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Decedents, Estates, and Trusts > Trusts > Flashcards

Trusts Flashcards

1
Q

Definition of Trust

A

a trust is a legal arrangement where a settlor conveys property to a trustee to hold as a fiduciary for one or more beneficiaries

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2
Q

Trust law that applies

A

a) Testamentary trust: domicile
b) Inter vivos: nexus with a state

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3
Q

parties to a trust

A

1) Settlor – creator
2) Trustee – hold legal title, fiduciary duties, active role, functions
3) Beneficiary – benefit of property / trust. Hold equitable title to trust property

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4
Q

Third party rights

trustee and beneficiary

A

a) A trustee is both the trustee and an individual
(i) If sued in capacity as trustee
* Claim on trust propertypay from trust property
(ii) If sued in capacity as individual
* Claim on individual cannot touch trust property
* Pay from individual property

b) Beneficiary can sue trustee for breach of trust duty and distributions

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5
Q

trustee functions

4

A

custodial
administrative
distributive
investment

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6
Q

custodain function

A

taking the property and safeguarding it

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7
Q

administrative function

A

record keeping, paying taxes, accounting, filings

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8
Q

investment function

A

reviewing trust assets, prudent investment program reasonable in the circumstances

prudent man crap

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9
Q

distribution function

A

disbursement of income or principal to beneficiaries as outlined in trust terms

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10
Q

creating trust

5-6

A

parties
capacity of settlor and trustee
intent by settlor to create
ascertainable beneficiaries to enforce trust
specific property to be held in trust
sometimes - writing

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11
Q

trust party triangle

A
  • Settlor gives property up for benefit of B – donative or commercial transfer
  • Trustee receives property and has fiduciary duties attaches / distribute to B
  • B has right to sue T and hold him accountable and gets benefit
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12
Q

title split in trust

A

legal title and burden to trustee
equitable title and benefit to beneficiary

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13
Q

intent to create issues

A
  • Issue of precatory language: not clear direction of what intent is. Use strong direct language
  • “Trust” is not needed to create
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14
Q

ascertainable benficiary rule

A

trust must have one or more ascertainable beneficiaries to whom the trustee owes fiduciary duties and who can call the trustee to account

UTC a trust is created only if trust has a definite beneficiary unless
a. Charitable trust
b. Trust for care of animal
c. Or trust for a noncharitable purpose in Sec409

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15
Q

indefinite benficiary rule

C/l v. UTC

A
  1. In general: must be an ascertainable beneficiary within RAP
  2. If indefinite class
    a. Traditional rule: trust fails “my friends”

b. UTC 402 modern rule
i. Allows trustee to define from an indefinite class if done so in a reasonable time
ii. Allows trustee to appoint friends
iii. If not a reasonable time  property passes as if trust not created. Will or intestate

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16
Q

rule against perpeuities issue

A

ask: can know who the beneficiary is within 21 years?

  • beneficiaries need not be ascertained when the trust is created– they just must be ascertainable within the period of applicable rules against perpetuities
  • RAP: no interest in land is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.
    1. If everyone alive at time of creation of trust instrument and dies, then we wait 21 years and don’t know who takes - the trust dissolves
    2. If everyone alive at time of creation of trust instrument and dies, then we wait 21 years and we do know who goes to - the trust stands

charitable trust - no RAP

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17
Q

specific property to be held in trust

A
  • Must identify specific property (res) to be held
    1. Unless it is a pour over will where residue forms trust – catch all property
  • Property generally must be in existence at time of creation and ascertainable
  • Trust arises when the res is delivered and attained/accepted by trustee
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18
Q

writing for a trust

A

(optional) - can be oral if CC
* Writing is required if the trust is testamentary or the property is land
1. Wills act purpose and statute of frauds reqs. (Deed to land)

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19
Q

declaration of trust

A

when settlor declares himself to be trustee of certain property or beneficiary. Trustee must owe fiduciary duties to someone other than herself.

