Trusts Flashcards
1
Q
Elements of a valid trust
A
Intent
Identifiable corpus
Ascertainable beneficiaries
Proper purpose
Mechanics and formalities
2
Q
Elements of an express trust
A
Settlor has capacity to convey
Present intent to create trust
Competent trustee with duties
Definite beneficiary
Cannot have sole trustee and sole beneficiary
Specific property
Valid trust purpose
3
Q
Does a trust require any formal words?
A
no
4
Q
is communication to a beneficiary required?
A
no
5
Q
Is a promise to create a trust in the future enforceable?
A
no
6
Q
Can you change the character of a completed gift?
A
No settlor cannot go back and claim that an outright gift was really a transfer in trust
7
Q
Does language like “it is my hope” or “it is my wish” create a trust?
A
no
8
Q
The trust must impose what kind of obligation on the trustee?
A
A leal obligation, not merely a moral obligation
9
Q
Can a settlor place property he does not yet own in a trust?
A
No
10
Q
Property in trust must be ___ from other property
A
Identifiable and segregated (but may be a fractional or undivided interest in specific property)
11
Q
Purposes of a trust
A
Provide for and protect beneficiaries
Flexibility of asset distribution
Protection against settlor’s incompetence
Professional management of property
Avoid probate
Tax benefits
12
Q
Invalid Trust Purposes:
A
Illegal
Contrary to public policy
Impossible to achieve
Intended to defraud the settlor’s creditors
Based on illegal consideration
13
Q
Examples of acts contrary to public policy
A
Induce others to engage in criminal or tortious acts
Encourage immorality
Induce person to neglect parental, familial or civic duties
14
Q
Express trust
A
Created by the express intent of the settlor. Includes private trusts and charitable trusts
15
Q
Resulting trust and 3 types
A
Arise from the presumed intention of the owner of the property
1) purchase money resulting trusts,
2) resulting trusts arising on failure of an express trust, and
3) resulting trusts arising from an incomplete disposition of trust assets
16
Q
Creation of a Resulting trust from the failure of an express trust
A
arises where a settlor has conveyed property to a trustee under an express trust and
(1) the trust is void or unenforceable, or
(2) the beneficiary is dead or cannot be located
In such an event, the express trust terminates and the settlor becomes the beneficiary of the resulting trust.
17
Q
Purchase Money Resulting Trust
A
presumed whenever the beneficiary furnishes the consideration (usually money) for the acquisition of real or personal property but, with the beneficiary’’s consent, title is taken in the name of the “trustee”.
18
Q
In a purchase money resulting trust what are the three possible explanations for the relationship between the parties
A
settlor/beneficiary
donor/donee
creditor/debtor
19
Q
When is a resulting trust not implied?
A
(1) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed or been completed;
(2) the settlor was given consideration for their original transfer in trust;
(3) the settlor created the trust for an illegal purpose; or
(4) cy pres is applicable in cases of charitable trusts.
20
Q
Purpose of a resulting trust
A
to do what the settlor would have done had the settlor put their intent into words.
21
Q
Constructive trust
A
- Equitable remedy used to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of a fiduciary duty.
- turns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest in the property.
- The constructive trustee’s only duty is to convey the property to the person who would have owned it but for the wrongful conduct.
Remedy must be plead and proved by clear and convincing evidence
22
Q
Situations that may lead to a constructive trust
A
Breach of fiduciary duty
Theft or conversion
Fraud or duress
Homicide
Mere breach of promise will not be enough for a constructive trust unless it was a fraudulent promise or the breach of promise was done in a confidential relationship
23
Q
Inter Vivos trusts
A
Created while settlor is alive either by settlor declaring themself trustee or by transfer of property to another trustee
24
Q
Testamentary trusts
A
Created in a settlor’s valid will
25
Secret trust
Beneficiary promises to hold property in trust for someone else but the will does not state the true nature of the gift.
Results in constructive trust if gift is proven my clear and convincing evidence
26
Semi-secret trust
Will makes a gift in trust but fails to name the beneficiary.
The gift fails and trustee olds the property
Creates a resulting trust
27
Support trusts
Use of trust property limited to beneficiary’s support
Support = standard of living to which the beneficiary is accustomed.
Not assignable
28
Charitable trusts
Must have indefinite beneficiaries
May be perpetual
Cy pres doctrine applies
29
Honorary Trusts / Purpose trusts
No private beneficiaries and not for charitable purpose
Typically for benefit of pet or maintenance of burial places
Not available under common law because no human beneficiary, but okay under UTC
RAP applied to trusts not for the care of Pets unless statute says otherwise (UTC and most states do not subject pet trusts to the RAP)
Trust terminates when animal dies
30
What is a charitable purpose?
