trusts Flashcards
Elements of a trust
settlor, property held by one or more trustees, intent to create a trust, and a legitimate trust purpose. for private trust, need definite and ascertainable beneficiaries
settlor capacity
must have mental capacity and be over 18. if someone gives durable power of attorney that expressly authorizes agent to create trust with property, agent can do so even if individual has become mentally incompetent.
trust property
modern trust law allows for unfunded trusts to which the settlor directs future transfer of property rights, like making the trust the POD beneficiary of an insurance policy or investment account, or by making the trust a beneficiary of the settlor’s own last will and testament.
trust can exist from time of creation even without property in the trust, trustee’s only duty may be to take necessary steps to complete transfer of property into trust when pour-over provisions become effective
trustee
can be individual, group of individuals, or a corporation. must have legal capacity to exercise a fiduciary responsibility towards the property, meaning trustee must be able to take and hold legal title, be 18+, and have capacity to contract and execute deeds.
intent to create trust will not fail for lack of trustee, unless settlor says only one person can be trustee and that person is not available
acceptance of trustee position
each of these are treated as acceptance of trustee role:
signing written acceptance
conduct - accepting delivery of trust property knowing the purpose is conveying into trust, performing duties of trustee, otherwise manifesting acceptance of the responsibility, or
method stated in the trust
trustee bond
required of an individual serving as trustee only if a court finds it necessary to protect beneficiaries’ interests. never required of a corporate fiduciary
self-declaration of trust
settlor can be trustee of inter vivos trust. settlor can also be a beneficiary of the trust. however, settlor cannot be trustee and the only beneficiary.
successor trustee
common for settlor to name someone to take over as trustee if person initially named dies, becomes incapacitated, refuses, or requests removal. if settlor didn’t name back up, beneficiaries can name a substitute if they all agree or court can appoint someone.
intent to create a trust
to determine whether trust was created, look to whether the settlor attached enforceable duties to the transfer of the property. saying “take this and i hope you will ensure David has a good time” is not a trust because that is not an enforceable duty
oral trusts
valid if the trust’s terms are proven by clear and convincing evidence. true for all types of trust, even real property, though a writing is necessary to transfer title to real property
legitimate purpose
a trust whose purpose is to further commission of a crime, wastefully to destroy property, encourage divorce, or otherwise contrary to public policy is invalid. if a trust is contrary to public policy, then the beneficiary. will take free of the condition.
partial restraints on marriage are valid as long as they are reasonable restrictions, so is valid to bequeath with condition that son marries a Jewish woman within 5 years of her death
beneficiaries
private trusts must have definite and ascertainable beneficiaries. if there is only one trustee, that person cannot be the sole beneficiary.
private trusts
trusts that benefit private individuals. the rule against perpetuities applies
charitable trusts
cannot benefit named individuals, must have charitable purpose like relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, or other purposes beneficial to the community and benefit an indefinite group of persons. not subject to RAP. enforcement of terms rests with the attorney general of the state, or if the settlor is alive, they may maintain proceeding to enforce. ifi an identified set of institutional beneficiaries ceases to exist, or stated purpose can no longer be accomplished, a court may reform the trust under the doctrine of cy pres to redirect benefits to similar organizations or purposes
if a particular purpose becomes unlawful, impracticable, etc., trust does not fail in whole or in part, trust property does not revert to settlor, and court may apply cy pres.
a resulting trus provision is only valid if it goes to settlor and settlor is still living or it goes to settlor’s heirs and less than 21 years have passed since creation of trust
honorary trusts
aims that are more personal than charitable but not for benefit of specifically named humans. care for pets, cemetery plot, or to maintain a park. no human and living beneficiary to enforce duties.
honorary trusts for pets are allowed only for pets alive at time of grantor’s death and trust dissolves when the last pet dies. noncharitable purposes are only allowed honorary trusts for 21 years and the purpose cannot violate public policy. however, trusts to maintain cemeteries are valid in perpetuity
what happens if trust fails for lack of definite, ascertainable beneficiary?