(i) Incomplete delivery alone doesn’t turn a gift into a trust

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20
Q

categories of trusts

9

A

private
charitable
business
oral
statutory purpose
honorary trust
pour over
constructive
sham

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21
Q

private trust generally

purpose, modfification, enforcement

A

(i) Purpose: by a person for the benefit of an ascertainable individual
(ii) Subject to the rule against perpetuities

(iii) Modification: claflin, equitable deviation, decanting
(iv) Beneficiaries enforces

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22
Q

charitable trust generally

purpose, modification, enforcement

A

(i) Purpose: by an individual for the benefit of the public good
(ii) May exist in perpetuity – no RAP rule
(iii) Modification: cy pres, deviation
(iv) No RAP
(v) AG enforces

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23
Q

oral trust reqs

A

a trust need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence.
a) Fear of fraud so C&C req.

NEVER testamentary or land

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24
Q

semisecret trust

A

no beneficiary designated
* Intent to create trust appears on face of will
* Terms are unstated
* Extrinsic evidence not needed to prevent unjust enrichment of trustee
* Trust is invalid not enforceable

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25
Q

secret trust

A

will doesn’t indicate trust
* Devise is absolute on face, but nothing in will saying create a trust. Based on understanding
* Extrinsic necessary to prevent unjust enrichment of promisor or trustee
* Court will impose constructive trust on trustee-promisor

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26
Q

semisecret and secret trust

A

secret used to be enforceable through constructive trust
(i) Defining: there is intent to create a trust but not put in public view restatement says that it doesn’t matter if secret and semisecret trust if don’t give as intended then unjustly enriched to donee. Secret trustee unjustly enriched in the secret. Decedent’s remaining heirs in semi-secret are unjustly enriched.

(ii) Restatement now: collapse distinction; both are an unjust enrichment to the donee.

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27
Q

honorary trust (pets)

elements

A

(i) Intent
(ii) Non capricious
(iii) Specific
(iv) No beneficiary to enforce so the court will impose an honor trust on the trustee
* Binds the conscience of the trustee because no beneficiary to enforce the trust
(v) Transferee is not obligated to carry out the settlor’s purpose
(vi) If transferee declines, she holds the property on resulting trust and property reverts to settlor or settlors’ successors

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28
Q

statutory purpose trust

A

(i) Statutory trust for pet animal or other noncharitable purpose
(ii) Authorizes the court to
* reduce excessive trust property if capricious for intended use and
* provide for enforcement by settlor or court appointee / appoint one to enforce the trust

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29
Q

pour over trust

A

created from residue of estate; irrevocable
in writing

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30
Q

sham trust

A

when trust has settlor as trustee and only beneficiary, can’t do, not accountable to anyone

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31
Q

nature of trust

A

revocabily v irrevocability

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32
Q

revocable trust: creation of

A

a) Creation of intervivos trust
(i) Presumptively revocable unless terms provide otherwise or in a will
(ii) Created by declaration of trust or **deed of trust **
(iii) Transfer is non-probate –will substitute
* substitutes for conveying property at death outside of probate
* Can be oral, spendthrift but not SPAT

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33
Q

revocable trust: amending or revoking

CL v. UTC

A

(i) Settlor retains power to amend or revoke at anytime

(ii) Common law rule: must revoke in the way outlined by terms of the trust

(iii) UTC ways to revoke
* By substantial compliance with method provided in terms of trust OR

  • If terms not expressly exclusive or no terms:
    1. Later codicil or will expressly referring to trust OR devises property that would otherwise pass in terms of trust
    2. Any other method expressing C&C of settlor intent
  • Problems: make sure trustee knows about revocation! Trustee will deliver property after revoke
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34
Q

revocable trust: subsidiary law of wills

restatment rule and creditors rights

A

(i) Restatement: although need not have formalities of a will, to the extent appropriate a will **substitute should be subject to substantive restrictions on testation and rules of construction **
* Spousal shares, construction reading of wills, slayer rules, divorce, creditors rights, abatement and ademption

