Trusts Flashcards
** Beneficiaries of a charitable trust
Must be indefinite
Creation Methods
INTER VIVOS / living trust: created by settlor while alive
1. DECLARATION of Trust: settlor and trustee are the same person, retains legal title
2. Transfer / CONVEYANCE in trust: transfers LEGAL title to someone else
TESTAMENTARY trust: created in testator’s will
- Must meet all requirements of valid will first
Discretionary Trust
Trustee can determine how much a beneficiary receives, if anything
- Abuse depends on the extent of discretion conferred on the trustee. Court will generally not interfere unless trustee has acted in bad faith / dishonestly. Comporting with fiduciary duty as trustee?
- “Absolute and unreviewable discretion”
- Very common; trustee can exercise substituted judgment regarding distribution of property, same manner as settlor would
- Beneficiary does not have anything to transfer until a decision has been made by trustee to distribute money
- Nothing for creditors to reach; beneficiaries just have an EXPECTANCY that they will be the beneficiary of a power of appointment
- Some people may be able to reach property in discretionary trust regardless, e.g., child, spousal support, alimony
Duties of the Trustee
- Administer trust according to its terms, the laws
- Duty LOYALTY to beneficiaries: exercise the utmost good faith in all matters pertaining to the trust. Avoid SELF-DEALING (cannot personally benefit from the trust, i.e., purchase from, sell to, borrow from trust, claim excessive compensation). Good faith / fairness of transaction is irrelevant. Extends to all beneficiaries equally.
- Keep accurate records, give accountings on demand
- General standard: what a PRUDENT person would do with the property. Earmark it as belonging to the trust, segregate it.
- Administer the trust prudently, in good faith, and impartially
- Loyalty: no self-dealing
- Report: respond to beneficiaries requests and provide accounting
- Separate and Earmark Property
- Preserve and make trust property productive
Exceptions to a spendthrift provision
Some states do not enforce a spendthrift provision against certain types of creditors
- E.g., beneficiary’s dependents
- Alimony = dependent!
** Failure to name a trustee
May indicate lack of trust intent
Remedies for Self-Dealing
- Affirm the transaction
- Set aside the transaction
- Trace profits form the trustee
** Self-dealing
Trustee’s good faith or benefit to the trust is irrelevant
Settlor
Causes the trust to come into existence; aka trustor, grantor, donor
- Transfers legal title to a trustee and equitable title to beneficiary
** Furnishes consideration
** Settlor of revocable trust directing trustee to make non-diverse investments
If he owes his duty to the settlor, may relieve trustee of their duty to diversify
Spendthrift Provision
- Beneficiary cannot TRANSFER interest. Any attempt to transfer is void.
- Once paid, beneficiary can do whatever they want
- Settlor may have trustee spend on behalf of beneficiary, e.g., pay tuition - Creditors cannot attach the beneficiary’s interest
- If the beneficiary is actually paid, can reach it
LIMITATIONS:
- Settlor is the beneficiary (Self-settled spendthrift trust): generally, public policy prevents you from protecting your own assets from your own creditors. Can protect your property from other peoples’ creditors…
- Support claims for spouse, children
- Tort creditors
- Creditors who supplied necessities
Support Trust
The trustee is REQUIRED to pay/apply so much of the trust as necessary for the support of the beneficiary.
Use of the property is limited to the beneficiary’s support, e.g., health, maintenance
- Mandatory: trustee must distribute funds
- Discretionary: if they do distribute funds, must be for support
- Almost always deemed impliedly spendthrift
- Standard of support: if not stated, what lifestyle beneficiary was accustomed to
- Trust instrument should state how and when the funds should be provided
Termination of trust
Most jurisdictions permit termination of a trust by its beneficiaries only if
- All of the beneficiaries consent and
- Including UNBORN and UNASCERTAINED beneficiaries, FUTURE beneficiaries, no matter how uncertain - The modification will not interfere with a material purpose of the trust.
Most states do not permit a guardian to consent to termination on behalf of unborn beneficiaries.
- Spendthrift provision precludes termination by beneficiaries
A court can terminate a trust if the trust purposes are carried out early or the purposes become illegal / impossible to carry out.