trust property falls to residue
rule against perpetuities
common law rule states that no future interest is valid if it does not vest within 21 years of a life in being. however, virginia has adopted a modified approach called the uniform statutory rule against perpetuities that allows a trust to proceed for 90 years to see if the trust will vest during that time and allows courts to reform a trust to eliminate any remaining RAP problem after 90 years. the RAP also does not apply if the trust instrument, by its terms, states that it shall not apply
contest of inter vivos trust
may allege settlor lacked capacity, undue influence, or fraud. same rules apply from wills to undue influence and fraud
statute of limitations to challenge inter vivos trust
action contesting validity of revocable inter vivos trust must be brought w/in the earlier of 2 years after settlor’s death or 6 months after trustee sent person commencing judicial proceeding a copy of the trust instrument, the trustee’s name and address, and a notice of time allowed for contesting
trustee liability
trustee can be subject to liability for distributing trust property if the trustee knows of a pending judicial proceeding contesting validity of the trust or a potential contestant has notified trustee of a possible judicial proceeding and it is in fact commenced w/in 60 days after notice
beneficiary liability
beneficiary of a trust determined to have been invalid must return any distribution received
no contest clause
as with will, trust can effectively discourage contests by including provision stating that a named beneficiary shall receive nothing if the contest the trust, but a beneficiary can ask for a court determination as to whether a type of petition would trigger no-contest clause without actually contesting, and request for interpretation does not amount ot trust contest
inter vivos trust
to be effective, non-probate transfer, trust must be inter vivos.
revocability of inter vivos trust
all inter vivos trusts are revocable or modifiable by settlor unless settlor expressly made trust irrevocable and non-modifiable.
conservator of incapacitated settlor, guardian, or agent under durable power of attorney may revoke or modify trust only if expressly authorized by the trust or if authorized by court for good cause
non-probate pour over devices
individual can name inter vivos trust as payable on death beneficiary, resulting in pour over of those assets into trust, keeping the assets out of probate.
pour over will
will can pour over part of the estate into a pre-existing inter vivos trust or create a new testamentary trust. however, these will pass through probate, not non-probate. bequest of assets to inter vivos trust created before, concurrently with, or after will’s execution is valid
testamentary trust
trust created by will. parents may create for estate to go to their minor children while children are below certain age, so if testator dies whille children are below specified age, a person named as trusteee would take legal title as trustee for benefit of the children
constructive trust
equitable device meant to remedy a bad act or even innocent misdirection of property. court imposes constructive trust. if person who should have taken property is prevented from receiving property due to some misconduct, and they can show by clear and convincing evidence that they should have taken, the court will apply a constructive trust on those who actually took, where their trustee duty is to take steps necessary to convey property to rightful owner
resulting trusts
arises by operation of law to do equity rather than by actions of initial property owner as trust settlor. it directs that property be returned to its original owner.
Jeff places one-million dollars in trust to pay for David’s law school education, but David dies before all the money is expended. The remaining assets of the trust “result back” to Jeff because of the impossibility of completing the trust purpose. This is a resulting trust
purchase money resulting trust
occurs if someone pays purchase price for land but misunderstands implications of doing so and causes title to be taken solely in the name of someone else. They can recover title.
If there is no reason to give the land to that other person, then there is a presumption of a PMRT, that may be rebutted by clear and convincing evidence. Evidence can show that a gift or loan of the purchase price was intended. if the eventual title holder of the property is a relative, the presumption is that the person paying the purchase price intended a gift, not a PMRT
creditors of the settlor
trusts generally cannot be set up to prevent settlor’s creditors who existed before trust was created from taking property. the creditor can get an order attaching to trust assets
creditors of trust beneficiary
may be able to get court order requiring payouts intended for beneficiary ot go to them. court can authorize creditor or assignee to reach the beneficiary’s interest by attachment of present or future distributions
spendthrift provision
spendthrift trust is where settlor has added a clause to the trust instrument that seeks to restrict ability of beneficiaries creditors from reaching assets. settlor includes statement that trust is immune from creditors and must also deprive beneficiary of ability to sell interest in the trust, or could simply say it’s a spendthrift trust. then creditors must wait for distributions to be made and try to force debtor to use money to pay debt
spendthrift restrictions are valid and enforceable unless enforcement would violate public policy.
public policy exceptions to spendthrift clauses
to secure payment of child support; to pay a lawyer who has provided legal services for protection of beneficiary’s interest; to satisfy claims of U.S. government, Commonwealth, county, city, or town; to satisfy claims of state welfare agency seeking reimbursement for public assistance, including medical assistance
court ordered distribution for creditors when there is a spendthrift clause
if the trust directs mandatory distribution of income of principal and trustee has not made distribution in reasonable time, court can order trustee to make required distribution, after which creditor can seek to take it from beneficiary
court ordered distribution with no spendthrift clause
if a Trust says the trustee shall give a beneficiary x amount on periodic basis by mandatory distribution, creditor can compel payout to themselves. however, if payout is discretionary, cannot compel payout, though may try to do so if some standards like “comfort and welfare of beneficiary” as that provides a standard
self-settled spendthrift trust
allows settlor to protect assets from creditors if:
trust is irrevocable, transfer of assets to the trust do not make the settlor insolvent, trust instrument contains spendthrift clause, when distributions are made to settlor must be at least one other beneficiary to whom distributions can be made, and settlor must not have right to disapprove of trust distributions
trustee duties
- duty of loyalty - no self dealing
- duty to act prudently
- duty to collect, control, and protect trust property (acquire insurance, for example, and assert claims of trust and defend against claims against trust)
- duty to segregate trust property from trustee’s own property
- duty to keep adequate records
- duty of impartiality among beneficiaries
- duty to report (keep beneficiaries informed)
- duty to furnish copy of trust instrument upon request
- duty to give 60 day notice to beneficiaries of trust’s existence, identify of settlor, right to request copy of instrument, right to annual report, and their name, address, and phone #
- periodic and final accounting to beneficiaries - at least annually and on termination, must send report of trust property/liabilities/receipts/disbursements and listing of trust assets and market value
settlor waiver of duties
settlor can waive breaches of trustee duties except breach of duty of good faith or reckless indifference to the purposes of the trust or the interests of the beneficiaries
settlor as trustee can pretty much do whatever they want
duty of loyalty
trustee serves in fiduciary capacity and cannot benefit themselves - must act solely to benefit the beneficiaries. cannot engage in self-dealing.
self-dealing
trustee must not sell trust assets to himself or buy assets from himself for the trust, trustee may not borrow trust funds, trustee cannot lend funds to the trust and must return any interest earned on the loan. trustee may not profit from serving as trustee by taking advantage of confidential info learned as trustee (but can take reasonable compensation), trustee cannot take excessive fees or do excessive tasks (like stock trading) to take more fees, corporate trustee cannot buy its own stock as trust investment (but bank can retain its. stock if it was part of estate when trust was created, provided retention is prudent)
exceptions to duty of loyalty
trustees who are also beneficiaries may act to benefit themselves in their role as beneficiary, if all beneficiaries validly consent without improper conduct, after receiving complete and full disclosure, trustee can proceed with action amounting to self-dealing, settlor may waive duty in trust instrument but must be made aware of consequences and cannot authorize theft or reckless indifference to beneficiaries’ interests
uniform prudent investor act
Virginia’s uniform prudent investor act utilizes a portfolio theory of diversified investments, so each element of investment plan for large trust is evaluated for prudence in reference to overall portfolio, the beneficiary’s needs, and terms specified by settlor. it is evaluated in light of circumstances at time of investment, not in hindsight.. trustees should consider:
general economic conditions and effect of inflation/deflation, expected tax consequences, role an investment plays in portfolio, expected total return, need for liquidity, relationship to purpose of trust, differing interests for income beneficiaries and remainderpersons
prudence
trustee should administer trust as a prudent person would, by considering purposes, terms, distributional requirements, and other circumstances of the trust. exercise reasonable care, skill, and caution.
if trustee has special skills in a certain area, will be held to standard of that level expertise
efficient market hypothesis
market value of publicly traded investments reflects experts’ best estimate of future value, and trustees are not expected too outguess the market
adjustment powers
under virginia’s uniform principal & income act, the trustee may reallocate some principal to income by cashing out some stock and distributing to income beneficiaries or vice versa if necessary to maintain impartiality.
when making adjustments, must consider:
- settlor’s priorities
- expected duration of trust
- direction in the trust instrument regarding invasion of principle or accumulation of income
- current circumstances ofo the beneficiaries
- current economic conditions and trends and their likely effect on the value of assets or income
- need for liquidity, regularity of income, and preservation and appreciation of capital
- any recent increase or decrease in value of trust assets
- anticipated tax consequences of an adjustment
- total amount of ordinary income/principal available
reallocation of less than 10% is considered not substantial
how should trustee distribute trust expenses
trustee’s fees = 1/2 charged to income, 1/2 against principal
ordinary expenses = routine expenses charged against income - property taxes, insurance premiums, ordinary repairs, mortgage interest payments
capital expenses = charged against / paid from principal - capital improvements and environmental cleanup, mortgage principal payments
unitrusts
trustee may, without judcial approval, but after giving notice to beneficiaries, elect to make an income trust into a total return unitrust. the income beneficiary automatically receives certain percentage (usually 3-4%) of far market value of total assets, regardless of how much income was generated, reducing concerns about impartiality. the income beneficiaries would then share with remainderpersons an interest in the corpus growing in value as much as possible
delegation by trustee
trustee may delegate trust powers and duties, and is not liable for actions taken by agent if trustee exercised reasonable care in: selecting the agent, establishing the terms of delegation, and periodically reviewing the agent’s actions
trustee liability for loss caused by breach of duty
beneficiary can file suit against trustee for breach of fiduciary duty and ask court to enjoin trustee, void action of trustee, order accounting, remove trustee, and/or order trustee to divulge any profits from self-dealing and compensate beneficiaries for financial loss
co-trustee liability
co-trustee not liable for non-serious breaches of other trustees if they dissent or do not join in the action and notifies the other trustees.
