Trusts Flashcards
Types of trusts
Inter vivos trust
Testamentary trust
Inter vivos trust (living trust)
An inter vivos trust is a trust created while the settlor is living and transfers some or all of their property into the trust. The settlor can designate themself as the trustee or a 3P.
Testamentary trust
A testamentary trust is created in writing in a will or in a document incorporated by reference into a will. The will containing the trust must meet the attested or holographic will requirements.
Elements to create a trust
1) intent, 2) trust property, 3) valid trust purpose), and 4) ascertainable beneficiaries
Intent element of creating a trust
Settlor may manifest intent orally, in writing, or by conduct. Manifestation of intent must occur prior to or simultaneously with transfer of property.
Trust property element of creating a trust
The trust must be funded with identifiable trust property, described with reasonable certainty.
Valid trust purpose element of creating a trust
A trust can be created for any purpose as long as it’s not illegal or contrary to public policy.
Ascertainable beneficiaries element of creating a trust
The beneficiaries must be identifiable
Exceptions to the ascertainable beneficiaries element of creating a trust
Class gifts: Trusts for a reasonably definite class will be upheld.
Charitable trusts: Trusts that exist for the good of the public do not need ascertainable beneficiaries.
Omitted children of trusts
A child omitted from the trust can force a share of the trust assets if 1) the child is born/adopted after trust is created, 2) settlor mistakenly believed the child was dead, or 3) settlor didn’t know the child existed.
Exceptions to omitted children of trusts
Cannot force a share if the child is either 1) provided for outside of the trust, or 2) the settlor had other children when the trust was executed and left a substantial amount of their estate to the omitted child’s parent.
Undue influence in creating trust
Undue influence is when a 3P exerts significant coercion upon the settlor with the intent to improperly influence the settlor’s judgment. If undue influence is shown, the trust may be invalidated in whole or in part.
Approaches to showing undue influence in creating trust
Traditional approach
Confidential relationship
Traditional approach of undue influence in creating a trust
contestant must show 1) susceptibility, 2) motive, 3) opportunity, and 4) causation.
Confidential relationship approach of undue influence in creating a trust
a presumption of undue influence arises when 1) principal beneficiary has a confidential relationship with the settlor, 2) principal beneficiary participated in executing the trust, and 3) gift to beneficiary is unnatural. If the presumption arises, the beneficiary must show through clear and convincing evidence that they did not exercise undue influence.
Fraud in creating trust
Fraud is an intentional misrepresentation with the intent to deceive and improperly influence the settlor’s judgment
Types of fraud in creating trust
Fraud in the inducement
Fraud in the execution
Fraud in the inducement
Fraud in the inducement occurs when a misrepresentation causes the settlor to make a different trust than they otherwise would’ve made.
Fraud in the execution
Fraud in the execution occurs when the misrepresentation is about the trust itself or its contents.
Charitable trust requirements
A charitable trust must have 1) a charitable purpose, and 2) indefinite beneficiaries (community at large). If a charity fails to follow the trust terms, the trustee can sue for the return of the funds.
Cy pres doctrine
Courts may modify a charitable trust to seek an alternative charitable purpose if the original charity becomes illegal, impracticable, or impossible to perform. Whether the court can modify the charitable trust depends on specific or general intent by the settlor.
Cy pres doctrine - specific intent found
If there is specific intent, the court may not modify the trust and the trust is terminated and becomes a resulting trust.
Cy pres doctrine - general intent found
If there is general intent, the court will substitute a similar charity.
Income beneficiary
An income beneficiary receives income from the trust.
Remainder beneficiary
A remainder beneficiary is entitled to the trust principal upon termination of the trust.
Lapse
Under CL, if a beneficiary dies before the settlor the gift to the beneficiary lapses (fails).
Anti-lapse
under modern anti-lapse statutes, if the beneficiary was blood-related to the settlor the beneficiary’s child will take the gift.
Class gift exception to anti-lapse
If the trust beneficiaries are a class, only the members of the class who are alive at the time of the trust execution will receive the benefit of the trust.
