Trusts

Question 1

Legal Title Held by Trustee

Answer 1

No benefit from property, but maybe fee
Trustee is fiduciary
Care, Loyalty, Liability for failing to meet burden

Question 2

Beneficial Title Held by Beneficiary

Answer 2

Can use gift based on instructions in the trust instrument

Question 3

Settlor

Answer 3

Person who creates the trust
Trustor, Grantor, Donor (but use Settlor)

Question 4

Trust Property

Answer 4

Contents of the trust
Not a legal entity, must contain property

AKA:
Principal
Corpus
Trust Res

Question 5

Basic functioning of trusts

Answer 5

The settlor creates a trust by transferring legal title to the trustee (for example, a person with good investment skills) and equitable title to a beneficiary (a person or charity deserving of a windfall). The trustee manages and invests the property in accordance with legal duties and the settlor’s instructions as contained in the trust instrument. The trustee makes payments to or for the benefit of the beneficiary following the settlor’s instructions in the trust instrument. When the trustee’s duties are completed, the trust terminates and the trustee

Question 6

Big Six Reasons to use Trust

Answer 6

Provide for and protect beneficiaries
Flexibility of asset distribution
Protect against own incompetence
Professional management of property
Probate avoidance
Tax benefits

Question 7

Validity of Trust Elements

Answer 7

Trust intent
Identifiable corpus
Ascertainable Beneficiaries
Proper purpose
Compliance with mechanics and formalities

Question 8

Validity of Will: Trust Intent

Answer 8

Two elements:
Splitting of legal and equitable title
Imposition of fiduciary duties on title holder
No special language needed, just the elements
No need to notice beneficiaries, but can show intent
Promise to make trust not binding, like contract needs consideration
Must exist at time of conveyance

Question 9

Validity of Will: Trust Intent: Split of title

Answer 9

So long as sole trustee and sole beneficiary are not the same, this is met
But, even if same person on one side, works so long as not sole beneficiary
Just so long as not united in ONE person
Also, consider small splits like a life estate
As long as there is remainderman, split works

Question 10

Validity of Will: Identifiable Corpus

Answer 10

Trust Property
Must be identifiable with certainty
Anything capable of transfer can be in the trust

Question 11

Validity of Will: Ascertainable Beneficiaries

Answer 11

Private Trusts
Only requires beneficiary with capacity

Class Gifts
Beneficiaries may be designated by generic descriptions such as “children.”
Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit
The trustee must be able to determine who belongs to the class.
Must be ascertainable
Ie. grandchildren, siblings, etc NOT friends

Honorary Trust
Provides benefits to non-human, non-charitable purposes
Ie. maintain grandfather clock, care for pets

Question 12

Validity of Will: Proper Purpose

Answer 12

Can create trust for any purpose not illegal or against public policy

Question 13

Validity of Will: Compliance with Mechanics and Formalities

Answer 13

Inter Vivos trust: Trust created while settlor is alive
Must designate trustee
Delivery of trust/Funding of trust
Writing generally required

Question 14

Validity of Will: Compliance with Mechanics and Formalities: Inter Vivos trust:

Answer 14

Inter Vivos trust: Trust created while settlor is alive

Types:
Declaration of trust
Settlor declares self trustee of property

Conveyance in trust
Settlor transfers title to trustee

Testamentary trust
Trust created in settlor’s valid will

Question 15

Validity of Will: Compliance with Mechanics and Formalities: Must designate trustee

Answer 15

Must have:
Enforceable duties
Capacity to take and hold title
Ability to manage property

If no trustee:
Court will not allow trust to fail unless trust says that

Question 16

Validity of Will: Compliance with Mechanics and Formalities: Delivery of trust/Funding of trust

Answer 16

Must:
Personal property identified or physically delivered
Real property conveyed by deed
OR
Property devised by will to testamentary trust
Must transfer to trustee

Trust will faIl if no property transferred

Question 17

Pour-Over Will

Answer 17

Gift in will to inter vivos trust
Very common
Will go into trust as the terms of the trust exist, goes in on date of death

Question 18

Testamentary Secret Trust

Answer 18

Settlor and will beneficiary orally agree that beneficiary will hold as trustee for someone else
Might allow extrinsic evidence to show constructive trust

Question 19

Testamentary Semi-Secret Trust

Answer 19

Will leaves property in trust without beneficiary or terms
Almost always fails

Question 20

Inter Vivos Secret Trust

Answer 20

Grant of property outright but grantee promised to hold in trust for another.
Normally grantee not bound by this due to SoF
However, if alleged beneficiary can show some wrongdoing, some courts might hold the grantee to the terms

Question 21

Voluntary Transfers of Interest by Beneficiaries

Answer 21

Equitable interest is presumptively freely transferable

But
Spendthrift provision: Precludes voluntary transfers

Question 22

Involuntary transfers

Answer 22

Unless a statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust. The interest is subject to judicial sale. To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied

Question 23

Discretionary Trusts

Answer 23

Trustee determines how much beneficiary receives
Beneficiary has nothing to transfer until trustee makes payment
Creditor can’t reach without payment too

Question 24

Spendthrift Trust

Answer 24

Virtually every trust created has one

Two prongs:
Beneficiary may not transfer the interest
Once trustee pays beneficiary, they can do what they want

So, many trusts have the trust pay for the benefit of the beneficiary, directly paying rent etc.

