trusts Flashcards
If a trust does not contain a spendthrift clause (which prohibits both voluntary and involuntary alienation of a beneficiary’s interest), a beneficiary’s creditors may reach the beneficiary’s interest by either
(i) attaching present or future distributions or (ii) by other means, which presumably would include the sale of the beneficiary’s interest.
creditor is limited to reaching
the beneficiary’s interest, not the trust assets themselves.
Creditors cannot compel distributions that are subject
to a trustee’s discretion, but may reach amounts the trustee chooses to distribute.
The Virginia Code makes clear that co-trustees have some responsibility for
the actions of each other.
Each trustee must exercise reasonable care to prevent a co-trustee from
committing a serious breach of trust and/or to compel a co-trustee to redress a serious breach of trust.
Co-trustees may obtain contribution from one another if
more than one trustee is liable to the beneficiaries for breach of trust unless the trustee seeking contribution was substantially more at fault than another trustee or committed the breach of trust in bad faith or with reckless indifference to the purposes of the trust and/or interests of the beneficiaries.
A trustee properly entering into a contract in a fiduciary capacity while administering the trust is
not personally liable.
Immunity from liability applies only if
the contract discloses the fiduciary capacity and the trust.
A trustee who contracts with a firm to manage trust assets
is not personally liable for the fees levied by the firm
when a real estate firm contracts to manage a trusts real property, the firm may seek payment from
trust assets
A trust is void to the extent its creation was induced by
fraud, duress, or undue influence.
A fiduciary owes to the beneficiary
scrupulous good faith, candor, and care in the management of the beneficiary’s interests.
presumption of undue influence
when the fiduciary (or a close family member) benefits from a document the fiduciary drafts.
if a court invalidates a trust, the trustor can move the court to impose
a constructive trust on the share which was subject to undue influence and/or fraud in the inducement
Constructive trusts are
not “real” trusts.
constructive trusts are equitable remedies that
return property to the rightful owner to prevent a fraud or if property has been properly acquired but it is contrary to the principles of equity that it should be retained for the acquirer’s own benefit
a constructive trust would
transfer share of the trust property to the settlor’s intended beneficiary, because the share was the result of fiduciary’s fraud.
The Virginia Uniform Trust Code (UTC) recognizes the common law principles under which a court may remove a trustee for
(i) breach of trust, (ii) inability to cooperate with co-trustees, (iii) lack of fitness, or (iv) persistent failure to administer the trust effectively.
The Virginia UTC provides statutory reasons for removal when the court finds that
(i) there has been a substantial change in circumstances, or removal is requested by all of the qualified beneficiaries;
(ii) removal best serves the interests of all of the beneficiaries;
(iii) removal is not inconsistent with a material purpose of the trust; and
(iv) a suitable co-trustee or successor trustee is available.
The duty of loyalty mandates that a trustee administer a trust
“solely in the interests of the beneficiaries.”
In general, a transaction is voidable by a beneficiary if it involves
trust property and is affected by a conflict between the trustee’s fiduciary and personal interests.
where a transaction is voidable by a beneficiary, a trustee may effectively defend the transaction if
it was authorized by the terms of the trust, by court order, or by consent of the affected beneficiaries.
Proof of self-dealing results in
a trustee’s liability
A transaction involving trust property is presumed to be affected by a conflict between personal and fiduciary interests if it is entered into by the trustee and:
(i) the trustee’s spouse, descendants, siblings, parents, or their spouses; (ii) an agent or attorney of the trustee; or (iii) a corporation or other person or enterprise in which the trustee has an interest that might affect the trustee’s best judgment.
A trustee must comply with the Virginia Uniform Prudent Investor Act which governs the standards that a trustee must meet when
investing trust assets.
The trustee must administer the trust as a prudent person would, by considering
the purposes, terms, distributional requirements, and other circumstances of the trust.
in satisfying the standard for investing trust assets the trustee shall exercise
reasonable care, skill, and caution.
