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