Discretionary trust
For a discretionary trust, the trustee is given complete discretion to apply payments of income or principal to the beneficiary. Creditors have the same rights as a beneficiary if the trustee exercises discretion to pay.
Mandatory trust
For a mandatory trust, the trust governs when and how trust property is to be distributed and the trustee has no discretion.
Alienability of trust interest
A beneficiary can assign their interest in trust property to 3P. Interest is freely alienable unless barred by a statute or spendthrift provision.
Support trust
A support trust directs the trustee to pay income or principal as necessary to support the beneficiary. Creditors cannot reach these assets unless they are providing a necessity to the beneficiary.
Spendthrift trust
A spendthrift provision expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer interest. Creditors usually cannot reach the trust interest unless money is owed for child or spousal support, basic necessities, or tax lien holders.
Revocable trust
In CA, trusts are presumed revocable. With revocable trusts, settlors have the right to modify or terminate the trust.
Irrevocable trust
With irrevocable trusts, modification/termination while the settlor is still alive can occur if 1) consent of all beneficiaries, and 2) proposed change does not interfere with the primary purpose of the trust.
Methods of termination of trust
Express condition in trust has been met
Trust purpose accomplished: Trusts will automatically terminate when the trust purpose has been accomplished.
Consent: A trust can be terminated if all beneficiaries consent. However, a trustee can block termination by the beneficiaries if the trust is shown to have an unfulfilled material purpose.
Court: A court can terminate a trust if its purpose has become illegal, impracticable, or impossible.
Trustee’s power to terminate trust
A trustee does not have power to terminate a trust unless the trust expressly says so.
Removal of trustee
A court can remove a trustee if the purpose of the trust would be frustrated by the trustee’s continued position or if the trustee violated a fiduciary duty.
Trustee’s powers
The trustee has powers granted expressly in the trust and powers necessary to act as a reasonably prudent person managing the trust. This includes implied powers to contract, sell, lease, or transfer trust property.
Trustee’s fiduciary duties
Duty of care
Duty of loyalty
Trustee duty of care
Trustees have a general duty to act with a duty of care in administering the trust.
Trustee duty of care - Investment rules
Prudent investor rule
Duty to diversity
Trustee duty of care - prudent investor rule
Under the prudent investor rule, a trustee must act as a prudent investor would act when investing their own property (less risk).
Trustee duty of care - duty to diversify
Under the duty to diversify, a trustee must adequately diversify the trust investments to spread the risk of loss, but not if administrative costs outweigh the benefits.
Trustee duty of care - Duty to make property productive
A trustee has a duty to make a productive economic use of trust property. This includes pursuing all possible claims, maximizing investments, selling assets when appropriate, securing insurance, and paying property expenses.
Trustee duty of care - Duty to be impartial
Under the duty to be impartial, a trustee must balance the interests of the present beneficiaries meaning the trustee cannot favor one present beneficiary over the others unless the trust provides for it. Additionally, the trustee must balance the interests of the present and future beneficiaries by investing property so it produces a reasonable income for the present beneficiaries while preserving the principal for the remainder beneficiaries.
Trustee duty of loyalty
Trustees have a general duty of loyalty to administer the trust in good faith (subjective standard) and to act reasonably (objective standard) in managing the trust.
Trustee duty of loyalty - Self dealing
When the trustee personally engages in a transaction involving trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and their own personal interest. Self-dealing is considered a per se breach of the duty of loyalty. Even when the self-dealing is authorized, the transaction must still be reasonable and fair to avoid breach.
Trustee duty of loyalty - Duty to disclose
Under the duty of loyalty, a trustee has the duty to disclose complete and accurate info about the trust property. A trustee must allow access to trust records and accounts.
Trustee duty of loyalty - Duty to account
Under the duty of loyalty, a trustee has the duty to account for actions taken on behalf of the trust so that the trustee’s performance can be assessed against the terms of the trust.
Remedies for trustee’s breach of fiduciary duties
When a trustee violates their duties, beneficiaries may sue the trustee and seek damages or removal of the trustee.
