Trusts Flashcards
trust definition
a formal arrangement intentionally created by a settlor under which a trustee manages property for the benefit of a beneficiary
types of express trusts
charitable: set up for a charitable purpose and it typically has a large class of beneficiaries
private: non-charitable purpose
kinds of interests typically found:
1)right to receive income from the trust
2) principal of the trust
constructive and resulting trusts
an equitable remedy that arises by operation of law
hallmark of the trust arrangement
trust holds legal title but not equitable title
trustee’s creditors
personal creditors of trustee cannot reach trust assets
creditors of the trustee in their fiduciary capacity cannot reach personal assets
caveat: if breaches fiduciary duties, personal assets are at risk
what law is applied
VA law applies
follows the Uniform trust code with a few modifications
Knowledge under the UTC
A person has knowledge of a fact if:
1) she has actual knowledge of that fact
2) she has received notice/notification of that fact or
3) based on all the facts and circumstances known to the person at the relevant time, she has reason to know that fact
corp/entity has knowledge if the relevant info is:
1) received by an employee having responsibility to act for the trust, or
2) would have been brought to the employee’s attention if the corp exercised reasonable diligence
qualified beneficiary under the UTC
a living beneficiary who is likely to be affected by a change to the trust because the beneficiary is:
1) a permissible distributee of trust income or principal, or
2) would be a permissible distributee if either the interests of other qualified beneficiaries terminated or the trust itself terminated
representation under the UTC
when a beneficiary is not capable of acting on their own behalf, must act through a representative
there cant be a conflict of interest
UTC allows for virtual representation
UTC as default rules
they apply in the absence of some provision to the contrary in the trust
if conflict: trust instrument controls
there are certain rules that cannot be modified by the trust instrument
relationship between UTC and common law
UTC does not displace the rules about trusts under CL or equity
continue to apply as long as there is no conflict
if conflict: UTC controls
choice of law
the law of the jurisdiction designated in the trust unless the designation is contrary to public policy of the jurisdiction having the most significant relationship to the matter
examples:
1) laws on self-settled spendthrift trusts
2) privileged status of claims for child support against spendthrift and discretionary trusts
3) inheritance rights of spouse under rules for elective share/ augmented estate
five methods of creating a trust
1) a transfer of property by the settlor to another person as trustee during the settlor’s lifetime
2) a declaration by the owner of property that the owner holds identifiable property as trustee
3) Testamentary trust:a transfer of property by the settlor under the settlors will that takes effect upon settlors death
4) exercise of a power of appointment in favor of a trustee
5) a petition by an interested party to a circuit court
elements of a trust
1) there must be a settlor with capacity to make a trust
2) settlor must have the intention of creating a trust
(doesnt have to be written)
cant be through fraud etc.
3)trust must have a purpose that is lawful, not contrary to public policy, and possible to achieve
4)trust must have one or more beneficiaries
5)trust must have a trustee
how does a trustee accepts the role
1)substantially complies with the terms of the trust regarding acceptance, or
2) the trustee accepts the trust property, exercises trust powers, and performs trust duties
how can a trustee be removed
1) by courts own motion, or
2) by request for a breach of trust, lack of cooperation, unfitness, or a substantial change in circumstances
trusts not required to have ascertainable beneficiaries
charitable trust
trust for care of an animal
certain trusts permitted by UTC
Charitable trust
trust for the:
1)relief of poverty
2) advancement of education or religion
3) promotion of health
4) promotion of a gov or municipal purpose, or
5) promotion of other purposes the achievement of which is beneficial to the community
Trust for care of an animal
UTC allows a settlor to establish a trust for the care of an animal that was alive during the settlor’s lifetime
cannot put excessive amounts in the trust- will be distributed out
UTC time when ascertainable beneficiary not necessary
UTC allows for the creation of a trust for a non-charitable purpose that does not have a definite ascertainable beneficiary or for a non-charitable purpose to be selected by the trustee
cannot last longer than 21 years
enforced by someone:
1)named in the trust, or
2) appointed by the court
cannot have excessive amounts
Rule against perpetuities
Uniform statutory rule against perpetuities: an interest is valid if it either:
1) satisfies the CL version of the rule, or
2) actually vests or lapses unvested within 90 years of when the interest is created
interest is created when the trust becomes irrevocable
trusts that are exempt:
1)charitable trusts
2) cemetery trusts
3) perpetual-care funds, and
4) employer provided retirement plans
opting out:
can write in trust instrument for any personal property but not real property
