Trusts Flashcards
What is a trust?
A trust is a fiduciary relationship in which a trustee holds legal title to specific property and the designated beneficiaries hold equitable title.
What are the trustees duties?
Fiduciary duties to
- Deal with the property with reasonable care
- Maintain the utmost degree of loyalty
- Be personally responsible if their conduct falls beneath the required standards
Define settlor
The person who causes the trust to come into existence
What are the purposes and uses of trusts
- Providing for and protecting trust beneficiaries
- Flexibility of asset distribution
- Protection against settlor’s incompetence
- Professional management of property
- Probate avoidance
- Tax benefits
What are express trusts?
Trusts created by the express intention of the settlor
What are the types of express trusts
Private trusts- private beneficiaries who are an ascertainable class of people
Charitable trusts- Charitable beneficiaries (indefinite class or people or general public)
What are the types of trusts created by operation of law?
Resulting trusts- Arise from the presumed intention of the owner of the property
Constructive trusts- An equitable remedy used to prevent unjust enrichment
What are the five elements of a valid trust?
- Intent
- Identifiable corpus (that the settlor currently owns)
- Ascertainable beneficiaries
- Proper purpose
- Mechanics and formalities
What is required to have valid intent to create a trust?
- A settlor with capacity to convey
- A present intent to create a trust relationship
- A competent trustee with duties
- A definite beneficiary
- The same person cannot be the sole trustee and the sole beneficiary
What are precatory expressions?
Statements by the settlor of hope, wish, or suggestion for how property be used
Ex: I hope you will use this money to pay for your college tuition
Do precatory expressions create a trust?
There is an inference that they do not. The settlor must impose a legal obligation on the transferee, not merely a moral one
Define qualified beneficiary
Someone who, on the date the beneficiary’s qualification is determined is
- A current beneficiary OR
- A first-line remainderman (one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date
What is disclaimer and what is required to disclaim?
- Disclaimer is saying that you don’t want a trust
- In most states you disclaim by filing a written instrument with the trustee
- If a valid disclaimer is made, the trust is read as though the person who disclaimed was dead on the relevant date
Are class gifts permissible?
Class gifts are permissible if the class is reasonably definite- the trustee can determine who belongs to the class
(Gift to “my children” ok, gift to “my friends” not)
What purposes will make a trust invalid?
- Illegality
- Contrary to public policy
- Impossible to achieve
- Intended to defraud the settlor’s creditors or based on illegal consideration
What happens if a trust has a condition attached to an interest that is against public policy?
- The settlor’s alternative desires control if they were expressed
- If the illegal condition is a condition subsequent, the condition is invalidated but the trust remains valid
- If the illegal condition is a condition precedent, the preferred view is to hold that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable
How does a person accept trusteeship?
- Signing the trust or a separate written acceptance
- Substantially complying with the acceptance terms in the trust instrument OR
- Accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance
What are the grounds for removing a trustee?
- A serious breach of trust
- Serious lack of cooperation
- Unfitness, unwillingness, or persistent failure to administer
- A substantial change in circumstances
Is a writing required for a trust of land?
Yes- Statute of Frauds applies
But if no writing, an otherwise invalid oral trust of land may be enforced by imposing a constructive trust
Can pour-over property be initial trust funding?
Yes, if
- The trust is identified in the will AND
- The trust is executed before the testator’s death
Define secret trust
The settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else - and relies on the beneficiary’s promise - but the will does not state the trust nature of the gift
What standard is required to prove the existence of a secret trust?
Clear and convincing evidence
What is a semi-secret trust?
The will makes a gift in trust but fails to name the beneficiary. The gift fails and the named trustee holds the property in a resulting trust for the testator’s successors in interest
Can you transfer your interest in a trust?
Yes, as long as there are not restrictions in statutes or in the trust instrument
What is a discretionary trust?
The trustee is given discretion whether to apply or withhold payments of income or principal (or both) to the beneficiary
What is a spendthrift trust?
It precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims
Can a settlor use a spendthrift trust to protect their own assets?
In most states no, but a growing number of states are allowing self-settled spendthrift trusts called domestic asset protection trusts (DAPT)
Are support trusts assignable?
No
If a support trust is silent, what standard of living should be provided for the beneficary?