- Usually stated in express terms
- Settlor may modify or revoke trust for any/no reason, unless trust instrument expressly restricts that right
- May be able to revoke irrevocable trust if all beneficiaries agree
- Operation of law: property exhausted, merger, etc.
- By court: trust has been accomplished, illegal, impossible, unanticipated circumstances to further settlor’s intent, costs outweigh benefits.
- May be able to bring in C&C evidence to fix scrivener’s error
Testamentary Secret Trust
Testamentary gift silent as to trust nature of transfer.
- Settlor agrees with beneficiary of will that they will hold the property in trust for someone else, but doesn’t state the trust nature of the gift
- Courts will allow the alleged beneficiary to bring in evidence to show what happened, seek constructive trust remedy against will beneficiary who is being unjustly enriched
- Extrinsic evidence allowed
Testamentary Semi-Secret Trust
Will clearly says that it leaves property in trust to trustee but fails to state beneficiary, how the property will be used
- Does not create a trust, no ascertainable beneficiaries
- Give legal titles back to settlor’s beneficiaries in interest
- “Resulting trust”
Extrinsic evidence not allowed
Trust
Title of property is divided;
- Legal (trustee)
- Equitable (beneficiary)
Gratuitous transfer of property
Trust intent
- Settlor splits legal and equitable title
- Imposes enforceable duties on holder of legal title
- PRESENT intent; exists AT TIME of property transfer
- Does not require specific language / merely calling it a “trust” does not create a trust
- Promise to make trust in FUTURE is not enforceable without binding contract / consideration
- Cannot RETROACTIVELY change the character of a gift (later say, by the way, that was a trust)
- PRECATORY language like, “I hope,” “I wish,” “I desire” is usually not enough, just a moral obligation, not a legal one
Trustee powers
Sources
- Express: by settlor, in trust instrument
- State statute
- Granted by the court
- Implied: necessary / appropriate to carry out the terms of the trust, e.g., sell trust property, incur reasonable expenses
- Multiple trustees: majority can exercise a power (previously, all trustees need to agree)
- MANDATORY: trustee must do it
- DISCRETIONARY: trustee may exercise powers re: distribution, management if done in good faith. Liable only for abuse of discretion. No such thing as absolute discretion; court can always intervene.
Valid trust
“To create a valid trust, there must be a SETTLOR who, INTENDING to create a valid TRUST PURPOSE, DELIVERS the TRUST PROPERTY to the TRUSTEE to hold for the benefit of one or more BENEFICIARIES.”
- Intent
- Identifiable corpus
- Ascertainable beneficiaries
- Proper purpose
- Mechanics and formalities
Acceptance of Trusteeship
- Sign the trust / written acceptance
- Start acting like a trustee, deemed to have accepted
Does an intended beneficiary have to accept the interest?
Do not have to accept, can DISCLAIM your interest
- Cannot have accepted ANY benefits from the trust
Allocation of Receipts and Expenses b/w Income and Principal
P and I: income goes to certain people, principal goes to others.
Uniform Principal and Income Act
- Receipts: if you sell an asset of the trust, all monies received are principal. Includes return of investment + appreciation, rent, interest on trust investments (e.g., CD), eminent domain awards, insurance proceeds. Stock dividend.
- Income: cash stock dividend, profits from sale of building. Rental payments.
- Wasting assets: 10% income, 90% principal
- Business: GAAC; income of the business
- Underproductive property sold: income is not reimbursed
Settlor can alter allocation
Trustee has ADJUSTMENT power, i.e., deviate from normal allocation rules in certain circumstances, e.g. trust income no longer meeting needs. Cannot do so against trust instrument, if trustee is beneficiary / would benefit trustee, cause bad tax consequences.
- Trustee must consider wide variety of factors before exercising this power.
