Trusts Flashcards
What is a trust?
A trust is a management device with a bifurcated transfer
What does the trustee own? What does the beneficiary own?
Trustee: legal title
beneficiary: equitable title
What is the original trust property and any increase in value?
principal
What is a revocable trust?
a trust that can be revoked at any time during the settlor’s life
+In CA, trusts are presumed to be revocable
When can an irrevocable trust be revoked?
usually it cannot. But it can be revoked if the trustee, settlor and all the beneficiaries agree to revoke the trust
What is a mandatory trust?
“Trustee to distribute $1,000 every month”
“Trustee to distribute law school tuition for the next three years”
What is a remedial trust?
An equitable remedy created due to fraud, duress, undue influence. The trustee’s only duty is to transfer the property
[when there has been fraud, there needs to be a remedy]
What is the general RAP approach to trusts?
courts use the “wait and see” approach meaning the interest will not be invalidated until it is clear that it will vest outside the RAP period
What is the person who creates a trust called?
settlor
What happens if there is no trustee?
the trust will not fail. Instead the court will appoint a trustee or a majority of the income beneficiaries may select a trustee
What are the requirements of an express trust?
[PIPA]
- property
- intent (not precatory)
- purpose (ok so long as it is not illegal or contrary to public policy)
- ascertained beneficiary (unless charitable)
What happens if there are “trust word” such as “in trust” or “for the benefit of?”
there is a presumption of a trust
Generally, trusts do not have to be in writing and can be done orally. When must they be done in writing?
- trusts subject to the statute of frauds (i.e., a conveyance of property)
- trusts created by will (i.e., a pour-over trust)
What happens if there is precatory language?
language that expresses the donor’s wishes that the donor use property in a certain way does not create a trust
How do you know if something is a gift or a trust?
a trust must involve a bifurcated transfer
A future interest can be sufficient to meet the trust property requirement.
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What do you call a trust without property?
empty trust?
What is a pour-over trust?
a will that receives and disposes of assets at the settlor’s death
What are exceptions to the requirement that there must be an ascertained beneficiary?
- unborn children are ok
- definite class gifts are ok
What is the requirement of a charitable trust?
it must have a charitable purpose. In the past this requirement was more stringent, but modernly the trend is to validate charitable trusts
- but aid to animals does NOT count
- but a trust for a group of people that do most activities with the settlor likely does not count as it must benefit society generally
- should not name people
What happens if the trust’s charitable purpose is no longer possible?
through the cy pres doctrine, courts can modify a trust to create a new purpose as close as possible to the original purpose
Who has standing to enforce the terms of a charitable trust?
the AG and the settlor
What is an express trust?
a trust that clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries
What are the two types of remedial trusts?
resulting
constructive
When is a resulting trust used?
when a trust fails and the trustee must return the property to the settlor or the settlor’s estate
Exs: when someone who is being cared for in a trust dies, when an org that was funded by a trust ends, the trust is illegal
What is a purchase-money resulting trust?
when person one pays for the property, but title is taken in person two’s name. If person two is not a close friend or relative, a court will create a purchase-money resulting trust
How do you avoid a resulting trust?
use a gift-over clause
Ex: Oliver’s will provides that if Archer dies without children, the remaining trust property is to go to Henry or Henry’s heirs.
What is a constructive trust?
a remedy used to prevent unjust enrichment if a third party who took advantage of the settlor through wrongful conduct (fraud, undue influence, duress, breach of duty etc)
What is a discretionary trust?
“Trustee to make payments for the health and care of beneficiary”
What is a support trust?
“Trustee to make distributions for the support of the beneficiary”
When can a creditor of a beneficiary reach trust principal or income?
only when such amounts become payable to the beneficiary OR subject to the beneficiary’s demand
Generally, a beneficiary’s equitable interest in trust property is freely alienable
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What is a spendthrift trust?
a trust that expressly restricts the beneficiary’s power to alienate her interest
+Creditors usually cannot reach the trust interest, unless money is owed for child/spousal support, basic necessities providers, or tax lien holders
+Language such as “the interests of the beneficiaries are inalienable and not subject to the claims of creditors”
Generally, creditors cannot reach trust property. What are the exceptions?
- spousal or child support
- those providing basic necessities
- holders of federal or state tax liens
What happens if the beneficiary wants to terminate a trust prematurely and trustee opposes termination? This is happening when the settlor is no longer alive
A trustee can block premature termination if the trust is still serving some material purpose.
When can a trust be modified due to changed circumstances (and the settlor is dead)?
- all beneficiaries agree and modification is consistent with the material purpose of the trust OR
- an unforeseen event frustrates the purpose of the trust
When is involuntary removal of a trustee likely to be granted? Remember that courts are hesitant to do this
- trustee became incapable of performing duties (illness, incapacitation, jail)
- material breach of duty
- trustee develops a conflict of interest
- a serious conflict between a trustee and a beneficiary
- the trust persistently performs poorly as a result of the trustee’s action or inaction
When can a trustee resign?
