Trusts Flashcards
Define beneficiary of a trust and their duties
Beneficiary is the equitable owner of the trust. The trust is managed for their benefit. Only real duty is to hold Trustee to account for managing correctly–they have power to enforce the trust instrument. and ENJOY benefit of trust.
Trustee definition
Legal owner and controller of the trust. Manages trust for benefit of other(s). Many duties.
Explain principal vs income in a trust
Principal is the original property of the trust and any increase in value
income is the $ invested by the trust
settlor definition
person who creates a trust and settles is on another
presumption for trust, revocable s not
UTC says trust is revocable unless it clearly creates otherwise
mandatory trust
trustee has no discretion, must make certain distributions from the trust on a schedule
nonmandatory trust
trustee can choose, sometimes within guidelines, about when to make payouts from the trust
remedial trust
a legal remedy. Also called a passive trust. Created by operation of law. Trustee’s only obligation is to hold on to trust until passing it along
Does RAP apply to trusts?
yes, the “wait and see approach” to see if it vests tends to be the practical approach
Can trustee enjoy benefit of trust?
Sometimes. But can’t be a sole beneficiary and the trustee.
What can trustee generally do with the property?
Sell, reinvest, etc–advantage of holding legal title to it
If trustee backs out, does trust fail?
No, trust can always find a trustee. Does not fail
During what time period can a revocable trust be revoked?
Any time during the settlor’s life but NOT by the settlor’s will
two types of express trusts
private and charitable
what is the effect of precatory language on a gift or trust?
Precatory language indicates the hope or wish of the grantor/settlor, but that has no legal effect
when does a trust creation need to be written down to be effective?
When the statute of Frauds would apply (i.e. if real property is in the trust) OR if a will is involved.
(minority rule: no oral trusts)
When does a trust need to be created in order to be in a will?
Trust has to already exist OR be created at the same time as the will. Cannot devise something that doesn’t exist.
What elements are needed to create a trust?
- Intent. Need trust words–“in trust” or “for the benefit of”
- In writing ONLY IF conveying real estate or the trust is in a will
- res: must have property in the trust
- must have a purpose. Can be anything so long as it’s legal and does not violate public policy
- Beneficiary. Must be ascertainable: either a person or a set of persons that we can identify. “members of Moab high school band” is fine. (exceptions!!)
how do you distinguish between a trust and a gift?
Gift: no trust relationship; same person has all benefit and all control
Trust: if different person enjoys benefit of trust than owns trust
what does “res” mean in a trust
“res” is the property in a trust
Can you have a trust without property in it (empty trust)
Generally no, but EXCEPTION:
pourover will where empty trust is created and a will puts property into it when settlor dies
what happens when funds are commingled?
This violates a duty to the beneficiary
Excepttion to need for ascertainable beneficiary
- Unborn children “A’s children” is fine
- Class gifts–so long as have criteria
- Charitable trust (bc we like charity)
What distinguishes an express public trust
charitable trust must have a charitable purpose for public good: poverty, education, religion, health, gov purposes, or “other purposes benefiting community at large or particular segment thereof” can be TINY segment, like super rare disease
What is the law’s attitude towards failing a charitable trust?
presumes general charitable purpose unless it’s CLEAR we don’t have one. Also no RAP applies. Because we like charity!
How is Cy Pres used for a charitable trust?
If charitable purpose no longer possible, court can use Cy Res (equitable doctrine) reform a trust so we don’t lose the gift.
FIND A GENERAL CHARITABLE PURPOSE
goal: to make new purpose very close to old
what happens if a charitable trust fails?
The trust assets go to a “resulting trust” which is passive creation of law, and we send it back to the settlor if we can’t use cy pres to find new charity
Settlor and maybe trustee can tecide
who has standing to enforce terms of charitable trust?
- AG office
- settlor under UTC
how to create an express trust?
- Inter vivos
a. declares that there is a trust
b. deed of trust–conveyance to another as trustee - By will, it goes into effect when you die
A settlor can declare himself to be the trustee of a trust by using a
declaration of trust
what is cy pres and when can it be used in conjunction with a trust?
