Trusts Flashcards
Express Trusts
A valid express trust requires: (1) a definitive beneficiary; (2) a settlor with capacity; (3) an present intent to create a trust; (4) a trustee; (5) a valid trust purpose; (6) trust property; AND (7) compliance with any State formalities.
Precatory Expressions
A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way does NOT create a trust because the settlor must impose a legal obligation on the transferee.
Split of Title
If the sole trustee and the sole beneficiary are the same individual, the equitable and legal titles merge and the trust TERMINATES.
Definitive Beneficiaries
Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit
(e.g., “grandchildren” is OK; “friends” is NOT).
Resulting Trust
If a trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or their successors is presumed.
NO resulting trust will be implied if (1) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed; (2) settlor received consideration for their original transfer in trust; or (3) cy pres is applicable in cases of charitable trusts.
Valid Trust Purpose
A settlor may create a trust for any purpose that is valid. Purposes that are (1) illegal; (2) contrary to public policy; (3) impossible to achieve; or (4) intended to defraud the settlor’s creditors or based on illegal consideration.
Absence of a Trustee
A trust will not fail because the trustee dies, refuses to accept appointment, or resigns. The court will appoint a successor trustee UNLESS the settlor clearly intended that the trust can only continue under the supervision of a particular named trustee.
Trustee Qualifications
Anyone with capacity to acquire and hold property for their own benefit AND has capacity to administer that property may be a trustee
(e.g., minors and insane persons can HOLD, but cannot ADMINISTER property).
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) lack of cooperation with other co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; (4) a substantial change in circumstances.
ExamTip: Primary consideration is whether trustee’s continuation in office would be a detriment to the trust.
Present Declaration of Trusts VS. Transfer of Conveyance in Trust
Present Declaration of Trust: A trust can be created by a person declaring themself trustee of specific property for a beneficiary.
Transfer or Conveyance in Trust: A trust can be created by transferring legal title of property to a trustee.
Trusts within the Statute of Frauds
Writing is required for trusts that involve land transfers
Discretionary Trusts
Trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary. Creditors CANNOT reach (but can attach) the beneficiary’s interest until the trustee exercises their discretion to make payments. They may not, however, compel a distribution by the Trustee.
ExamTip: A court can force a trustee to satisfy a judgment for the support or maintenance of beneficiary’s child, spouse, or former spouse (this exception also applies to spendthrift trusts).
Spendthrift Trusts
A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust. Creditors are precluded from reaching the spendthrift trust to satisfy their claims (note: CANNOT even attach!)
ExamTip: Restraint on alienation is all-or-nothing. A spendthrift cannot permit voluntary transfers, but purport to deny access to creditors.
Domestic Asset Protection Trusts (“DAPT”)
A settlor (i.e., person who furnished the consideration) cannot use a spendthrift trust to protect their own property from creditors. Many states, however, now allow for self-settled spendthrift trusts known as “domestic asset protection trusts”.
Support Trusts
A support trust directs the trustee to pay only so much of the income or principal as is necessary for the beneficiary’s support. Interests in a support trust are NOT assignable.
Standard of Support: The beneficiary’s accustomed standard of living.
Termination of Trusts
A trust will terminate automatically (1) upon the expiration of the term specified in the instrument; (2) when all purposes of the trust are accomplished; (3) purpose has become unlawful or contrary to public policy; OR (4) purpose is impossible to achieve.
Revocation of Trusts by Settlors
Under the UTC, a settlor can revoke OR amend a trust UNLESS the terms expressly state that it is irrevocable.
Under the traditional rule, a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust.
Termination of Trusts by Beneficiaries
With Settlor’s Consent: A trust may be terminated or modified upon the consent of the settlor and all beneficiaries EVEN IF the modification or termination conflicts with a material purpose of the trust
Without Settlor’s Consent: A trust may also be terminated or modified on the consent of only all beneficiaries (but no settlor consent) ONLY IF no material purpose of the trust would be frustrated.
ExamTip: ALL beneficiaries, including unborn and unascertained beneficiaries must consent.
Termination of Trusts by Courts
A court may terminate or modify the trust if (1) the trust could have been modified if all beneficiaries had consented; and (2) the interest of any non-consenting beneficiaries will be adequately protected.
Other grounds of termination by court: (1) Unanticipated circumstances threaten the trust’s purpose; (2) Continuation of the trust on its existing terms is impracticable or wasteful; or (3) The value of the trust is insufficient to justify the cost of administration.
Termination of Trusts by Trustees
A trust that has insufficient property to justify the cost of administration may be terminated by the trustee. Trustee must notify all beneficiaries, wind-up the affairs of the trust, and distribute whatever remains to remainder beneficiaries.
Powers of a Trustee
Express Powers: Mandatory & Discretionary; Implied Powers
Imperative (Mandatory) Powers: Powers enumerated in the trust instrument that MUST be exercised (e.g., Pay $1,000 per month to Beneficiary).
Discretionary Powers: Powers that the trustee may or may no perform as the trustee determines in their judgment to be most appropriate. Trustee must act in good faith and their discretionary acts subject to abuse-of-discretion review. No trustee is entitled to “absolute discretion”.
Implied Powers: Powers that are appropriate to achieve the proper investment, management, and distribution of the trust property (e.g., sell trust property; lease trust property; incur reasonable expenses; hire agents; mortgage trust property; and repair property).
ExamTip: UTC has numerous powers enumerated for trustees.
Duties of a Trustee
- Duty to Administer Trust in good faith and in a prudent manner
- Duty of Undivided Loyalty to avoid self-dealing and treat beneficiaries with utmost fairness AND impartiality (ExamTip: Trustee’s good faith or benefit to the trust is irrelevant. Self-dealing is a per se violation of this duty).
- Duty to Report an annual accounting of the trust, trustee’s contact information, and information about the trust administration when requested.
- Duty to Separate Trust Property: Simply no commingling of “earmarked” trust property.
- Duty to Invest Trust Property Prudently / Duty to Diversify Trust Investments
Prohibited Self-Dealing & Its Consequences
A trustee must not (1) buy from or sell to trust any of his property; (2) borrow funds from trust or loan money to the trust; (3) use trust assets as collateral; (4) cannot gain personally as trustee. All of these would entail self-dealing if a close relative of Trustee engaged in them.
Consequences: Self-dealing transactions are VOIDABLE by the affected beneficiary UNLESS (1) a court or the express terms of the trust approved it; (2) beneficiary failed to bring a timely suit; (3) beneficiary consented or ratified.
Prudent Investor Rule
A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.
Investment decisions are evaluated by an assessment of the entire trust portfolio. Trustee must have an overall investment strategy!
