Trusts Flashcards
Define Trust
A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.
Legal Interest
The legal interest is held by the trustee who has the responsibility of ownership
A trustee is a fiduciary and thus: (1) must deal with the property with reasonable care; (2) must maintain the utmost degree of loyalty; and (3) is personally responsible if their conduct falls beneath required standards.
Equitable or Beneficial Interest
Held by the beneficiary who receives the benefits of ownership as set forth in the trust
The beneficiary is the person who enforces the trust and the person the trustee owes duties toward.
Settlor
The settlor is the person who causes the trust to come into existence by supplying the initial trust property. Other terms for the settlor include trustor, grantor, and donor
Express Trusts
Express trusts are created by the express intention of the settlor. They fall into two categories distinguished primarily by the identity of their beneficiaries:
Private—private beneficiaries (certain ascertainable persons)
Charitable—charitable beneficiaries (indefinite class of persons or the public in general)
Trusts Created by Operation of Law
Resulting Trusts: Resulting trusts arise from the presumed intention of the owner of the property.
Constructive Trusts: Constructive trusts are an equitable remedy used to prevent unjust enrichment.
Trust Validity
There are five main elements of a valid trust:
- Present intent
- Identifiable corpus
- Ascertainable beneficiaries
- Proper purpose
- Mechanics and formalities (caacity to convey, competent trustee, split of title)
Express Trust Requirements (UTC)
The five elements required for an express trust are:
- (1) a settlor with capacity to convey,
- (2) a present intent to create a trust relationship,
- (3) a competent trustee with duties,
- (4) a definite beneficiary, and
- (5) the same person is not the sole trustee and sole beneficiary.
Additionally, there must be a present disposition in trust of specific property then owned by the settlor, and the trust must have a valid trust purpose. Consideration is not required.
Capacity of Settlor
The capacity required to create an inter vivos trust is the same as to make an inter vivos gift, and the capacity to make a testamentary trust is the same as that required to make a will.
Present Intention to Create a Trust
The settlor must intend to split the legal and equitable title and to impose enforceable duties on the holder of the legal title
Split of Title
Any split is sufficient so long as the sole trustee is not the sole beneficiary
Identifiable Corpus
The property must be ascertainable with certainty.
The trust property must be an existing interest in existing property. A future interest may be held in trust, but an interest not yet in legal existence (that is, a mere expectancy such as the right to inherit from a person who is still alive) cannot be held in trust. Future profits from an existing contract can be a trust res. The trust res must be existing property that the settlor has the power to convey, including intangibles (for example, promissory notes) in which the settlor has an assignable interest
Qualified Beneficiary
A qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is: (1) a current beneficiary, or (2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date).
Incidental and Indirect Beneficiaries
Not everyone who benefits from a trust is considered to be a beneficiary. The trust must operate directly to benefit the person (for example, an attorney designated by the trust instrument is not a beneficiary).
Notice to and Acceptance by Beneficiary
Notice to a beneficiary is not essential to the validity of a trust. Lack of such notice may indicate, however, that no trust was intended. Acceptance by the beneficiary is required, but can take place after a valid trust is created. Acceptance may be express or implied and is generally presumed.
Disclaimer
No one can be compelled to accept an interest in a trust against their will. Under the law of most states, a beneficiary may disclaim an interest by filing a written instrument with the trustee (or, if a trust created by will is involved, with the probate court). If a valid disclaimer is made, the trust is read as though the disclaimant was deceased as of the relevant date.
Anti-Lapse Statutes
The anti-lapse statutes in most states apply only to wills and come into play only if a will beneficiary within a certain degree of relationship predeceases the testator. (See Wills outline.) Several states and the UPC apply the anti-lapse statute to future interests created in trusts—even to future interests expressly made contingent on survival—unless the trust makes an alternate gift in case of a beneficiary’s nonsurvival
Divorce
A final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse. The UPC and several states have extended the “divorce revokes” rule to beneficiary designations of individuals who are related to the former spouse but not the settlor. The governing instrument is read as though the former spouse (and their relatives) is deceased.
