TRUSTS Flashcards
Trust
A trust is a legal arrangement in which a trustee holds title to property for the benefit of an ascertainable beneficiary.
Trust - Revocability
Unless expressly designated as irrevocable, trusts are revocable by default. A revocable trust becomes irrevocable when the grantor dies or loses capacity.
Types of Trust - Checklist
EXPRESS TRUSTS
- Private Express Trust
- Inter Vivos Trust
- Testamentary Trust
- Charitable Trust
- Cy Pres Doctrine
REMEDIAL TRUSTS
- Resulting Trust
- Constructive Trust
Private Express Trust
A private express trust must have
(1) a grantor with an intent to create a trust
(2) a trustee
(3) at least one ascertainable beneficiary
(4) a valid trust purpose
(5) trust res
Express trusts can be created through a writing, verbal communication, or conduct.
Private Express Trust - Grantor With Intent
A grantor is the creator of the trust. The grantor must have the express or implied intent to create a trust
Private Express Trust - Trustee
A trustee is a person or an entity that holds legal title to trust res and has duties to the beneficiary.
A single person may not act as both the sole trustee and sole beneficiary.
Courts will appoint a trustee if the grantor fails to designate a trustee or the named trustee resigns, dies, or is removed.
Private Express Trust - Beneficiaries
A beneficiary is a person or an entity that holds equitable title to the trust res and receives the benefit of the trust.
Private Express Trust - Trust Purpose
A trust purpose is valid as long as it is legal
Private Express Trust - Trust Res
Trust res is identifiable and specific trust property
Intervivos Trust
An inter vivos trust is created while the grantor is still alive and transfers all or some of the grantor’s property into trust.
The grantor has the right to revoke the trust during his lifetime.
Testamentary Trust
a testamentary trust is created by a valid will which provides for the distribution of some or all of the grantor’s estate.
The trust takes hold once the grantor has died.
Testamentary trusts must be in writing.
Charitable Trust
A charitable trust is created
(1) for a charitable purpose that benefits society.
(2) the Beneficiary of the trust need not be specific.
Courts will interpret the grantor’s intent broadly or if the trust lacks a purpose or beneficiary, will choose a purpose aligned with the grantor’s intent.
Charitable Trust - Cy Pres Doctrine
If the original purpose of a charitable trust becomes unlawful, impracticable, or impossible to execute, courts may apply cy res to substitute the original purpose with another that is aligned with the grantor’s intent
Resulting Trust
A resulting trust is an equitable remedy arising by operation of law that requires the trustee to revert property to the grantor or his estate if the trust fails.
- *A trust fails when*
- (i) its purpose becomes impossible,*
- (ii) it’s missing a vital provision, or*
- (iii) the purpose of a charitable trust ends*
Constructive Trust
If a defendant wrongfully acquired property and would be unjustly enriched, courts may impose a constructive trust. Under a constructive trust, the defendant holds the wrongfully acquired property as a trustee and must convey it to the plaintiff.
Trust Modification and Termination Checklist
- Trust Modification
- Modification by Living Grantor
- Trust Termination
- Expiration
- Accomplished Purpose
- Termination by Grantor
- Revocable Trust
- Irrevocable Trust
- Termination by Beneficiaries and Trustee
- Judicial Termination
Trust Modification - Modification by Living Grantor
A grantor may unilaterally modify a trust if he has expressly reserved that right in the trust. If the grantor failed to reserve the right, the grantor may still modify the trust if
(1) all beneficiaries consent, and
(2) the modification does not interfere with the trust’s main purpose
Trust Termination - Expiration
An express trust can expire at the end of a stated term
Trust Termination - Accomplished Purpose
A trust automatically terminates once its purpose has been accomplished
Trust Termination - Termination by Grantor
Revocable Trust - The grantor may unilaterally terminate a trust if he expressly reserved that right in the trust
Irrevocable Trust - the grantor may still terminate a trust, even if he failed to reserve the right to do so, if all beneficiaries consent during the grantor’s lifetime
Termination by Beneficiaries and Trustee
If the grantor is deceased, the beneficiaries may still terminate the trust if all beneficiaries and the trustee consent. Courts may overrule the termination if the trustee can show that the trust’s purpose has not been fulfilled. A trustee does not have the power to unilaterally terminate the trust absent an express provision therein.
Judicial Termination
A court may terminate a trust if
(i) the trust’s purpose has been accomplished, or
(ii) the purpose becomes illegal, impracticable, or impossible
Distribution - Beneficiaries and Creditors Checklsit
- Beneficiaries
- Income Beneficiary
- Remainder Beneficiary
- Discretionary Trust
- Mandatory Trust
- Support Trust
- Spendthrift Trust
- Alienability of Trust Property
Beneficiaries
Income Beneficiary - Income beneficiaries receive income from the trust (profits from a business held in trust and cash dividends)
Remainder Beneficiary - Remainder beneficiaries are entitled to the trust principal upon termination of the trust (profits from sale of stock)
Discretionary Trust
A discretionary trust confers the trustee with the discretion to determine when to pay beneficiaries, which beneficiaries to pay, and how much should be paid. The trustee must act in good faith. A beneficiary’s creditors can only access the trust property once a payment is made by the trustee.
Mandatory Trust
A mandatory trust does not give the trustee discretion as to distribution.
The trustee is bound by the terms of the trust and must distribute the trust property accordingly
Support Trust
A support trust directs the trustee to make distributions in support* of the beneficiary. The only way a creditor can access the trust property is if he can demonstrate that there are sufficient assets to satisfy the debt and still support the beneficiary.
*Payments can be made for the beneficiary’s health or education
Spendthrift Trust
A spendthrift trust confines a beneficiary’s ability to alienate his interest, preventing creditors from reaching the trust property. Generally, creditors cannot reach the trust property unless (i) the beneficiary owes money for child or spousal support, tax liens, or basic necessities or (ii) there is a surplus.
Alienability of Trust Property
A beneficiary has the right to freely alienate his trust interest unless restricted by statute or the trust itself
Trustee’s Powers, Duties, and Remedies Against Trustee - Checklist
- Trustee’s Powers
- Trustee’s Duties
- Duty of Care
- Duty to Prudently Invest
- Breach
- Duty of Impartiality
- Duty to Prudently Invest
- Duty of Loyalty
- Duty to Disclose
- Duty to Account
- Delegation of Duties
- Duty of Care
- Remedies Against Trustee
Trustee’s Powers
The trustee’s powers include those expressly granted to him in the trust an any other implied power necessary to act as a reasonably prudent person in directing the trust
(e.g. power to contract, lease, pay taxes, or transfer trust property, etc.)
Duty of Care
The trustee owes beneficiaries a duty of care to manage the trust as a reasonably prudent person would in managing his own affairs. A trustee’s standard of care will be heightened if he has special skills.
Duty of Care - Duty to Prudently Invest
The duty to prudently invest requires the trustee to act as a reasonably prudent investor would when investing his own assets. The trustee must adequately diversity the trust investments, make property productive, and exercise reasonable care and skill when managing trust assets.
Duty to Prudently Invest - Breach
Courts consider the following factors when determining whether a trustee has breached the duty to prudently invest:
(i) the distribution requirements of the trust, (ii) general economic condition, (iii) the role that the investment plays in relationship to the trust’s overall portfolio, and (iv) the trust’s need for liquidity, regularity of income, and preservation of appreciation of capital.
Duty of Impartiality
A trustee has a duty to remain impartial when dealing with the trust’s beneficiaries
Duty of Loyalty
A trustee owes beneficiaries the fiduciary duty of loyalty which requires that the trustee not engage in self-dealing and distribute trust assets in good faith and in the beneficiaries’ interest. Courts will deem self-dealing as a per se breach of the trustee’s duty of loyalty, and the trustee will be personally liable for any losses.
Duty to Disclose
A trustee is required to fully disclose truthful information about the status of the trust assets
Duty to Account
A trustee is required to occasionally account for actions made in furtherance of the trust so that his conduct can be evaluated
Delegation of Duties
Under common law, a trustee was prohibited from delegating authority. Under modern law, the trustee may delegate if he utilizes due care and skill when appointing agents.
Remedies Against Trustee
If a trustee has breached any of his duties, the trust beneficiaries may sue for damages or the trustee’s removal.
Co-Trustee Liability
Co-trustees are liable for one another’s wrongful acts if they
(i) engage in or hide the breach
(ii) authorize the co-trustee to commit the breach
(iii) fail to take reasonable measures to avert breach, or
(iv) wrongfully delegate authority to the other
Third Party Liability
A third party who knowingly takes part in a breach of trust is also liable for any losses resulting from that breach.
