Trusts Flashcards
Settlors Capacity to Create A trust
- Must intend trust to take effect immediately
- Must express intent by words or conduct while the settlor owns the property
- Precatory expressions (hope, wish, suggestion) result in the inference that no trust was intended, but inference may be overcome by other evidence
Trustee
If there is no trustee a court can appoint one, an inter vivos trust without a trustee will fail because no valid dealer and transfer, trustees have duties and a settlor himself can be a trustee but a sole beneficiary can’t be the sole trustee. Additionally, a failure to name a trustee or a promise to name a trustee later may be evidence lack of present intent.
A settlor can make himself a trustee, then name a successor trustee after he dies as long as there are other beneficiaries other than himself named.
Requirements of an Express Private Trust
- Settlor with capacity and present intent to create a trust
- Trustee
- Trust Property must be identifiable
- Definite Beneficiaries
- Valid Trust Purpose
Trust Property
Property of any time including future interests, settlor must have power to convey the property, and it must be described with certainty
Beneficiaries
Must be capable of taking and holding the title to the property, must be ascertainable, must vest under RAP, notice of being a beneficiary is not required but beneficiary must accept and acceptance of a gift is presumed. Trustees can be in a class but the class must be reasonably definite so that the trustee can determine who they are. If a trust fails for lack of beneficiaries only that part of the trust fails and the amount that was to pay a resulting trust in favor of the settlor is created.
Beneficiary Disclaimers
No one can be compelled to accept, must be made nine months of the interest creation. or 9 months after someone turns 21.
Anti Lapse Statute
In most states only applies to wills. UPC applies to trusts meaning that if the beneficiary is dead it passes to heirs.
Class Gifts
Are allowed, but the class must be ascertainable at the time of distribution
Trust Purposes
Can’t be illegal, impossible to achieve, against public policy, intent to defraud creditors, or based on unlawful consideration. If there is an invalid condition subsequent, the trust is still valid just ignore the conditions. If an invalid condition precedent, the condition is struck and the court decided if it is valid trust.
Formalities of an Inter Vivos Trust
Created during the settlors life
a. Declaration of trust by the property owner that he holds in trust, or
b. Transfer of property by the settlor to the trustee
c. No writing is required unless trust of land
Formalities of a Testamentary Trust
Created by Settlors Will
a. Essential terms must be ascertained from the will, incorporated document, facts
of independent significance, or exercise of the power of appointment
b. Secret trust (absolute gift but trust intended)—constructive trust imposed
c. Semi-secret trust (a gift in the trust without beneficiary)—resulting trust for the testator’s heirs, this is not a valid trust
Charitable Trust
A charitable trust must be for a valid charitable purpose, there must be indefinite beneficiaries and RAP does not apply (unless shifting from charity to private use), the trust is enforceable by the settlor, beneficiary, or the attorney general
Cy Pres Trust
When the settlor’s intended purpose is impracticable, unlawful, or wasteful the court can sub in a new purpose. IT must be shown there was charitable intent. The court will select another purpose close to the settlers. Under the UTXC, intent is presumed and cy pres is mandatory.
Oral Trust
Valid in some states when there is clear and convincing evidence. If invalid can be imposed as a constructive trust.
Pour Over Trusts
The gift of trust is in the will, trust can remain unfunded during the testator’s life but the content of the will must pour over at death. Trust must be executed before the testator’s death.
To pour over into a revocable trust the trust must be in existence or executed at the time of the will’s execution
Under the modern rule, a will can devise a trust established or to be established during the testator’s lifetime.
Revocable Trusts
Under the UTC, trusts are presumed revocable unless stated otherwise. Under the traditional rule. The power to revoke also has the power to modify.
Irrevocable Trusts
In some states can be revoked when all living people with vested or contingent interest give written consent. Trust becomes irrevocable when settlor dies.
Honorary Trusts
These are trusts not for a charitable person but made for someone who can’t enforce trust like pets. These are enforceable by someone named in the trust or appointed by the court. If there is more than needed the excess is distributed to the settlor or successors.
