Trusts Flashcards
Property in a trust
Legal title goes to trustee
Equitable title goes to beneficiary
Legal title
- responsibility of ownership
- no benefit
- fiduciary duties:
(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 title
- receives the benefits of ownership
- has little or no control over the trust or trust property
Settlor
The person who creates the trust by supplying the initial trust property (aka principal, corpus, trust estate, res)
-aka trustor, grantor, donor
A trust is a property conveyance that
Splits title and imposes duties
NOT a contract
Why create trusts
- protect and provide for beneficiaries
- flexibility of asset distribution
- protection against settlor’s incompetence
- professional management of property
- probate avoidance
- tax benefits
Express trust
Created by express intention of settlor
Private or charitable
Trusts created by operation of law
- resulting trust: attempt to carry out implied intent
- constructive trust: equitable remedy to prevent unjust enrichment
First step is assessing trust validity
five elements
- intent
- identifiable corpus
- ascertainable beneficiaries
- proper purpose
- compliance with mechanics and formalities
Intent
- to split title, to enforce duties on holder of legal title
- settlor must have capacity (same as for inter vivos gifts and wills)
- communication to beneficiary not required
- intent must exist at time of property transfer (present intent)
- cannot change a gift to a trust later on
Precatory expressions
-expression of hope, wish, suggestion
-does not create a trust
UNLESS
-Definite and precise directions
-Directions addressed to a fiduciary (for example, executor under a will)
-A resulting “unnatural” disposition of property (for example, close relative will otherwise take nothing) if no trust imposed; or
-Extrinsic evidence showing that the settlor previously supported the intended beneficiary
Split of title
Any split into legal and equitable as long as the same person does not own all of the legal and equitable title
If they are, merger, and there is no trust
Identifiable corpus
Must be ascertainable with certainty
Can be anything transferable
Trust property must be segregated from other property
No res, no
trust
because trustee has no property to manage
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).
Capacity for beneficiary
- person or entity capable of taking and holding title
- need not be competent
Can a beneficiary disclaim?
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.
Divorce
Final divorce revokes all beneficiary gifts and fiduciary appointments in favor of the former spouse
Class gifts
Very common for trusts (children, grandchildren)
Trustee must be able to determine who belongs to the class
-trustee can select from a class (discretionary trust)
If a trust fails, title goes
Back to the settlor
Valid purpose
- not illegal
- not against public policy
- possible to achieve
- not intended to defraud creditors
What if the purpose of the trust is contrary to public policy
- The settlor’s alternative desire controls if expressed.
- If the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid.
- If the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable.
Trustee
Most trusts will not fail for lack of trustee
-court can appoint
Acceptance of a trusteeship
Acceptance 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.
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.
Inter vivos trust
- created by settlor when alive
- declaration of trust: settlor and trustee are the same person
- conveyance in trust: settlor transfers legal title to someone else
Testamentary trust
-all the requirements of a valid will must be effective first, before determining whether the trust is valid
Statute of frauds
- writing required for trusts of land
- part performance precludes SoF defense
Pour-over gift from will to trust
- can be initial trust funding
- 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 secret trust
- testamentary gift that is silent about the trust nature of the transfer
- 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
Testamentary semi-secret trust
- the will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest
- no trust created
Transfer of beneficiary’s interest
General rule is that they can be sold or transferred
Rare, there are often provisions to limit
Discretionary trust
- trustee can determine how much, if anything, beneficiary receives
- very common
Spendthrift provisions
- beneficiary may not transfer interest
- creditors cannot attach beneficiary’s interest
- ineffective if settlor is beneficiary (self-settled spendthrift trust- goal is to prevent you from protecting your property from creditors)
- some states allow “domestic asset protection trusts”
Support provisions
Limit use of the property to the support of the beneficiary
If the trust is silent- standard is beneficiary’s accustomed standard of living
termination
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.
Settlor may modify, revoke, or amend, unless
the terms expressly state that it is irrevocable
beneficiaries can modify
- with settlor’s consent
- if all beneficiaries agree (difficult w/ unascertained beneficiaries)
Virtual representation
Current beneficiaries represent unascertained beneficiaries
Claflin rule
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 by operation of law
- property is exhausted
- merger of title
Can a court modify or terminate a trust?
yes
Reformation
In some states, the court can reform the terms of a trust to reflect the settlor’s intent if a mistake in the terms is shown by clear and convincing evidence.