A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, shall
use those special skills or expertise.
Courts reviewing investment decisions of trustees must focus on the facts and circumstances at the time of
the decisions; the review should not be based on hindsight.
investment losses alone are
insufficient to find a trustee in breach.
Investments are evaluated as a part of
the overall investment strategy (i.e., the entire trust portfolio) rather than in isolation.
A trustee must diversify the investments of the trust unless the trustee reasonably determines that,
because of special circumstances, the purposes of the trust are better served without diversifying.
A violation by a trustee of a duty the trustee owes to a beneficiary is a
breach of trust.
A court may order any appropriate relief for a breach of trust, including:
(i) compelling the trustee to perform the trustee’s duties;
(ii) enjoining the trustee from committing a breach of trust;
(iii) compelling the trustee to redress a breach of trust by paying money (calculated below), restoring property, or other means;
(iv) suspending or removing the trustee; and/or
(v) reducing or denying compensation to the trustee.
A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of
(1) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred (e.g., imprudent investments), or
(2) the profit the trustee made by reason of the breach (e.g., self-dealing).
Damages cannot be speculative, so they must be
proven with some certainty.
A spendthrift trust contains a provision that
restrains the transfer of a beneficiary’s interest.
To be effective, a spendthrift provision must restrain both
voluntary and involuntary transfers.
under an effective spendthrift trust, the beneficiary cannot transfer his interest…
voluntarily.
Except for (i) children with child support orders, (ii) judgment creditors that provided services for the protection of the beneficiary’s interest in the trust, and (iii) government entities; creditors cannot reach the interest or any distribution before
it is received by the beneficiary.
While the beneficiary of even a spendthrift trust may disclaim his interest, the disclaimer must occur before
the disclaimant accepts or attempts to transfer the interest sought to be disclaimed.
Under Virginia law, a spendthrift provision may indicate a
material purpose for a trust that cannot be modified or terminated without the consent of the settlor and all beneficiaries.
A creditor can reach the beneficiary’s interest in
the trust.
The creditor cannot, however, directly reach the
assets of the trust (as this would impair the interests of other beneficiaries).
a creditor party with a judgment against a beneficiary under the trust may
attach beneficiaries interest as a beneficiary in the trust (e.g., distributed income), but not the trust assets themselves.
A resulting trust arises by operation of law, where a court
implies a trust and declares the settlor or their heirs to be the beneficiary.
A resulting trust can arise where
an express trust fails, and the settlor hasn’t declared their intent; in that case the beneficial interest in the trust property is in the settlor or if deceased it passes to their successors.
resulting trust can arise when
a valid trust’s purpose is fully satisfied and some trust property has not been disposed, in that case the settlor has made an incomplete disposition and the property reverts back to the settlor or if deceased, their successors in interest.
third class of resulting trust is
a Purchase Money Resulting Trust
A Purchase Money Resulting Trust arises when
one party pays the purchase price for property, or assumes payment for all or part of the purchase price, and causes title to be taken in another party’s name.
Under a PMRT, If the parties are not related, there is a presumption that the person supplying consideration
did not intend to make a gift, instead the person intended for the grantee to hold the property in trust for them.
This presumption can be rebutted with evidence of
a gift or loan was intended.
Under a PMRT, if the grantee is a child, spouse, or parent of the person paying the purchase price
a gift is presumed.
The standard to overcome this presumption when the parties are not related is
clear and convincing evidence.
In order for a charitable trust to be valid
it must have a charitable purpose
a charitable trust cant benefit
identifiable individuals
a charitable trust can be
perpetual
The charitable trust must have a purpose which benefits
the community, such purposes include: relief of poverty, advancement of education or religion, health, to accomplish governmental purposes
The trust can benefit a limited class of individuals, but it cannot be so narrow to benefit
a few individuals intended to personally aid
A trust that receives a devise from the will of the settlor of the trust (i.e., a “pour over” trust) is not an invalid trust due to
failure to conform to the formalities required for a will
In Virginia, a “pour over” trust is valid if
the trust was identified in the testator’s will and the terms of the trust were set forth in a written instrument.
