Trusts Flashcards
Traditional v. Modern approach to Trust revocability
Traditional rule presumed irrevocability, Modern trend flipped and presumed revocable
Mandatory v. Discretionary v. Remedial Trust
Mandatory: Trustee must make distributions as outlined in Trust
Discretionary: Trustee has power to make distributions at their discretion (abuse of discretion standard)
Remedial: Legal remedy created by operation of law
A Trustee
holds legal title and has power to manage property (may be bank or company in addition to person)
A beneficiary
holds equitable title to the property, benefits from the trust, and has power to enforce trust instrument
Requirements of an Express Trust
(1) Intent
(2) Property in Trust
(3) A trust purpose (cannot be illegal or contrary to public policy)
(4) Beneficiaries (ascertainable)
Intent of an express trust requires
“trust words” or otherwise clear intent. Can be oral
Exception to oral being allowed:
(1) SoF (conveying real property)
(2) Part of a devise (e.g. Will) - Testamentary trust (must follow ALL will formalities including witnesses)
(3) Minority Jx require writing
Note: Be wary of precatory or ambiguous language
Exception to Property being in a Trust
Pour Over trust (Trust terms in writing at time a Will is executed in which property will pour over into a Trust at decedents death)
Beneficiaries must be
Ascertained or have some clear criteria to determine who the person is
Exceptions:
(1) Unborn children
(2) Class gifts (class must be definite)
(3) Charitable trusts
(4) Indefinite class (e.g. “my friends”) so long as distribution is not required to be equal
Charitable trusts must have
a charitable purpose (e.g. relief of poverty, advancing religion or education, benefitting the community at large or particular segment of the community)
Modern trend is to find charitable trust
The doctrine of Cy Pres allows for
modification of a trust when its charitable purpose is no longer possible
Find Trust’s general charitable purpose and make trust conform as closely as possible to that
If new charitable purpose is impossible (or original purpose was clearly specific), property goes to Resulting Trust for the Testator’s estate
Who has standing to enforce charitable trusts?
Attorney General’s office and Settlor
Declaration of Trust v. Deed of Trust
(1) Settlor declares herself holder of property and serves as trustee
(2) Settlor conveys property to a trustee and settlor does not serve in that role
Resulting Trusts are used when
a trust fails and the Trustee must return property to a Settlor or the Settlor’s estate (goal is to avoid unjust enrichment)
Note: “Gift-over” clause may avoid creation of resulting trust
Purchase-Money Resulting Trust
Person 1 buys property but title is taken in Person 2’s name and Person 2 is NOT the natural object of Person 1’s bounty (not a close friend or relative)
Constructive trusts are used when
a 3rd party takes advantage of the settlor and is used to prevent unjust enrichment
Look out for: Fraud. duress, undue influence, breach of duty, detrimental reliance
Alienability of Trust Property and Creditor’s ability to reach
(1) Beneficiary’s equitable interest in trust property is freely alienable (unless limited by statute) allowing creditors to reach beneficiary’s equitable interest
(2) A creditor cannot reach trust principal or income until such amounts become payable to the beneficiary or the beneficiary can demand payment
Support and Discretionary trusts shield beneficiaries from creditors’ claims by
preventing beneficiary from being able to demand payment ensuring creditors can only reach when the trust makes a payment
Spendthrift Trusts are used to
expressly restrict the beneficiary’s power to alienate their interest (creditors cannot reach until payment is made)
Exceptions:
(1) Spousal or Child support
(2) Creditors who provided basic necessities to beneficiary
(3) Holders of federal or state tax liens
3 Ways of Terminating a Trust
(1) Expiration
(2) Satisfaction of Material Purpose
(3) Unfulfilled material purpose
Unfulfilled material purpose doctrine allows
a trustee to block premature termination of a trust if it is still serving some material purpose
Most commonly seen for:
(1) Discretionary Trusts
(2) Support Trusts
(3) Age-dependent trusts
A settlor may terminate or modify a trust if
the trust is not irrevocable or ALL the beneficiaries consent
If the settlor has died, a trust may be modified if
(1) All beneficiaries agree to modify consistent with the original purpose of the trust, OR
(2) An unforeseen event (or unanticipated change) has frustrated the purpose of the trust - no beneficiary consent required
A trustee may be removed if
the trustee breached a fiduciary duty or grossly mismanaged the property
Trustee may resign with written notice if settlor is alive
Removal likely to be granted if
-Material breach
-Serious conflict between trustee and beneficiary
-Conflict of interest arises
-Trust persistently performs poorly due to trustees actions or inactions
Principal v. Income from Trusts
Traditional Rule: any money generated from trust property was income, and any money generated in connection with a conveyance of trust property was principal
Old Rule: life beneficiary entitled to income, future interests entitled to principal
Modern Approach (UPAIA)
-Focus is on the total return of trust portfolio and trustee can re-characterize and re-allocate items as necessary (so long as reasonable - fair and balanced)
Factors trustee must balance between principal and income
(1) Intent of settlor and language of trust instrument
(2) Nature, duration, and purpose of trust
(3) Identities and circumstances of beneficiaries
(4) Anticipated effect of economic conditions
(5) Anticipated tax consequences
Trustees powers are derived from
trust documents first, then statute or common-law principals
Modern trend: Grant all powers necessary to act as a reasonably prudent person
Duty of Loyalty and Duty of Care are
fiduciary duties owed to trust
Any beneficiary has standing to sue trustee for breach
Duty of Loyalty for a trustee is an
Objective standard (act reasonably)
Self-dealing is a breach of loyalty (always per se)
Even if trust documents permit some self-dealing, still must be reasonable and fair
Conflicts of interest assessed under reasonable and good-faith test
Duty of Care
Subjective standard (act in good faith)
Care of ordinarily prudent person
Any special skills of trustee must be used, and will be held to heightened standard
Trustee has a duty to be impartial
Delegation under Duty of Care
Old Rule: Barred delegating authority
New Rule: Permit delegation though trustee has a duty to oversee
Investments under Duty of Care
Old rule: Severely limited (minimize risk)
Modern Rule: Prudent investor
