Trusts Flashcards
Elements of Valid Private Trust
To determine whether a valid private trust has been created, look for the following characteristics:
(1) Settlor with capacity
(2) Present intent to create a trust (manifested by settlor’s words, writing, or conduct)
(3) Trustee (inter vivos trust only; a testamentary trust will not fail for lack of a trustee)
(4) Definite beneficiary(ies) (note: same person cannot be sole trustee and sole beneficiary)
(5) Trust property (res)
(6) Valid trust purpose (one that is not illegal, against public policy, or impossible to achieve, and does not violate Rule Against Perpetuities)
*A trust can be created by inter vivos transfer, by inter vivos declaration of trust, or by will (testamentary trust)
Definite Beneficiaries
- beneficiaries may be “definite” even though not yet ascertained (for example, unborn children) - beneficiaries may be unascertainable when the trust is created but they must be ascertainable by the time their interests are to come into enjoyment
- if class gift, trustee must be able to determine who belongs to the class
Regarding validity of a trust, most MEE answers state: “a trust of personal property is valid if it has a trustee, a beneficiary, and trust property.”
Pourover Will
A will that makes a gift to a trust is valid so long as the trust is identified in the will and the terms are INCORPORATED IN A WRITING executed before or concurrently with the execution of the will
- under the modern approach, later made amendments to the trust are valid
- under common law, amendments made after execution are not valid
Discretionary Trust
The trustee has discretion to decide when to make a distribution to a beneficiary. The beneficiary cannot demand any part of the income or principle. Nor can a creditor, unless it shows the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor (there is an exception under the UTC for child support or alimony)
Support Trust
Trustee must pay what is necessary for the beneficiary’s support
Spendthrift Trust
A spendthrift trust restrains “both the voluntary and involuntary transfer of a beneficiary’s interest”
Rights of a Creditor
- generally, a creditor may not reach (i.e., by garnishment or attachment) part of a beneficiary’s distribution prior to the beneficiary reaching it
- Exceptions for favored creditors:
(1) a child support or spousal support creditor (for maintenance and support)
(2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust (e.g., a lawyer)
(3) a claim of the state or United States (usually for taxes), and
(4) creditors with claims for necessaries in some states (this is not recognized by states that follow the UTC)
Charitable Trust
A charitable trust may be created for a charitable purpose (including for the relief of poverty, the advancement of education, the advancement of religion, the promotion of health, governmental or municipal purposes, or other purposes that are beneficial to the community). It MUST have a large number of not readily identifiable individuals (rather than a few identifiable individuals)
*Note that a charitable trust is not subject the rule against perpetuities
Modifying a Charitable Trust
- a charitable trust may terminate if the charitable purposes becomes unlawful, impracticable, or impossible
- however, cy pres may save the trust (common law doctrine that is also part of the UTC). It states: if a particular charitable purpose has become unlawful, impracticable, or impossible to achieve; no alternative is named in the trust; and the court finds that the settlor had general, rather than specific charitable intent, then the court may apply cy pres to modify or terminate the trust by directing that the trust property be distributed in a manner consistent with the settlor’s general intent
Honorary Trust
Trust that does not have a charitable purpose or a definite beneficiary. It is often a trust to take care of a thing (e.g. cemetery plot or pets) for a noncharitable purpose.
- under the UTC, this is valid but may not be enforced for more than 21 years
- under Common Law, such a trust would not be valid if it violates the rule against perpetuities, but a court may characterize the trust as a “power” and allow the trustee to exercise that power in accordance with the trust terms for 21 years
Resulting Trust (Remedy)
If a trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or their successors is presumed
Inter Vivos Trust
A trust can be created by inter vivos transfer, by inter vivos declaration of trust, or by will (testamentary trust - not IV)
IV trusts are created when the settlor is alive either by the settlor declaring himself trustee for another or by the transfer of property to another trustee
- the present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee)
- if a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent
Present Declaration of Trust - Settlor is Trustee
- a trust can be created by a person declaring himself trustee of specific property for a beneficiary
- the settlor KEEPS legal title
- no conveyance of personal property is needed as long as the property is identified and segregated
- real property should be conveyed from the settlor as an individual to the settlor as trustee
Transfer or Conveyance in Trust - Settlor is not Trustee
- the settlor creates the trust by transferring legal title of property to a trustee
- the settlor may retain or transfer the equitable title, but the settlor CONVEYS legal title
- settlor must convey the property to the trustee
- real property is conveyed by deed
- personal property is conveyed by physical delivery or an appropriate written assignment (delivery means placing the trust property out of the settlor’s control)
Testamentary Trust
Testamentary trusts are created in the settlor’s valid will
- all requirements of a valid will must be effective before it can be determined whether the requirements of a valid trust are met
Formalities
- trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will
“Secret Trust” - Constructive Trust Imposed
- in the case of a secret trust, the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else - and relies on the beneficiary’s promise - but the will does not state the trust nature of the gift
- the intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust
- if the promise can be proven by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary
“Semi-Secret Trust” - Resulting Trust Imposed
- in a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary
- the gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest
Rule statement for creating a valid trust
To create a valid trust, there must be a settlor who, intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one or more beneficiaries. If there are no trust assets when the trust instrument is executed (i.e., the settlor promises gratuitously to create a trust in the future), a trust arises in the future only if, when the assets come into existence, the settlor manifests a new intention to create the trust. This remanifestation, however, is not required if the promise is supported by consideration
Merger of Title
Merger of title results in termination of trust where the sole trustee is the sole beneficiary
Rule statement for valid pour-over gift from will to trust
Under the traditional view, to create a valid pour-over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution.
However, under the prevailing view, a will may devise property to a trustee of a trust established or to be established during the testator’s lifetime, i.e., the trust may be established after the will is executed. Additionally, pour-over gifts are valid even if the trust is unfunded during the testator’s lifetime, and even if the trust is amended prior to the testator’s death.
Rule Statement for Spendthrift Provision
A spendthrift provision is one on which the beneficiary is unable to voluntarily or involuntarily transfer his interest in the trust. He cannot sell or give away his rights to future income or capital, and his creditors generally are unable to collect or attach such rights.
However, an exception is made when the settlor is the beneficiary of the trust and attempts to protect his own retained interests from his creditors by inclusion of a spendthrift provision. In that event, the settlor-beneficiary’s creditors can reach his right to the income just ad is the spendthrift restriction did not exist.
