Trusts Flashcards
What is a trust?
A trust is a fiduciary relationship where a trustee holds legal title to specific property + beneficiaries hold the equitable title
What does the trustee do?
Trustee is a fiduciary and must:
(1) deal with the property with reasonable care
(2) must maintain the utmost degree of loyalty AND
(3) is personally responsible if their conduct falls beneath required standards
Owes these duties to the beneficiary
Who is the beneficiary?
Hold the equitable title and receive the benefit of ownership as laid out in the trust instrument
Generally has little/no control over the trust property
Do not need capacity–just need to be able to take + hold property
Whats a settlor?
The person who creates the trust
How do trusts actually work?
(1) settlor transfers legal title to trustee + equitable title to beneficiary
(2) trustee manages + invests the property per legal duties and trust instrument
(3) trustee makes payments to or for the benefit of the beneficiary
(4) when trustee’s duties are done, the trust terminates and remaining property goes to remainder beneficiaries
Why trusts?
(1) provide for + protect beneficiaries
(2) flexibility of asset distribution
(3) protect against own incompetence
(4) professional management of property (+ someone to sue)
(5) probate avoidance (especially in states where probate is cumbersome)
(6) tax benefits
What are the types of trusts?
Express Trusts
Resulting Trusts
Constructive Trusts
What is an express trust?
MOST COMMON
They are created by the express intention of the settlor
Private Trusts: for ascertainable persons
Charitable Trusts: for indefinite class of persons/public generally
What trusts are created by operation of law?
Resulting Trusts: arises from presumed intention of owner of property
Constructive Trusts: used as an equitable remedy to prevent unjust enrichment
What makes for a valid trust?
(1) trust intent
(2) identificable corpus
(3) identificable beneficiaries
(4) proper purpose
(5) compliance with mechanics + formalities
How does trust intent work?
Settlor must INTEND to split equitable + legal title and to impose fiduciary duties on legal title holder
No specific words are required
There need not be any communication to the beneficiary–delivery of property to trustee is enough
Must intend for the trust to take effect immediately
Promise to make a future trust isn’t enforceable sans consideration
Trust purpsoe
GENERAL RULE: can be created for any purpose
Invalid if:
-illegal
-performance requires crime or tort
-contrary to public policy
-violates RAP
Inter Vivos Trusts
Trust created while settlor is still alive
Declaration of Trust
Settlor declares themselves the trustee
-no conveyance of personal property needed but real property should be conveyed from the settlor as person to settler as trustee
Conveyance of Trust
Settlor transfers legal title to a trustee + either retains or transfers equitable title
-personal property identified or physically delivered
-real property = conveyed by need OR devised by will to testamentary trust
Pour over gift from will
A gift in will to inter vivos trust
Goes into trust as to date of death
NOTE: pour over gifts can be initial trust funding as long as (1) the trust is IDed in the will AND (2) the trust is executed before the testators death`
trust is created before death but SPRINGS into existence AT death when funding comes through
Testamentary Trusts
Trusts created in the settlors will
Requirement: must be a valid will
Secret Trust
“Constructive Trust” imposed when the settlor + will beneficiary orally agree that beneficiary will hold as trustee for someone else
-settlor relies on this promise
-but the will does not explicitly note the nature of the gift
Intended beneficiary: can use extrinsic evidence + must prove by clear and convincing evidence
Semi-Secret Trust
Will makes a gift in a trust but fails to name beneficiary
Gift fails + named trustee will hold property in a resulting trust for the testator’s successors in interest
Resulting Trust + Trust Formation
If a trust fails for lack of a beneficiary–a resulting trust in favor of the settlor or their successors is presumed
How to designate a trustee
-must have enforceable duties
must have ability to manage property
-capacity to hold and take
If trustee not named or can’t do it–courts will often appoint a trustee
Spit of Title
All good unless the sole trustee and the sole beneficiary are the same person
THEN title would merge and trust is terminated
This is only OK with a life estate so long as there is a reminder beneficiary
Honorary Trusts
Trust set up to provide benefits for a non-human, non-charitable purpose
Ex: pets, maintain a grandfather clock
Trusts contrary to public policy
Public policy is violated if the purpose of trust is to to induce others to
-engage in crime or tort
-encourage immorality
-induce a person to neglect parental, familial or civic duties
If condition is contrary to public policy:
*Settlors alternative desire if expressed will control
*If illegal condition is a condition subsequentcondition is invalidated but trust is OK
* if condition precedent–preferably will hold the interest valid unless there is evidence to show that the settlor’s wish would be to void altogether
Voluntary Transfers of Beneficiaries
Presumption that a beneficiary can freely transfer their interest in the trust
Doesn’t really happen though
Involuntary transfers
Creditors
Presumption that beneficiary’s creditors can reach their interest in the trust
-subject to judicial sale
-to avoid–have trustees pay the beneficiary’s income to creditors
Discretionary Trusts
MOST COMMON
-trustee determines how much beneficiary receives
-beneficiary has nothing t transfer until trustee transfers to them
-beneficiary cannot interfere with the discretion unless there is an abuse of power–court can intervene
Creditors rights: before trustee sends money–creditors cannot get at anything
-cannot compel a trustee to make a transfer
Spendthrift Trust
Restraints on alienation
Precludes beneficiary transferring interest in the trust and the beneficiary’s creditors are precluded from reaching it to satisfy claims
-purpose to to protect beneficiary from themselves
Limitations:
Majority Rule: ineffective if settlor is beneficiary
-growing number of states are allowing this though
Exception: for special class of creditors
-claims of dependents, the government, and persons supplying necessities
Support Trusts
What property that the trustee transfers to beneficiary is restricted in use:
HEMS Standard
-health
-education
-maintenance
-support
Issues:
Standard of support: previous standard of living
Question of whether the beneficiary’s other income + resources should be taken into account (generally case by case)
How does a trust end?
