Trusts Flashcards
Trust is
A fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage invest safeguard any ministry, the trust, assets, and income for the benefit of designated beneficiaries, who hold equitable title.
Ownership
- Legal interest held by the Trustee
- Equitable or Beneficial interest held by the beneficiary
Legal Interest
A trustee is a fiduciary and thus :
- Must deal with the property with reasonable care
- Must maintain the utmost degree of loyalty
- Is personally responsible if their conduct falls beneath required standards.
Equitable or Beneficial Interest
The beneficiary usually has a little or no control over the trust or the trust property. They are the person who enforces the trust and the person, the trustee owes duties toward.
Purposes and Uses
- Providing for and Protecting Trust Beneficiaries
- Flexibility of Asset Distribution
- Protection Against Settlor’s incompetence
-Professional management of property - Probate avoidance
- Tax benefits
Classifications of Trusts
- Express : private or charitable
- Operation of Law : resulting (presumed intention of owner) or constructive (equitable remedy)
Elements of a Valid Trust
- Intent
- Identifiable Corpus
- Ascertainable Beneficiaries
- Proper Purpose
- Mechanics and Formalities
Elements of an Express Trust
Governed by the Uniform Trust Code UTC
- A settlor with capacity to convey
- A present intent to create a trust relationship
- A competent trustee with duties
- A definite beneficiary ;and
- The same person is not the sole trustee and the sole beneficiary.
Also must be
6. A present disposition in trust of **specific property then owned **by the settlor and (res)
7. The trust must have a valid purpose.
Consideration is not required.
Precatory Expressions
Settlor’s expression of hope wish or mere suggestion that the property be used in a certain way is called precatory language. The inference is that this language does not create a trust because the settlor must impose a legal obligation on the transferee not merely a moral one. This inference can be overcome by:
- Definite and precise directions addressed to a fiduciary and the resulting unnatural disposition of property or
- extrinsic evidence showing that the settler previously supported the intended beneficiary.
Split of Title
Any split of title is sufficient so long as the sole trustee is not the sole beneficiary if they are the same individual, the titles merge in the trust terminates.
Identifiable Corpus
A trust is a type of property transfer. The trust property is required. The property must be ascertainable with certainty when there is no trust property the trust fails. The trust property must be an existing interest in existing property. A future interest may be held interest, but an interest not yet illegal existence cannot be held in trust, The settlor cannot transfer or does not get on cannot be trust property.
Beneficiaries
A trust cannot exist without someone to enforce it. Das and ascertainable beneficiary is necessary to the validity of every trust, except charitable, an honorary trust.
Qualified beneficiary
A qualified beneficiary is one who on the date the beneficiary’s qualification is determined, is :
- A current beneficiary
- A first line remainderman (one who would become eligible to receive distributions, for the event, triggering the termination of a beneficiaries interest, or of the trust self to occur as the qualification date)
Qualify beneficiaries may have additional rates compared to remote beneficiaries .
Trust purpose
The general rule is that a settlor may create a trust for any purpose however, a trust purpose is invalid if it is illegal, contrary to public policy, impossible to achieve, or intended to defraud the sellers creditors, or based on illegal consideration.
Acts Contrary to Public Policy
Public policy is violated is the purpose of a trust is to induce others to engage in criminal or tortious acts, encourage immorality, or induce a person to neglect, parental, familial, or civic duties.
Condition against Public Policy
If a condition attached to an interest is against Public Policy:
Settlers alternative desire controls if expressed
Is the legal condition is a condition Subsequent the condition is invalidated, but the trust is valid.
If the illegal condition is a condition, precedent the preferred view is to hold the interest valid unless there’s evidence that the settlers wish would be to avoid the beneficiaries interest all together if the condition is unenforceable.
Disclaimer
No one can be compelled to accept an interest in a trust against their will.
Most states allow a beneiciary to disclaim an interest by filling a written instruments with the trustee
Many states require disclaimer within 9 months
Anti-Lapse Statutues
*Generally only for wills. *
UPC: apply the anti-lapse statute to future interests created in trusts even to future interests expressly made contingent on survival - unless trust makes an alternate gift for if beneficiary does not survive.
Divorce
A final decree of divorce or annulment revokes all beneficial gifts and fiducuary appointments in favor of a former spouse.
UPC and several states have extended the divorce revokes rule to beneficiary designations of individuals who are related to the former spouse but not the settlor
Definiteness of Beneficiaries
Under Private Trust
- Unascertained Beneficiaries- may be definite though not yet ascertained, but must be ascertainable by the time their interests come into enjoyment.*
- Class Gifts - may be designated by generic descriptions trustee must be able to determine who belongs to the class, but must be ascertainable by the time their interests come into enjoyment.
- Common Law- Reasonably definite class required
- **UTC **- Trustee my select from indefinite clas*s
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.
Rule Against Perpetuities
Common Law: a nonvested property onterest is onvalid unless it is certain to vest or fail no later than 21 years after death of person alive when created.
Wait and See Approach: an alternative 90 year vesting period that would have the same interest.
