Trusts Flashcards
Intent - Element
- Intent to split legal and equitable title
- Intent to impose enforceable duties on holder of legal title
- Settlor must have present intent to create trust
- No formal words required
- Promise to create trust in future is unenforceable unless there is binding contract
Any split of title into legal and equitable portions is permissibly if the same person does not own all the legal equitable title
- If same person owns legal and equitable title (is the trustee and beneficiary solely) the trust terminates
Elements of an Express Trust
- A settlor with capacity to convey
- Present intent to create a trust relationship
- A competent trustee with duties
- Definite beneficiary
- Same person is not the sole trustee and sole beneficiary
With a present disposition of specific property owned by settlor and trust must have a valid purpose!
Identifiable Corpus - Element
- Any property the settlor can transfer can be held in trust
- Property the settlor cannot transfer or does not yet own cannot be trust property
- Trust property must be separated from other property, but it can be a portion of
specific property
Beneficiaries - Element
Qualified Beneficiary
- Beneficiary who is current or first line remainder beneficiary
Beneficiary may disclaim interest if they have not accepted any benefits
- Once you accept benefits – CANNOT DISCLAIM!
Anti-Lapse Statutes
- Some states apply anti-lapse statutes to interests in trusts
- If requirements are met, trust interest will go to predeceased beneficiary’s
descendants
Divorce
- Divorce revokes all trust provisions in favor of ex-spouse
may allow trustee or third party to select which class members receive benefit
Class Gifts
Beneficiaries need not be identified at the time a trust is created but must be susceptible of identification by the time their interests are to come into enjoyment
Beneficiaries may be a class, provided that the class is sufficiently definite
o Grandchildren and siblings = yes!
o Friends = NO! How do we know who all your friends are?????
Settlor may allow trustee or third-party discretion to select class members, as long as the class is REASONABLY DEFINITE; if it is to broad the trust will be invalid
When a portion of the trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or the settlor’s successors in interest is presumed
- Or alternatively, could be accumulated for distribution to the remainder beneficiaries down the line
Trust Purpose - Element
Trust may be created for any purpose that is not:
- Illegal
- Against public policy
- Impossible to achieve
- Intended to defraud
Trustee - Element
Trust will not fail for lack of trustee because court can appoint one
Acceptance of Trustee
- Must sign trust instrument or written acceptance
- If person starts acting like trustee, they will be deemed to have accepted
Trustee Compensation
- Trust instrument can indicate compensation
- If instrument is silent, trustee usually entitled to reasonable compensation
Court has power to remove trustee and appoint new one
Secret Trust
- Settlor agrees with Will beneficiary that beneficiary will hold property in trust for
someone else - Will does not state trust nature of gift
- Courts allow trust beneficiary to present extrinsic evidence and seek construct trust
remedy
Semi-Secret Trust
- Will makes gift in trust but fails to state beneficiary
- Gift fails -> trustee must give legal title back to settlor’s successors in interest
(resulting trust) - Extrinsic evidence NOT allowed
Creditor’s Claims in the absence of statute or spendthrift trusts
In the absence of a statutory prohibition or a spendthrift clause, the interest of an insolvent beneficiary can generally be reached to satisfy the claims of his creditors
However, the creditor reaches only the INTEREST of the beneficiary and not the trust property itself
Discretionary Trust
In a discretionary trust, the trustee is given discretion whether to apply or withhold payment of trust property to the beneficiary
o The beneficiary cannot interfere with the exercise of the trustee’s discretion unless
the trustee abuses her power
o Generally, a court will not interfere, unless the trustee acts in bad faith or
dishonestly
- Trustee determines how much beneficiary receives
- Beneficiary has nothing to transfer until trustee decides to distribute money, so
there is nothing for creditors to reach
o Exceptions for claims for child or spousal support
Spendthrift Trusts
Prohibits the voluntary and involuntary transfer of the beneficiary’s interest
- some states do not enforce against certain types of creditors
- Beneficiary cannot transfer interest
- Creditors cannot attach beneficiary’s interest
- Most states, a settlor cannot use a spendthrift provision to protect their own
property = Ineffective if Settlor is the Beneficiary
o Some states allow this -> Meaning settlor creates a trust with themselves as
the beneficiary = Domestic Asset Protection Trust
Support Trust
- Directs the trustee to pay only so much of the income/principal as is necessary
for the beneficiary’s support - Use of trust property limited to beneficiary’s support
- May be mandatory or discretionary
- Impliedly spendthrift
- Standard of support if not in instrument = Lifestyle to which beneficiary
accustomed
Creditors of Trustee?
