Trusts Flashcards
What is a trust?
A fiduciary relationship in which a trustee holds legal title to manage property on behalf of the beneficiary who holds equitable title.
What is the distinctive feature of a trust?
The separation of legal title and beneficial enjoyment
Who is the settlor of a trust?
The creator of the trust
Who holds the legal title and owes fiduciary duties in a trust?
The trustee
Who holds equitable title in a trust?
The beneficiary
What are the fiduciary duties of a trustee?
To manage, invest, safeguard, and administer trust assets and income for the benefit of the designated beneficiaries
What are the reasons for using a trust?
- protect and preserve property from potential mismanagement by beneficiary
- protect and preserve property for a future generation
- protect settlor and property in event settlor is deemed incompetent
- probate avoidance: speed and privacy
- reduce tax liability
What are the three types of trusts?
- express
- resulting
- constructive
How does an express trust arise?
Expressed intention of the settlor
How does a resulting trust arise?
From the presumed intention of the settlor
How does a constructive trust arise?
in cases involving wrongful conduct and unjust enrichment
What are the two types of express trusts?
- private: for the benefit of certain ascertainable persons
- charitable: for the benefit of an indefinite class of persons or the public in general
What are the requirements for a valid express trust?
1) a settlor with capacity to convey title to trust
2) intent to create a trust
3) one or more definite beneficiaries
4) a present disposition in trust of identifiable property
5) lawful purpose
Beneficiaries are presumed to accept their interest in the trust unless
they affirmatively disclaim it
What is a qualified beneficiary?
a beneficiary who, on the relevant date, is currently eligible to receive a distribution from the trust, or would be eligible to receive a distribution if the trust is terminated on that date
What is a discretionary trust?
Trustee decides which class members receive benefits
What is the Virginia Anti-Lapse statute?
If a beneficiary is dead at the time of the execution of the trust instrument or at the time of the settlor’s death, their descendants take in their place when the beneficiary is the settlor’s grandparent or a descendant of the settlor’s grandparent.
In VA, if a trust is revocable, what will revoke your ex-spouse’s gift in the trust?
Divorce or annulment
A trust may designate a class of beneficiaries so long as
the individual members of the class are readily ascertainable at the time that trust property is distributed
If tenancy by the entirety property is transferred to a trust, claims of individual creditors as to the entire estate are still exempt so long as
- the couple remains married
- the property continues to be held in trust
- it continues to be their property
What does “lawful purpose” mean in regard to creating a trust?
- not unlawful
- not contrary to public policy
- not impossible to achieve
In Virginia, is a writing required for a valid trust?
No, even for real property
How can an oral trust be proved?
by clear and convincing evidence
A trust will not fail for lack of a
trustee
What are the qualifications for a trustee?
- must be of legal age
- must be competent
- must have the capacity to enter into contracts
What must a nonresident individual do to be named as trustee?
Appoint a resident agent for service of process
A nonresident bank or trust company not authorized to do business in VA cannot serve as
a testamentary trustee
What are the grounds for removal of a trustee?
1) a serious breach of trust
2) lack of cooperation among co-trustees
3) unfitness, unwillingness, or persistent failure to administer trust effectively
4) a substantial change of circumstances
What is the merger doctrine?
If the sole trustee and sole beneficiary are the same individual and hold precisely the same interests, titles merge and the trust is terminated.
An express trust can be created by:
- inter vivos or testamentary transfer to a trustee;
- self declaration of trust; or
- exercise of a power of appointment
What is an inter vivos trust?
Created while settlor is alive
What is a testamentary trust?
created after settlor dies via valid will
What is a pour-over will?
Valid will that funds inter vivos trust already in existence
What are the three requirements for a pour-over will?
- will identifies trust
- trust terms are separate from will
- valid trust created before, concurrently, or after will
What is the approach for a pour-over will essay?
- is the will valid?
- are the 3 requirements for pour-over will met?
- is there a valid trust?
Does a charitable trust need to designate a particular beneficiary?
NO
What are charitable trust purposes?
- altruistic and beneficial to community
- Court determines whether purpose is charitable
What is the cy pres doctrine?
“as near as possible” when a charitable purpose becomes unlawful, impracticable, impossible, or wasteful, court can selec an alternative based on settlor’s general charitable purpose.
A charitable trust provision that would result in distribution of the trust property to noncharitable beneficiaries prevails over the court’s power to apply cy pres only if:
1) the property is to revert to the settlor and the settlor is then living; or
2) fewer than 21 years have elapsed since the trust was created
Suit to enforce a charitable trust can be brought by
- the settlor
- a qualified beneficiary
- Attorney General
What are honorary trusts?
established to provide benefits for non-human and non-charitable beneficiaries
When does a resulting trust arise?