Creditors cannot attach interest–But once paid, creditors can go after it
Just need to say “this is a spendthrift trust/provision” and it attaches these

Ineffective if settlor is beneficiary

Common Exceptions:
Support of spouse or child
Creditors who supply necessaries
Tort creditors

Question 25

Support Trusts

Answer 25

Support provision: Use restricted to beneficiary’s: Health Education Maintenance Support Can be mandatory or discretionary (ie, IF used, must be used for this) Standard of support If the instrument does not specify, the beneficiary’s accustomed standard of living prior to trust Whether the beneficiary’s other income or resources should be taken into account is a question of the settlor’s intent and is decided by courts on a case-by-case basis

Question 26

Methods of Modification or Termination

Answer 26

By express terms of trust By settlor unless irrevocable By the Beneficiary By Operation of law By the Court

Question 27

Methods of Modification or Termination: By settlor unless irrevocable

Answer 27

Needs to be if for tax reasons Settlor may be able to revoke irrevocable trust if they have written consent from all people with vested and contingent interests

Question 28

Methods of Modification or Termination: By the Beneficiary

Answer 28

By agreement of all beneficiaries if settlors intent not frustrated Difficult if some not legally competent Settlor can consent And, modification cannot frustrate the material purpose of the trust (Claflin rule) Provisions preventing termination by beneficiaries Support provisions Spendthrift provisions Payment at certain ages Payment at certain dates Discretionary trust provisions

Question 29

Methods of Modification or Termination: By Operation of law

Answer 29

Property goes away, no trust Merger, all legal and equitable title merge

Question 30

Methods of Modification or Termination: By the Court

Answer 30

Purpose of trust accomplished, illegal, impossible to fulfill

Question 31

Duty of Trustee Upon Termination

Answer 31

The trustee’s powers do not end immediately upon trust termination. The trustee may continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust.

Question 32

Trustees Source of Powers

Answer 32

Express powers granted in instrument Statutes contain list of powers trustees has Trustee could go to court and show good cause for more powers Implied Powers Not granted in instrument but necessary for maintaining trust Ie: Power to sell Hire agents Mortgage Repair Etc.

Question 33

Multiple Trustees

Answer 33

Majority of trustees can act (does not need to be unanimous)

Question 34

Trustees Exercise of Powers

Answer 34

Powers can be Mandatory or discretionary Liability comes if trustee abuses or fails to exercise discretion All can be reviewed with abuse of discretion

Question 35

Trustee’s Duties Overview

Answer 35

Trustees owe their fiduciary duties to the beneficiaries of the trust. In some states, a trustee of a revocable trust owes duties only to the settlor. Can usually walk away from being trustee, but if you agree or start administering, then accept it

Question 36

Trustee’s Duties Listed

Answer 36

Duty of Loyalty Duty to Avoid Self-Dealing Duty to Keep Accurate Records and Render Accountings Duty to Use Skill and Care of Reasonable Person Standard of Care for Investing

Question 37

Trustee's Duty of Loyalty

Answer 37

Trustee owes beneficiary loyalty and good faith in all matters pertaining to the trust

Question 38

Trustee's Duty to Avoid Self-Dealing

Answer 38

Except fees, trustee nor trustee’s family and associates cannot benefit May not: Purchase property from the trust Sell property to the trust Cannot borrow from trust Cannot claim excessive compensation Good faith is not considered here

Question 39

Trustee's Duty to Keep Accurate Records and Render Accountings

Answer 39

The trustee must keep accurate records of all trust transactions and render accountings to the beneficiaries or the court upon demand. Beneficiaries need this information so they can enforce the trust.