Cy pres is an equitable doctrine that allows the court to re-form a charitable trust whose purpose no longer works in order to keep the trust operating. It cannot be used on a private trust.
how is a remedial trust created?
It’s an equitable remedy created bu operation of law
passive in nature
trustee has only one duty: to convey property back to the settlor
2 types of remedial trust
-
resulting trust. Used when a trust fails. Return property to settlor or settlor’s estate
Goal: to avoid unjust enrichment.
“purchase $ resulting trust”
how to avoid resulting trust: gift over clause - constructive trust--there is wrongful conduct. Sometimes takes advantage of the settlor–duress, breach of duty, detrimental reliance by a 3rd party, etc. As remedy, court will lock down the trust property so property goes back to state as trustee’s only option
how tp prevent a resulting trust if your trust fails
make a gift over clause–a second place for the trust property to go if the first trust fails
different types of trust distribution
- mandatory trust: trustee has no discretion as to how to distribute
- discretionary trust: has SOME direction. “makes distributions to support beneficiary while he is in college”
alienability of beneficiary’s interest in trust property
As soon a beneficiary has it, can alienate at will!
UNLESS trust itself limits that right. Maybe beneficiary unreliable
when can a beneficiary’s creditor get at the beneficiary’s trust interest?
As soon as B has the ability to alienated–so as payments come in!
Creditor can get at payment
Creditor CANNOT yeah reach trust principal or income until it’s in the trustee’s hands
Note: if trustee is worried about this and has discretion, can stop making payments
what kind of trust protects assets?
asset protection trusts: shield B from creditor’s claims
- support trust: creditor can only reach when trustee makes support payment
- discretionary trust: same as above
- spendthrift trust: expressly restricts B’s power to alienate her interest.
exceptions to spendthrift trust for creditors
When can creditors get to a spendthrift
- child or spousal support
- tax liens
- basic support for beneficiary (food etc)
a purchase money resulting trust is imposed when..
the beneficiary is not the natural object of the settlor’s bounty
how to terminate a trust
- expiration. express can retire at end of term. When A turns 25, it terminates
- fulfillment of material purpose. automatically ends when purpose fulfilled
- Settlor dead, B wants to terminate trust (get $) and trustee opposes termination.
- Trustee can block termination if material purpose is still being served. happens in age dependent, support trust, discretionary trust
- Settlor alive! can terminate if clause allows it, or if Bs agree to do it
how to modify trust if settlor alive
settlor can unilaterally modify trust if reserved this power in the trust doc
if settlor did NOT reserve power, all Bs must consent and must be consistent with material purpose of the trust
OR
if purpose is trust is frustrated. If you see unanticipated facts on an exam, make sure you know purpose of trust
can trustee terminate or modify trust unilaterally
NO
how to remove trustee
- T is incapable
- material breach of trustee duty
- T conflict of interest
- SEROUS conflict between t and a B
- Trustee has not performed well die to T’s management
- Trustee can resign with notice
Claflin doctrine re: blocking trust modification
The Claflin Doctrine says that a trustee can block premature termination of a trust if it is still serving its material purpose.
can a settlor modify an irrevocable trust
Nope, that’s the point of an irrevocable trust
how can trustee balance interests of life estate beneficiary versus future interest holder
old rule: income goes to life estate, principal foes to future interest holder??
UPAAIA: trustee is now supposed to be focused on “TOTAL RETURN” of trust
Trustee can re-characterize parts of trust
allocation must be reasoable
factor trustee MUST take into account when making trust decisions:
- intent of seller and language of trust
- nature, duration, purchase of trust
- identifies and circumstances of beneficiaries
- anticipated effect of economic conditions
- anticipated tax consequences
What are the trustee’s powers and where find them?
Trustee’s powers are in the trust docs
If trust is silent, go to common law principles:
- all powers necessary to act as reasonably prudent person (has legal title):
- sell, lease-resegregate property
What are trustee’s duties?
Duty of loyalty: objective standard: did act reasonably
1. NO doing business with, or borrowing money from, the trust if you’re a trustee. “no further inquiry” rule. We don’t look into motivation or reasonableness or actual harm. it’s a per se violation.