Creditors of the trustee cannot reach trust property to satisfy their claims; they have only a personal claim against the trustee
Modification or Termination by Settlor
Settlor may modify or revoke trust for any reason unless trust instrument expressly states it’s irrevocable
Modification or Termination by Beneficiary
Need the consent of the settlor and ALL beneficiaries
- ALL BENEFICIARIES = even unborn (need a guardian to represent them)
****Beneficiaries may modify without settlor’s consent if
o All beneficiaries agree
o Changes would not upset material trust purpose
Modification or Termination by Court
- Trust’s purposes accomplished, illegal, or impossible
- Unanticipated circumstances
- Value of trust too low
- Some states -> Fix mistake if shown by clear and convincing evidence
Modification by Trustee
- Terminate uneconomic trust
- Combine or divide trusts
Duties of Trustee
Trustee has duty to administer trust according to its terms in good faith and in a prudent manner
**Trustee dues cannot be enlarged after he has accepted. Must provide in trust for later additions to the trust corpus.
Duty of Loyalty
- Avoid self-dealing
- Trustees cannot
o Personally benefit from trust
o Purchase property trust
o Sell own property to trust
o Borrow from trust
o Claim excessive compensation
- Trustee’s good faith or fairness irrelevant
- Examples of breaching duty of loyalty
o Purchasing stock from the trust at an above-market rate
o Lending trust money at a reasonable rate
o Borrowing funds to invest in a risky start up for personal use and then restoring
the funds
o Making profitable investment of trust money in a corporation for which his
sister serves on the board of directors
Duty to Preserve Property and make it productive
- Prudent Investor Rule
Additional Trustee Duties
- Keep records
- Render accountings
- Earmark trust property
o Label property as belonging to trust rather than individually owned
- Keep trust property separate (no commingling)
Prudent Investor Rule
Trustee must invest in same manner as prudent investor
- Portfolio Approach
o View investments together in context of entire trust portfolio and part of
overall investment strategy
- Factors considered in making investment decisions
o Trust purposes
o Economic conditions
o Tax consequences
o Role of each investment in portfolio
o Income and appreciation
o Other resources of beneficiaries
o Need for liquidity, regularity of income, or preservation of capital
o Asset’s special relationship to beneficiary
- Trustee must diversify investments unless trust purposes are better served without
diversification
- Trustee with higher skills has duty to use those skills
- Trustee with lower skills must comply with prudent investor rule
- Trustee has duty to review trust property
Loyalty and Impartiality
- Trustee must administer trust exclusively for beneficiary’s interest
- Trustee must act impartially and not favor one beneficiary over another
Delegation
- Trustee may delegate investment and management functions
- Trustee protected from liability if acted prudently in
o Selecting agent
o Establishing scope and terms of delegation
o Periodically reviewing agent’s actions
Liabilities of Trustee
Trustee commits a breach of trust is liable to the beneficiaries
Damages Recoverable for Breach
- Lost profits
- Depreciation in value of trust property
- Trustee’s profits from breach
Remedies for Self-Dealing
- Affirm transaction if trust profited
- Set aside transaction if trust lost money
- Trace profits from the trustee
Trustee is not Liable for Breach when
- Reasonably relied on terms of trust
- Beneficiaries consented or ratified transaction
- Settlor or instrument allowed conduct
- Exculpatory clause relives trustee from liability for breaches
o Generally, exculpate only negligent conduct
Trustee will not be liable for acts of co-trustees if trustee did not join in the action and exercised reasonable care in preventing the breach or compelling the co-trustees to redress it
Grounds for Removing Trustee
- Incompetence
- Unfitness
- Serious breach of duty
- Serious conflict of interest
- Insolvency
- Extreme hostility between trustee and beneficiaries