1. nature, purpose, expected duration of trust
2. intent of the settlor
3. identity and circumstances of trust
4. capital needs
5. nature of trust’s assets
6. amount allocated to income
7. whether trust gives power to trustee to invade principal or accumulate income
8. inflation
9. tax consequences
Ascertainable beneficiaries
Required because they ENFORCE the trust
- Need not be identified when the trust is created, but must be ID’d when their interests vest
- May be a class, if definite
- Settlor can allow trustee to select members of a class so long as the class is REASONABLE DEFINITE
* When a trust fails for lack of beneficiaries, a resulting trust in favor of the SETTLOR or settlor’s SUCCESSORS IN INTEREST is presumed
- Residuary beneficiary for testamentary trust
Beneficiaries modify trust
If the beneficiaries can get the consent of the settlor, they can modify
- May be able to modify without consent with
1. Agreement of all beneficiaries - Virtual representation: allows current beneficiary in similar situation to represent unascertained beneficiaries
2. Settlor’s intent would not be frustrated - Changes would upset a material purpose of the trust
- E.g., support provisions, spendthrifts, payments that pay at age, date, discretionary trust
Beneficiary dies first
If trust is silent, gift usually fails. Some states / UTC have anti-lapse rules, goes to beneficiary’s descendants.
Does the beneficiary of a trust need to know that they are one?
Do NOT have to know they are the beneficiary of a trust
- Notification bolsters trust intent element
Beneficiary transfer interest
Interests are freely transferrable and creditors can involuntarily get property
- Very rare because spendthrift provisions prevent this, and beneficiary’s interests are almost always limited to live estates
Can a creditor reach a beneficiary’s future interest?
No!
- In the absence of a spendthrift provision, a creditor CAN reach a trust beneficiary’s interests. However, if they merely hold an interest that will vest in the future, cannot be satisfied out of the future interest
Capacity
- Inter vivos gift –> inter vivos trust
- Will –> testamentary trust
Capacity for Beneficiary
Person/entity that can take, hold title.
- Cannot have indirect/incidental benefits…need actual equitable TITLE to sue for breach of trust
- Do not need to be competent.
Cash divdends
INCOME
Charitable Trust
Helps society in general; may designate particular organization.
- Court makes determination whether purpose is charitable, not settlor
- Does not require specific language, but settlor must be sufficiently altruistic (e.g., cannot just benefit family)
- What is generally accepted in the COMMUNITY as charitable? If basis is religion, is it against the law / public policy?
- RAP does not apply
- Enforced by named charitable organization, State AG
Class gifts
Okay to not know members of class at time of creation. But at time of DISTRIBUTION, class membership must be ASCERTAINABLE.
- Can allow trustee/third party to select who receives benefit
- If not ascertainable, legal title goes back to SETTLOR
Compensation for Trustee
State law determines if not indicated in trust
- Reasonable compensation
Constructive Trust
It is NOT a trust! Not express, implied…it is intent defeating. Equitable REMEDY designed to prevent unjust enrichment. Cannot in good conscience retain the benefit of the property.
- There must be a nexus between the IMPROPER CONDUCT and the PROPERTY
- Remedy: give legal title back to person who deserves it
- Fraud, duress, breach of fiduciary duty / abuse of confidential relationship, homicide (in states lacking slayer statute), promise made in contemplation of death and holding for the benefit of another
Creditor against a remainder-beneficiary
Except as otherwise provided by statute or validly restricted by the terms of the trust instrument, e.g., a spendthrift provision, the interest of an insolvent trust beneficiary can generally be reached by appropriate proceedings
- Creditor reaches only the INTEREST of the beneficiary, not the principal
Cy pres
Applies when a specific charitable purpose indicated by the settlor is no longer practical or possible, and the settlor manifested a general charitable intent
- If you cannot carry out a charitable trust as written, courts apply this doctrine of equitable approximation, court can substitute in equitably equivalent charity
- General charitable intent…
- If it FAILS, becomes a resulting trust (remainder beneficiary)
- Application is mandatory in UTC jxns
Disbursements relating to environmental matters
PRINCIPAL
Divorce
If the settlor is divorced from his beneficiary spouse, those provisions in favor of spouse are voided
- Need a FINAL divorce
- Sometimes void gifts to ex-spouse and other ex-relatives
Does a trust have to be in writing?
- Some states allow oral trusts of personal property in certain circumstances
- If a trustee starts acting like a trustee, then they will consider that as part performance, estopped from denying existence of a trust
- SOF protects against FALSE CLAIMS against true donee of outright gift, i.e., false claims that they don’t have equitable title
Domestic Asset Protection Trusts
Do allow creation of spendthrift trusts for yourself!