Benefits the public
Ex: relief of poverty, advancement of education or religion, promotion of health, parks, museums, playgrounds
31
Do charitable trusts require specific language?
no , charitable intent just must be clear.
32
What is the doctrine of cy pres
Only applies to charitable trusts
“As near as possible”
When a charitable purpose selected by the settlor is impracticable,unlawful, impossible to achieve, or wasteful, the court may select an alternative by ascertaining the settlor’s primary purpose.
33
Are charitable trusts bound by the RAP?
No. But RAP does apply to shifts between private and charitable uses
34
Delivery of property to trustee– Declaration of trust
No conveyance of personal property needed as long as property is identified and segragated
35
Delivery of property to trustee – conveyance of trust
Settlor must convey the property to the trustee (real property by deed, personally property by delivery)
36
Must a trust be in writing?
Most states, not for personal property. Oral trusts may be established by clear and convincing evidence
In all states, YES for land under the statue of frauds
37
How does party performance effect the statue of frauds defense?
If the holder of legal title acts as if they are a trustee, part performance precludes the statute of frauds defense.
38
Do most states allow extrinsic evidence where an ambiguity appears on the face of the writing?
yes
39
Pour Over Will
A settlor can make gifts to a trust established during their lifetime in their will. Trust must be clearly identifiable from language in the will
40
Can pour over property be the initial trust funding (initial res)
Yes if 1) trust is identified in the will and 2) trust is executed before testators death
41
Duties of trustee as a fiduciary
1. Must deal with property with reasonable care
2, Must maintain the utmost degree of loyalty
3. Personally response if their conduct falls beneath required standard
42
Trustee
Holds legal title
Duty to manage, invest, safeguard, and administer trust assets to the beneficiary
43
Requirements for a qualified Beneficiary
Current beneficiary or first line remainderman
44
Does a beneficiary have to be competent?
no
45
Does a beneficiary have to have notice?
No (but lack of notice may indicate a trust was not intended)
46
Does a beneficiary have to accept?
Yes. may be express or implied and is generally presumed
47
Disclaimer
A party may disclaim an interest in a trust by filing a written instrument with the trustee.
48
Time period for disclaimer
Must be made within 9 months of the interest creation (unless beneficiary is under 21 then within 9 months of turning 21)
49
Effect of disclaimer
read as though disclaimant is deceased
50
Can an individual disclaim so that their creditors cannot reach the property in trust?
Yes unless the creditor is a federal tax lien
51
Effect of Divorce
Must have a final decree or annulment
Revokes all beneficial gifts and fiduciary appointments in favor of former spouse
52
What happens if a trust lacks a beneficiary?
Creates a resulting trust in favor of the settlor or their successors
53
If Sam is the settlor and Teresa are Bruce and the trustees and Teresa and Bruse are also the beneficiaries, is the trust valid?
yes
54
What happens if a trustee dies, refuses, or resigns?
Court will appoint successor
55
How may a trustee accept?
- Signing the trust or separate acceptance
- Accepting delivery of trust property
- Exercising powers or performing duties as a trustee
- Substantially complying with the acceptance terms in the trust instrument
56
Is a trustee entitled to compensation?
Yes, reasonable compensation or whatever is specified in the trust instrument
57
When can a trustee be removed
Serious breach of trust
Serious lack of cooperation among co-trustees
Unfitness, unwillingness, or persistent failure to administer
Substantial change in circumstances
58
Is a trustee liable for tort claims arising prior to the time the trustee accepted the position?
no
59
How may a trustee resign under the UTC
30 days noticed to qualified beneficiaries, settlor and co-trustees or
Obtaining court approval
60
May a beneficiary transfer their interest in a trust
Yes unless prohibited by the statue or trust instrument
61
May a beneficiary’s creditors reach the beneficiaries interest in trust?