Virginia does not require that a “pour over” trust be created before
the will that provides a “pour over” devise to the trust is executed.
Virginia recognizes a “pour over” trust, even though the trust is not funded until
the trust receives the devise from the testator’s will.
Virginia recognizes the right of a settlor to change the terms of a “pour over” trust after
the will has been executed.
In Virginia, a remainder interest in a charitable trust that is triggered by the termination of the trust’s specific charitable purpose must give way to the application of the doctrine of cy pres if
more than 21 years have passed since the creation of the trust
Typically, the doctrine of cy pres does not apply when
a conditional gift is directed to a specific charitable purpose and that purpose can no longer be achieved.
Virginia permits cy pres to override a condition in a trust that requires the termination of the trust and distribution of the trust assets to a noncharitable beneficiary when
(i) the beneficiary is not the settlor, and (ii) more than 21 years have passed since the creation of the trust.
where a remainder interest in the children of the settlor’s sibling would be void under the common law Rule Against Perpetuities, the Virginia Rule Against Perpetuities also contains
an alternative “wait and see” provision.
“wait and see” provision
the remainder interest vested within the 90 year time period for the “wait and see” provision.
Consequently, the remainder interest in the trust is not void under the Virginia Rule Against Perpetuities.
While a trust for the care of an animal can include more than one animal, the animals must be
alive during the settlor’s lifetime
Virginia does not permit a trust for the care of
unborn animals
Virginia, by statute, specifically recognizes the validity of a trust to
care for an animal.
Under the “90-year wait-and-see” alternative to the common law rule
an interest that currently violates the Rule Against Perpetuities is not invalid unless it does not actually vest or fail within 90 years of the creation of the interest
although a settlor does not have the power to place excessive amounts in trust for the benefit of an animal, when a settlor does so,
the trust is not invalidated
when a settlor places excessive amounts in trust for the benefit of an animal, the excess is
distributed in accord with the terms of the trust, or if the trust is silent, in accord with the statute
The Virginia Uniform Prudent Investor Act is the default rule governing
the standards that a trustee must meet when investing trust assets that can be altered by the terms of the trust.
A trustee must invest and manage trust assets as
a prudent investor would
a prudent investor would invest and manage trust assets exercising
reasonable care, skill, caution
Trustees with specialized investing expertise have a duty to
use their expertise in investing trust assets.
Nothing here suggests that the trust instrument modified the default rule, so
the VA UPIA standards apply to management of the trust assets.
a trustee must diversify the investments of the trust unless
the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.
Virginia trustee’s obligation of impartiality under Virginia’s Uniform Principal and Income Act.
The duty of impartiality requires that the trustee consider the interests of both present and future beneficiaries when deciding on trust investments, balancing of interests between income beneficiaries and remaindermen
In order to create a trust, the settlor must have
capacity to do so and indicate an intention to create a trust.
A trust need not be evidenced by
a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence.
a trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of
(i) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occured, or (ii) the profit the trustee made by reason of the breach
use of trust funds by a trustee as his own is
a breach of trust
even though a trust does not suffer a loss resulting from a breach of trust by the trustee, where the trustee makes a profit from a breach of trust, the beneficiaries are entitled to
the profit made by the trustee
a co-trustee’s failure to take action upon learning of his co trustee’s taking of trust funds for personal use
constitutes a breach of the co-trustee
a trustee who received a benefit from the breach of trust is not entitled to
contribution from another trustee to the extent of the benefit received
In general, a self-settled irrevocable trust is not
protected from claims against the settlor
in a self-settled irrevocable trust a creditor of the settlor may reach
the maximum amount that can be distributed to the settlor or for the settlor’s benefit
Since the trustee has the discretion to distribute all the trust assets to the physician, the patient may reach
all of the assets in the trust
In Virginia, the trustee of a testamentary trust must qualify with
the clerk of the circuit court or the court in order to serve as trustee.
