Trusts Flashcards
Definition of a Trust
A trust is the right to enjoyment of property that another holds legal title in.
Property is held by the Trustee, at the request of a Settlor, for the beneficiary (third-party).
Unless it states otherwise, a trust is irrevocable if made before April 1, 2010. It cannot be amended, either.
Methods to Create a Trust
- Transfer of property to another (to be held in trust) during the Settlor’s lifetime, or by disposition upon the Settlor’s death.
- Declaration by an owner that they hold identifiable property as a Trustee (“I will hold this property for X”)
- Exercise of a power of appointment
- Declaring an irrevocable Trust
- Promise by one to another whose rights, under the promise, are to be held in trust for a beneficiary.
- Ex: A pays purchase price for land and vests title in B. B agrees to hold it in trust for A’s daughter.
Regardless of how, a valid trust requires the 5 statutory requirements.
Requirements of a Valid Trust
Can’t I Be Done Studying?
- Capacity: settlor has capacity (presumed unless proven otherwise).
- Intention: of settlor to create a trust
- Beneficiary: definite beneficiary, charitable trust, non-charitable purpose, or pet care trust
- Duties: trustee must have duties to perform
- Same Person: trustee is not the sole beneficiary
Validity of an Oral Trust
A trust generally does not need to be in writing. However, terms of an oral trust must be established by clear and convincing evidence.
- Trust for real property cannot violate SoF
Ex: a clear declaration that is heard by others is a valid oral trust.
Validity of Trust: If some terms are unlawful
The trust is enforceable to the extent of its lawful purposes, which are not contrary to public policy, and are possible to achieve.
- Any terms that violate this are stricken, but the others remain.
NOTE: Online sports betting is legal as of 2019.
Marriage Restraints
- Total restraints are unlawful (To X only if she divorces Z).
- Partial restraints are lawful if it leaves a reasonable choice available
Wills Funding Trusts
A will can make a gift to a trust, as long as the trust is identified in the will and the trust terms are in a written instrument other than the will.
Two elements are needed for this:
- Needs a valid will (or holographic or dispensing power)
- Valid trust (meets the 5 statutory requirements)
Validity of a Pet Care Trust
Valid under MI law.
The Court has discretion to reduce the amount of property in the trust if the amount substantially exceeds the required amount for the intended use.
Can a beneficiary challenge the validity of a trust?
A beneficiary cannot challenge a trust after accepting its benefits (Election Doctrine)
Exception
Challenges based on fraud, duress, or undue influence
- Trust will be void only to the extent of the challenge
Spendthrift Clauses: Definition
Prohibits creditors from satisfying the beneficiary’s debts w/ the trust, by transferring the beneficiary’s interest.
Rule: spendthrift trusts are valid and enforceable in MI.
Exceptions
A ‘favored creditor’ (below) can, by garnishment or attachment:
1. Claim by MI or the U.S. (i.e., taxes)
2. Trust beneficiary’s child/former spouse w/ order for support
3. Judgment creditor who provided services to preserve/protect the beneficiary’s interest in the trust (i.e., lawyer who made it).
Favoured creditor can ONLY reach the amount the beneficiary can reach.
Ex: If MI has a $40,000 debt to collect, and your trust allows you to collect $20,000 each year, they can only take out $20k/year.
Discretionary Trust Provision
This is when a trustee is given discretion to determine when and how to distribute the assets to the beneficiary.
If this exists, a creditor must wait until it is distributed directly to the beneficiary.
Pure Discretion Trust
When the trustee has power, in its sole discretion, to determine distribution. Here, even if there is no spendthrift clause, a creditor cannot reach for the trust.
- Applies to favoured creditors, too.
Modifying/Terminating Trusts: General Rule
The court can modify/terminate a trust if:
- Unexpected circumstances
- Administration of the trust is too expensive
- To satisfy the settlor’s taxes
- Court can reform terms of the trust to conform to the settlor’s intention if it can be shown by clear & convincing evidence.
- Even if its terms are unambiguous
Ex of 5: Settlor made oral trust to “this girl.” He was pointing to his niece, Millie, who he hated, instead of her twin sister, Lana, who he loved. A court could reform the trust to make Lana the beneficiary, as long as there is clear and convincing evidence.
Charitable Trusts
A charitable trust can be created for any purpose.
- It must have a large number of ppl who are not readily identifiable.
Ex: A trust designed to be a law school scholarship to the city.
It may fail if the charitable purpose becomes illegal, impracticable, or impossible.
Cy Pres: Court can substitute another charity or modify the trust in-line with the settlor’s original purpose.
- IF the settlor had a general charitable intent (not specific)
Contesting a Revocable Trust
You must contest the validity of a revocable trust w/i earlier of:
- Two years after settlor’s death
- Six months after getting notice of the trust
No-Contest Clause (Terror/In Terrorem Clause)
State that anyone who challenges the trust will not receive any of its benefits.
Rule: Enforceable and strict. If it expressly forbids any challenges, it will cover a very broad class of challenges, unless there is probable cause for the challenge.