- express trust fails
- settlor makes incomplete disposition of property
- one party pays the purchase price for property and causes the title to be taken in another party’s name (“PMRT”)
When a resulting trust arises due to failure of an express trust, what happens to the property?
Trustee holds the property until it is transferred back to the settlor or her estate.
When a resulting trust arises due to incomplete disposition, what happens to the property?
Reverts back to settler/estate or settlor’s successors
What is a constructive trust?
Equitable remedy to prevent unjust enrichment that resulted from wrongful conduct
What is the duty of a trustee of a constructive trust?
to convey the property (give legal title) to the person who would have owned it but for the wrongful conduct
What is a secret testamentary trust?
absolute gift in will made in reliance on beneficiary’s promise to hold the property in trust for another
What is a semi-secret testamentary trust?
gift in will to a person “in trust,” but does not name trust beneficiary
Is extrinsic evidence allowed to prove secret and semi-secret testamentary trusts?
secret: yes
semi-secret: no
If agreement of a secret testamentary trust can be proven by clear and convincing evidence, what is the result?
Constructive trust to prevent unjust enrichment is imposed in favor of intended beneficiary
What is the result of a semi-secret testamentary?
The trust fails and the courts impose a resulting trust where the property returns to the settlor’s estate.
What is a spendthrift trust?
a trust that precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and their creditors are precluded from reaching it to satisfy any claims.
To protect against creditors, trusts may allow
trustee to pay expenses directly
What are the statutory exceptions to spendthrift protections?
A spendthrift clause cannot be used to shield the beneficiary from:
1. child support
2. their own creditors when the beneficiary is the settlor
3. claims by the government
Once income or principal has been distributed to a beneficiary of a spendthrift trust,
it is no longer protected by a spendthrift provision
Does VA allow self-settled spendthrift or asset protection trusts?
Yes
What are the requirements for qualified interest in VA?
- trust must be irrevocable and inter vivos
- must be at least one beneficiary other than the settlor
- has a qualified trustee
- incorporate VA laws to govern validity, constructions, and administration
- include a spendthrift provision
- settlor cannot have right to disapprove distributions from trust
What is qualified interest?
a settlor’s interest to the exten that the settlor is entitled to receive distributions in the sole discretion of an independent qualified trustee
What is a qualified trustee?
one who is not, and whose actions are not, subject to direction by the settlor (or associates), someone residing outside VA, an entity in which the settlor owns at least 30% voting power, or an entity not entitled to engage in trust business
When does a creditor of a beneficiary have access to a discretionary trust?
- claims are for the support or maintenance of the beneficiary’s child;
- for necessaries furnished by a creditor of a support trust beneficiary (HEMS)
- against a settlor-beneficiary or a discretionary trust
In Virginia
A settlor can revoke or amend a trust unless
the trust terms expressly state that it is irrevocable and cannot be amended
In Virginia,
a trust can be terminated or modified if all
beneficiaries and the settlor consent even if the modification or termination conflict with a material trust purpose
In Virginia,
a trust can be modified or terminated only by all beneficiaries if
termination or modification are not inconsistent with material trust purpose.
In VA,
what may constitute material purpose and preclude early termination of a trust?
a spendthrift provision
Why might a court terminate a trust?
a court may modify or terminate a trust if:
1. unanticipated circumstances threaten the purposes of the trust;
2. continuation of the trust on its existing terms is impracticable or wasteful;
3. to achieve settlor’s tax objectives
4. to reflect settlor’s intent if mistake in terms is shown by clean and convincing evidence
What is the Uniform Prudent Investor Act (UPIA)?
Trustee must act as a prudent investor
What is the standard of prudence?
Reasonable care, skill, and caution
In Virginia,
a trustee has how long to invest?
4 months
Asset of trust sold = principal, what is all included in the principal
- return of the investment
- the amount you paid for it, plus the appreciation
is Rent income or principal?
Income
Income or Principal?
1. cash stock dividend
2. stock split/other reorganization
- income
- principal
Under what circumstances is the trustee not liable to a beneficiary for breach of trust?
- the trustee acted in reasonable reliance on the terms of the trust; or
- the beneficiary either consented to the conduct, released the trustee from liability, or ratified the transaction
What are a beneficiary’s remedies for a trustee’s breach of trust?
1) specific performance of the trustee’s duties
2) enjoin trustee from committing a breach of trust
3) compel the trustee to pay money or restore property
4) suspend the trustee
When is a co-trustee not liable for breach of trust by other co-trustee?
- he did not join in the action
- he exercised reasonable care in preventing breach of trust or compelling the co-trustee to redress the breach
When are exculpatory clauses void?
- if they relieve the trustee of liability for breach committed in bad faith or with reckless indifference; or
- if they appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor
