Trusts Flashcards
Trust
A fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.
Who is the beneficiary?
The person who receive the benefits of ownership (holder of equitable title). They enforce the trust and the trustee owes duties toward them.
Who is the settlor?
The person who causes the trust to come into existence by supplying the initial trust property.
Reasons for creating a trust
-Providing for beneficiaries
-Flexibility of asset distribution
-Protection against settlor’s incompetence (as an alternative to a guardianship)
-Professional management of property
-Avoiding probate
What are express trusts, and what are the two categories?
Created by the express intention of the settlor, and categorized into private or charitable based on the beneficiary.
What is a resulting trust?
Arises from the presumed intention of the owner of the property.
What is a constructive trust?
An equitable remedy used to prevent unjust enrichment.
What are the elements of a valid trust?
-Settlor with capacity
-Present intent to create trust (words, writing, or conduct)
-Trustee (inter vivos only; testamentary will not fail for this reason)
-Definite beneficiary (sole trustee can’t be sole beneficiary)
-Trust property (res)
-Valid trust purpose (not illegal, against public policy, impossible to achieve, or violative of RAP)
What is the standard for capacity to create a trust?
Same as an inter vivos gift for an inter vivos trust, and same as a will for a testamentary trust.
Is communication of intent to beneficiaries necessary?
No, but it may bolster the intent element.
When must the settlor intend for the trust to take effect?
Immediately - a promise to create a trust in the future is not enforceable, but a future interest can be property of a trust.
Do precatory expressions create a trust?
No. They are an expression of hope, wish, or mere suggestion that the property be used in a certain way.
What split of legal and equitable title is sufficient?
Any time the sole trustee is not the sole beneficiary, however slight the interest of the second person is. If only one person holds both, legal and equitable title merge and the trust is extinguished.
What is the standard for an identifiable corpus?
The property must be ascertainable with certainty. Without an ascertainable res, the trust fails.
Property that the settlor cannot transfer or does not own is insufficient.
Who are qualified beneficiaries?
Anyone who, on the date the beneficiary’s qualification is determined, is (1) a current beneficiary or (2) a first-line remainderman. The trust must operate DIRECTLY to benefit them.
Can you disclaim a trust interest?
Yes. Many states and federal gift tax require that disclaimer be made within 9 months of the interest’s creation (unless the person is not yet 21).
You may not disclaim a trust if estoppel applies - that is, if you have exercised any dominion or control over the interest or accepted any benefits under the trust.
Do anti-lapse statutes apply to trusts?
Typically only to wills, but some states apply them to future interests created in trust unless the trust makes an alternate gift in case of a beneficiary’s nonsurvival.
What is the impact of divorce on a trust?
Revokes all beneficial gifts and fiduciary appointments in favor of a former spouse. The UPC and some states will also extend the revocations to individuals who are related to the former spouse but not the settlor.
At what time must beneficiaries be ascertainable?
When their interests are to come into enjoyment
Can beneficiaries be designated with generic descriptions?
Yes, such as “children” as long as they are ascertainable when they are to benefit. You just have to be able to determine who belongs to the class.
-Common law: class must be reasonably definite
-UTC: trustee may be empowered by settlor to select beneficiaries from an indefinite class
What is the general rule about trust purposes?
A trust may be created for any purpose, but it is invalid if the purpose is illegal, contrary to public policy, impossible to achieve, or intended to defraud the settlor’s creditors.
What happens if a condition attached to an interest is against public policy?
-Settlor’s alternative desire will control if expressed
-If condition subsequent: condition is invalidated but trust is valid
-If condition precedent: hold interest valid unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest if the condition was not enforceable.
How does RAP apply to trusts?
Many states have either adopted a wait-and-see approach or an alternative 90-year vesting period, or have abolished the RAP altogether to allow dynasty trusts.
Will a trust fail because the trustee dies, refuses appointment, or resigns?
No, the court will appoint a successor trustee
How do you accept a trusteeship?
- Sign trust or separate written acceptance
- Substantially comply with the acceptance terms in the trust instrument
- Accept delivery of trust property
What compensation is a trustee entitled to?
Reasonable compensation or whatever is specified in the trust instrument
When can a trustee be removed, and what are grounds for removal?
Trustee can be removed by court on its own motion or by request from settlor, beneficiary, or co-trustee.
Grounds:
-serious breach of trust
-serious lack of cooperation among co-trustees
-unfitness, unwillingness, or persistent failure to administer
-substantial change in circumstances
Inter vivos trust
Trust created while the settlor is alive by either declaring themself trustee for another (retaining legal title) or by transfer of property to another as trustee (settlor retains or transfers equitable title and conveys legal title).
What does delivery mean, and when is it required?
Delivery means placing trust property out of the settlor’s control. When an inter vivos trust is created by a conveyance in trust, the property must be conveyed to the trustee.
When is a writing required for a trust?
Typically not required for a trust of personal property (but you must have clear and convincing evidence to establish an oral trust). A trust of land requires a written instrument under the SoF.
What is a pour-over gift, and when are they valid?
When a settlor makes a gift by will to a trust established during their lifetime. It can be the initial funding for a trust if the trust is (1) identified in the will and (2) executed before the testator’s death.
What are testamentary trusts?
Created in the settlor’s valid will.
What is the difference between a secret and semi-secret testamentary trust?
- Secret trust imposes constructive trust (settlor agrees with will beneficiary that beneficiary will hold property in trust for someone else and relies on that promise, but the will does not state the true nature of the gift - must be proven by clear and convincing evidence)
- Semi-secret trust implies resulting trust (will makes a gift in trust but fails to name beneficiary, so named trustee holds the property on a resulting trust for the testator’s successors in interest)
Absent restrictions by statute or trust instrument, what transfers may occur with a beneficiary’s interest in the trust?