Unascertained Beneficiaries
Beneficiaries may be “definite” even though not yet ascertained (for example, unborn children). Beneficiaries must be ascertainable by the time their interests are to come into enjoyment
Class Gifts
Beneficiaries may be designated by generic descriptions such as “children.” Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit, for example, “to my children and upon their death, to my then surviving grandchildren.” The trustee must be able to determine who belongs to the class
Resulting Trust Remedy
Property reverts to settlor: If a trust fails for lack of a beneficiary (for example, because the beneficiaries are not ascertainable), a resulting trust in favor of the settlor or their successors is presumed
Trust Purpose
The general rule is that a settlor may create a trust for any purpose. However, a trust purpose is invalid if it is:
- Illegal
- Contrary to public policy
- Impossible too achieve
- Intended to defraud the settlor’s creditors or based on illegal consideration
Trustee
Once established, a trust will not fail because the trustee dies, refuses to accept appointment, or resigns. The court will appoint a successor trustee unless it is clear that the settlor intended the trust to continue only so long as a particular trustee served. The absence of a trustee may cause an attempted inter vivos trust to fail for lack of delivery.
Acceptance of Trusteeship
A person accepts a trusteeship by: (1) signing the trust or a separate written acceptance; (2) substantially complying with the acceptance terms in the trust instrument; or (3) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance. However, the person designated as trustee may still act to preserve the trust property without accepting the trusteeship, provided they send notice of rejection to the settlor or a qualified beneficiary. If the trusteeship is not accepted within a reasonable time, it is presumed to be rejected
Trustee Must Have Duties
The settlor must intend to impose enforceable duties on the trustee. If duties are not spelled out in the trust instrument, the court will usually imply duties if there is an intention to create a trust, a res, and an identified beneficiary
Qualifications of Trustee
Anyone who has capacity to acquire and hold property for their own benefit and has capacity to administer that property may be a trustee. (Minors and insane persons can hold property, but cannot administer.)
Removal of Trustee
A court can remove a trustee on its own motion or upon request by the settlor, a beneficiary, or a co-trustee.
Grounds for removal include: (1) a serious breach of trust; (2) serious lack of cooperation among co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; or (4) a substantial change in circumstances. The basic factor considered is whether continuation in office would be detrimental to the trust.
Successor Trustees
A successor trustee succeeds to all of the rights, powers, and privileges of the original trustee and is subject to all of the original trustee’s duties, liabilities, and responsibilities
Inter Vivos Trusts
Inter vivos trusts are created while the settlor is alive either by the settlor declaring themself trustee for another or by the transfer of property to another as trustee. The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee). If a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent
Transfer (Delivery): Declaration of Trust
If a trust was created by a declaration of trust, no conveyance of personal property is needed as long as the property is identified and segregated. Real property should be conveyed from the settlor as an individual to the settlor as a trustee
Transfer (Delivery): Conveyance in Trust
If the trust was created by a conveyance in trust, the settlor must convey the property to the trustee. Real property is conveyed by deed. Personal property is conveyed by physical delivery or an appropriate written assignment. Delivery means placing the trust property out of the settlor’s control
Statue of Frauds
Writing Required for Trusts of Land Most states do not require a writing for a trust of personal property. Oral trusts may be established only by clear and convincing evidence. For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the Statute of Frauds. Note that an otherwise invalid oral trust of land may be enforced by imposing a constructive trust.
Part Performance Precludes Statute of Frauds Defense If the holder of the legal title acts as if they are a trustee, part performance will preclude the Statute of Frauds defense. The Statute of Frauds is to protect the donee of a gift from false claims that the donee is really a trustee
Pour-Over Gift from Will to Trust
Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust—even an amendable and revocable trust—established during their lifetime. The trust must be clearly identified from language in the will
Testamentary Trusts
Testamentary trusts are created in the settlor’s valid will.
Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) 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.
In the case of a secret trust, the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else—and relies on the beneficiary’s promise—but the will does not state the trust nature of the gift. The intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust. If the promise can be proven by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.
Transfer of beneficiary’s interest: Voluntary Transfers—Gifts and Sales
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 previous conditions and limitations
Transfer of beneficiary’s interest: Involuntary Transfers—Creditors
Unless statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust. The interest is subject to judicial sale. To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied
DISCRETIONARY TRUSTS
In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary
Creditor’s Rights in Discretionary Trusts
Before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is not assignable and cannot be reached by their creditors. Put simply, the beneficiary has nothing to transfer and no interest for creditors to reach—the beneficiary merely has an expectancy to be a beneficiary. Creditors are usually allowed to attach the beneficiary’s interest but may not compel the trustee to make a distribution. If the trustee has notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must make those payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision
RESTRAINTS ON ALIENATION— SPENDTHRIFT TRUSTS
A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims. The purpose is to protect the beneficiary from their own improvidence.
In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors. However, a growing number of states allow self-settled spendthrift trusts, that is, the “domestic asset protection trust” or “DAPT.”
Support Trusts
A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support. A support trust may be mandatory or discretionary. If discretionary, the creditors’ rights are the same as they are for other discretionary trusts
Not assignable: Even without a spendthrift clause, the beneficiary’s interest in a support trust is such that no one but the beneficiary can enjoy it; the beneficiary’s interest is not assignable by definition
Standard of Support: If the instrument is silent, the standard of support is the beneficiary’s accustomed standard of living. Whether the beneficiary’s other income or resources should be taken into account is a question of the settlor’s intent and is decided by courts on a case-by-case basis
Termination of the Trust
A trust will terminate automatically upon the expiration of the term specified in the 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
Termination by the Settlor
Under the UTC, a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. However, some states, even some that have adopted the UTC, follow the traditional rule, which provides that a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust
Termination by the Beneficiaries
With Settlor’s Consent: A trust may be terminated or modified upon the consent of the settlor (or the settlor’s agent, conservator, or guardian) and all beneficiaries, even if the modification or termination conflicts with a material purpose of the trust
Without Settlor’s Consent: A trust also may be terminated or modified on the consent of only all beneficiaries (that is, without consent of the settlor), but only if no material purpose of the trust would thereby be frustrated
Termination or Modification by the Court:
Under the UTC, a court may terminate modify a trust even without the consent of all of the beneficiaries if (1) the trust could have been terminated had all of the beneficiaries consented, and (2) the interest of a beneficiary who does not consent will be adequately protected
Additionally, a court may terminate or modify a trust if:
- Unanticipated circumstances threaten the purposes of the trust
- Continuation of the trust on its existing terms is impracticable or wasteful; or
- The value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives
Termination by Operation of Law
A trust will terminate by operation of law if the property has been exhausted or if the legal and equitable titles have merged
Termination by the Trustee
Uneconomic Trust: In some states, a trustee can terminate a trust if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice
Combination and Division of Trusts Absent: contrary terms in the trust, the trustee can combine several trusts into one trust or divide one trust into several trusts, provided doing so does not frustrate any purposes of the trusts or impair the rights of any beneficiary. The trustee is not required to obtain the consent of the qualified beneficiaries prior to combining or dividing trusts, but the trustee must provide them with notice
Duties of Trustee upon Termination
Wind Up Trust Business The trustee’s powers do not end immediately upon trust termination. The trustee may continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust.
Distribute to Remainder Beneficiaries: The trustee must then timely distribute trust property to the appropriate remainder beneficiaries
Powers of the Trustee: Sources
The trustee can properly exercise only such powers as are expressly or impliedly conferred upon them. These include:
- Powers expressly conferred upon them by the terms of the trust (which control)
- Powers granted by state law; and
- Implied powers that are appropriate to achieve the proper investment, management, and distribution of the trust property
Joint Powers
Co-trustees who are unable to reach a unanimous decision may act by majority decision in many states. If a co-trustee cannot perform because of, for example, absence or illness, the remaining co-trustees may act for the trust
Duties of the Trustee
Trustees owe their fiduciary duties to the beneficiaries of the trust
Duty to Administer Trust
The trustee has a duty to personally administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries. If a trustee has special skills or expertise, they will be held to a higher standard. If there is more than one beneficiary, the trustee must act impartially, taking into account any of their differing interests.
Duty of Loyalty
Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which the trustee is dealing with the trust in their individual capacity. A trustee owes a duty of undivided loyalty to the trust and its beneficiaries.
- A trustee cannot buy or sell trust assets even if the price is a fair one.
- A trustee may not sell property of one trust to another trust of which they are also trustee.
- A trustee may not borrow trust funds nor loan their personal funds to the trust (except to protect the trust), and any interest paid on such a loan must be returned to the trust.