Question 40

Trustee's Duty to Use Skill and Care of Reasonable Person

Answer 40

Duty to use the skill and care of a reasonable person and protect and insulate trust property No confusion between trust and trustee’s property allowed Must be segregated from trustees property and other trusts Corporations can make common trust funds though

Question 41

Prudent investor rule

Answer 41

Is default Trustee must consider following basic factors: Purpose of the trust Terms of the trust Distribution requirements Prudence measured as to portfolio as whole – not individual investments Some speculation and risk is appropriate Case by case and must consider many factors Diversification is required <--

Question 42

Standard of Care for Investing Special Skills

Answer 42

Trustee with special skills Bound by higher standard Trustee without special skills Still bound by prudent investor requirements

Question 43

Standard of Care for Investing Duties

Answer 43

Duty to review investments Duty of loyalty Duty of Impartiality

Question 44

Standard of Care for Investing: Duty to review investments

Answer 44

Must review investments to ensure continued compliance

Question 45

Standard of Care for Investing: Duty of Loyalty

Answer 45

Must invest in sole interest of beneficiaries Only consider monetary safety of investments

Question 46

Standard of Care for Investing: Duty of Impartiality

Answer 46

Must not favor one beneficiary over another unless specified in trust instrument

Question 47

Delegating the Investment Duty

Answer 47

If you use proper care, trustee will not be liable so long as: Use reasonable care in selecting agent Establish scope of delegation Periodically review agent’s work

Question 48

Remedies: Surcharge

Answer 48

Action against trustee for money damages Damages Beneficiaries seek: Lost profits Depreciation or losses to trust property Profits trustee earned by breach (disgorged to trust) Choice of remedy Self-dealing transaction may improve trust Even if breach, can be affirmed by beneficiaries

Question 49

Remedies: Removal of Trustee

Answer 49

Mere disputes are likely not enough for this Grounds: Dispute that interferes with proper administration of trust Refusal to post bond Refusal to account Court will look at settlor’s intent

Question 50

Trustee's Liability to Third Parties in Contracts/Torts

Answer 50

Contract Plaintiffs General rule: trustee personally liable for contracts entered into for trust Can put express provision in contract to make them not liable Can simply put “as trustee” after signature to raise rebuttable presumption Trustee may seek reimbursement if has to pay so long as valid contract for trust Tort Plaintiffs Trustee is liable for employees and agents only if there is personal fault on the basis of the trustee

Question 51

Charitable Trusts

Answer 51

Generally same rules unless specified here No clearly ascertainable beneficiaries Goal is to benefit community or society Charitable Purposes: Poverty relief Education, science, or art Religion Health Government or municipal Other goals that benefit the community No special language needed to make the charitable trust

Question 52

Charitable Trusts: Altruism Requirement

Answer 52

Must be altruistic, not setting up only for family. But benefit can still affect family incidentally.

Question 53

Cy Pres

Answer 53

When a charitable purpose selected by the settlor is accomplished or becomes impracticable, the court may select an alternative under the doctrine of cy pres, which means “as near as possible.” The court must find a general charitable intent on the part of the settlor and ascertain their primary purpose. This doctrine applies to outright charitable gifts as well as to charitable trusts. Doctrine of equitable approximation Can create battles between charities for who is closer to intent

Question 54

Charitable Trust Enforced by

Answer 54

The duty of enforcement is placed upon the state attorney general. Under the UTC, however, the settlor and qualified beneficiaries (that is, current beneficiaries and first-line remaindermen) have standing to enforce the trust.

Question 55

Resulting Trusts Definition

Answer 55

Trust created by implication of law: actions speak louder than words What would the settlor have done if put in words Must go to court to get this

Question 56

Who benefits from a Resulting Trust

Answer 56

Settlor, alive If settlor has died Settlor’s successors in interest Settlor’s heirs Settlor’s will beneficiaries

Question 57

How Resulting Trust Created

Answer 57

Failed express trust Ineffective trust creation Merges beneficial interest back to settlor Resulting Trust Implied from Excess Corpus A resulting trust in favor of the settlor also arises when the trust purpose is fully satisfied and some trust property remains

Question 58

Purchase money resulting trust

Answer 58

When you give money to seller, seller gives title to someone else, what legal relationship is created? In this type of situation, there are three possible explanations for the relationship between the parties: Settlor/beneficiary of PMRT—Trustee of PMRT Donor—Donee (gift) Creditor—Debtor Gift or purchase money resulting trust? Expectation to be repaid: debtor creditor Gift presumed if payor is close relative PMRT if payor is not close relative PMRT result: Trustee is the person who gets the legal title, but owes it to the Settlor

Question 59

Constructive trust

Answer 59

Equitable remedy to prevent unjust enrichment Equity turns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest in the property Not automatic, must be pleaded and proven Constructive trusts are imposed on specific property Must do equity to get equity Ie reimburse D for mortgage payments on improperly held property

Question 60

Grounds For Constructive Trust

Answer 60

Slayers Fraud Abuse of confidential relationship Promises made in contemplation of death Can be imposed on good faith heirs too if bad faith heirs caused creation

Question 61

Analytical Framework

Answer 61

Identify type of trust Inter vivos or testamentary? Private or charitable? Look for elements of valid trust If valid, look to traits of trust Revocable? Irrevocable? Discretionary provisions? Subject to being changed? Court making any changes? Cy pres? Can trust be terminated? Powers of trustee Standard of care and prudent investing and accounting Fiduciary duties violated? Liable to beneficiaries or third parties?