
if the trust is irrevocable, valid spendthrift, the settlor has no power or interest
what can creditors get?
nothing b/c the spendthrift provision would keep them from it all
Merger doctrine
if the sole trustee is also the sole beneficiary of the trust the legal and equitable titles merge and the trust doesn’t arise
but this doesn’t happen if there are contingent remaindermen
is a trust revocable or irrevocable
in texas all trusts are revocable by the settlor unless they expressly say otherwise
remember: if revocable, the maker is the owner of the trust for creditor’s purposes and the spendthrift clause would be ineffective
but revocable trust assets can’t be reached by creditors unless settlor’s probate estate is exhausted
when the charitable trust is trying to pick a new charity
trustee may name a new charitable trust on giving notice to the attorney gen, only when replacement charitable beneficiary has same/similar charitable purpose as the failed one
judicial cy pres: court may reform the trust to divert the funds to a charitable purpose as near as possible
where charitable trustees are starting judicial proceedings/settling out of court
certified copy of petition initiating the proceeding must be sent to attorney gen by registered or cert mail, enabling him to decide if to participate in the proceeding
if notice is not given, any judgment or settlement in the proceeding is voidable by the attorney gen
