Trusts Flashcards
What are the elements of a trust?
- Trust must be established for a valid, legal purpose.
- The settlor must be competent when creating the trust.
- The trust must have a trustee.
- The settlor must have intended to create a trust.
- The trust must be funded, i.e., must have some property (called the corpus or res).
- The settlor must identify an ascertainable beneficiary.
Is a writing required to create a trust? Why or why not? What are best practices?
Yes and No.
Black letter law: No, not for oral trusts of personal property, so long as there is clear and convincing evidence of the trust/intent.
Yes, if you want to convey real estate or create a testamentary trust.
Best practices: Always put it in writing.
Whats the difference between a secret/semi-secret trust?
Semi-secret trust: Face of the will reveals testator intended to create a trust, but the Terms of the trust are not disclosed. (EG- I give my property to Aaron, according to the conversations we have had.) These Trusts are unenforceable because terms can’t be proved.
Secret trust: Face of the will looks like gift is outright; and Terms of the trust and existence of the trust is not disclosed; Trust is still not enforceable, but court may apply constructive trust remedy
What is a revocable trust used for?
it is used for incapacity planning as well as to manage property and avoid probate by coordinating the distribution of assets upon donor’s death.
What are the requirements of a Charitable Trust?
- Must have a valid charitable purpose (not merely benevolent)
- Are overseen and enforced by the state attorney general (and sometimes donors or others with standing).
- Subject to cy pres, a more vigorous doctrine of modification than applies to private trusts.
- Free from the rule against perpetuities.
- Enjoy tax benefits.
What is a valid “charitable purpose” for a charitable trust?
“the relief of poverty, the advancement of education or religion, the promotion of health, governmental or municipal purposes, or other purposes the achievement of which is beneficial to the community.” UTC § 405(a).
Doctrine of Cy Pres
if a particular charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful:
(1) the trust does not fail, in whole or in part;
(2) the trust property does not revert to the settlor or the settlor’s successors in interest; and
(3) the court may modify or terminate the trust by directing that the trust property be applied or distributed, in whole or in part, in a manner consistent with the settlor’s charitable purposes…
Should a court intervene in a trust dispute?
Only to prevent misinterpretation or abuse of the discretion by the trustee will a discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary be subject to judicial control (even if the (R3D Trusts § 50)
Difference between ascertainable and NON ascertainable standards in a trust?
Ascertainable Standards: Although the trustee must exercise some judgment in whether a distribution is appropriate, ascertainable standards are theoretically objectively determinable and a beneficiary can ask a court to compel a trustee to make a distribution covered by the standard (IE - Education, Health, Emergency etc…)
Non-ascertainable Standards: Trustee still must act reasonably and in good faith, but it will be difficult for a beneficiary to convince a court to override a trustee exercise of discretion here (EG - distributed for beneficiaries’ “happiness”, “welfare” etc…)
Difference between Mandatory & Discretionary Trust Distribution?
Mandatory: Trustee must pay funds to a beneficiary and cannot exercise discretion as to the amount or the timing.
Discretionary: Trustee must exercise judgment in deciding what and how much to distribute, when to distribute, or to whom to distribute (or all of these).
When will a court enforce a “good faith” standard in trust distribution?
The court will not substitute its judgment for that of trustee. However, the court will apply a good faith or reasonableness standard, even if the trustee is directed to act in her “sole and absolute discretion”.
If trustee has acted unreasonably, the court will usually tell the trustee to go back and do a better job but will not give the trustee specific directions about what to do.
Should the Trustee Consider a Beneficiary’s Other Assets?
R3D Trusts § 50: Is trustee, in determining the distributions to be made to a beneficiary under an objective standard (such as a support standard):
- required to take account of the beneficiary’s other resources
- prohibited from doing so, or
- to consider the other resources but has some discretion in the matter. If the trust provisions do not address the question, the general rule of construction presumes [this] . . . .
When is a trustee exculpated from liability?
(A term of a trust relieving a trustee of liability for breach is unenforceable to the extent that it:
(1) relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or
(2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.
(b) An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.
What are the 3 exceptions to a spendthrift provision?
(1) a beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance;
(2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust; and
(3) a claim of this State or the United States to the extent a statute of this State or federal law so provides.
What is the effect of a spendthrift provision?
Prevents beneficiaries’ creditors from getting access to their interest in the trust; the effect of a spendthrift provision is generally to insulate totally a beneficiary’s interest until a distribution is made and received by the beneficiary.
Can a creditor get a court to order a mandatory distribution to them? What about a discretionary distribution?
Under a mandatory distribution and absent a spendthrift clause, a creditor can get a court order to force a trustee to pay the creditor directly instead of the beneficiary (who is not the settlor.)
Under a discretionary dist., it is unlikely. A court will not force a trustee to make a discretionary payment to a creditor, so creditor must wait until payment is made to beneficiary and go after them.
Can a creditor reach the assets of a settlor who is also a beneficiary?
Yes, a creditor can reach all of the assets that may be distributed to the settlor/beneficiary in these circumstances.
What does it mean when a trustee has a duty of obedience?
the Trustee has the duty to comply with the terms of the trust and applicable law.
What are T’s Duties of Impartiality?
The duty of impartiality means that the trustee must manage the trust in a way that keeps the interests of all current beneficiaries and future beneficiaries in mind while making investment decisions or making distributions to any one beneficiary. This is not a duty to treat all beneficiaries the same way. Sometimes settlor’s directions favor one B over another.
What are a trustees’ Duties of Loyalty?
The duty of loyalty means that T must not put T’s own interests (or the interests of others who are not the Bs) above those of the Bs. T must avoid self-dealing and conflicts of interest. A trustee must act “solely in the interests of the beneficiaries.”
What is The Prudent Investor Rule (Duty to Invest Trust Property)? What 2 investment goals should a prudent trustee have in mind?
A trustee is to invest trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust, and use reasonable skill, care, and caution in making investments as similarly situated trustees would make.
Invest w/ 2 goals in mind: (1) to produce income for the income beneficiaries, and (2) increase value of trust property for remainder beneficiaries.
What about duty of care/prudence?
The duty of care is the duty to manage trust property and to administer the trust w/ “reasonable care, skill, and caution.” This includes the duty to gather and protect the property, to keep proper records, to keep the property separate from the trustee’s own property, and to invest prudently.
What are some duties that the trustee has in protecting the trust property?
- Take reasonable steps to take control and protect trust property;
- Take reasonable steps to enforce claims of the trust and defend claims against the trust;
- take reasonable steps to collect trust property from former trustee and others holding trust property;
- keep adequate records of trust administration and separate (not commingle) and identify (earmark) property as belonging to trust.
Remedies for trustee’s breach of duty?
If the trustee breaches a duty, a court can:
- enjoin the trustee from committing a breach of trust,
- compel the trustee to pay for a loss caused by a breach,
- require the trustee to restore property to the trust,
- order the trustee to account to the beneficiaries or the court,
- remove the trustee, or
- reduce or deny compensation owed to the trustee.