Unless there is a state statute, yes
62
Discretionary trust
Trustee given discretion whether to give or withhold payments to beneficiaries
Beneficiary has not right to payment that they can enforce against the trustee
63
Creditors and discretionary trusts
Creditors are usually allowed to attach beneficiary’s interest but may not compel trustee to make a distribution. If trustee decides to make a distribution, must make payments directly to the creditor unless the beneficiary’s interest is protected by a spendthrift provision
64
Exceptions to discretionary trusts
Court can force trustee to satisfy a judgment for spousal support or child support
65
Spendthrift trust
Precludes beneficiaries from voluntarily or involuntary transferring their interest in trust. Creditors precluded from reaching trust to satisfy their claims
Beneficiary may not transfer interest
Assignments are unenforceable (but a trustee can pay an assignee if trustee wants and beneficiary wants)
66
Self settled spendthrift trusts
Common law and most states = settler cannot use spendthrift trust to protect own property from own creditors
Growing number of states say this is okay
67
Another name for self settled spendthrift trusts
Domestic asset protection trust
68
What creditors can breach a spendthrift trust
Beneficiary’s child or former spouse
Claims by the government
69
When does a trust terminate
When specified in the instrument
When all purposes have been accomplished
When purpose has become unlawful or contrary to public policy
When trust goals have become impossible to achieve
By the settlor
By the beneficiaries
70
When can the beneficiaries revoke a trust at common law
All beneficiaries agree
No material purpose of the trust would be frustrated
71
Examples of purposes that could be frustrated
Support, spendthrift provision, payment at certain age or date, discretionary trust
72
When can Court revoke a trust under the UTC
- Court may modify if 1) trust could have been terminated had all beneficiaries contented 2) the interest of a beneficiary who does not consent will be adequately protected
OR
- Unanticipated circumstances threaten purpose of the trust
- Continuation on existing terms would be impracticable or wasteful
- Trust value is insufficient to justify cost of administration or achieve settlors tax objectives
73
Can a settlor amend/revoke a trust
Yes unless terms expressly state trust is irrevocable
74
If a settlor is still alive can he block the termination of a trust if all beneficiaries have agreed to terminate?
Settlors objections are not a bar but are evidence of whether termination would defeat the trust purpose
75
Can a court reform a trust to reflect settlor's intent if there is a mistake in the terms?
In some states, yes if can show mistake by clear and convincing evidence
76
When can a trustee terminate a trust?
In some states when property is less than $50k and amount is insufficient to justify cost of administration.
Notice to qualified beneficiaries required.
77
Duties of trustee upon termination of trust
Wind up trust benefits
Distribute all property to beneficiaries
78
What powers can a trustee exercise
Power expressly or impliedly conferred
By instrument or by statute
79
Examples of powers of a trustee
Sell or lease trust property
Incur reasonable expenses
Hire agents
Mortgage property
Repair
80
What happens if a trustee fails to exercise an imperative (mandatory) power?
A court will upon petition order the trustee to exercise the power as long as the exercise does not violate the law or public policy
81
Is exercise of discretionary powers subject to judicial review?
Yes, on an abuse of discretion standard
82
Trustee has a duty to personally administer the trust in _____
Good faith and in a prudent manner
83
General duties of a trustee
Duty of loyalty and impartiality
Duty to review trust property
Duty to report
Duty to keep property separate
Duty to enforce claims and defend trust from attack
Duty to preserve trust property and make it productive
84
What is included in the trustees Duty of Loyalty?
- cannot buy or sell trust assets
- may not sell property of one trust to another trust of which they are also trustee.
- Cannot borrow trust funds nor loan their personal funds to the trust
- cannot use trust assets to secure a personal loan.
- cannot personally gain through their position as trustee.
85
corporate trustee
A corporate trustee cannot invest in its own stock as a trust investment. But it can retain its own stock if such stock was a part of the original trust res when the trust was established, provided that retention of the stock meets the prudent investor standard.
86
Indirect self dealing
trustee presumably violates their duty of loyalty if the trustee enters into a transaction with their spouse, close relatives, attorney, or corporation in which they own a significant interest.
87
A transaction involving trustee self-dealing is voidable by the beneficiary affected by the transaction unless:
1) a court or the terms of the trust approved it;
(2) the beneficiary failed to bring suit within the prescribed time period;
(3) the beneficiary gave their consent, ratification, or release; or
(4) it involves a contract or claim arising before the trustee became trustee.
88
Duty to Report
(1) provide the qualified beneficiaries with the trustee’s name, address, and telephone number
(2) respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested; and
(3) furnish an annual accounting of the trust.
89
Duty to separate trust property
No commingling with the trustee's own property. Must earmark trust property by labeling it as a trust .
90
What standard is used by most states with regard to a trustee’s duty to make sound investments?
Prudent person rule
91
Under the uniform prudent investor act, what is the standard of care
Reasonable care, skill, and caution
92
Portfolio approach
investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust. Thus, some speculation may be appropriate or even required.
93
Must a trustee diversify investments?
Yes unless they reasonably determine that the purposes of the trust are better served without diversification.
94
Trustee with special skills or expertise
Professional trustee or attorney may be held to a higher standard
95
Trustee with lower skill
Cannot excuse a breach by proving trustee posses subnormal business judgment
96
Is delegation of investment and management functions permitted?