(ii) Creditors: can reach into trust to reach funds if revocable intervivos trust – settlor could’ve paid then so can pay now. Settlors right to revoke trust is regarded as equivalent to ownership. Not protected.
* Cannot reach things settlor could not reach during life: life insurance, retirement, joint property

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35
Q

revocable trust: creditors rights

A

(ii) Creditors: can reach into trust to reach funds if revocable intervivos trust – settlor could’ve paid then so can pay now. Settlors right to revoke trust is regarded as equivalent to ownership. Not protected.
* Cannot reach things settlor could not reach during life: life insurance, retirement, joint property

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36
Q

revocable trust: duty owed

A

in a revocable trust, the trustee only owes a duty to the settlor – not remaining beneficiaries

37
Q

irrevocable trust: creation of

A

a) General: Settlor relinquishes all control, power to revoke or amend trust and property
(i) Must be clear of intent to not revoke. Explicitly state irrevocable
(ii) If existing trust – pour over residue revokes only portion in the will
(iii) If created by will trust – trust revokes
b) Testamentary is created by will / Transfer is probate

38
Q

irrevocable trust: fiduciary adminsitration

A

ongoing (i) Administration of property by a trustee in accordance with settlors’ intent

39
Q

irrevocable trust: types and clauses

A

(ii) Can be spendthrift / mandatory or discretionary
(iii) Usually charitable and SPATs

40
Q

irrevocable trust: duty owed

A

to beneficiaries exclusively. All beneficiaries. Remainders included

41
Q

irrevocable trust: creditor’s rights

A

depend on distribution method and clauses

42
Q

irrevocable trust: modification and termination

just list

A

american and british rule
claflin equitable deviation decanting
trustee removal
cy pres

43
Q

distribution methods

A

mandatory
discretionary
support
discretionary support

44
Q

mandatory method

general and creditors

A

: trustee must distribute property in certain way
a) Creditors rights: creditor can step into the shoes of beneficiary; Creditors can access mandatory payments. They have same payment rights as a beneficiary

45
Q

discretionary and support trust: common law rule

A

2) Discretionary: trustee has discretion and flexibility over distributions to beneficiary
a) Common law on creditors rights
(i) Discretionary v. support trust
* Discretionary: creditor has no recourse against the trust interest of beneficiary
1. If actually pay beneficiary, then likely can garnish this
2. Get a court order to pay C first

  • Support: when trustee has discretion to pay for support/care of beneficiary
    1. Rule: insulate most but not all creditors
    2. allow child support and suppliers of necessities - educational provider, health care provider, landlord to reach proceeds because beneficiary has right to get support for these reasons so creditor has the same rights
46
Q

discretionary and support trust: modern rule

A

collapse the distinction of discretionary and support trust

(i) UTC 504: a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if: The discretion is expressed in the form of a standard distribution; or The trustee has abused the discretion.
* Exceptions: can reach for child support or spousal support

47
Q

specific trust clauses

A

spendthrift
self settled asset trust

48
Q

spendthrift clause

A

provision in trust that shields beneficiary’s interest from most creditors
a) In general: restricts a beneficiary’s right to alienate or assign their interest in trust. Involuntary or voluntary transfer of interest must be restricted
(i) So the trustee can only ever pay the designated beneficiaries

b) Settlors are not protected by a spendthrift clause

c) Creditors cannot reach trust income or property for benficiary
(i) EXCEPT
* Child, spousal, or former spouse support
* One who provided service for protection of the interest in trust (lawyer)
* US government or state government
* Vague language “anyone who can garnish with good reason and court order” – not torts