- as provided by the trust instrument
- in the case of a revocable trust, with the consent of the person holding the power to revoke the trust
- in the case of a trust that is not revocable, with the consent of all beneficiaries OR
- pursuant to a court order obtained on petition by the trustee
What was the old rule regarding the trustee’s management of the trust?
the life beneficiary was entitled to income (any money generated by investing)
The holder of the remainder interest was entitled to the principal
What is the modern rule regarding the trustee’s management of the trust?
the trustee is to focus on the total return of the trust portfolio. Allocations must be reasonable
What are factors that the trustee must balance?
[BI PET]
- identities and circumstances of the Beneficiaries
- Intent of settlor
- nature, duration, and Purpose of the trust
- anticipated effect of Economic conditions
- anticipated Tax consequences
[overall the trustee is given significant flexibility]
What does a future interest holder have?
a present equitable interest. Therefore the possessor has standing to challenge the trustee’s management
What is the future interest held by the grantor following a life estate?
reversion
What is a future interest held by a transferee (not a grantor) capable of becoming possessory at the natural termination of the prior estate?
remainder
In determining the trustee’s powers, where is the source?
1) look to the trust documents
2) if silent on this issue, then refer to the statutory and common-law principles
-the modern trend is to grant the trustee all those powers necessary to act as a reasonably prudent person
What are the duties of the trustee?
[the trustee PLACED-D the check]
- to make property productive
- loyalty
- to account
- care (ordinary prudent person)
- equal treatment
- to distribute in accordance with the trust/settlor
- to disclose
What question is asked when there is an issue regarding the trustee’s duty of loyalty?
Did the trustee act reasonably? This is an objective standard
What is the standard when judging the trustee’s duty of care?
ordinary prudence
- the trustee should treat the trust property as his own
- the standard of care is heightened if the trustee has special skills
What is the no further inquiry rule?
If the trustee engaged in self-dealing, the court does NOT inquire into the
reasonableness or good faith. This is a per-se breach and creates an irrebuttable presumption of breach
What is the standard used when the trust document allows self-dealing?
the transaction must still be reasonable and fair for the trustee to avoid liability
What is the standard when judging a conflict of interest (that is non-self-dealing)?
reasonable AND good faith test
What are the common law and modern views on delegation by a trustee?
common law: a trustee could not delegate authority
modern law: delegation is permitted
What are the common law and modern views on investments by a trustee?
common law: a trustee breached by making investment outside a specific list of acceptable investments
modern view: a trustee has discretion to invest and manage property as would a prudent investor (diversified and success is measured by the success of the portfolio as a whole)
+argue both sides for why this investment was appropriate or not
What is the duty of impartiality?
the trustee has a duty to balance the competing interests of present and future beneficiaries fairly
How long can a trustee serve?
the noncharitable trustee may serve, for only 21 years after the settlor’s death
What is a testamentary trust?
a trust that is created by a will and the will contains the material provisions of the trust
What is an honorary trust?
a trust in which there is neither a private beneficiary nor a charitable trust. Generally invalid except to care for pets or maintain cemetery plots
What are the majority and minority rules on a settlor revoking a trust?
majority: only if the power is expressly reserved in the trust can the settlor modify or revoke the trust
minority (CA): trusts are generally revocable
What are ways to challenge the validity of a trust?
- undue influence (SMOC, presumption)
- fraud (inducement, execution)
What are the types of beneficiaries?
income beneficiary: the person who receives income from the trust
remainder beneficiary: the person who is entitled to the trust principal upon termination of trust
How can a trustee block a trust from terminating?
by showing that there remains an “unfulfilled material purpose”
How does a trust terminate?
- if settlor is deceased, by consent of all the beneficiaries
- by the court if its purpose is illegal, impracticable, impossible
- automatically when the trust purpose has been accomplished
What is the duty to account?
Periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed against the terms of the trust
What is the duty to disclose?
Disclose complete and accurate information about nature and extent of
the trust property, including allowing access to trust records and accounts.
What are some examples of self-dealing?
- borrowing from or making loans to the trust
- using trust assets to secure personal loans
- acting for personal gain through trustee position
Ex: a trustee living in the house for free
What are the remedies for a violation of a trustee’s duties?
beneficiaries may:
- Sue the trustee for money damages or disgorgement
- Trace and recover property
- Discharge and replace the trustee
- Ratify the transaction and waive the breach
[STD-R]
How is a trust revoked?
1) substantial compliance with a method provided in the trust’s terms
2) if not set out by the trust
- a later will or codicil
- any other means that provides clear evidence of the settlor’s intent
What is a future interest created in an ascertainable grantee that is capable of becoming possessory upon the expiration of a known fixed duration and is not subject to any conditions precedent
vested remainder
for cy pres to apply, the purpose of the trust must be charitable.
o