(1) by terms of trust [express terms]
(2) by the settlor
(3) by the beneficiaries if settlors intent is not frustrated
(4) by operation of law if trust exhausted or merger of title
(5) by the court
Revocable Trusts
Modern Rule: a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable
Traditional Rule [still followed by some states]: trust is irrevocable unless the right to revoke or amend is reserved
Beneficiaries + Revocation
May agree to modify/terminate if all the following are true:
(1) all beneficiaries agree (this can be extra hard if some aren’t born yet)
(2) all are legally competent
(3) the settlors intent is not frustrated
(a) the settlor consents OR (b) will not impair any material trust purpose
Court + Revocation
Early Termination: may prematurely end when the trusts purpose has been completed or has become illegal or impossible
Duties of Trustee at Revocation
(1) wind up trust business
(2) distribute remainder to the remainder beneficiaries
Source of Trustees Power
(1) Express Powers
-those conferred by the trust instrument, state law + court decree
(2) implied powers
-had all powers that are necessary or appropriate to carry out terms of the trust if those powers are not expressly forbidden in the instrument
(3) joint powers–if there are 2+ trustees
Traditional view: must act by unanimous
Modern/Majority View: 3+ just need a majority
Fiduciary Duty of Trustee
Owed to beneficiaries
NOTE: that in some states in a revocable trust–a trustee owes their duties only to the settlor
All the trustee duties
Duty to administer trust
Duty of Loyalty
Duty to Account
Duty to Separate + Earmark Trust Property
Duty to administer trust
bound to follow terms of trust
Duty of Loyalty
Owes beneficiaries loyalty + good faith in all matters pertaining to the trust
(1) may not purchase property from trust
(2) cannot sell property to trust
(3) cannot borrow from trust
(4) cannot claim excessive comp
Duty to Account
must keep accurate records + give accountings to beneficiaries/court when asked
General Standard of Care required
Reasonably Prudent Person Standard
-must exercise the degree o skill, care, and causation that would be exercised by a reasonably prudent person in managing their own property
Duty to separate and earmark trust property
Keep separate from own property
DO NOT COMMINGLE
Exception: corporate trustees often create common trust funds to create diversification + higher rate of return
Investment + Management Decisions
Traditionally could not be delegated
NOW: a trustee may delegate investment and management functions that a prudent trustee of comparable skills would properly delegate under the circumstances
Prudent Investor Rule
Must consider:
-purpose of trust
-terms of trust
-distribution requirements
Must exercise: reasonable care, skill, and caution when investing + managing
NOTE: re loyalty to beneficiaries that social investing might be an issue unless you re returns
Portfolio Approach
Prudent re prudent investor rule is evaluated as to overall investment strategy/context to entire trust portfolio
Duty to Review Trust Property
When assume office or when there is a new trustee
Must review investments to ensure continued compliance
Impartiality
Trustee must be impartial and cannot favor one beneficiary over another
Liability to the Trustee
Beneficiaries may bring actions for $ damages if there is breach:
(1) lost profits
(2) depreciation of losses to trust property
If trustee self-dealing:
(1) if trust profited–affirm transaction
(2) if trust lost money–set aside transaction
(3) trace profits from the trustee if trustee profitted
Removal of Trustee
Court may remove if continued work would be detrimental to the trust
Trustees liability to 3rd parties
Generally personally liable to 3rd parties in contracts made in course of their work for the trust
-can put express condition in that they don’t have personal liability
-may also seek reimbursement
Tort Liability + Trustee
Personally liable for torts committed in the course of trust work-
Modern Rule: Liable for torts of agents/employees only if personal fault can be traced to the trustee
Charitable trust
Charitable Trusts:
(1) no clearly ascertainable beneficiary
(2) Goal is to benefit community or society
Class to be benefited + charitable trust
The class to be benefitted can be limited but it can’t be so narrow as to only benefit a few people whom the settlor wishes to aid personally
Cy Pres
Doctrine of Equitable Approximation
Used for when the trustee cannot carry out the charitable trust as written for some reason
- Court has to determine charitable intent broader than what can’t be carried out anymore
- Charities are going to have to argue their purpose is basically the same
- Extrinsic evidence is OK to try and figure out what would be more in line with settlor’s intent
Note: that if a specific intent is found instead of general–the trust fails and passes to settlor’s successors in title
NOT BOUND BY RAP
Often enforced by the state attorney general
Resulting Trusts
Resulting Trusts: involve revisionary interests and are based on presumed intent of settlor
Creation: conveyed to trustee AND
(1) Failure of express trust
(a) trust is void or unenforceable
(b) no beneficiary
(v) cy pres is not doable
(2) Purchase money resulting trusts
(3) Incomplete disposition of trust assets
Purchase Money Resulting Trust
Unusual Fact Pattern
Presumed whenever:
(1) The beneficiary furnishes consideration (usually money) for the acquisition of real or personal property but with the beneficiary’s consent–title is taken in the name of the trustee
Three possible relationships here:
(1) Settlor/beneficiary of PMRT
(2) Donor-donee
(3) Creditor-debtor
a. If person providing money intends to be repaid then no PMRT
Exception:
when close family relationship—gift is presumedif NOT close relative, then PMRT