- Minority rule
Interest
Held by beneficiary; get benefit of property as set forth in trust
- Can enforce fiduciary duties
Estate taxes
PRINCIPAL
Expenses from proceeding concerning principal interest
PRINCIPAL
Extraordinary receipts
Proceeds from sale of trustee assets, etc.
PRINCIPAL
Funding the trust
Must delivery property from settlor to trustee
- Trust instruments could be perfect, but need to actually CONVEY the property
- Declaration of trust: hold the personal property separate/identified, change registration
- Land: need to DEED the land from yourself as an individual to yourself as a trustee
- Conveyance: deed, physical delivery, written assignment, etc.
- POUR-OVER WILL: contains a provision leaving property to an inter vivos trust, governed by terms of that trust. Lapse if trust revoked before death. Modern law, can be trust funding. Takes effect at time of death. Traditionally, had to create a trust and then leave. The instrument must be executed before the testator dies but doesn’t have to be executed before or at the time of the will execution.
Honorary / Purpose Trust
Not human beneficiaries / not particularly charitable. E.g., pet trust.
Identifiable Corpus
Must be ascertainable with certainty. Trust requires PROPERTY because it’s a property conveyance
- Must be SEPARATED from other property, but can be PORTION
- Anything you can TRANSFER can be held in trust
- CANNOT hold in trust property of another person, spouse’s community property, future income, expectancy of heir / beneficiary of living person’s will…
If there are no assets when the trust instrument is executed
I.e., settlor promises gratuitiously to create a trust in the future, a trust arises in the future only if, when the assets come into existence, the settlor manifests anew an intention to create the trust. The re-manifestation is not required, however, if the promise is supported by valid consideration.
Insurance premiums covering loss of a principal assets
INCOME
Investments
Prudent investor standard: the trustee must invest in the same manner as a prudent investor, unless changed by the trust instrument
- View conduct at time of DECISION
- Trust language that appears to adopt other language impose this standard
- View investments TOGETHER, portfolio approach, overall investment strategy with reasonable risk/return objectives
- Consider trust purposes, terms of the trust, economic conditions, taxes, role of investment in portfolio, income & appreciation, other resources of the beneficiary, liquidity/income, heirloom
- Diversification is prudent
- If person is MORE skilled than prudent investor, bound to exercise those higher skills. If LOWER skills, still need to comply with higher standard.
- Duty to review trust property investments; are they still good investments? Successor trustee must review all property right away.
- Duty is to the BENEFICIARIES; social investing/woke portfolio has to be just as good. If settlor wants it, should be put in trust instrument.
- Cannot favor one beneficiary over another, unless trust allows it
- Can delegate investment/management functions to someone with the prudent investor’s skills. Protected from personal liability if you use reasonable care in selecting agent, establish the scope and terms of the delegation, and periodically review what the agent has done
Kinds of trusts
EXPRESS: created through the express intent of settlor
- Private beneficiaries
- Charitable beneficiaries
OPERATION OF LAW
- Resulting trust (implied intent)
- Constructive trust (equitable remedy to prevent unjust enrichment)
Lack of trustee
Most trusts will not fail for lack of trustee.
- Court can appoint one
- Cannot force someone to be a trustee, despite being named in a trust
Legal title
Held by trustee; responsibilities of ownership
- No benefits of the property
- Owes FIDUCIARY duties to the beneficiary; must deal with reasonable care, maintain the utmost degree of loyalty, is personally liable for lapses below the standard of care
Liabilities of the Trustee
MONEY damages: lost profits that trust would have earned but for the breach, depreciation in trust value, trustee earned profits
- NOT liable if the trustee reasonably relied on the terms of the trust, beneficiary consented to the conduct or ratified the breach; exculpatory clause (strict interpretation, only exculpate NEGLIGENCE, not bad faith, etc.)
- Co-Trustees: if don’t agree/join, initially protected. Still has the duty to sue their co-trustees for breach of trust, monitor what the other trustees are doing.
REMOVAL of trustee: wide variety of reasons. Court has very broad discretion to remove trustee, appoint successor trustee.
Liability of Third Parties to the Trust
- If the trust property is inappropriately in the hands of someone who is not a BFP, court can set aside transaction, get property back for trust.