Yes. Trustee must
1. act prudently in selecting an agent,
2. establishing the scope and terms of the delegation, and
3. periodically reviewing the agent’s actions.
97
Is trustee liable for the decisions/actions of the agent?
Not liable if the delegation was proper
98
If trustee is about to or has breached the court may:
1. Enforce specific performance of duties
2.Enjoin trustee form committing breaching behavior
3. Compel trustee to pay money or restore property
4. Remove the trustee
99
Beaching trustee liable to the beneficiaries for the greater of:
Amount necessary to restore; or
Trustee’s profit from the breach
100
Remedies for self dealing
Beneficiary may:
Affirm transaction if trust profited
Set aside the transaction if the trust lost money
Trace profits from trustee if trustee profited
101
When is a trustee not liable for breach
The trustee acted in reasonable reliance on the terms of the trust; or
The beneficiary consented and released the trustee from the liability or ratified the transaction
102
When is an exculpatory clause void?
1) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference; or
(2) appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor
103
Is a trustee liable for the acts of a co-trustee?
no ; if the trustee did not join in the action and exercised reasonable care in preventing the breach or compelled the co-trustee to redress the breach
104
When may a court remove a trustee?
- incapacity
- unfitness
- Commission of a serious breach of trust
- Serious conflict of interest
- Insolvency
- Extreme hostility between the trustee and beneficiaries that would interfere with proper trust administration
- Refusal to post any required bond
- Refusal to account
- Lack of cooperation among co-trustees that substantially impairs trust administration
- Unwillingness or persistent failure to administer the trust
- Substantial change of circumstances
105
When is a trustee liable to third paries?
May be sued on contracts made in the trustee’s fiduciary capacity
A third party injured in tort can sue the trust estate by suing the trustee in his fiduciary capacity
106
Does respondeat superior work for the trust/trustee relationship?
No. A trust is a piece of property
107
When is a third party liable to the trust
When they knowing participated in a breach of trust they are liable to the estate for the resulting loss
108
Direct suits by beneficiaries are allowed where the trustee:
(1) participated in the breach,
(2) has left the jurisdiction and no successor trustee is appointed, or
(3) fails to sue a third person liable in tort or contract.
109
When may a trustee exercise the “adjustment power”
If the trustee determines that by distributing only the trust’s income the trustee is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may adjust between principal and income to the extent necessary.
110
Factors to consider when exercising the power of adjustment:
1) thenature, purpose, and expected duration of the trust;
(2) the intent of the settlor;
(3) the identity and circumstances of the beneficiaries;
(4) the needs for liquidity, regularity of income, and preservation and appreciation of capital;
(5) the nature of the trust’s assets;
(6) the net amount allocated to income under the other sections of the Act and the increase or decrease in the value of the principal assets;
(7) whether and to what extent the trust gives or denies the trustee the power to invade principal or accumulate income;
(8) the actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and
(9) the anticipated tax consequences of an adjustment.
111
When allocating receipts(money in) to a trust, what is considered part of the trust INCOME
Ordinary receipts from use or investment of trust property (e.g. , rents, interest)
Cash dividends
Proceeds from contract insuring trustee against loss
10% of payment from a deferred compensation plan (e.g. , pension plan), unless otherwise characterized
10% of proceeds received from a liquidating asset (e.g. , patents, copyrights)
10% of proceeds received from a working interest (e.g. , oil and gas interests)
112
When allocating receipts(money in) to a trust, what is considered part of the trust PRINCIPLE
Extraordinary receipts
Stock dividends
Proceeds form life insurance policy naming trust or trustee as beneficiary
90% of payment from a deferred compensation plan (e.g. pension plan)
90% of proceeds received from liquidating assets (patents and copyrights)
90% of proceeds received from a working interest (e.g. , oil and gas interests)
113
When allocating expenses of a trust, what expenses come out of the trust INCOME
Ordinary income tax
Ordinary repairs
Depreciation
Insurance premiums covering loss of a principal asset
50% of Trustee compensation
50% of all expenses ofr accountancy, judicial proceedings, and other matters affecting income an remainder interests.
114
When allocating expenses of a trust, what expenses come out of the trust PRINCIPLE
Capital gains
Extraordinary repairs
Capital improvements
Estate taxes
Disbursements related to environmental matters
Payments on the principal of a trust debt
Expenses of a proceeding that concerns a principal interest
50% of Trustee compensation
50% of all expenses from accountaning, judicial proceedings, and other matters affecting income an remainder interests.
