Trusts Flashcards
Formation of a Trust
(1) a settlor or trustor who creates the trust,
(3) a trustee, whose duty it is to manage the trust,
(4) intent to create trust,
(5) trust property (res),
(5) delivery of trust property to trustee,
(6) beneficiaries, and
(7) a valid trust purpose.
Types of Trusts
(1) Secret
(2) Semi-Secret
(3) Charitable
(4) Cy Pres
(5) Spendthrift
(6) Discretionary
(7) Support
Secret Trusts
If a will
(1) makes a gift that’s absolute on its face to a named B (secret trustee) AND
(2) in reliance on named secret trustee’s promise to hold property in trust for another, then
(3) courts allow extrinsic evidence - MUST show by clear and convincing evidence.
Result is a constructive trust on the trustee.
Semi-Secret Trusts
Will makes a gift that’s explicitly in trust but fails to name
(1) the actual B, and/or
(2) purpose of trust.
Result of Semi-Secret Trust
Trust Fails - the named trustee holds the property as resulting trustee in favor of T’s heirs, and property falls into residuary, or if none, to intestacy.
Charitable Trusts
Trust intended to benefit public.
Cy Pres
Where trustor had charitable intent, but specified charitable use is no longer possible or practical, court must decide whether trustor had
(1) specific charitable intent so trust fails, or
(2) general charitable intent so devoted to a similar use close to original use.
Spendthrift Trusts
B cannot alienate interest in trust and creditor cannot compel trustee to pay.
Once trustee pays/distributes assets to beneficiary, creditor can try to come after assets
Spendthrift Exceptions
Certain creditors can compel payment by trustee:
(1) claims of dependents (spousal/child support),
(2) gov’t claims (taxes), and
(3) suppliers of necessities (food/housing/medicine).
Discretionary Trusts
Trustee has complete discretion on whether to pay or withhold
If trustee has notice of attachment, must pay creditors
Support Trusts
Trustee is required to pay only so much as necessary for the support of the beneficiary
Limited amount only
Non assignable
Beneficiary Termination
Revocable/modifiable if
(1) all beneficiaries consent (including remote and contingent Bs), and
(2) modification/termination will not interfere with a material purpose of trust.
Failure of Express Trust
When express trust fails because B is dead, equity creates resulting trust in settlor (or if dead, settlor’s estate)
Fiduciary Duties of Trustee
DEC PP LIAA
(1) Delegation
(2) Earmark
(3) Care
(4) Prudence/Diversify
(5) Productive Property
(6) Loyalty
(7) Impartiality
(8) Allocate Income & Expenses
(9) Administer Trust According to Terms
Duty to Delegate
Trustee may delegate management functions that a prudent trustee would delegate, and must exercise reasonable care, skill, and caution in
(1) selecting an agent,
(2) establishing the scope and terms of the delegation, and
(3) periodically reviewing the agent’s actions.
Trustee responsible even if delegate is co-trustee
Duty to Earmark
Trustee must keep trust assets separate from personal assets and property, and
assets must be titled in the name of trustee as trustee.
(“T as trustee of ABC trust.”)
Duty of Care
Prudent Investor & Skill, Care and Caution
Skill: Capabilities
Care: Diligence & Efforts (includes duty to investigate)
Caution: Conservatism in managing trust.
Duty of Prudence/To Diversify
Make prudent investments, which requires diversification and placing trust assets into investments that will maximize the value of trust assets
Duty to Make Property Productive
The trustee has a duty to make property productive
Duty of Loyalty
Trustee cannot purchase trust property for the trustee’s own accounting or that of related persons without FIRST obtaining court approval.
Duty to Act Impartially
Trustee has a duty to act impartially toward both the income and principal beneficiaries.
Trustee CANNOT choose investments that largely favor income over the growing value of the trust corpus
ALSO APPLIES TO ALLOCATION.
Duty to Allocate Income
(1) money -> income UNLESS capital gain or in distribution of liquidation of an entity;
(2) insurance proceeds -> principal, EXCEPT business income loss allocated to income;
(3) proceeds from patents, copyrights, oil and gas royalties and lease payments, and similar payments are allocated 10% to income and 90% to principal.
Stock Dividends -> Principal
Duty to Allocate Expenses
Professional Compensation -> allocated evenly
Ordinary -> Income
Debt, Tax, Enviro matters -> Principal
Duty to Administer Trust According to Terms
Follow trust instructions.
Remedies for Breach of Fiduciary Duty
Trustee is liable for all losses resulting from breach
A gain from one breach cannot offset a loss from another - trustee liable for entire amount of loss.
Trustee can also be removed as trustee.
