trusts Flashcards
inter vivos gift
occurs when the donor has intent to make gift and delivers the gift
actual delivery = physically hands over the property
constructive delivery = handing over key to box containing gift, etc.
acceptance is presumed if subject matter is of value
joint tenant bank accounts
a surviving joint tenant is entitled to the money in joint bank account when the other JT on the account dies, unless the account was set up for convenience of the parties
totten trust
a bank account with named beneficiary. if beneficiary survives account holder, the funds automatically vest to beneficiary.
revocable by will (must be expressly clear) and during trustee lifetime if the trustee withdrawals all funds from account or delivers a signed revocation in writing to the bank naming a new beneficiary
trust definition
fiduciary relationship b/t trustee and trust beneficiaries that divides legal and equitable title
legal title
trustee holds legal title to property and becomes owner of property for the record
equitable title
beneficiary holds equitable title to the property and is entitled to financial benefits of property
parties involved in trust
settlor: person who creates the trust
trustee: person who holds assets of the trust for benefit of beneficiaries; manages the trust assets according to terms of trust
beneficiary: person entitled to assets or profits
express v. implied trust
express: created when person has intent to create trust and complies with formalities to create the trust express trusts are either private (private beneficiaries or ascertainable beneficiaries) or charitable (beneficiaries are charity or indefinite class of persons or public in general)
implied: created by conduct, regardless of whether there was intent to create a trust
implied trust is either resulting trust (arises from presumed intent of owner) or constructive (equitable remedy to prevent unjust enrichment)
valid trust elements
- intent to create trust
- trust property/res
- ascertainable beneficiaries
- trustee
- formalities (real property - must comply with SOF; testamentary trust - must comply with valid will formalities)
intent to create a trust
intent may be determined by written or spoken words or conduct. no specific words required; only need to intend to create the legal relationship and duties of a trust and intent for it to take effect immediately, even if benefit is in future
precatory language: merely expresses the settlor’s wishes regarding his property, not intent
capacity: same as will contests
trust property
property that makes up the trust as a whole - anything can make up trust property
must be specifically described with certainty or ascertainable with certainty from a description
future interest may be held in trust, but an interest not in legal existence cannot
unenforceable gift promise cannot be held in trust
ascertainable beneficiary
at the time of creation, the settlor must either specifically identify the beneficiary by name or sufficiently describe how the beneficiary is to be identified (my kids = valid; my friends = invalid)
beneficiary must be able to possess title to the property (i.e., cannot be an animal), but the beneficiary does not need capacity to manage the property
sole trustee cannot be sole beneficiary
revocable v. irrevocable trust
UTC/Maj: trust is revocable unless the settlor expressly provides otherwise
pour over provision
devises property to a previously existing trust under terms of that trust
distinguishable from testamentary trust b/c a pour over provision does not create a trust; it transfers property into a trust already existing
thus, pour over cannot devise property to testamentary trust, b/c testamentary trust does not come into existence until death
charitable trust
trust with purpose of accomplishing a substantial amount of social benefit to public at large or a reasonably large class
beneficiary may be indefinite, named, or contain a class of persons. RAP does not apply
cannot be invalidated for failure to state specific charitable purpose or beneficiary. courts will select one consistent with settlor’s intent if there is a general charitable intent
cy pres doctrine
doctrine allows the court to modify the terms to make them as near as possible to OG intention of settlor to prevent trust from failing unless there is a specific charitable beneficiary or reverter clause
only applicable if:
- property is placed in trust for charitable purpose that has become unlawful, impossible, or impracticable, to carry out AND
- settlor manifested a general charitable intent to devote property to charitable purpose (majority of courts presume general charitable intent)
discretionary trust
grants the trustee absolute power and discretion to make good faith determinations regarding when and how much of trust property should be distributed to beneficiaries of the trust
courts may interfere if trustee is making decisions in bad faith
support trust
contains provisions directing the trustee to pay to beneficiary as much of the income or principal as is necessary for beneficiary’s education and support
can be pure or discretionary
pure support trust: limits trustee discretion. trustee is obligated to spend only so much of the property as necessary for education and maintenance of beneficiary
discretionary: trustee has discretion on distribution. if it contains an ascertainable standard, beneficiary may compel the trustee to make payments in accordance with that standard
spendthrift trust
contains provisions designed to protect beneficiaries from their own carelessness. two main functions: beneficiary cannot sell or assign interest and creditors cannot reach beneficiary’s interest
creditors are able to reach interest if
- settlor is beneficiary
- creditor is seeking reimbursement for providing necessaries
- creditor has order for child or spousal support
rights of creditors in trust property
creditors have no greater rights in trust property than rights of beneficiary. if trust prevents beneficiary from receiving the property, then creditors cannot receive it either. absent spendthrift, creditors are able to reach property by attachment of the interest income to the beneficiary (i.e., cannot go after principal, but can go after interest income if there are no spendthrift provisions)
creditors can reach the interest once distributed
alienability of trust interest
interests are alienable, devisable, and descendible unless terms of trust provide otherwise (i.e., spendthirft provisions, etc.)
beneficiary invasion of trust principal
an income beneficiary is only entitled to trust income UNLESS trust authorizes otherwise.
if a beneficiary will eventually receive the trust principal, a court may permit invasion unless it is contrary to settlor intent or adversely affects other beneficiaries.
a court may permit invasion if it is in the best interest of beneficiaries or for the maintenance or support of the beneficiaries.