The beneficiary’s accustomed standard of living
How can the beneficiaries revoke a trust if they have the settlor’s consent?
ALL beneficiaries and the settlor must consent
How can the beneficiaries revoke a trust without the settlor’s consent?
If ALL beneficiaries consent (including future and un-ascertained beneficiaries) AND no material purpose of the trust would be frustrated
When can the court terminate a trust?
- If the trust could have been terminated with the consent of all of the beneficiaries and the interests of any non-consenting beneficiaries will be adequately protected
- Unanticipated circumstances threaten the purpose of the trust
- Continuation of the trust on its existing terms if impracticable or wasteful
- The value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives
What is the amount under which some states will deem a trust uneconomic?
$50k
If co-trustees cannot reach a unanimous decision, what standard is required for action?
In most states, they can act by majority agreement
What are the trustee’s duties?
- Duty to administer trust
- Duty of loyalty
- Duty to report
What does a trustee’s duty to report include?
- Given qualified beneficiaries their name, address, and phone number
- Respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested
- Furnish an annual accounting of the trust
What act governs the trustee’s investment responsibilities?
The Uniform Prudent Investor Act
Under UPIA, what is the standard of care the trustee must exercise in investments?
The trustee must exercise reasonable care, skill, and caution when investing and managing trust assets
Are trust investments evaluated individually or overall?
Overall
Are trustee’s with special skills/experience held to a higher standard of care?
Yes
Is socially conscious investing permissible?
Only if the returns are the same as investing “traditionally” (in big oil etc)
Can the trustee delegate the investment and management functions?
Yes, if they act prudently in doing so and periodically review the agent’s actions
Who is the trustee liable to?
The beneficiary
What is the trustee’s liability for breach of trust?
Whichever is greater of these options
- The amount necessary to restore the trust property and distributions to what they would have been absent the breach
- The trustee’s profits from the breach
What are the beneficiary’s options if the trustee engages in self-dealing?
- Affirm the transaction (if the trust profited)
- Set aside the transaction (if the trust lost money)
- Trace profits from the trustee (if the trustee profited)
When are exculpatory clauses void?
If they
- Relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference OR
- Appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor
When can a court remove a trustee?
- Request of beneficiary
- Request of settlor
- Request of a co-trustee
- Of the court’s own volition
Can you sue the trust?
No- it isn’t a legal entity. You can sue the trustee in their fiduciary capacity though
What are income receipts
- Ordinary receipts from use or investment of trust property (rents, interest)
- Cash dividends
- Proceeds from contract insuring trustee against loss
- 10% of payment from a deferred compensation plan (pension plan) unless otherwise characterized
- 10% of proceeds received from a liquidating asset (ex patents, copyrights)
- 10% of proceeds received from a working interest (ex oil and gas interests)
What are income expenses?
- 50% of regular compensation of the trustee and any person providing investment services
- 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
- Ordinary expenses
- Insurance premiums covering loss of a principal asset
What are principal receipts?
- Extraordinary receipts (ex proceeds from sale of trust assets)
- Stock dividends
- Proceeds from life insurance policy naming trust or trustee as beneficiary
- 90% of payment from a deferred compensation plan (ex pension plan) unless otherwise characterized
- 90% of proceeds received from a liquidating asset (patents, copyrights)
What are principal expenses?
- 50% of all regular compensation of the trustee and any person providing investment services
- 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
- Expenses of a proceeding that concerns a principal interest
- Payments on the principal of a trust debt
- Estate taxes
- Disbursements related to environmental matters
What is distinct about a charitable trust?
- It must have indefinite beneficiaries
- It may be perpetual- rule against perpetuities does not apply
- Cy pres applies
Cy pres
Means as near as possible.
If a charitable trust’s purpose cannot be carried out as written, the court may select an alternative under the doctrine of cy pres by ascertaining the settlor’s original purpose
What is a resulting trust?
A trust that arises from implication of the settlor’s conduct
When does a resulting trust arise?
The settlor has conveyed property to a trustee under an express trust and
- The trust is void or unenforceable OR
- The beneficiary is dead or cannot be located
A resulting trust also arises in favor of the settlor when the trust purpose is fully satisfied and some trust property remains
What is a constructive trust?
Not really a trust, but a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct
