Trusts Flashcards
Trust Validity
Five main elements of a valid trust:
- Intent
- Identifiable Corpus
- Ascertainable Beneficiaries
- Proper Purpose
- Mechanics and Formalities
Trust Formation - Intent
Intend to split the legal and equitable title and to impose enforceable duties on holder of legal title (sole trustee and sole beneficiary cannot be the same individual)
No formal words required unless statute of frauds applies
Communication with beneficiary is not necessary, delivery of property to trustee is sufficient
Intent must be manifested by settlor at the time they owned property and prior to its conveyance to another
Promise to create a trust in the future is not enforceable unless its a binding contract (i.e, has consideration)
Expression of hope, wish, or mere suggestions that property is used in one way do not create a trust. Must impose legal obligation, not merely moral one
Trust Formation - Identifiable Corpus
Required trust property that is ascertainable with certainty. Must be an existing interest in existing property
- A future interest can be held in trust but an interest not yet in legal existence cannot be
- Property the settlor cannot transfer or does not yet own cannot be trust property
Trust Formation - Ascertainable Beneficiaries
Capacity: capable of taking and holding title to property.
Acceptance: required but can take place after valid trust is created, express or implied
Disclaimer: may disclaim interest by filing written instrument with trustee. If disclaimed, trust is read as though disclaimant was deceased. Cannot disclaim if they exercised dominion or control over interest or accepted benefits under trust. Can defeat creditor’s claims
Beneficiaries must be ascertainable by the time their interests are to come into enjoyment
Class gifts are ok, even if beneficiaries are unascertainable at time trust is created, as long as they are ascertainable when they are to benefit
Trust Formation - Purpose
Invalid purpose if:
- illegal
- performance requires a criminal or tortious act
- contrary to public policy
- violates Rule Against Perpetuities
Absence of Trustee
A trust will not fail once established because the trustee dies, refuses to accept appointment, or resigns.
Court will appoint successor trustee unless it is clear that the trust was only supposed to continue when a particular trustee serves
Duties of Trustee
Passive trust, where trustee has no duties, is void and beneficiaries take legal title.
Trustee is anyone who has capacity to acquire and hold property for their own benefit and capacity to administer property for trustee
Removal of Trustee
A court can remove a trustee or refuse to confirm appointment because:
- serious breach of trust
- habitual drunkenness
- conflict of interest
Beneficiaries must have grounds to remove
Once appointment has been accepted, trustee cannot resign without court permission, unless all beneficiaries consent or the trust provides otherwise
Trust Formation - Mechanics and Formalities
Inter Vivos Trusts - created while settlor is alive either by settlor declaring himself trustee or by transfer of property to another as trustee. Intent manifested by conduct or words and Delivery. SOF (required for land), part perforamnce precludes SOF defense
Pour-Over Gift from Will to Trust - Settlor can make gifts by will to a trust, even an amenable and revocable trust, established during their lifetime. Pour Over Property can be initial funding if 1) trust is identified in will, and 2) trust is executed before or concurrently with testator’s death
Testamentary Trusts - created in settlor’s valid will. Trust intent and essential terms must be ascertained from will itself, writing incorporated by reference into the will, or existence of power of appointment created by will
Transfer of Beneficiary’s Interest
A beneficiary may freely transfer their interest in the trust. Assigned interest is subject to all previous conditions and limitations
Creditor’s may reach beneficiary’s interest in trust
In a discretionary trust, before a trustee exercises discretion to make payments to beneficiary, beneficiary’s interest is not assignable and cannot be reached by creditors
Spendthrift Trusts
Precludes beneficiary from voluntarily or involuntarily transferring interest in trust, and creditors cannot reach it to satisfy claims
Exceptions: certain creditors can reach assets for claims of dependants, gov’t, persons supplying necessities, and in some states, tort creditors
Support Trusts
Directs trustee to pay only so much of income or principal as is necessary for the beneficiary’s support. Interest cannot be assigned or reached by creditors.
Modification by Settlor
Under UTC and by statute, a settlor can revoke or amend a trust unless terms expressly state that it is irrevocable
In some states, a settlor can also revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests
Modification by Beneficiaries
May agree to modify or terminate the trust if ALL the following:
- all beneficiaries agree (note: existence of unborn or unascertainable beneficiaries may make this impossible to achieve)
- All beneficiaries are legally comptent
- Settlor’s intent is not frustrated (Settlor consents OR modification/termination will not impair any material trust purpose)
Duty of Trustee Upon Termination
- Continue to exercise powers for a reasonable time period necessary to wind up affairs of trust
- Timely distribute trust property to appropriate remainder beneficiaries
Trustee Powers
Express: by trust instrument, state law, court decree
Implied: Necessary and appropriate to carry out terms of trust, unless expressly forbidden
Trustee Duties
General standard of care: exercise degree of care, skill, and caution that a reasonably prudent person would use in managing their own property. If trustee has greater of special skill, will be held to higher standard
- Duty to administer trust: bound to follow terms of trust and will be liable for noncompliance
- Duty of loyalty: trustee cannot enter into transaction in which trustee is dealing with trust in individual capacity
- Duty to account: must keep accurate records of all transactions and render accountings to beneficiaries upon demand
- Duty to separate and earmark trust property: no commingling
- Duty to perform personally: can only delegate acts that would be unreasonable to require them to do personally
- Duty to defend trust from attack
- Impartiality: must act impartial and not favor one beneficiary over another when investing and managing trust assets
- Duty to preserve trust property and make it productive
Beneficiaries Rights in case of Prohibited Transaction
- set aside transaction
- recover any profit made by trustee
- affirm transaction
Investments
Governed by UPIA
Trustee must exercise reasonable care, skill, and caution when investing and managing trust assets
Investment decisions evaluated in context of entire trust portfolio as part of overall investment strategy. Must diversity investments unless the purposes of the trust are better served without divestment
Must act exclusively for beneficiary. Social investing may be problematic
Can delegate investment and management functions only if prudent trustee of comparable skills could properly delegate. Must act prudently in 1) selecting an agent, 2) establishing scope and terms of delegation, 3) periodically reviewing agent’s actions
- With a proper delegation, trustee is not liable to beneficiary for decisions or actions of agent
Enforcement by Beneficiaries
- Money damages - losses from breach and profit that would have accrued but for the breach
- Self-dealing remedies - affirm, set aside, or trace profits
- Removal of trustee - court may remove if continuation in office would be detrimental to trust
Defenses: equity will not enforce trust if beneficiaries consented to or joined in breach. Sue within a reasonable time or estopped by doctrine of laches.
Trustee’s Liability to 3rd Parties
- Personally liable on contracts made in course of trust administration
- Personally liable for torts committed in trust admin, including those committed by trustee’s agents
Liability of 3rd Parties to Trust
- BFP cuts off beneficiaries’ equitable interests
Charitable Trusts
- Must be for charitable purpose - can be expressed in very general terms, but must be significantly altruistic and class cannot be so limited as to only benefit a few individuals
- Beneficiaries must be indefinite - public generally or indefinite class of members of the public
Note: not bound by RAP
Note: enforcement by State AG
Cy Pres
“As near as possible” - court may find general charitable intent on part of Settlor and ascertain their primary purpose
If only specific intent found, trust fails and passes to settlor’s successors in title
Resulting Trusts
Reversionary interests based on presumed intent of settlor. Settlor is beneficiary, and if settlor is deceased, successors in interest are beneficiaries.
Resulting trust:
- purchase money resulting trusts
- arising on failure of express trust
- arising from incomplete disposition of trust assets
Constructive Trusts
Flexible equitable remedy to prevent unjust enrichment from wrongful conduct. Turns holder of legal title into trustee that may not retain beneficial interest of property and has a duty to convey it to person who would have owned it but for wrongful conduct.
- Requested as remedy in court action, established by clear and convincing evidence
- Requires particular property