Spendthrift Trust
the beneficiary may not voluntarily or involuntarily transfer his interest. The settlor can’t be a beneficiary. Interest is free from claims of creditors. However, some states allow the dependants of the beneficiary to claim for it. Look at who furnished consideration for the trust and who is able to avoid creditors.
When are spendthrift trusts uneforceable?
Unenforceable against a claim brought by the government or by a child, spouse, or former spouse with a support order or when the settlor is a beneficiary.
Discretionary Trust
The trustee has discretion on how to issue payments. Interest can’t be reached by creditors until payment is made. The trustee must pay creditors directly if he has
notice and decides to make a payment —unless there is a spendthrift restriction. A beneficiary can’t interfere with the discretion of a trustee unless the trustee is acting in bad faith.
Support Trust
Directs the trustee to pay only so much of the income or principal as is necessary’s for the beneficiary supports.
A trust to pay all of the income to A for his support is not a support trust, this just states the motive for the transfer.
Creditors Right in a Spendthrift Trust
Creditors are precluded from reaching the trust to satisfy claims and creditors can’t attach to the interest.
Modification of a Trust by a Beneficiaries
Can terminate or modify when settlor and all beneficiaries consent or all beneficiaries consent and there is no frustration of purpose. A representative can be appointed to present the interest of minor, unborn, or unascertained beneficiaries. Most states don’t allow for the termination of spendthrift trusts without the permission of the settlor.
Modification of Trust by the Court
- May modify if trust could have been modified if all beneficiaries had consented
and interests of nonconsenting beneficiaries will be protected - May terminate or modify if circumstances unanticipated by the settlor threaten the trust purpose
- May modify if continuation of trust is impracticable or wasteful
- May modify or terminate if the value is insufficient to justify administration cost or
achieve tax objective - May reform to reflect the settlor’s intent if clear and convincing evidence shows
settlor’s intent and trust were affected by a mistake
Modification of a Trust by a Trustee
Can terminate if less than $50,000 is in the trust and is insufficient to justify admin costs.
Constructive trust
the equitable remedy to prevent unjust enrichment.
1. Theft or conversion
2. Fraud, duress, undue influence, mistake, or interference with contract relations
3. Breach of fiduciary duty (e.g., attorney/client, director/corporation, trustee/beneficiary)
4. Breach of fraudulent promise, promise by one in a confidential relationship, promise
concerning will or inheritance, promise to forgo foreclosure bid
6. Secret trust, even if the secret trust was created after the will was executed. Just matters that the testator relied on the promise.
Imperative Powers of Trustee
Powers expressly conferred by trust, can be court ordered to complete these powers.
Discretionary Powers of a Trustee
They may or may not perform these powers, the trustee determines if it’s in the trust’s best judgment.
Powers of a trustee
- Powers expressly conferred by trust
- Powers an individual has over own property unless limited by trust
- Powers appropriate to achieve investment, management, and distribution of trust
property not forbidden by trust - Powers conferred by UTC unless limited by trust
Duties of Trustee
FIdicuary duty to the benficiaires.
Duty to administer the trust in good faith and impartiality the duty of loyalty
the duty to report
the duty to separate trust property
the duty to enforce claims and defend trust from attack, and
the duty to preserve property and make it productive.
The duties of a trustee usually can’t be changed once they are accepted, if assets are to be later added that should be noted in the trust.
Duty of Loyalty of a Trustee
a. Cannot buy assets from or sell assets to the trust
b. Cannot borrow from trust or loan to trust
c. Cannot personally gain through position
d. Corporate trustee cannot buy (but may retain) own stock
e. If duty is breached, the transaction is voidable by the beneficiary unless:
1) Transaction authorized by a trust or approved by the court;
2) Beneficiary failed to bring suit within the prescribed time period;
3) Beneficiary consented, ratified transaction, or released trustee; or
4) Transaction involves contract or claim from before trustee became
trustee
f. The settlor can waive self-dealing restrictions
The trustee’s good faith and actual benefit to the trust is irrelevant.
Duty to Sepearte Property by Trustee
If the property is comingled and it losses value or is lost or destroyed, it’s presumed to be the trustees, if it gains value it’s presumed to be the trust assets.
Duty to Preserve and Make Property Productive
Must invest as a reasonably prudent investor.
1) Trustees with special skills are held to a higher standard
2) Trustee must diversify investments
3) Investment decisions may be delegated if a prudent trustee would do so
4) Impartiality: must be fair to beneficiaries, social investments are allowed but not to the detriment of the trust
Can delegate investing power to someone with better skills
If breached the trustee is liable for any losses or any potential lost profits.
If there is a revocable trust and the settlor is directing the trustee to make nondiverse investments because the trustee owed a duty to the settlor such a directive may relieve the duty of loyalty to the beneficiaries to diversify.
Trustee Liability
If there’s a breach trustee can be ordered specific performance of duties, an injunction against the trustee, complete trustee to pay money to restore the property, or to suspend or remove the turstee
Trustee Liability to Benficaries
Amount to restore trust and distribution to what would be an absent breach of any profit from the breach
Trustee’s Defenses to Breach
a. Trustee acted in reasonable reliance on trust terms
b. Beneficiary consented, released trustee from liability, or ratified transaction
c. Exculpatory clauses are void if they relieve the trustee of liability for a breach committed in bad faith or reckless indifference or appear in trust because of the trustee’s abuse of a confidential relationship with the settlor
d. Trustee is not liable for acts of co-trustee if not joint or did reasonable care in preventing breach/compelling to redress breach.
Allocation of Receipts and Expenses
Either income or principal. The trustee must be fair to all beneficiaries.
Income Beneficiaries
Receipts: Interest and dividend income goes to income, rental income, interest on bonds or CDs, money received from an entity, liquidating assets, and 10% of mineral rights.
Expenses: one-half trustee and consultant compensation; one-half accounting
and legal expenses; ordinary expenses (interest payments on debt, ordinary
repairs, taxes, insurance premiums)
Principal Beneficiaries
Proceeds of a sale of an asset, eminent domain awards, capital gains, property other than money, insurance proceeds where trust is beneficiary, liquidating assets, and 90% of mineral rights.
Expenses: one-half trustee and consultant compensation; one-half accounting
and legal expenses; principal payments on debt; environmental costs
Will Substitutes
Revocable Trusts
Life Insurance Trusts
Totten Trust Bank Accounts
Life Insurance Trust
- Contingent beneficiary trust allowed (e.g., “proceeds to A, but if A does not
survive, to B in trust for my children”) - Assignment of policy trust allowed (assign policy to party to hold in trust)
Totten Trust Bank Account
- Trustee-depositor has full rights during the lifetime
- Revoked by withdrawals, any other lifetime act indicating intent to revoke, or by
will - Subject to depositor’s creditors’ claims
- Automatically terminates if the beneficiary predeceases depositor
Resulting Trust
- Purchase money resulting trusts—the person taking title did not supply consideration; sole duty is to convey title to one furnishing consideration
a. No resulting trust presumption if parties closely related - Failure of express trust—resulting trust arises with the settlor as a beneficiary
- Excess corpus—if trust property remains after the purpose is fulfilled, resulting trust for the settlor arises
Creditors’ Rights to a Regular Trust
Can attach only to the beneficiary’s current interest in the trust.
Secret Trust
An absolute gift will be made in reliance on the beneficiary’s promise to hold the property in the trust. Extrinsic evidence is allowed and a constructive trust imposed in favor of the intended beneficiary is created
Semi Secret Trust
A gift in a will to a person in trust but doest do not name the beneficiary. Extrinsic evidence is not allowed and the trustee holds a resulting trust for the testator’s legatees or heirs. This type of trust is not allowed.
Power of Appointment
An authority created in a donee that allows the donee to designate within the limits prescribed who shall take what assets.
A general power of appointment is exercised in favor of the donee, her estate, creditors, or the creditors of her estate.
A special power of appointment is exercisable in favor of a specified class of person that does not include the donee.
A presently exercisable power is exercisable by the donee during life time.
A testamentary power is one that is exercisable only be the donee’s will.