49
Q

self settled asset trust

4 elements

A

settlor may insulate trust assets in which the settlor could have a beneficiary interest in to limit personal liability exposure. Cannot shield for own benefit. Creditors can reach what settlor can
a) UFTA: if make transfer to trust, with intent to hide or avoid from creditors, invalid trust

b) Elements to create SSAT
(i) Trustee must live in the jurisdiction
* Must be third party
* Trust protector required some times
(ii) Property must be held in jurisdiction
(iii) Trust must be irrevocable
(iv) Trust must not require any part of income to be paid to the settlor as beneficiary
* Cannot be a mandatory distribution & settlor cannot be principal beneficiary
c) Federal government may get assets

50
Q

when settlor consents to modify or terminate trust

A

a) For revocable trust: need only C&C of intent to revoke or modify. Give notice to trustee
b) For irremovable: settlor can revoke if consent from her and all beneficiaries
c) Notify trustee!

51
Q

modify or terminate: British and American rule

A

a) Common law rules
(i) British rule: beneficiaries all agree trust should be terminated, then it can be terminated

(ii) American / Claflin: trust may be terminated or modified if (1) all beneficiaries agree and (2) if the court concludes that the continuance of the trust is not necessary to achieve any material purpose
*** Elements: all parties consent & not contrary to material purpose of the settlor **
* Policy: preserves the settlors plan and intention but it looks at it through one the view of one place / time

52
Q

Claflin: modern rule

UTC v. restatment

A
  • UTC 411
    1. Preserves material purpose – must not be contrary to material purpose
    2. No unanimity requirement for beneficiaries interests of absent B adequately protected
  • Restatement
    1. Weakens material purpose requirement: termination if reason to terminate outweighs material purpose
    2. Beneficiary unanimity
    * General: Noncharitable trust may be terminated upon consent of all beneficiaries if court concludes continuance of trust is not necessary to achieve any material purpose
53
Q

equitable deviation

A

changed unanticipated circumstances that would
impair accomplishment of purposes of trust or
will further purpose of the trust
c. Further the material purpose of the trust and with settlor’s probable intention

54
Q

administrative v. dispositive terms

def and CL/modern rule

A
  1. Administrative – powers, rules, way property distributed
  2. Dispositive – gifts themselves, beneficiaries outlined, property distribution
    * Traditional rule: only administrative terms could be modified
    * UTC 412: can change dispositive and administrative terms if further material purpose
55
Q

equitable deciation v. Claflin

A

(iii) Equitable deviation has higher burden than Claflin’s “not contrary to material purpose”
* It must further settlor’s intent and material purpose
* When continuation is impractical or wasteful or impairing

56
Q

decanting

A
  • Statutory means to modify or terminate
  • In general: distribution of assets from one trust to a second trust to achieve the settlor’s original intent
    *Rule: new trust must be the same as the first trust.
    1. Can’t materially change the scheme that the settlor set up in the first trust.
    2. Second trust cannot add or remove the beneficiaries in the first trust
  • Trustee must have discretionary power to do this in original trust
57
Q

trustee removal

traditional v UTC

A

a) Traditional rule: only remove a trustee for cause  serious breach of duty only. High bar

b) Modern UTC 706 rule: settlor, co-trustee, or beneficiary may request the court to remove a trustee or a trustee may remove himself.
(i) The court may remove the trustee if
* serious breach of trust (trad.)
* Lack of cooperation among co-trustees substantially impairs administration of trust
* failure of Trustee to administer trust effectively

  • Substantial change of circumstances OR removal request by all Beneficiary AND
    1. Removal serves best interests of all beneficiaries
    2. Not inconsistent with material purpose AND
    3. There is a suitable trustee replacement
58
Q

charitable trust: purposes

5/6

A

Settlor intended a recognized charitable purpose:
(i) Relief of poverty
(ii) Advancement of education or religion
(iii) Promotion of health
(iv) Government or municipal purposes
(v) Other purposes the achievement of which is beneficial to the community

59
Q

charitable trust: RAP

A

not applicable to charitable trust. Must answer threshold question first of nature of trust

