Trusts Flashcards
Cy Pres Doctrine
Applies when a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent (under UTC, general charitable intent presumed)
The court can direct the trust property to be applied to another charitable purpose as close as possible to the original one
Creditors’ Rights in Discretionary Trust
In the absence of statutory prohibition or spendthrift clause, beneficiary’s interest can be reached to satisfy claims of creditors.
But before trustee exercises discretion to make payments to beneficiary, beneficiary has no interest for creditors to reach.
Creditors usually allowed to attach the beneficiary’s interest but may not compel distribution (except for spousal/child support)
What happens when a trust or portion of a trust fails for lack of a beneficiary (or sufficiently definite beneficiary)?
resulting trust in favor of the settlor or settlor’s successors in interest
Elements of a valid trust
(i) settlor with capacity to convey
(ii) a present intent to create a trust relationship
(iii) a competent trustee with duties
(iv) a definite beneficiary
(v) the same person is not the sole trustee and sole beneficiary
What is the requisite intent to create a trust?
intent to split the legal and equitable title and to impose enforceable duties on the holder of the legal title (manifested at time settlor owned the property)
must intend trust to take effect immediately – promise to create trust in future is not enforceable unless binding contract
Requirements for definite beneficiaries
Must be ascertainable when they are to benefit, but don’t need to be ascertainable when trust created
May be a class, as long as class is sufficiently definite. Settlor can give trustee discretion to select class members as long as the class is reasonably definite. If too broad, trust (or portion) is invalid
What is a valid trust purpose?
Generally any purpose as long as it’s not:
- illegal
- contrary to public policy
- impossible to achieve
- intended to defraud the settlor’s creditors or based on illegal consideration
definition of Rule Against Perpetuities
a nonvested property interest is invalid unless it is certain to vest or fail no later than 21 years after the death of a person who is alive when it is created
Grounds for removal of a trustee
- serious breach of trust
- serious lack of cooperation among co-trustees
- unfitness, unwillingness, or persistent failure to administer
- a substantial change in circumstances
mechanics and formalities for inter vivos trust
- declaration of trust (settlor is trustee) OR
- (i) transfer or conveyance in trust and (ii) delivery of property to trustee
writing only required for land (unless part performance), but oral trusts established only by C+CE
Definition of support trust
A support trust is one that directs the trustee to pay only so much of the income or principal as is necessary for the beneficiary’s support
notes:
- may be mandatory or discretionary
- beneficiary’s interest not assignable
secret v. semi-secret testamentary trust
secret trust: absolute gift in will made in reliance on beneficiary’s promise to hold the property in trust for another, must prove promise by C+CE and constructive trust will be imposed
semi-secret trust: gift in will to a person “in trust,” but does not name trust beneficiary, gift fails and trustee holds property in resulting trust for testator’s successors in interest
Beneficiary’s right to payment in discretionary trust
no enforceable right to payment; beneficiary can’t interfere with exercise of trustee’s discretion unless trustee abuses their power
definition of spendthrift trust
A trust that precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust
notes:
- most states still don’t allow self-settled spendthrift trusts
- can’t protect from orders for child/spousal support
When can/will a trust be terminated or modified?
- will terminate automatically upon expiration of term specified in instrument
- by settlor unless terms expressly states irrevocable
- upon consent of settlor and all beneficiaries even if conflicting with material purpose
- upon consent of all beneficiaries if no frustration of material purpose (spendthrift is material purpose)
- by operation of law (i.e. property exhausted or titles merged)
- by the court (if trust could’ve been modified if all Bs consented and nonconsenting Bs’ interest is protected)
- by trustee (i.e.,if uneconomic - less than 50k and insufficient to justify cost of admin.)
note:
- for consent of beneficiaries, look to see if all beneficiaries are in being and able to consent
- most states don’t allow guardian to consent to termination on behalf of unborn beneficiary
sources of trustee’s power
- powers expressly conferred upon them by terms of the trust (controlling)
- powers granted by state law
- implied powers that are appropriate to achieve the proper investment, management, and distribution of the trust property
discretionary powers and their limits
- powers that the trustee may or may not perform, as the trustee determines in their judgment to be the most appropriate
- must exercise in good faith
- will be liable for abuse of discretion or complete failure to exercise
- grant of absolute or uncontrolled discretion is still reviewable, but a court is unlikely to intervene
duties of the trustee
- duty to administer trust - in good faith and in a prudent manner in accordance with terms and purpose of the trust and the interests of beneficiaries
- duty of loyalty - can’t enter into any transaction in which trustee is dealing with trust in individual capacity (good faith and actual benefit to the trust are irrelevant)
- duty to report - respond to requests for information and send annual accountings
- duty to separate trust property and keep records
- duty to enforce claims and defend trust from attack
- duty to preserve trust property and make it productive