only majority of trustees is needed to take an action. a co-trustee dissenting from majority action should express dissent in writing and should not participate.
however, if serious breach, each trustee has affirmative duty to exercise reasonable care to prevent a serious breach by doing things such as bringing suit to enjoin co-trustees
statute of limitations for breach of duty
beneficiary has 1 year to file action against trustee after receipt of report/accounting that discloses facts showing potential breach and informs beneficiary of time allowed for commencing action
trust director
settlor may employ corporate trustee to manage trust assets but appoint trust director to oversee trustee, exercise power to override decisions of trustee, or direct corporate trustee to take certain actions.
trust director is fiduciary and has same duties/liabilities as trustee. a directed trustee is not liable for reasonable action taken to comply w/ trust director’s direction but they cannot comply with direction entailing willful misconduct
tort liability of trustee
trustee is personally liable for torts committed in course of administering the trust if trustee is personally at fault
liability of trustee for breach of contract
trustee is not personally liable as long as trustee si acting in fiduciary capacity, trustee has disclosed fiduciary capacity, contract is part of administering trust, and contract does not state otherwise
modification or termination of revocable trust
modifiable or terminable at will of settlor at any time during life, can be done explicitly, by written revocation or amendment of instrument, or it can be done implicitly by doing things inconsistent with original trust terms (like selling/giving away property)
modification or termination of irrevocable trust
court can order modification/termination, even if inconsistent with material purpose of trust, if the settlor and all beneficiaries consent. if settlor is incapacitated, proxy consent can be given by agent under durable power of attorney, conservator w/ court approval, guardian w/ court approval
modification or termination of irrevocable trust without consent of settlor
if settlor objects or is dead, but all beneficiaries consent, court can order modification not inconsistent with a material purpose of trust or termination of trust if its continuation is not necessary to achieve material purpose.
modification or termination without consent of all beneficiaries
court can order if interests of any beneficiiary who does not consent would be adequately protected
trustee power to modify or terminate w/o consent of all beneficiaries
trustee may modify or terminate trust, or petition court to do so, w/o consent of settlor or all beneficiaries if:
- unanticipated circumstances - if circumstances not anticipated by settlor arise and modification/termination will further purposes of trust
- tax advantages - modify in way that achieves settlor’s tax objectives
- purposes - trust may terminate if no trust purpose remains to be achieved, or if purposes of trust have become unlawful/contrary to public policy/impossible
- uneconomic - if trust value is less than $100k, trustee may terminate w/o court approval if trustee concludes that trust’s value is insufficient to justify admin costs - must first give notice to qualified beneficiaries, those who would be income or remainder beneficiaries, or who would be distributees if trust terminated on that date
reformation by court to correct mistakes
court may reform terms of trust, even if terms are unambiguous, if proved by clear and convincing evidence that both settlor’s intent and trust terms were affected by mistake of fact or law
effect of divorce on trust
if either party files for action in nature of dissolution, and either has created revocable trust naming the other as trustee, mere filing automatically revokes trust provision. If divorce occurs, then any beneficial interest one spouse has in revocable trust created by the other is extinguished.
effect of death on trust
if a trust instrument provides for distribution of trust property on settlor’s death and beneficiary has predeceased, trust provision presumptively fails. if it was gift to an individual, property is part of trust corpus, if class gift, sum presumptively is redistributed among surviving members.
the anti-lapse statute applies to trusts, so if predeceased beneficiary is grandparent or descendant of grandparent, beneficiary’s descendants take in shoes of beneficiary
ademption
specifically named trust property in testamentary trust is presumptively adeemed in its absence upon death of settlor, except for stocks affected by corporate action, property condemned/lost/stolen and insured and settlor received payment after death, and if trustee alienated after settlor became incapacitated
power of attorney
empowers person to transact business for someone else. they can pay bills, deal with insurance companies and government agencies, etc.
simple power of attorney expires when the principal affirmatively terminates it or becomes incompetent
third parties who act in reliance on power of attorney without actual knowledge that it has been revoked or become ineffective are protected
durable power of attorney
power of attorney that remains effective even after principal becomes incapacitated and unable to give direction. must say that it will not be affected by lack of capacity. but necessarily terminates on death.
springing durable power of attorney
becomes effective if/when grantor becomes incapacitated.
difference between trust and power of attorney
holder fo power of attorney does not hold legal title, does not owe duties to anyone other than grantor, and does not carry robust duties of property management that trustees have as to large assets. power cannot continue after death.