60
Q

cy pres

trad v. modern

A

way to modify or terminate charitable trust. “as close as possible”
a) Traditional rule: if a charitable trust’s specific purpose becomes illegal, impossible or impracticable, a court may direct application of the property to another purpose that is within the settlor’s general charitable intent

b) Modern rule: same as traditional and added wasteful
(i) Wasteful: the appreciation of the trust greatly exceeds the specified purpose – calls for a broader purpose or application
c) The change should be as near as possible to original purpose – general charitable purpose

61
Q

charitable trust: deviation

A

a) Court may modify if anticipated circumstances and will further purposes of the trust with probable intent
b) Court may modify administrative terms if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust administration.
(i) Different from cy pres because must further material purpose
(ii) While cy pres changes dispositive terms – MATERIAL PURPOSE entire nature of charitable trust

62
Q

if change to dispositive terms in charitable trust

A

analyze under both cy pres and equitable deviation

effect is different*

63
Q

change from history of fiduciary duty

A

a) Trustees had no power other than distributing
(i) Now trustees are empowered the same way as an owner in fee simple
(ii) Duties essentially duties induce the trustee to adhere to terms of the trust and act prudently and in good faith in the best interests of the beneficiaries

64
Q

elements of duty of loyalty

A

(i) No self dealing
(ii) No conflicts of interest
(iii) No self interested transactions
(iv) No selling individual property to the trust (unjust enrichment)
(v) Duty to bring suit against trustee in bad faith
(vi) Notice for resignation if need to excuse self
* No dealing with trust in the individual capacity
* Self dealing – no inquiry rule it’s a violation

65
Q

no further inquiry rule

general

A

if trustee undertakes a transaction that involves a conflict between the fiduciary capacity and personal interests, no further inquiry is made. No questions. It is a breach.
(i) Good faith or fairness of transaction are irrelevant
(ii) Common law rule – bright line

(iii) Defenses / exceptions
* Settlor authorized
* All beneficiaries authorized after full disclosure
* Judicial approval

66
Q

No further inquiry rule: common law

A

(ii) Common law rule – bright line

(iii) Defenses / exceptions
* Settlor authorized
* All beneficiaries authorized after full disclosure
* Judicial approval

67
Q

No further inquiry rule: modern rule

A

leniency for indirect conflicts
* When trust assets with its own banking department, invest assets in mutual fund, reasonable compensation

68
Q

settlor authorized problems in duty of loyalty

A
  • Even if broad provisions of a trust, a trustee violates the duty of loyalty to the beneficiaries by acting in bad faith or unfairly.
  • Structural conflict or consent** cannot be bad faith**
69
Q

co trustee breach of duty rules

A

if in possession of knowledge of a breach by a co-trustee, the trustee cannot resign. They must act affirmatively by giving notice to beneficiaries and court
(i) UTC: 30-day notice to all beneficiaries
(ii) May dip into trust property to protect the trust
(iii) Bad faith actions negate contribution
(iv) Damages: entitled to compensatory and punitive and constructive trust

70
Q

duty of prudence generally

A

must administer the trust as prudent person would by considering the purpose, terms, distributional requirements, and other circumstances of trust. Trustee should exercise reasonable care, skill, and caution.
(i) Objective standard

71
Q

duty to inquire

A

inquire if discretionary or discretionary support trust method into beneficiary’s finances
(i) Must inquire into beneficiary’s needs and circumstances under duty of prudence

72
Q

extended discretion

A

“sole absolute uncontrolled discretion”
* Trustee cannot act arbitrarily or capriciously, or abuse its discretion, and must act in good faith

73
Q

exculpatory clauses

A

excludes trustees from liability except willful neglect or default
* excused from liability for breach of trust (UTC)
* if trustee is draftsman must show disclosure of clause and meaning to settlor
* not excusable for bad faith, reckless indifference, intention or willful neglect, or trustee abuse