a trustee cannot use trust property to pay income of beneficiaries when trust income is insufficient unless there is an express or implied power of invasion
judicial modifications of trust
cy pres doctrine (charitable trust only)
deviation: trustee and beneficiaries can request the court permit deviation or modify terms of trust if continuing the trust is impracticable or wasteful and the modification furthers the trust purpose b/c of unanticipated circumstances
common law: only administrative provisions can be modified
UTC: dispositive provisions may be modified when circumstances arise that were not anticipated
modification of trust by parties
maj: a trust is generally irrevocable and cannot be modified unless settlor retained the right to do so in terms of trust.
minority of courts hold settlor is free to modify or revoke the trust instrument unless otherwise stated
UTC: trust can be modified:
- by settlor, unless expressed otherwise
- if settlor and beneficiaries consent
- beneficiaries consent and modification is consistent with purpose
- modification will further trust purpose b/c of unanticipated circumstances
- court determination that value of trust is insufficient for administration and all beneficiaries are notified
- necessary to conform to settlor intent
termination of trust
- trust is revoked or expires pursuant to terms
- material purpose has been satisfied or becomes unlawful, against pub policy, or impossible
- settlor and all beneficiaries agree to terminate
- all beneficiaries agree AND no material purpose for trust remain
- termination will further the purpose of the trust due to circumstances that were not foreseen by settlor or
- court or trustee determine value of property is too low to justify costs of administration
if trust is terminated, property vests in beneficiaries who may distribute property in any manner they choose. trustee may retain reasonable amount of property to cover debts, expenses, or taxes
fiduciary duty of trustee
trustee must manage property exclusively for benefit of all the trust beneficiaries and administer the trust in good faith pursuant to the terms and purposes of the trust
includes:
- duty of care
- duty of loyalty
- duty to act impartially
- duty to administer trust according to terms
- separate and earmark property
- preserve and make trust property productive
duty of care
- duty to exercise the degree and skill as a person of ordinary prudence would exercise in dealing with his own property - focus on conduct, not results of conduct
- Uniform Prudent Investor Act (UPIA) requires trustee to exercise the care and skill as an investor of ordinary prudence would exercise in investing his own property (diversify, avoid risky investments, avoid speculation)
exculpatory clause
maj: settlor may limit the potential liability of trustee by including an exculpatory clause in trust; however, these do not excuse bad faith
conflict of interest
duty of loyalty
a transaction is presumed to be affected by conflict of interest if entered into by trustee spouse or heirs, agent or attorney of trustee, or an entity that trustee has an interest in that might affect trustee best judgment
No further inquiry rule: a transaction entered into by trustee for trustee own benefit is automatically presumed to be a conflict of interest. it is voidable without further inquiry
if it involves a person who has close business relationship or personal relationship with trustee, the presumption is rebuttable if trustee shows the transaction was not affected by any conflict
duty of loyalty
trustee owes duty of loyalty to beneficiaries where the trustee may not obtain personal gain from administering the trust, except for fees
self-dealing: self-dealing is a per se breach of loyalty. includes any transaction involving trust property that trustee enters into for his own gain. may be excused where approved by court, beneficiary did not commence action within required time, beneficiary consented, or transaction occurred before the person became trustee
waiver: settlor may expressly waive duty of loyalty in trust instrument. waiver does not exclude bad faith
duty of to act impartially
must be impartial to all beneficiaries when investing, managing, and distributing property
newly acquired assets that must be allocated to trust income
receipt of rental payments from trust property and corporate distributions
newly acquired assets that must be distributed to trust principal
funds received from sale of property and repayment of loan principal
power of appointment
conveyed by will or trust from donor to donee granting the right to appoint or distribute property left by donor. the holder of POA does not receive full title to property, only the power to appoint or distribute
general power of appointment
granted when donor does not leave any restrictions as to appointment of the property - thus, POA is free to appoint property to himself, creditors, or any other he chooses
special power of appointment
donor leaves restrictions on the appointment of property. donee may not exercise a special POA for his own benefit
POA via general residuary clause
POA may be exercised in general residuary clause only if the power of appointment is general power or testator will manifests an intention to include the property subj to the power
acceleration
future interest may be accelerated, allowing future interest holder to take possession immediately if the present interest holder loses title or legal right to property or disclaims the property
disclaimer by beneficiary
o No one can be compelled to accept an interest in trust – a beneficiary may disclaim an interest in trust by filing a written instrument with the trustee within 9 months of the interest’s creation (assuming trustee has reached age 21)
Once disclaimed, it is treated as if beneficiary died
o Estoppel: beneficiary can be estopped from making disclaimer if they have exercised any dominion or control over interest or accepted any benefits under trust
o Disclaimants creditors: majority holds that a disclaimer relates back to the date of transfer for all purposes – a disclaimer by an insolvent beneficiary can be used to defeat creditor’s claims but not federal tax lien
Cannot disclaim if you have accepted any benefit
removal of trustee
Grounds for removal
o Serious breach of trust
o Serious lack of cooperation among co-trustees
o Unfitness, unwillingness, or persistent failure to administer or
o A substantial change in circumstances
A trustee can resign after acceptance by either
o Giving 30 days’ notice to qualified beneficiaries, settlor (if living), and co-trustees or
o Obtaining court approval
testamentary trust - secret vs. semi-secret
trust created by settlor valid will
Secret trust – constructive trust imposed
o Secret trust – absolute gift in will made in reliance on the beneficiary promise to hold the property in trust for another
the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else – and relies on beneficiary promise – but the will does not state the trust nature of the gift
Semi-secret trust – resulting trust implied
o Semi-secret trust – the will makes gift in trust but fails to name the beneficiary
o The gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest
o No extrinsic evidence allowed – trustee holds on resulting trust for testator’s legatees or heirs
