Trusts Flashcards
Trusts Generally
A trust is a fiduciary relationship with respect to property in which one person (the trustee) holds the legal title to the trust property (the res) subject to enforceable equitable rights in another (the beneficiary). It is a device whereby one or more persons manage the property for the benefit of others. The trust must have a valid trust purpose. The trustee ordinarily has legal title to the property, and the beneficiaries have equitable title. The testator or grantor who creates an express trust is the settlor, who must have had the intent to create the trust. Consideration is not required for the creation of a trust; in fact, trusts are usually created gratuitously.
REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Settlor with Capacity and Present Intent to Create a Trust
- Must intend trust to take effect immediately
- Must express intent by words or conduct while settlor owns the property
- Precatory expressions (hope, wish, suggestion) result in inference that no trust was
intended, but inference may be overcome by other evidence
REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Trustee
- Failure to name trustee (or failure of trustee to accept or qualify) does not defeat a testamentary trust; court will appoint trustee
- Inter vivos trust will fail without trustee because there can be no valid delivery and transfer of trust property (see below)
- Trustee must have duties
- Settlor may declare himself trustee
REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Trust Property (Res)
- Property may be of any type, including future interests
- Must be property that settlor has the power to convey
- Must be described with certainty
REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Beneficiaries
- Must be capable of taking and holding title to property
- Must be definite (ascertainable within the period when all interests must vest
under the Rule Against Perpetuities); e.g., “friends” is insufficient - Notice not required but beneficiary must accept; acceptance is presumed
REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Valid Trust Purpose
- Trust or provision must not be:
a. Illegal;
b. Impossible to achieve;
c. Contrary to public policy (e.g., induce crimes, torts, divorce, child neglect,
etc. );
d. Intended to defraud settlor’s creditors; or e. Based on illegal consideration - Effect of invalid condition subsequent—condition stricken, but trust is valid
- Effect of invalid condition precedent—condition stricken, but court decides
whether interest is valid or fails
REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Formalities
- Inter vivos trust—created during settlor’s life
a. Declaration of trust by property owner that he holds in trust, or
b. Transfer of property by the settlor to the trustee
c. No writing required unless trust of land - Testamentary trust—created by settlor’s will
a. Essential terms must be ascertained from will, incorporated document, facts
of independent significance, or exercise of power of appointment
b. Secret trust (absolute gift but trust intended)—constructive trust imposed
c. Semi-secret trust (gift in trust without beneficiary)—resulting trust for testator’s
heirs
CHARITABLE AND HONORARY TRUSTS - Charitable Trusts
- Purpose must benefit the public (e.g., poverty relief, education, health)
- Must have indefinite beneficiaries
- May be perpetual—Rule Against Perpetuities (“RAP”) does not apply
a. RAP does not apply to limitations that shift beneficial interest from one charity to another (charity-to-charity exception)
b. RAP does apply to a limitation shifting the interest from private use to charitable or from a charitable use to a private use - Enforceable by settlor, a qualified beneficiary, or attorney general
- Cy pres—if settlor’s intended purpose is impracticable, unlawful, or wasteful, court
substitutes new charitable purpose
a. Must find settlor had general charitable intent, not just interested in the
named charity
b. Court will select another purpose as near as possible
c. Uniform Trust Code (“UTC”)—settlor’s general charitable intent is presumed
and application of cy pres is mandatory
CHARITABLE AND HONORARY TRUSTS - Honorary Trusts
- Not for charitable purpose, but no private beneficiaries who can enforce trust (e.g., trusts for pets, graves)
- Enforceable by someone named in the trust or appointed by court a. Under UTC, enforceable for 21 years or for life of the animal
- If property is more than is needed, excess is distributed to settlor or his succes- sors unless trust provides otherwise
TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Beneficiary’s Equitable Interest Is Alienable
Beneficiary may voluntarily transfer interest in trust, and his creditors may levy on his interest
TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Spendthrift Trusts
- Spendthrift trust provides that beneficiary may not voluntarily or involuntarily transfer his interest (i.e., cannot sell or give away interest, and creditors cannot reach it)
- Not valid if settlor is also a beneficiary
- Unenforceable against claim brought by government or by child, spouse, or former
spouse with support order
TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Discretionary Trusts—Trustee Has Discretion to Pay or Withhold Income or
Principal
- Before trustee makes discretionary payment, interest cannot be reached by credi- tors
- After trustee elects to make payments, must pay creditors directly if he has notice—unless there is a spendthrift restriction
TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Support Trust Cannot Be Assigned or Reached Even Without Spendthrift Clause
A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support. This is a discretionary trust with a support standard.
MODIFICATION AND TERMINATION OF TRUST - By Settlor
- UTC: trusts presumed revocable and amendable unless terms expressly state otherwise
a. Traditional rule: must reserve right to revoke or modify - Power to revoke includes power to modify
MODIFICATION AND TERMINATION OF TRUST - By Settlor
- UTC: trusts presumed revocable and amendable unless terms expressly state otherwise
a. Traditional rule: must reserve right to revoke or modify - Power to revoke includes power to modify