- Voluntary: beneficiary may freely transfer interest
- Involuntary: creditors may reach the beneficiary’s interest
What is a discretionary trust, and what are a creditor’s rights in it?
Trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary.
Beneficiary has nothing to transfer and no interest for creditors to reach and creditors cannot compel a distribution. If a trustee has notice of attachment, they must pay creditor unless there is a spendthrift provision. Exceptions: satisfying a judgment against eh beneficiary for support of child, spouse, or former spouse.
What is a spendthrift trust?
Precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and beneficiary’s creditors are precluded from reaching it to satisfy their own claims.
What are the limitations on the enforcement of a spendthrift trust?
In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors.
Also ineffective against certain creditors: support orders for child & spouse, claims by government, sometimes tort creditors or creditors who provided necessaries
What is a support trust?
A trust that directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support. May be mandatory or discretionary, and the standard of support is accustomed standard of living if trust does not specify otherwise.
Can the trustee’s creditors reach the trust property to satisfy their claims?
No. The trustee only holds legal title.
In general, when will a trust terminate?
Upon the expiration of the term specified in the instrument or when all purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve.
Under the UTC, can a settlor revoke or amend a trust?
Yes, unless the terms expressly state that it is irrevocable. Some states allow a settlor to revoke an irrevocable trust with written consent of all beneficiaries
Traditional rule: trust is irrevocable unless power to revoke or modify is expressly reserved.
How may the beneficiaries terminate or modify a trust?
- With consent of settlor and ALL beneficiaries (even if doing so conflicts with material purpose)
- Without settlor’s consent but (1) with the consent of all beneficiaries where (2) no material purpose of the trust would be frustrated - Claflin Rule
What are examples of material purposes of the trust?
-support of beneficiary
-spendthrift provision
-payment at certain ages/dates
-discretionary trust
How may a trust terminate by operation of law?
If the property has been exhausted or if the legal & equitable titles have merged.
How may a trust be terminated by the court?
-If termination/modification is not available because not all beneficiaries consent, a court may terminate or modify if (1) the trust could have been modified if all beneficiaries had consented and (2) the interests of any nonconsenting beneficiary will be adequately protected.
-Unanticipated circumstances threaten purposes of trust
-continuation of trust is impracticable or wasteful
-value of trust is insufficient to justify cost of administration
How may a trust be terminated by a trustee?
- Uneconomic - trust property is less than $50,000 and amount is insufficient to justify cost of admin
- Absent contrary terms, decanting a trust (combining several or dividing one, so long as purpose is not frustrated).
What is the trustee’s duty upon termination?
To wind up the affairs of the trust and to timely distribute trust property to appropriate remainder beneficiaries.
What are the sources of a trustee’s power?
-Powers expressly conferred upon them by terms of trust
-Powers granted by state law
-Implied powers that are appropriate to achieve proper investment, management, and distribution of trust property
What powers does a trustee have under the UTC?
-powers conferred by terms of the trust
-powers that an unmarried competent owner has over individually owned property
-any other powers appropriate to achieve proper investment, management, and distribution of trust property
-any other powers conferred by the UTC
When there are multiple trustees, how are decisions made?
Majority decision
What is the difference between imperative and discretionary trustee powers?
Imperative powers are mandatory and must be exercised under the trust instrument (court may order them to exercise).
A discretionary power is one that the trustee may or may not perform based on their good faith judgment (subject to judicial review for abuse of discretion, even even absolute or uncontrolled discretion is granted).
What are the trustee’s duties?
- Administer the trust (prudently, in good faith, and impartially)
- Loyalty (no self-dealing of any kind - good faith or benefit to the trust is irrelevant)
- Report (respond to beneficiaries’ requests and provide accounting)
- Separate and earmark property (keep trust assets physically separate from other assets)
- Preserve and make trust property productive
What is the investment standard for trustees?
Most states use the Uniform Prudent Investor Act (UPIA), which provides default provisions in the absence of specific provisions in the trust itself. The standard of care is reasonable care, skill, and caution when investing and managing trust assets.
The entire trust portfolio and overall investment strategy are evaluated rather than individual investment decisions. Investments should be diversified
What factors must a trustee consider when making investment decisions?
-Trust purpose
-General economic conditions
-Effect of inflation/deflation
-Role that each investment plays in the portfolio
-Asset’s special relationship or value to the purposes of the trust/beneficiaries
And more
Will a trustee’s special skills or expertise be considered?
Yes, they have a duty to use special skills or expertise (so a professional trustee or attorney may face a higher standard)
Can a trustee delegate their duties?
YES. The trustee must act prudently in selecting an agent, establishing the scope and terms of the delegation, and periodically reviewing the agent’s actions.
What remedies are available if the trustee commits or is about to commit a breach of trust duties?
- Specific performance of duties
- Enjoin trustee from committing breach of trust
- Compel trustee to pay money or restore property
- Suspend or remove the trustee
What damages may the trustee be liable for in the event of breach?
To the beneficiaries, the greater of:
-amt necessary to restore trust property and distributions to what they would have been in the absence of breach OR
-trustee’s profit from breach
What are the remedies for self-dealing?
- Affirm transaction if trust profited
- Set aside transaction if trust lost money
- Trace profits from trustee if trustee profited
When is an exculpatory clause effective?
Only for negligent conduct (not for bad faith, reckless indifference, or abuse of a confidential relationship)
