Trusts Flashcards
Basic definition of a trust
Fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer trust assets and income for the benefit of designated beneficiaries who hold equitable title.
Elements of a valid trust
Intent Identifiable corpus Ascertainable beneficiaries Proper purpose Mechanics and formalities
Express trust elements
settlor with capacity to convey
present intent to create a trust relationship (no specific words required)
competent trustee with duties
definite beneficiary
same person is not the sole trustee and sole beneficiary
present disposition in trust of specific property then owned by settlor
trust has a valid purpose
trustee
trust will not fail because trustee dies, refuses to accept appointment, or resigns. court will appoint a successor trustee. Trustee entitled to reasonable compensation or to whatever compensation is specified in the trust instrument.
removal of trustee
(1) serious breach of trust
(2) serious lack of cooperation among co-trustees
(3) unfitness, unwillingness, or persistent failure to administer
(4) substantial change in circumstances
Trustee can resign by either
(1) giving 30 days notice to qualified beneficiary, settlor if living, and co-trustees
(2) obtaining court approval
Inter vivos trust
created while settlor is alive either by settlor declaring themselves trustee for another or by transfer of property to another as trustee.
If conveying property to a trust, the property must be properly conveyed.
Pour over gift from will to trust
settlor can make gifts by will to a trust, even an amendable and revocable trust.
Trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the initial trust funding if
(1) trust identified in the will and
(2) trust executed before testator’s death
Testamentary trusts
Created in settlor’s valid will.
Trust intent and essential terms of the trust must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will.
Secret trust
settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else and relies on beneficiary’s promise. Will does not state trust nature of the gift. Intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust. If promise can be proven by clear and convincing evidence, constructive trust will be imposed on property.
Semi-secret trust
Will makes a gift in trust but fails to name the beneficiary. Gift fails and named trustee holds property in a resulting trust for testator’s successors in interest.
Transfer of beneficiary’s interest
absent restrictions by statute or by the trust instrument, a beneficiary may freely transfer their interest in the trust. The assigned interest remains subject to all pervious conditions and limitations.
Unless statute or the trust provides otherwise, beneficiary’s creditors may reach beneficiary’s interest in the trust
Discretionary trust
Trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary.
Before trustee exercises their discretion to make payments, the beneficiary’s interest is not assignable and cannot be reached by their creditors.
Creditors can attach to the beneficiary’s interest but may not compel the trustee to make a distribution. If trustee has notice of an attachment, they must make payment directly to creditors.
Exception is that the court can force trustee to satisfy a judgment or order against beneficiary for support or maintenance of child, spouse, or former spouse of beneficiary.
Spendthrift trust
Precludes beneficiary from voluntarily or involuntarily transferring their interest in the trust and the beneficiary’s creditors are precluded from reaching it to satisfy their own claims.
In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors. But a growing number of states allow self-settled spendthrift trusts.
Spendthrift clause cannot be used to shield beneficiary from judgments for support or maintenance of child, spouse, or former spouse or claims by the government.
Support trust
directs trustee to pay only so much of the income or principal as is necessary for the beneficiary’s support. Can be mandatory or discretionary.
These trusts are impliedly spendthrift because the beneficiary cannot assign their interest.
If the instrument is silent, standard of support is the beneficiary’s accustomed standard of living. Whether or not to take beneficiary’s other income and resources into account is a question of settlor intent and is decided by courts on a case-by-case basis.
termination of trust
Expiration of term specified in instrument or when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve.
Settlor can revoke or amend a trust unless terms expressly state it is irrevocable. In some states settlor can revoke irrevocable trust on written consent of all living persons with vested or contingent interests.
Termination of trust by beneficiaries
With consent of settlor and all beneficiaries trust can be terminated or modified even if the proposed change conflicts with a material purpose of the trust.
Without settlor’s consent a trust can be terminated or modified on consent of all beneficiaries if no material purpose of the trust would be frustrated.
Common material purposes
- support of beneficiary
- spendthrift provisions
- payment at certain ages
- payment at certain dates
- discretionary trusts
Look out for unborn or unascertained beneficiaries. Their interests must be represented.
termination of trust by the court
Court can terminate or modify if
(1) trust could have been modified if all beneficiaries consent
(2) interests of any non-consenting beneficiaries will be adequately protected or
- unanticipated circumstances threaten purpose of trust
- continuation of trust on existing terms is impracticable or wasteful or
- value of trust is insufficient to justify the cost of administration or achieve settlor’s tax objectives
termination of trust by trustee
in some states, trustee can terminate if trust property is less than $50k and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice.
Trustee powers
- powers expressly conferred by trust
- powers granted by state law and
- implied powers appropriate to achieve the proper investment, management, and distribution of the trust property
Implied trust powers
- sell trust property
- lease trust property
- incur reasonable expenses
- hire agents
- mortgage trust property
- repair
Discretionary trustee powers
Ones the trustee may or may not perform as the trustee determines in their judgment to be the most appropriate. Trustee must exercise a discretionary power in good faith.
court will review for abuse of discretion.
Trustee duties
Duty to administer trust in good faith and prudent manner
Duty of loyalty
Duty to report
Duty to keep trust property separate
Duty to enforce claims and defend trust from attack
Duty to preserve trust property and make it productive
Duty of loyalty
Duty of undivided loyalty to the trust and its beneficiaries
- cannot deal with trust in individual capacity
- cannot buy or sell trusts assets
- may not sell property of one trust to another trust which they are also trustee of
- may not borrow trust funds nor loan their personal funds to the trust
- cannot use trust assets to secure a personal loan
- cannot personal gain through their position as trustee
- cannot invest its own stock but can retain it if already owned when they became trustee
- no self-employment
Trustee’s good faith or the actual benefit to the trust is irrelevant.
Self dealing transaction voidable if :
(1) court or the terms of the trust approved it
(2) beneficiary failed to bring suit within the prescribed time period
(3) beneficiary gave their consent, ratification, or release or
(4) involves a contract or claim arising before the trustee became trustee
Trustee investments
Governed by the Uniform Prudent Investor Act. If trust instrument provides investments can be made in the trustee’s discretion, it is a question of interpretation whether the trustee’s power expanded beyond the UPIA.
Standard of care- trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.
Investment decisions evaluated in context of entire trust portfolio and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust. Trustee must diversify the investments of the trust unless they reasonably determine that purposes of the trust are better served without diversification.