Acceptance of Trusteeship
A person accepts a trusteeship by:
1. signing the trust or a seperate written acceptance
2. substantially complying with the acceptance terms in the trust instrument
3. accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance.
Qualifications of Trustee
Anyone who has capacity to acquire and hold property for their own benefit and has capacity to administer that property may be a trustee.
* Entitled to reasonable compensation or to whatever compensation is specified in teh trust instrument
Removal of Trustee
A court can remove a trustee on its own motion or upon request by the settlor, a beneficiary, or a co-trustee. Grounds for removal include:
1. a serious breach of trust
2. serious lack of cooperation among co-trustees
3.** unfitness, unwillingness, or persistent failure** to administer; or
4. a substantial change in circumstances.
Mechanics and Formalities
A trust can be created by inter vivos transfer, by inter vivos declaration of trust, or by will.
Inter Vivos Trusts
Inter vivos trusts are **created while the settlor is alive ** either by:
* The settlor keeps legal title
* The settlor conveys legal title , but may retain or transfer equitable title
The present intent required must be manifested by conduct or words.
Transfer of Property to Trustee
Delivery
Declaration of Trust- If a trust was created by a declaration of trust , no conveyance of:
* Personal Property: segragated and identified
* Real Property: deed land from the settlor as an individual to the settlor as an individual to the settlor as a trustee.
Pour over from Will to Trust
a settlor can make gifts by will to a trust- even an amendable and revocable trust - established durign their lifetime
Por over property can be initial trust funding
Testamentary Trusts
Secret vs. Semi-Secret
Testamentary trusts are created in a valid will.
Trust intent and the essential terms of the trust must be ascertained from the will itself, an incorporated writing, or from teh excercise of a power of appointment created by the will.
Secret Trust
- Absolute gift in will made in reliance on beneficiary’s promise to hold the property in trust for another
- Extrinsic evidence allowed
- Constructive trust imposed in favor of intended beneficiary
Semi-Secret Trust
- Gift in will to a person“in trust” but does not name trust beneficiary
- Extrinsic Evidence is not allowed
- “Trustee” holds on** resulting trust ** doe testators legatees or heirs
Transfer of the Beneficiary’s Interest
Voluntary
Absent restrictions by the instruement **a beneficiary may freely transfer their interest in the trust **, assigned interests remain subject to all previous conditions and limitations.
Involuntary- Creditors
Beneficiary’s creditors may reach the interest in the trust, unless the trust instrument or statute says it cant. The interest is subject to judicial sale, To avoid, trustee can pay income to the creditors until the deby is satisfied.
Discretionary Trusuts
The trustee is given discretion whether to apply or withold payments of income or principal (or both) to a beneficiary.
Very Common
Creditor’s Right
Creditors are usually allowed to attach the beneficiary’s interest but may not compel the trustee to make a distribution..
Exceprion: Courts can force the trustee to satisfy a judgement or order against the beneficiary’s child, spouse, or former spouse.
The beneficiary has nothing to transfer and no interest for creditors to reach before teh trustee excercises their discretion to make payments to the beneficiary who merely has an expectancyto be a beneficiary
Beneficiary’s Rights
The beneficiary has** no right to payment** that they can enforce against the trustee. They cannot interfere with the excercise of the trustee’s discrestion unless the trustee abuses their power, then the court will intervene.
Spendthrift Trusts
Restraints on Alienation
Precludes the beneficiary from voluntairily and involuntairily transferring their interest in the trust and the beneficiary’s creditors are precluded from reaching it to satisfy their claim.
Most courts uphold spendthrift trusts
Spendthrift Trusts - Characteristics
- Beneiciary may not transfer their interest
- Beneficiary’s Creditors cannot attach Beneficiary’s Interest
until income or principal has been paid to the beneficiary.
Restraint on Creditors
Involuntary Alientation
Restraint on Involuntary Alienation only is Invalid
A restriction permitting the beneficiary to transfer but denying creditors to reach, is probably invalid
Limitations of Spendthrift Trusts
Enforcement Limitation
In most states, the settlor cannot use a spendthrift to protect their own property from their own creditors.
**Cannnot be used to sheild the beneficiary from:
* Judgements or court orders for child/spouse(former)
* Government Claims
Minority of states allow under the Domestic Asset Protection Trust (DAPT)**
Creditor can reach a mandatory distribution of income or principal if the trustee did not make it within a reasonable time.
Support Trusts
- Directs the trustee to pay only enough(necessary) of the income or the principal for support.
- May be mandatory or discretionary
- Not assignable - only the beneficary can enjoy
- If the* instrument is silent*, the standard of support is the beneficiary’s **accustomed standard of living. **
Termination
Generally
A trust will **terminate automatically **upon the expiration of the term specfied in the instrument or when all of purposes of the trust have been accomplised, become unlawful, etc.
Most common way for a trust to end is by its express terms.
Termination - By Settlor
Under the UTC - A settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. Some states, including that adopted the UTC, follow the
Traditional Rule- provides that a trust is irrevocable unless the settlor ** expressly reserves the power** to revoke or modify the trust.
In some states, settlor may revoke unpon the written consent of all living persons with vested or contingent interests
Termination - By Beneficiaries