- Refusal to post bond
- Refusal to account
Trustee’s Liability to 3rd Parties
- Contracts -> trustee personally liable but can avoid liability by contract provision
or indicating role as trustee by signature
o Trustee entitled to indemnification or reimbursement from trust - Torts -> Trustee liable if personally at fault
Uniform Principal and Income Act (UPAIA)
- Describes how principal and income should be allocated
- Settlor can alter rules
- Trustee has adjustment power
Adjustment Power
- Trustee must consider many factors
- Adjustment cannot be made if
o Prohibited by trust instrument
o Trustee is also beneficiary
o It would cause adverse tax consequences
Allocation of Receipts
- Money from selling asset -> Principal
- Rent -> Income
- Interest on trust investments -> Income
- Eminent Domain Awards -> Principal
- Insurance proceeds if principal is destroyed -> Principal
- Cash stock dividend -> Income
- Stock dividend, stock split, or shares received because of reorganization ->
Principal - Wasting Assets -> 10% income, 90% principal
- Sale of unproductive property -> Principal
Allocation of Expenses
- Ordinary income tax -> Income
- Capital Gains Tax -> Principal
- Ordinary repairs -> Income
- Extraordinary repairs and capital improvements -> principal
- Depreciation -> Income
- Trustee compensation and accounting expenses -> 50% income, 50% principal
Charitable Purposes
- Relief of poverty
- Advancement education, science, or art
- Advancement of religion
- Promotion of health
- Governmental purposes such as parks and museums
Settlor must be sufficiently altruistic in supplying benefits
Charitable Trust - 3 Rules
- Must have indefinite beneficiaries
- May be perpetual
- Cy Pres Doctrine applies
Cy Pres Doctrine
If charitable purpose cannot be carried out, court may select an alternative by ascertaining settlor’s primary purpose
The settlor must have had a GENERAL CHARITABLE INTENT
o Specific charitable intent would prevent the application of cy pres
Court can direct trust property be applied to another charitable purpose as close as possible to the OG one, rather than permit the trust to fail and become a resulting trust
Honorary or Purpose Trust
- No human beneficiaries and not for charitable purpose
- Common example -> Trust to care for pet or maintenance of burial places
Generally, Rule Against Perp’s applies (not for animal care trusts) if duration more than a human life in being plus 21 years
Resulting Trusts
- Arise by implication from settlor’s conduct
- Beneficiaries -> Settlor or settlor’s successors in interest if settlor has died
- Purpose is to do what settlor would have done
Situations Giving Rise to Resulting Trust
- Failure to create express trust
- Beneficiary is dead or cannot be located
- Excess trust corpus and no provision for remainder
- Purchase money resulting trust
o Supplier of purchase money gives money to seller who gives title to property
to 3rd party
Constructive Trusts
Not a trust but an equitable remedy to prevent unjust enrichment resulting from wrongful conduct
- Must be requested as remedy in court action
- Must show particular property was involved in improper conduct
- Constructive trustee’s only duty is to give legal title back to person who would
have owned it but for wrongful conduct
Power of Appointments
A power of appointment is an authority created in a donee enabling the donee to designate, within the limits prescribed by the donor of the power, the persons who shall take certain property and the manner in which they shall take it
General Power of Appointment
Is exercisable in favor of the donee, her estate, her creditors, or the creditors of her estate
Special Power of Appointment
Is exercisable in favor of a specified class of persons that does not include the donee, her estate, her creditors, or the creditors of her estate
Testamentary Power
Exercisable only by the donee’s will because Settlor wishes to limit the class of objects to his children and issue of deceased children and for the power to be exercisable only by Wife’s will, a special testamentary power of appointment would fully meet his goal