spendthrift trusts
contains a spendthrift clause that prohibits a beneficiary from alienating their interest in the trust
prohibits both the voluntary and involuntary alienation of the trust interest
doesnt prohibit a creditor from reaching the money already in the beneficiary’s hand
extends only to beneficiary who is not also the settlor of the trust
exceptions to spendthrift protection
exception creditors:
1) a child of the beneficiary who has a judgment or order against the beneficiary
2) a judgment creditor who has provided services for the protection of the beneficiary’s interest in the trust
3) government: except special needs/supplemental needs trusts
Overdue distributions
due under the terms of the trust but trustee doesnt make it within a reasonable time after the designated distribution date
treated as an asset of the beneficiary
discretionary
trust that provides for distributions to be made at the discretion of the trustee
cant compel distributions to be made, but if not a spendthrift can garnish any distributions that are made
protection of settlor from creditors under a revocable trust
while alive, treated as though they are the owner of whatever assets are in the trust
after death: if there is not enough money in probate, trust assets can still be reached by creditors and are available for the costs of settling the settlor’s estate and to satisfy allowances to survivors
protection of settlor from creditors under irrevocable trust
general rule: if settlor makes herself the beneficiary of an irrevocable trust, the settlor’s creditors can reach the assets up to the maximum amount that could be distributed for the settlor’s benefit
Qualified self-settled spendthrift trust
exception to settlor rule of creditors under irrevocable trusts
four reqs:
1) trust is irrevocable
2) trust incorporate VA law and includes an otherwise valid spendthrift clause
3) A VA trustee who is independent of the settlor has sole discretion as to whether to distribute and
4) at least one other beneficiary is entitled to receive distribution of income or principal during the settlor’s lifetime
who is not independent:
1)settlor
2)settlor’s spouse, children, siblings
3) an employee of the settlor, and
4) any business entity with respect to which the settlor has 30% or more of the voting power
what is protected:
1) any assets are protected from the claims of a future creditor
2) those assets are also protected from the claims of a current creditor for which no collection action is initiated within five years of the transfer, unless the creditor can show that the settlor’s transfer of the assets into the trust was made with the intent to delay, hinder, or defraud the settlor’s creditors.
examples of will substitutes
revocable trust
life insurance
bank accounts
statutory trusts
revocable trusts
any inter vivos trust created on/after July 1 2006 is a revocable trust unless expressly stated otherwise
not subject to same reqs as a will but do have to have mental capacity and it is treated as part of the augmented estate
pour over trust: allowed as long as identified in the will and terms are set forth in a written instrument
settlor control of revocable trust
settlor has extensive control: can change or revoke up until death
trustee owes fiduciary duties to settlor not beneficiary
amending/revoking a revocable trust
if made in substantial compliance with the reqs of trust instrument
or by any method that manifests intent by clear/convincing evidence
divorce/annulment: same rules as wills
challenges to validity of revocable trusts
may challenge no later than the earlier of:
1) 2 years after the settlor’s death, or
2) 6 months after trustee sends the person a copy of the trust
if trust is declared invalid, and distributions received have to be returned
life insurance
can be held in a trust with the trustee as the beneficiary
any spendthrift protection protects the trust as well
bank accounts
joint saving accounts and joint checking accounts are presumed to be survivorship accounts unless clear and convincing evidence to the contrary
P.O.D accounts: money goes to designated person after death
statutory trsts
Uniform transfer to minors act: a gift to a custodian for a minor creates a statutory trustL custodian becomes the trustee
Uniform custodial trust act: holds assets for a beneficiary in the event of the beneficiary’s incapacity
general fiduciary duties and obligations of the trustee
1)administer the trust and invest the trust assets in good faith in accordance with the terms and the purposes of the trust and in the interest of the trust beneficiaries
2) must comply with the UTC, UPIA, and UP and Income Act
3) fundamental duties of loyalty, prudence, and impartiality
4) permitted to delegate powers and duties: if in good faith, not liable for the acts of the agent
Trustee duty of loyalty
requires the trustee to administer the trust solely in the interest of the beneficiaries
if operates under a conflict of interest in a transaction involving trust assets, transaction is voidable by the beneficiary
presumed conflict of interest if:
1)The trustee’s spouse;
2)The trustee’s descendants, siblings, parents, or their spouses;
3)An agent or attorney of the trustee; or
4)A corporation or other person or enterprise in which the trustee has an interest that might affect the trustee’s best judgment.
