Trusts

Question 1

Legal & Equitable Title

Answer 1

Legal Title belongs to Trustee - responsibilities of ownership

Equitable Title belongs to Beneficiary -

If both given to same person in the entirety, then merge, and trust extinguishes.

Question 2

Trust Validity

Answer 2

Elements:

1. Settlor
2. Intent
3. Purpose
4. Assets Delivered
5. Trustee
6. Beneficiaries

Question 3

Intent Requirements (1)

Answer 3

Settlor Needs Capacity

Settlor needs present intent to create (split title and impose duties)

Question 4

Identifiable Corpus (2)

Answer 4

Property must be ascertainable with certainty. Anything transferable can be held in trust.

Question 5

Ascertainable Beneficiaries (3)

Answer 5

Requires a person that can take and hold title.

Class Gifts: must be specific, cannot be “friends” - otherwise fails and goes back to settlor.

Discretionary Trust: Trustee exercises judgment to pick people from a class to get gifts.

Qualified Beneficiary (UTC): current or first line remainder have additional enforcement rights.

Question 6

Valid Purpose (4)

Answer 6

Cannot be illegal or against public policy.

If violates: Court either (1) takes out condition; or (2) gift is void in entirety.

Question 7

Mechanics & Formalities of Trust (5)

Answer 7

Inter vivos (living trust - declaration of trust) - settlor retains legal title

Testamentary Trust (created in will - conveyance in trust) - all requirements of a valid will required first.

Trust should always be in writing but can be valid as ORAL TRUST of personal property under certain circumstances with clear & convincing evidence.

Question 8

Trustee Powers/Duties

Answer 8

Trustee has power necessary and appropriate to properly invest, manage, and distribute property if not contrary to trust terms. Majority of Trustees must agree.

1. Duty to administer
2. Duty of loyalty
3. Duty to report
4. Duty to separate trust property and keep records
5. Duty to enforce claims and defend trust (separate and earmark property)
6. Duty to preserve property and make it productive.

Trustee must avoid self-dealing (except reasonable compensation).
Earmark Property - keep separate! Prudent Investor Standard - needs to monitor if delegates to others.

Question 9

Trust

Answer 9

A trust is a fiduciary relationship in which one party (trustee) holds legal title to property for the benefit of designated beneficiaries.

Trust property: the principal, the corpus, the res

Question 10

Why create a trust?

Answer 10

1. Protect and provide for B
2. Flexibility of asset distribution
3. Protect settlor
4. Professional management of property
5. Avoid Probate
6. Tax Benefits

Question 11

Express Trusts

Answer 11

Created with express intent of the settlor.

Question 12

Resulting Trust

Answer 12

Attempts to carry out implied intent; based on conduct of settler.

Only people that can benefit are settlor; or successors in interest.

Purchase Money resulting Trust (PMRT):

When you give money to seller; but instead of property; the seller (with my permission) gives title to someone else - with intent that the person holds the property for you!!

Question 13

Constructive Trust

Answer 13

Equitable remedy to prevent unjust enrichment where equity turns the holder of Legal title into trustee when the person cannot in good conscience retain title. Accomplished by court order.

Requires: Particular property and nexus between improper conduct. Must reimburse for anything they did (payments / insurance).

Used in states without slayer statutes.

Question 14

Removal of Trustee

Answer 14

Grounds for removal (by settlor, beneficiary, or co-trustee):

1. Serious breach of trust
2. Serious lack of cooperation
3. Unfitness, unwillingness, or persistent failure
4. substantial change in circumstances

Question 15

Pour-Over Will

Answer 15

Settlor can make gifts by will to a trust, and the will provides for the initial trust funding, but trust instrument must be executed before testator dies.

Question 16

Testamentary Secret Trust

Answer 16

Beneficiary agrees with Settlor to hold gift for another person but will does not state the trust nature of the gift.

If intended beneficiary brings in extrinsic evidence to prove by clear and convincing evidence, then a constructive trust is imposed in favor of them.

Question 17

Testamentary Semi-Secret trust

Answer 17

When the will makes a gift in trust but fails to name the beneficiary; gift fails, and trustee holds property for testator’s successors in interest.

No ascertainable beneficiary = no trust = “A Resulting Trust”

Question 18

Transferability

Answer 18

Very rare that Beneficiaries can transfer interests, or that creditors can access, because they’re usually “life estates”.

Spendthrift provisions: prohibit transferability; creditors can only reach distributions.

Question 19

Discretionary Trust

Answer 19

Trustee decides when how much B receives - very common.

Beneficiaries only hold an “expectancy”.

Who can reach property? Child support, support of current spouse, and alimony for ex-spouse.

Question 20

Spendthrift Trust

Answer 20

1) Beneficiary cannot transfer their interest; and
2) Creditors cannot attach to B’s interest except those distributed to B (CANNOT reach trust interest).

Enforcement Restrictions: If settlor is B, then public policy prevents you from protecting your own money from own creditors. But sometimes DOMESTIC ASSET PROTECTION TRUSTS (DAPT) allow.

Question 21

Support Trust

Answer 21

Use of property is limited to B’s support: health, education, maintenance of support.

Mandatory: Trustee MUST pay support.
Discretionary: If distributed at all, B must be used for support.

In support & discretionary trusts, creditors can only reach TRUST INTEREST.q

Standard of SUPPORT? Presumption is the lifestyle B was accustomed.

Support trusts (even without spendthrift) are implied to be spendthrift.

Question 22

Termination

Answer 22

Trusts terminate automatically at expiration of a specified trust term or when its purposes have been accomplished, unlawful, or contrary to public policy.

Settlor can terminate or modify unless terms expressly prohibit.

Beneficiaries can sometimes modify/terminate without settlor consent if it would not frustrate the material purpose of trust. Need unanimous consent (which may be prevented w/unborn Bs).

Sometimes if trust has less than $50K, and insufficient to justify administration, may be terminated with notice to Bs.

Question 23

Cy Pres Doctrine for Charitable Trusts

Answer 23

Allows courts to modify terms of charitable trust to be as near as possible to settler’s original intention.

Arises when trust’s original purpose is accomplished, or becomes:

• Impractical
• Unlawful
• Wasteful

State’s attorney general enforces.

Question 24

Damages from Trustees who breach

Answer 24

1) Lost profits - doesn’t need to gain, just didn’t earn what they should have.
2) Depreciation in value of trust property - breach caused decrease in value.
3) Self-dealing profits - get these back for the trust or hold trustee liable for losses.
4) Removal from office

CO-trustee has duty to monitor other trustees.

TRUSTEE PERSONAL LIABILITY: clause in contract can limit liability; many states say trustees are not liable for tort respondeat superior.

When trustee is not liable: Trustee reasonably relied on trust terms; Bs consented; or Settle explicitly allowed; or EXCULPATORY CLAUSE

Question 25

Exculpatory Clause

Answer 25

Courts interpret strictly - usually exculpate negligent actions of trustee (but not those done in bad faith)

Question 26

Trust Ledgers

Answer 26

Universal Principle & Income Act: Default rules for how money is spent and distributed. Trustee has adjustment power, although not used often.

Principle: Sale proceeds; stock dividends, insurance proceeds (change in form, not substance); capital gains tax expense; capital expenses.

Income: Rent, Interest, cash stock dividends; income tax expense; maintenance improvements; depreciation

Trustee compensation & accounting expenses are 50% each.

VS Uni-trust focuses on making trust more valuable, whether principle or income Bs.

WASTING RESOURCES (patents / pensions / oil interest): 90% principle and 10% income

BUSINESS INCOME: use generally accepted accounting principles.

Question 27

Charitable Trusts

Answer 27

A trust that has the purpose of benefiting an unascertained group of people or the public at large.

Characteristics:

1) Indefinite Beneficiaries Required;
2) Charitable Purpose (standard of community unless religious);
3) Can be perpetual (no RAP)

Question 28

Types of trusts

Answer 28

Express Trust - express intent

Resulting Trust - Implied intent

Constructive Trust - Equitable Remedy only