74
Q

duty of prudence: history of investment function

A
  • prudent man rule: prudence no speculation
    1. must observe how men of prudence, discretion and intelligence manage their own affairs not in regard to speculation but to the permanent disposition of their funds considering probable incomes as well and safety of capital to be invested.
75
Q

duty of prudence: modern rule

A

prudent investor rule

75
Q

duty of prudence: modern rule

A

prudent investor rule

76
Q

prudent investor rule: UTC rule

A
  • General UTC rule: Trust investments should be: Evaluated not in isolation but in the context of the portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonable suited to the trust
    1. Context based analysis
77
Q

modern portfolio theory

A

influenced prudent investor rule
1. Isolation is bad
2. Know the risk and return or reward distribution
3. Diversification is essential
4. Delegate
a. Risks: firm, industry, market

78
Q

diversification rule

A

mandated unless special circumstances: trustee shall diversify investments unless trustee reasonably determines that because of special circumstances the purposes of the trust are better served without diversifying.

  • The general rule may be expanded restricted, eliminated or otherwise altered by terms of trust
    1. Does not abrogate duty to diversify
79
Q

duty at inception of trust

A

within a reasonable time after accepting a trusteeship or receiving trust property, trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purpose, terms, distribution requirements, and other circumstances of trust.

80
Q

custodial and administrative functions

5 duties- CPEMABDC

A

(i) Duty to collect and protect trust property
* Collect and protect property without unnecessary or unreasonable delay
**(ii) duty to earmark trust property **
* trustee must designate property as trust rather than his own individual property
**(iii) duty not to mingle trust funds with trustee’s own **
* no fund mingling, no matter the purpose of the funds
**(iv) duty to keep adequate records of administrative **
* document important actions and decisions and the reason for them
(v) duty to bring and defend claims
* must take reasonable steps to enforce and defend claims relating to the trust

81
Q

duty of impartial

A

**a) Rule: **when trust has two or more beneficiaries the trustee shall act impartially in investing managing and distributing the trust property, given due regard to the beneficiaries’ respective interests.

b) Can: generate income and preserve and grow corpus of trust

82
Q

principal and income issues

A

(i) Power to adjust UPC: if trustee is not a remainder beneficiary and cannot comply with duty of impartiality may convert income to principle and vice versa. Trustee should not be beneficiary
d) Uni trust: settlor may set a percentage of the value of the trust corpus that must be paid to the income beneficiary each year. The corpus is then revalued each year.

83
Q

duty to inform and account

A

a) Generally must give beneficiaries material information
(i) notify beneficiaries that they are beneficiaries
(ii) send copy of trust instrument
(iii) Reasonably informed
(iv) They can waive right to be informed
(v) Informed of offers that will change the nature of trust

b) Duty to disclose: Any non routine action must be informed or disclosed under duty – prudence

84
Q

duty to disclose

A

Any non routine action must be informed or disclosed under duty – prudence

85
Q

duty to account

A

a) Disclose developments
b) Annual reports of trust performance
c) Responses to requests for information

86
Q

mandatory trust duties

A

(cannot be waived): Terms of trust can prevail over code except (these are MANDATORY)
(i) (2) the duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries …
(ii) (8) the duty to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust…
(iii) (9) the duty to respond to the request of a qualified beneficiary of an irrevocable trust for the trustee’s reports and other information reasonably related to the administration of a trust…

b) This means that the duty of loyalty, the duty to notify/inform, and the duty to report are non-negotiable and mandatory duties

87
Q

mandatory trust duties

A

(cannot be waived): Terms of trust can prevail over code except (these are MANDATORY)
(i) (2) the duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries …
(ii) (8) the duty to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust…
(iii) (9) the duty to respond to the request of a qualified beneficiary of an irrevocable trust for the trustee’s reports and other information reasonably related to the administration of a trust…

b) This means that the duty of loyalty, the duty to notify/inform, and the duty to report are non-negotiable and mandatory duties

Decedents, Estates, and Trusts (3 decks)

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