- A trustee cannot use trust assets to secure a personal loan. • A trustee cannot personally gain through their position as trustee. • A corporate trustee cannot invest in its own stock as a trust investment. But it can retain its own stock if such stock was a part of the original trust res when the trust was established, provided that retention of the stock meets the prudent investor standard. • Self-employment can constitute a form of prohibited dealing.
Beneficiary’s Rights in Case of Prohibited Transaction
A transaction involving trustee self-dealing is voidable by the beneficiary affected by the transaction unless: (1) a court or the terms of the trust approved it; (2) the beneficiary failed to bring suit within the prescribed time period; (3) the beneficiary gave their consent, ratification, or release; or (4) it involves a contract or claim arising before the trustee became trustee.
Duty to Preserve Trust Property and Make It Productive
The power to invest is normally implied from the duty to make trust property productive. The trustee is expected to take actions to, for example, lease land, collect claims, and invest money
Uniform Prudent Investor Act
Standard of Care: A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets
Portfolio Approach—Prudence Evaluated as to Overall Investment Strategy: Investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust.
Remedies for Breach of Trust
If the trustee commits, or is about to commit, a breach of trust duties, the court may: (1) enforce specific performance of the trustee’s duties, (2) enjoin the trustee from committing a breach of trust, (3) compel the trustee to pay money or restore property, or (4) suspend or remove the trustee.
Damages to Beneficiaries for Breach
If a trustee commits a breach of trust, the trustee is liable to the beneficiaries for the greater of: • The amount necessary to restore the trust property and distributions to what they would have been absent the breach, or • The trustee’s profit from the breach A trustee is liable to a beneficiary for any profit arising from administration of the trust, even if there was no breach.
Remedies for Self-Dealing
In the case of self-dealing, the beneficiary may have a choice of the following remedies: • Affirm the transaction if the trust profited • Set aside the transaction if the trust lost money • Trace profits from the trustee if the trustee profited
When Trustee Is Not Liable for Breach
A trustee is not liable to a beneficiary for a breach of trust if: (1) the trustee acted in reasonable reliance on the terms of the trust; or (2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.
Contracts on Behalf of Trust Estate
a trustee may sued on the contract in the trustee’s fiduciary capacity. A third party may sue the trustee personally only if the trustee, in entering into the contract, failed to reveal the fiduciary relationship either by indicating their role as trustee in their signature or by referring to the trust.
Indemnification or Reimbursement from Trust Property If the contract was properly entered into for the trust and the trustee was not in breach, the trustee is entitled to indemnification or reimbursement from trust property
Adjustment Power
If the trust calls for distribution of trust income to a beneficiary, the trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc., to the beneficiary. If the resulting distribution effectuates the settlor’s intent and the purposes of the trust, then nothing further needs to be done. If, however, the trustee determines that by distributing only the trust’s income the trustee is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may adjust between principal and income to the extent necessary.
Charitable Trusts - Distinctive Requirements
a charitable trust must have indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies
Charitable Trust Purpose
A charitable trust must have a purpose considered to benefit the public. Charitable purposes include: • The relief of poverty • The advancement of education or religion • The promotion of health • The accomplishment of government purposes (such as parks, museums, and playgrounds)
Cy Pres
When a charitable purpose selected by the settlor is impracticable, unlawful, impossible to achieve, or wasteful, the court may select an alternative under the doctrine of cy pres, which means “as near as possible,” by ascertaining the settlor’s primary purpose. This doctrine applies to outright charitable gifts as well as to charitable trusts
Enforcing Charitable Trusts
Suit to enforce a charitable trust can be brought by the settlor (but some states require the settlor to have an interest in enforcing beyond merely being the settlor), a qualified beneficiary, or the state’s attorney general
Resulting Trusts
Resulting trusts involve reversionary interests and are based on the presumed intent of the settlor
Resulting trusts arise by implication from the settlor’s conduct. Resulting trusts are of three types: (1) purchase money resulting trusts, (2) resulting trusts arising on failure of an express trust, and (3) resulting trusts arising from an incomplete disposition of trust assets (that is, excess corpus).
Purchase Money Resulting Trusts
A purchase money resulting trust is presumed whenever X (the “beneficiary”) furnishes the consideration (usually money, but any other valuable consideration suffices) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”).