During the settlor’s lifetime, if the trust is revocable, the duties of the trustee are owed exclusively to
the settlor
Since the trust in question did not specify that it was irrevocable, the trust is presumed to be
revocable in Virginia
While a trust is revocable, a trustee may follow the directions of the settlor, even if
those directions would violate the trust terms
while a trustee generally has a duty to follow the terms of a trust, the trustee of a revocable trust may
follow the directions of the settlor, even if those directions would violate the trust terms.
generally a trustee is subject to the prudent investor standard unless
the terms of the trust provide otherwise, the trustee of a revocable trust may follow the directions of the settlor, even if those directions would violate the prudent investor standard
the independence of a trustee from the settlor will not relieve a trustee from
adhering to the terms of the trust or the prudent investor rule.
An exculpatory clause that excuses the trustee from breach of trust is unenforceable to the extent that it
provides immunity for a breach committed in bad faith or with reckless indifference to trust purposes or the interests of the beneficiaries.
a trustee is not a guarantor of
the success of the investments made by the trustee, even in the absence of the grant of absolute discretion as to trust investments.
even if the court determines that the trustee violated the prudent investor rule, the exculpatory clause would
protect the trustee from liability so long as the violation did not result from conduct that was undertaken in bad faith or with reckless indifference to trust purposes or the beneficiaries’ interests
the exculpatory provision, while generally effective to immunize the trustee from negligent conduct that results in a breach of trust, does not protect the trustee from liability for such conduct that was
undertaken in bad faith or with reckless indifference to trust purposes or the beneficiaries’ interests.
Creditors of the beneficiary of a spendthrift trust generally may not reach the interest of the beneficiary until
the beneficiary is entitled to receive a distribution of that interest
a child of the beneficiary who has a judgment or court order against the beneficiary for support is
an exception creditor who may reach the beneficiary’s interest in the spendthrift trust.
although many states classify the recipient of a spousal award as an exception creditor
Virginia does not
If all of the beneficiaries as well as the settlor of an irrevocable noncharitable trust consent to its termination, the court may
enter an order terminating the trust, even if the termination of the trust is inconsistent with a material purpose of the trust.
Although a spendthrift provision in a noncharitable irrevocable trust can constitute a material purpose that prevents the termination or modification of the trust when the settlor does not consent to the termination or modification, when
all of the beneficiaries and the settlor consent to the termination of the trust, the court may order the termination of the trust.
while a trust provision may authorize ways in which a trust may be terminated, a trust provision cannot affect
the power of a court to modify or terminate a trust.
Trustees have a duty to administer the trust and invest trust assets in
good faith, in accordance with its terms and purposes and the interests of the beneficiaries.
To give different beneficiaries successive enjoyment of property, trusts often
give income to one beneficiary and a remainder to another.
A trustee’s duty of impartiality requires that the trustee consider the interests of
both beneficiaries when deciding on trust investments.
Virginia has adopted the Uniform Fiduciary Principal and Income Act (UFPIA), which facilitates the balancing of
interests between income beneficiaries and remaindermen.
The UFPIA gives the trustee power to make discretionary adjustments between
principal and income
In exercising discretion, the trustee must
(1) act in good faith,
(2) administer the trust impartially (to the extent directed under the trust instrument), and
(3) administer the trust in accordance with its terms.
VUTC common law grounds for trustee removal
1) breach of trust
2) failure to cooperate w/ co-trustees
3) lack of fitness
4) persistent failure to administer trust effectively
VUTC other recognized removal grounds, when court finds
1) substantial change in circumstances
2) removal requested by ALL qualified beneficiaries
3) best interest of all beneficiaries
4) not inconsistent with material purpose of trust
5) suitable co-trustee/successor trustee available