- Third party engaged in breach of trust transaction
Merger of title
Settlor is settlor, trustee, and sole beneficiary
Money spent by trustee
Ordinary income tax, comes out of income. Capital gains tax, out of principal.
Ordinary repairs, income, extraordinary repairs, principal.
Depreciation comes out of income.
Compensation for trustee/accounting expenses: 50/50
Ordinary Expenses
INCOME
Ordinary receipts
From use / investment of trust property…e.g., rents, interest…
INCOME
payment from deferred compensation, liquidating asset (e.g., patent / copyright), proceeds from a working interest (e.g., oil and gas)
10% INCOME
90% PRINCIPAL
Payments of the principal of a trust DEBT
PRINCIPAL
Pour-Over Will
Traditionally, to create a valid pour-over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution. However, under the majority rule, a will may devise property to a trustee of a trust established or to be established during the tesator’s lifetime, ie.e, the trust may be eestablished after the will is executed but before testator’s death. Valid ieven if trust is unfunded during T’s lifetime.
Powers of the trustee
Must have real powers and duties, cannot be nominal
Proceeds from contract insuring trustee against loss
INCOME
Proceeds from life insurance policy naming trust or trustee as beneficiary
PRINCIPAL
Purpose for trust
Any purpose as long as it is not illegal or against public policy
- If court invalidates purpose can
1. Get rid of condition, let beneficiary get property even if they don’t comply
2. Gift is void in its entirety
Qualified Beneficiary
- Current beneficiary
- First-line remainder beneficiary
- If the trust were to end today, they would benefit. Not remote.
- Have additional enforcement rights
Reasons to create a trust
- Protect / provide for beneficiaries
- Flexibility of asset distribution
- Protection against settlor’s incompetence (e.g., guardianship)
- Professional management of property
- Probate avoidance
- Tax benefits
regular compensation of trustee / investment services, all expenses for accounting, judicial proceedings, and other matters affecting income / remainder interests
50% INCOME
50% PRINCIPAL
Removal of the Trustee
Can be removed by the court. Successor trustees have same rights/duties of original
Resulting Trust
Arises from implication because of the settlor’s CONDUCT. Trustee conveys back to settlor.
- Carry out the settlor’s intent
- Settlor / settlor’s successors in interest are the only ones who can benefit
1. Attempt to create trust, but was ineffective, property back to settlor
2. No provision for a remainder, remainder back to settlor
3. Purchase money resulting trust PMRT, you give money and seller gives title directly to someone else…why would someone do this? - Gift (presumed if closely related)
- Loan (repay money for item)
- PMRT: intended the other person to hold the property for you (e.g., shipping package to a friend’s house)
Requirements for a valid division of equitable and legal title
Any split of title into legal and equitable title works as long as the same person does not owe all of the legal / equitable title
- TRUSTEE and BENEFICIARY cannot be same person
- If there are CO-BENEFICIARIES, that’s okay! Title isn’t in ONE person!
- Even if weak, remote, beneficial title is in someone else, that is okay
Stock dividends
PRINCIPAL
Trustee modify trust
- If low value, trustee may be able to terminate trust for being uneconomic. $50k
- Combine/divide up trusts (decanting)
- If trust has ended, can still, for a reasonable period of time, wind up trust business, distribute to beneficiaries
Trustee’s Actions
Legal duties imposed by state law + settlor’s instructions
- Usually instructions in settlement document trump defaults in state law
- Will make payments to the beneficiary / for benefit of beneficiary according to instructions stated in trust
- Competed eventually and the trust ends, distributes remaining property to remainder beneficiary who gets both legal and equitable title
Trustee’s Heirs / Creditors
Don’t have any claim to trust property…trustee only has legal title 3
Trustee’s Liability to Third Parties
A trust is not a legal entity and cannot sue / be sued. Must sue trustee in representative capacity
CONTRACTS: trustee is liable on the contracts he signs as trustee because he has signed it…personally liable. To avoid personal liability, have provision in contract saying he’s not personally liable. Presumption, if you sign as “trustee,” intent to exclude personal liability.
- Can get indemnified / reimbursed from trust property
TORTS: liable for the torts that the trustee does. In many states, abolished respondeat superior for trustee’s agents.
Unitrust
Beneficiary is entitled to % of trust, rather than income
- Keeps income and principal beneficiaries happy
