Trusts Flashcards
Trust is formed (SPIRIT B)
- A valid express trust requires: 1) a beneficiary; 2) a settlor with capacity; 3) an intent to create a trust; 4) a trustee; 5) a valid purpose; 6) trust property (the res); and 7) compliance with any state formalities (i.e. signed in front of notary).
Who can beneficiaries be
natural persons, corporations, or other organizations.
Who cannot be the sole trustee and the sole benficary
trustee because they have duties to preform
Will a trust fail solely because the person refuses to act as a named trustee, dies or is removed?
no, but there must be a named trustee for the trust to be valid
What happens when a trustee refuses to serve, dies, or is removed
Court will appoint a new trustee
When conducting you analysis, if no facts indicate failure of compliance, you should state
“as no facts indicate otherwise, it will be assumed the trust formation complied with all state formalities.”
Resultant trust
When a trust fails or there is incomplete disposition of trust property, a court may create a resultant trust to return property to the settlor. This trust’s goal is to avoid unjust enrichment and is appropriate when a beneficiary is not using the money as the trust dictates.
Discretionary trust
– When a trustee has absolute discretion and power to determine distributions. Discretion of the trustee must be in good faith - a court will not interfere unless abuse is found.
Trustee standard of care
If the trustee has special skills they will be held to a higher standard.
Spend thrift provision
– A provision that requires the trustee to use only so much income or principle as is necessary for the support of the beneficiaries.
Spendthrift trust
Expressly restricts the beneficary’s power to voluntarily or involuntarily transfer an equitable interest. A trust restricting only involuntary transfers is void as against public policy
duty of care
trustee must exercise that degree of care, skill and caution exercised by a reasonably prudent person in their own dealings. This duty requires 1) diversifying assets; 2) making property productive; and 3) making informed decisions regarding investment schemes. Mistake in judgement do not expose trustee to liability as long as RC was exercised
Duty of loyalty
A trustee is required to 1) refrain from self-dealing; 2)administer the trust in the best interest of the beneficiaries; and 3) act impartially towards each beneficiary.
Duty to diversify assets
A trustee is required to invest trust assets in varying classes of investments to protect against risk.
Duty to distribute the trust instrument
trustee has a duty to invest and expend trust resources only in accordance with the trust instrument.
Making property productive
A trustee is required to invest trust assets to produce income relative to the assets invested.
Making informed decisions
A trustee must perform responsibilities with the due diligence required to invest trust assets only after developing the requisite knowledge of the investment landscape.
Duty to inform and account
– A trustee must disclose to beneficiaries complete and accurate information about the nature and extent of trust property, and periodically (at least annually) account for actions taken on behalf of the trust so the trustee’s performance can be assessed against trust provisions.
Co-Trustee liability
When more than one trustee is assigned, all trustees are responsible for administering the trust, and held liable for acts of other trustees if 1) they participate, approve, or conceal a breach of trust; 2) negligently enable a breach; 3) fail to reasonably correct breaches; or 4) improperly delegate administration of the trust.
Charitable trust
trust is deemed charitable when it has a stated charitable purpose and exists for the benefit of the community at large or a class of persons with continually changing membership. The beneficiaries must indefinite and not to a single person. It is also enfored by the AG
Cy Pres
equitable doctrine where the courts will modify a charitable charitable trust to be as consistent or near as possible to the testator’s intentions should the purpose of the trust be frustrated. The arbiter of Cy Pres disbursement is the State Attorney General.
Modification of a trust
A trust may be modified by a settlor 1) who expressly reserved the power to modify the trust; or 2) who has the power to revoke or amend. A trust can be modified by a court when changes are required due to unforeseen circumstances, if all beneficiaries consent, and if modification is not contrary to trust purpose.
CA modification of a trust
California, a trust may be modified on petition by a trustee, or a court may modify a trust if the trust will be substantially impaired due to unknown or unanticipated circumstances of the settlor.
Termination of a Irrevocable trust
An irrevocable trust may be terminated if 1) the settlor and all beneficiaries agree while settlor is still alive; 2) all the beneficiaries agree, and it doesn’t frustrate the purpose of the trust; or 3) the trust ends on its own accord.
termination of a revocable trust
A revocable trust can be terminated in any way specified in the trust, or if it doesn’t state so, in any writing signed by the settlor.
Remedies against a trustee
A trustee may be removed and can be held liable for 1) any loss or depreciation in the value of the trust; 2) any profit made by the trustee through breach; 3) any missed profit caused by breach.
Beneficiary remedies to sue the trustee
Beneficiaries pursuing legal action against a trustee to 1) affirm conduct and keep profit; 2) order an accounting and demand trustee to pay losses; 3) disgorge any profits made; 4) remove the trustee.
Testamentary trust
Occurs when the terms of the trust are contained in writing in a will or a document incorporated by reference into a will.
Rights of creditors
A beneficary’s creditors cannot reach the beneficiary interest until income has been paid. An attempted transfer by the beneficiary in violation of a spendthrift provision is only effective in that it authorizes the trustee to pay funds directly to the attempted transferee.
Exceptions to spendthrift trusts
Many states allow certain classes of creditors like childern and spouses entitled to support and providers of basic necessities to reach a beneficaries interest dispite a spendthrift restraint
What are the 5 ways to terminate a trust
settlors and beneficaries agree to terminate
all beneficaries agree to terminate and all material purposes have been accomplished
merger
operation of law - purpose impossible, divorce, illegal or completed
term of trust expires
Clafin doctrine
Trust cannot be modified/terminated, even if all beneficiaries agree, if doing so would be contrary to a material purpose of the settlor
1. Material purpose includes spendthrift, support, discretionary trusts