When can a trustee modify
- uneconomic trust (property less than $50k)
- combination and division of trust allowed if no provision prohibit it
Duty of trustee upon termination
- wind up trust business
- distribute to remainder beneficiaries
Sources of trustee power
- expressly conferred by trust (controlling)
- granted by state law AND
- implied powers appropriate to carry out terms of trust
Joint powers
-if multiple trustees, the majority can exercise a power
Imperative/mandatory powers
- trustee must do these
- expressly required by the trust
Discretionary powers
- permit trustee to exercise powers as they see fit as long as done in good faith
- liable only if abuse of discretion or no discretion at all
- absolute discretion is not possible
Duty to administer trust
Once the trustee accepts the position of trustee, the trustee is bound to follow the terms of the trust and will be liable for noncompliance. 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.
Duty of loyalty
-avoid self-dealing
Duty to report
A trustee must: (1) provide the qualified beneficiaries with the trustee’s name, address, and telephone number; (2) respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested; and (3) furnish an annual accounting of the trust.
Duty to separate trust property and keep records
-no comingling
Investment standard of care
- most states have adopted Prudent Investor Rule, must use this unless trust has expressly changed the standard
- portfolio approach
- duty to diversify
- no social investing
- trustee can delegate investment functions
Remedies for breach of trust
(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.
When trustee 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.
Liability of co-trustees
Generally, a trustee will not be liable for the acts of co-trustees if the trustee did not join in the action and exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach.
Removal of trustee
If continuation would be detrimental to the trust
- incapacity
- serious breach of trust
- insolvent
- extreme hostility
- failure to post bond
- failure to account
A trust cannot be sued T/F
True, have to sue trustee in representative capacity
Trustee’s liability to third parties
- The general rule is that 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 refer- ring to the trust.
-provision in contract to disclaim personal liability
-can get indemnified from trust property if there is enough there
Torts
-T liable for torts that T does
-many states have abolished respondeat superior for trustee’s agents
Liability of third parties to the trust
A beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a bona fide purchaser (“BFP”).
To whom is trustee liable for breach?
Beneficiaries only
Allocation of receipts and expenses
- most states have adopted UPAIA
- adjustment power
Basic rules of allocation of receipts
- if you sell an asset, all monies received are principal
- rent on an asset is income
- interest on trust investment is income
- eminent domain awards are principal
- insurance proceeds for destroyed principal are principal
- cash stock dividend is income
- stock split/merger/reorg are principal
- wasting assets 10% is income, 90% is principal
- business = GAAP
- unproductive property is principal
Basic rules for allocation of expenses
Charged to income
- income tax
- ordinary repairs
- depreciation
Charged to principal
-capital gains tax
-extraordinary repairs/improvements
50/50: compensation for trustee/accounting expenses
Charitable trust special rules
a charitable trust must have indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies
charitable trust requirements
- charitable purposes (court decides)
- no special language needed as long as intent clear
- must be significantly altruistic
- beneficiaries must be indefinite
Cy pres doctrine
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.
Are charitable trusts subject to RAP?
No, they can be perpetual
Charitable trusts can be enforced by
- settlor
- qualified beneficiary
- state AG’s office
Honorary or purpose trust
a trust that is not for a charitable purpose and has no private beneficiaries. Honorary trusts are commonly established for the benefit of pets or for the maintenance of burial places
- nonhuman, noncharitable purposes
- pet trusts in all states
- purpose trusts in some states
Resulting trust
-arises by operation of law
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).
-settlor or settlor’s successors in interest is the only beneficiary
Circumstances giving rise to resulting trust
A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and (1) the trust is void or unenforceable, or (2) the beneficiary is dead or cannot be located. A resulting trust may also apply on failure of a charitable trust where cy pres is inapplicable. In such event, the express trust terminates and the settlor becomes the beneficiary of the resulting trust
Purchase money resulting trust
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”).
Constructive trust
- not a trust!
- flexible equitable remedy to prevent unjust enrichment
- must be requested as a remedy in a court action
- requires particular property as the trust res
- can arise in states that lack a slayer statute
- can arise from breach of fiduciary duty
- can arise from breach of promise by one in a confidential relationship