**can be validated if it is authorized by the terms of the trust, a court order, the consent of the beneficiaries
prohibits the trustee from commingling trust property with any property of another trust or trustee’s own property
trustee’s duty of impartiality
address the divergence interests among the beneficiaries- must consider all of them
Uniform Principal and Income Act: balancing of interest between income and principal beneficiaries
unitrusts: distributions will be determined as a percentage (between 3 and 5%) of total trust assets without regard to distinction between income and principal
allocation of trust expenses:
Income:
1)half the trustee’s commissions
2)half total expenses
3)ordinary expenses such as interest payments
Principal:
1)half commissions
2) half total expenses
3) payments on mortgage principal
4) taxes, and
5) any disbursements related to environmental matter
duty of prudence
requires the trustee to administer the trust as a prudent person would
if has special skill- should use it
Uniform prudent investor act: default rules
have to invest within reasonable time: 4 months
establishing an investment strategy
diversify unless better served without it or terms of the trust allow opposite
can delegate
safe harbor for small trusts: conclusively presumed to have been diversified
multiple trustee
multiple trustees typically act by unanimous decision, if disagreement- majority
may be responsible for action of another trustee:
1)each trustee has a duty to exercise reasonable care to prevent another from committing a serious breach of duty
2) in the event of a breach, each trustee has a duty to make the breaching trustee remedy the breach
following directions as a trustee
revocable: trustee may follow directions of settlor even if they would violate the terms
trust director: power to give directions to the trustee- has duties
protects trustee from liability absent willful misconduct or gross negligence
available remedies against a trustee
a court may:
1)issue an injunction to compel trustee to perform their duties
2) injunction to prohibit trustee from committing a breach of trust
3) order the trustee to pay money damages, restore property, or otherwise redress the breach
4) suspend or remove the trustee, or
5) reduce or deny compensation to the trustee
money damages that the trustee would be liable to pay
the greater of:
1) the amount needed to restore the value of the trust property or
2) the amount by which the trustee profited from the breach
damages cannot be speculative
trustee obtaining a contribution from a co-trustee
to obtain, co-trustee must also be liable from the breach
cannot obtain if trustee seeking contribution:
1) was substantially more at fault
2) committed the breach in bad faith, or
3) committed the breach with reckless indifference to the purposes of the trust or the interests of the beneficiaries
third party liability for trustee’s breach
generally are protected if third party acts in good faith and without knowledge of the breach
3rd party not required to determine:
1)scope of the trustee’s powers, or
2) propriety of the trustee’s actions
trustee liability even if there is not a breach of trust
is liable for any improper profit
but is not liable for a loss or depreciation in value of trust
transferring the principal place of trust administration
may transfer without judicial intervention, except a testamentary trust
must notify all qualified beneficiaries at least 60 days before initiating or dont need court approval if no beneficiary objects
terminating the trust without court approval
may do so if the trustee determines that the value of the trust does not justify the cost of trust administration
3 reqs:
1) total value cannot exceed 100,000
2) trustee must give notice to the qualified beneficiaries
3) trustee must distribute the trust property in a manner consistent with the purposes of the trust
combination and division of trusts
may combine or divide without court approval
terms dont have to be identical but it cannot materially impair the rights of any beneficiary
must give notice to the qualified beneficiaries
may a trustee preserve trust assets without accepting the trustee designation
yes
may take steps to protect the trust assets and within a reasonable time send notice rejecting the trustee position
notice must be sent to:
1) settlor if alive/competent
2) a qualified beneficiary
resignation of a trustee
terms of trust instrument control
if they dont say anything: can resign by giving 30 days notice
notice given to
1) settlor if still alive
2) co-trustees and all qualified beneficiaries
does not eliminate liability
must remain until successor is in place
documents prepared and provided by trustee
1)annual report: covers trust property, liabilities, receipts, disbursements, compensation
2) notice of a change in the method/rate of trustee’s compensation
3) a copy of the trust instrument at a beneficiary’s request
effect of SOL on beneficiaries bringing claims against trustees
1)if report adequately discloses the existence of a potential claim , have 1 year after the filing of the report
2) absence of a report, 5 years after the earliest of:
i) removal, resignation, death of trustee
ii) termination of the beneficiary’s interest in the trust
iii) termination of the trust
*** in the case of fraud, action is timely brought within 2 years of discovering fraud even if falls out of other SOL situations
notice of distribution plans on termination
trustee may give notice of the termination
trustee send a proposed plan of distribution to the beneficiaries that notifies them of their right to object and the time for making the objection
trust vacancies/appointments
terms of the trust controls
otherwise:
1)non charitable trusts- unanimous choice of qualified beneficiaries, or by court if not unanimous
2)charitable trusts: filled by the person chosen by the charitable beneficiaries