-Expectation to diversify and spread risk of loss, exercise reasonable care, caution and skill - and measure portfolio’s success as a whole
Administrative duties of a Trustee
(1) Duty to inform beneficiaries about nature of trust property
(2) Duty to account for actions taken on behalf of the trust (report on health of trust portfolio)
Fee Simple Absolute is the largest estate because it can
last forever
Defeasible fee is an interest which can
be cut short (look for conditional language “so long as” “while” “during which time)
Grantor retains possibility of reverter
Fee Simple Subject to Condition Subsequent (FSSCS) is an interest in fee simple which
terminates upon the happening of an event or condition (look for language such as “but if” or “on the condition that”)
Grantor has right of re-entry, must be affirmatively invoked (does not happen automatically)
Life estate is a
present possessory estate that ends at the death of the life tenant (or measuring life for life estate pour aurtrie vie)
Grantor retains right of reversion to life estate (automatic)
Future interests of a Grantor
Possibility of Reverter (for FSD)
Right of re-entry (for FSSCS)
Reversion (for life estate)
A remainder interest is an interest which
is capable of becoming possessory at the natural termination of the prior estate (must be held by transferee)
A vested remainder is
a remainder in an ascertained individual or group with no condition precedent
A vested class subject to open is
a class of people supposed to take and at least one member of the class has vested (is ascertained)
Each successive class member partially divests
A contingent remainder arises when the taker is
either unascertained or subject to a condition precedent
An executory interest may be either
springing (divest grantor), or
shifting (divest grantee)
Class Gifts to classes with right of survivorship means
Generally, if one class member dies that member’s share is automatically re-divided among surviving class members
RST. 3rd issues share of deceased class member to surviving Issue
Approaches to the interest of Issue of a predeceased class member’s future interest vesting
Minority Common law: Survival of child is not essential and deceased grandchild’s estate takes interest
Uniform Probate Code: Future interests under a trust are contingent on beneficiary surviving until the distribution (Estate of pre-deceased class member with no surviving issue therefore takes nothing)
Testamentary Trusts must
be created in writing in a will or document incorporated by reference into a will (must meet will formalities standards)
If a charitable trust fails it will result in
an honorary trust (may last for 21 years bc subject to RAP)
Honorary trust has no human identifiable beneficiaries and are generally for either animals or non-charitable purpose
Lapse of a Gift devised in trust
In most states, anti-lapse statutes do not apply to trusts
Under UPC, anti-lapse is applied to trusts and a substitute gift is created in the decedents of the deceased issue
The duty of impartiality requires a trustee to
treat all beneficiaries (including future and present beneficiaries) equally and not engage in favoritism
Allocation of income and principal in regards to fees
Generally split fees or costs between income and principal of trust, but ordinary expenses are charged to income generated while extraordinary expenses should be charged to the principal
When a trustee breaches their duty of loyalty / duty against self-dealing beneficiaries of the trust can
sue for either rescission of the sale/transaction or damages
Under the UPIA, whether a trustee has breached their duty of prudent investing considers 4 factors which are
(1) Distribution requirements of the trust
(2) General economic conditions
(3) Role that investment plays in relationship to trust’s overall investment portfolio (how substantial is the investment) and
(4) Trust’s need for liquidity, regularity of income, and preservation or appreciation of capital
A vested remainder accelerates into possession as soon as
the preceding estate ends for any reason, such as the disclaiming of the estate by its holder (provided no one would be harmed by making a distribution to them earlier than it would have otherwise been)
Prudential duties of a trustee include
(1) Prudent Investor Rule (reasonable care, caution)
(2) Duty to diversify
(3) Duty to make property productive (e.g. rent Trust property)
(4) Duty to be impartial
(5) Allocate principal and income
Support Trusts may be used to provide
the beneficiary with “necessities”
Typically interpreted as more than just bare essentials, and something things that maintain the standard of living for the beneficiary
A court may modify the terms of a trust that relate to the management of trust property if
continuing the trust on its existing terms would be impracticable, wasteful, or impair the trust’s administration
Must future beneficiaries (e.g. children of a settlor who take distribution after death of other parent) be alive at the time of distribution?
Under the common law: children must survive to the day of distribution, and failure to do so results in issue of the future beneficiary taking nothing
Under the UPC/modern approach: issue of pre-deceased future beneficiary would have a right to their parents’ share of class gift
A power of appointment enables the holder to direct a trustee to
distribute some or all of the trust property without regard to the provisions of the trust
A special power of appointment allows the donor to specify certain individuals as
the objects of the power, to the exclusion of others
Note: Special powers of appointment are strictly limited to the permissible objects (as opposed to general powers of appointment)
In some jurisdictions, the surviving spouse can set aside inter vivos transfers made by the decedent during marriage, without spousal consent, if
the decedent:
(1) initiated the transfer within one year of her death and
(2) retained an interest in the property (e.g. power to revoke) or received less than adequate consideration
When one with a power of appointment makes an appointment that exceeds the grant given to him,
other valid appointments are not invalidated, but the property or interest that was invalidly appointed passes to the “taker in default of appointment”
Note: Thus invalid appointment ONLY affects the invalid portion
When a donee of a special power of appointment fails to exercise the power, the property or interest passes to
the takers in default of appointment as specified in the trust instrument
IF not specified in trust instrument, passes to the permissible appointees (who it COULD have passed to had the powers of appointment been exercised, absent intent to the contrary