Trust docs CAN SAY self-dealing is ok, but still has to be reasonable
Duty of care: subjective, did trustee act in good faith?
care that person of ordinary person would have in managing his own estsate
If you have special skills (investor) higher standard.
Duty of impartiality: balance competing interest between future and current holders. Modern rule: allocation of income between current and future interest holders must be BALANCED. How to we know; look at at the total return.
Delegation of trustee duty:
common law rule was against it, but modern rule permits delegation
Can delegate duties: must choose reas person and oversee that person
Admin duties:
. 1. duty to inform Bs of issues with trust
. 2. duty to recount–actions taken, portfolio status.
What are teh old and modern rule for investments
old rule: specific list of investments, breach if finest outside
modern rule: prudent investor rule. Must manage and invest as prudent investor. Fiersify assets and spread risk of loss. Measure success of portfolio as a whole
duty of impartiality
Duty of impartiality: balance competing interest between future and current holders. Modern rule: allocation of income between current and future interest holders must be BALANCED. How to we know; look at at the total return.
can a trustee delegate any part of his duty?
common law rule was against it, but modern rule permits delegation
Trustee can delegate duties: must choose reas person and oversee that person
Trustee’s duty of care
Duty of care: subjective, did trustee act in good faith?
care that person of ordinary person would have in managing his own estsate
If you have special skills (investor) higher standard.
Trustee’s duty of loyalty
Duty of loyalty: objective standard: did act reasonably
1. NO doing business with, or borrowing money from, the trust if you’re a trustee. “no further inquiry” rule. We don’t look into motivation or reasonableness or actual harm. it’s a per se violation.
Trust docs CAN SAY self-dealing is ok, but still has to be reasonable
Desribe remainder
Waits patently for something to happen to get possession
- Vested remainder: remainderman is ascertained and there is no condition precedent
- Contingent remainder: ascertained, but
what makes a remainder vested?
- remainderman is ascertained
- there are no conditions precedent to his getting possession (other than life estate holder dying)
- if one member of a class in a class gift is vested, then the class is vested. If class members could still come along, then it’s vested subject to open.
- If no member of a class of class is vested, then its contingent
O to A for life, then to O’s children. O has 2 children. Describe.
O’s children are a class. The two have a vested remainder subject to open.
What makes a future interest contingent rather than vested?
- If remainderman is not ascertainable yet, OR
- if a condition precedent (If B graduates from law school) could block from getting possessory interest. We won’t know if it vests for sure until B dies, or graduates. O keeps a reversion, in case B never graduates.
O to A for life, then to B’s first child. B has no kids.
A has life estate
O has reversion
B has nothing
This is a contingent remainder–condition is that B has kids
What interest cuts short (divest) other interest
Springing executory interest. Cuts short the grantor. O to A for life, then B IF B gives A a proper funeral. So A dies, reverse to O (then hs fee simple subject to executory interest) and B has a springing executory interest.
O to A in on year. A has springing exec interest and O has given herself a fee simple subject to executory interest
Shifting executory interest. O to A for life, then to B and heirs if B graduates from law school, and if not to C. O: nothing; A: life estate; B vested remainder subject to executory interest; C has shifting executory interest (because in order to get it, must divest B)
What happens if class member dies? Who gets their part of class gift?
Q: Trustee shall distribute to A (son) for his life, then to my grandchildren, with children of any deceased grand children taking their parents’ place.
When does the future interest becomes possesory? When the son dies, because then no more grandchildren. What happens if a grandchild dies without issue before the son? Does interest vest in grandchild’s estate or does it fail? Common law says: survival of grandchild is not essential. Under UPC, grandchild must survive son or the gift fails–cannot pass on something that never vested.
RST3: share of deceased class member goes to their surviving issue --HOWEVER--
General rule: A gift to a group contains right of survivorship. If class member dies their share is divided among other class members.
3 questions for trusts
- who is in possession now
- who has a future interest
- what has to happen for it to vest?
Must a trustee explicitly accept trusteeship?
No, accepting the money or property that is the res in the trust is enough to indicate acceptance