consent to breach
trustee can be relieved of liability if beneficiary does any of the following:
1) consents to the conduct
2) releases the trustee from liability or
3) ratifies the transaction
relief is nullified by:
1) improper trustee conduct, or
2) the beneficiary not having knowledge of the material facts relating to the breach
informal settlements
beneficiary may enter into a binding non-judicial settlement involving any trust matter
cannot violate a material purpose of the trust
general rule for judicial interpretation of a trust
terms of the trust instrument are controlling
the court is to determine the intent of the settlor and look to the plain language of the trust instrument
court modifying/terminating a trust of settlor and all beneficiaries consent
may do it even if it is inconsistent with a material purpose of the trust
court modifying/terminating if settlor does not consent but all beneficiaries consent
termination: court can terminate the trust if continuing the trust is not necessary to achieve a material purpose
modification: can if the modification is not inconsistent with a material purpose
both cases: spendthrift is considered a material purpose of a trust
court modifying/terminating if not all the beneficiaries consent
can if determines that the interests of the non-consenting beneficiaries will be adequately protected:
1) when unanticipated circumstances arise
2) continued administration of trust becomes uneconomic
3) necessary to achieve the settlor’s tax objectives, or
4) necessary to reform the trust to conform to the settlor’s intention: even if language unambiguous if their is a mistake of fact/law
cy pres
modification/termination of a charitable trust
when the original charitable purpose becomes unlawful, impracticable, impossible or wasteful court may direct the trust assets to be applied/ distributed in a manner consistent with the settlor’s charitable purpose
what happens if a charitable trusts would result in distribution a non charitable beneficiaries
provision is enforced only if, at the time the provision becomes effectiveL
1) trust property is to revert to the settlor and the settlor is still alive, or
2) fewer than 21 years have passed since creation of the trust
protecting trustees for contracts
a trustee properly entering into a contract in her fiduciary capacity is not personally liable on the contract
only applies if contract discloses that the trustee is acting in a fiduciary capacity
protecting trustees for torts
A trustee is not personally liable for torts committed in the course of trust administration or for obligations arising from ownership of trust property, provided the trustee is not personally at fault
protecting trustees for partnership investments
A trustee who, acting in her fiduciary capacity, invests as a general partner in either a general partnership or a limited partnership, is not personally liable to third parties on partnership contracts if the trustee’s fiduciary’s capacity was disclosed in (i) the contract or (ii) a statement filed under the Uniform Partnership Act.
**This immunity does not apply if either the trustee or a close relative of the trustee holds a separate interest in the same partnership in a non fiduciary capacity.
If the trustee of a revocable trust holds an interest as general partner, the settlor may be treated as if he or she were a general partner for purposes of liability.
exculpatory clauses
are unenforceable to the extent that it purports to relieve the trustee from liability for a breach of trust committed in bad faith or with reckless indifference to the purposes of the trust
also unenforceable if it is the result of the trustee’s abuse of a fiduciary or confidential relationship with the settlor- presumed unless trustee proves adequate communication to settlor
common law grounds for removing a trustee
1) trustee breach of trust
2) inability to cooperate with co-trustees
3) lack of fitness, and
4) persistent failure to administer the trust effectively
statutory grounds for removing a trustee
1)substantial change in circumstances or there has been a request to remove by qualified beneficiaries
2) removal would best serve the interests of all trust beneficiaries
3) removal would not be inconsistent with material purpose
4) there is a suitable co-trustee or successor available
reporting and disclosure rules that apply to all trusts
1)The trustee must keep qualified beneficiaries reasonable informedabout the administration of the trust and material facts necessary for the protection of their interests.
2)Unless unreasonable under the circumstances, a trustee must respond promptly to requests from beneficiaries for information regarding trust-administration matters.
3) Upon request of a beneficiary, the trustee must promptly furnish the beneficiary a copy of the trust instrument
4) The trustee must notify qualified beneficiaries of any change in the method or rate of the trustee’s compensation
reporting and disclosure rules that apply to new trusts
july 1, 2006
1)Within 60 days of accepting trusteeship, the trustee must give the qualified beneficiaries notice of the trustee’s acceptance and certain contact information.
2)Within 60 days of learning that an irrevocable trust has been created or that a formerly revocable trust has become irrevocable, the trustee must notify the qualified beneficiaries of:
i)The existence of the trust;
ii)The identity of the settlor;
iii)The right to request a copy of the trust instrument; and
iv) the right to receive annual reports.
3)The trustee must furnish to permissible distributees and, upon request, to other beneficiaries, reports of trust receipts and disbursements, trust assets (including fair market values), trust liabilities, and the amount of the trustee’s compensation.
waiver by beneficiary
A beneficiary can waive his or her right to any of the information that is required to be disclosed or provided.
