Trusts Flashcards
5 methods of creating a trust*
- Transfer of property to a trustee during the settlor’s lifetime or by disposition taking effect upon the settlor’s death*
- When there is a declaration by the owner of the property that the owner holds identifiable property as a trustee*
- When there is an exercise of a power of appointment in favor of a trustee.
- By declaring an irrevocable trust.
- a promise from one person to another to hold property for the benefit of a 3rd person.
Validity of a Trust - 5 Statutory requirements to create a valid trust** [MOST HIGHLY TESTED]
The settlor 1) has capacity to create a trust
2) has intention
3) Trustee has duties to perform
4) same person is not the sole trustee
&sole beneficiary
5. Trust has a definite beneficiary, is a
pet care trust, is a charitable trust or is a
trust for a non-charitable purpose.
**Oral trust: A trust does not need to be in writing. However, the terms of an oral trust need to be established by CLEAR AND CONVINCING EVIDENCE
Pourover Will*
A will may fund a trust by devising property to the trustee, so long as the trust is identified in the testator’s will & the trust terms are set forth in a written instrument separate from the will. A trust can predate its funding.
Testamentary trust*
created within a will & does not take effect until the death of the settlor. There must be a valid will & valid trust
Pet care trust
valid, but court has discretion to reduce the amount if it determines that the amount substantially exceeds the amount required for the intended use. If reduced, amount passes as unexpended trust property
Validity if some terms are unlawful
A trust may be created only to the extent that its purposes are lawful, not contrary to public policy & possible to achieve. The terms of the trust that violate this can be thrown out, but the rest of the trust is valid.
Challenging Validity of Trust
Doctrine of election:
A beneficiary who accepts the benefits of a trust is thereafter barred from challenging the validity of the trust UNLESS the challenge is based on fraud, duress, or undue influence
No contest/ terror clauses:
→ are valid & enforceable, They are strictly construed & expressly forbid any challenge to a trust unless there is PROBABLE CAUSE for instituting the proceeding.
Spendthrift provision*
Spendthrift provisions are valid & enforceable. They restrain either the voluntary or involuntary transfer of a trust beneficiary’s interest. It prevents beneficiary’s creditors from satisfying the beneficiary’s debt w/ a beneficiary’s trust interest. Creditors have to wait until the money is transferred to the beneficiary first.
Exceptions to this rule where a creditor can reach the beneficiary’s interest is when the creditor is
1) beneficiary’s child or former spouse w/judgment or court order against beneficiary for spousal/child support
2) Claim by Michigan/US
3) A judgement creditor who provides services re beneficiary’s interest in trust (i.e. lawyer)
4) creditor who furnishes necessities
5) Settler’s creditors during settler’s lifetime if revocable trust.
A creditor can’t claim the entire amount at once. Can only reach what ben. can reach.
Discretionary Trust Provision
DTP exists when the trustee is given the discretion to determine whether or in what amount to distribute trust assets to beneficiaries. A trust beneficiary’s creditor can’t reach any of the trust income until it is given to the trust beneficiary.
Exception: if settlor creates dtp for his benefit, his creditors can reach what he would get
Settlor’s creditors
Unless the terms of the trust explicitly state the trust is irrevocable, the trust is deemed revocable, if it is created on or after April, 2020.
During the lifetime of the settlor, the property of the revocable trust is subject to the claims of the settlor’s creditors, even if there is a spendthrift provision.
If the trust is irrevocable, the settlor’s creditors can’t reach the trust assets. The creditor can only reach what the settlor reaches.
Modifying/Terminating the trust on request of beneficiary
The court may modify/terminate trust IF:
- Consent of trustee & qualified beneficiaries OR
- The interest of any qualified beneficiary (who doesn’t consent) will be adequately protected AND the modification/term is CONSISTENT w/material purpose of trust OR
- Court can reform terms of trust (even if it is unambiguous) to conform to the settler’s intention, if both settlor’s intent & terms of trust were affected by a mistake of fact or law (must be shown by clear & convincing evidence)
