Trusts Flashcards
What are the requirements for a valid trust?
A valid trust has five main elements: (1) intent, (2) identifiable corpus, (3) ascertainable beneficiaries, (4) proper purpose, and (5) mechanics and formalities.
Intent: The settlor must have legal and testamentary capacity. Additionally, the settlor must intend to split legal and equitable title in the subject of the trust and to impose duties on the holder of the legal title. The expression of intent need not be made to the beneficiary, but it must be made when the settlor owns the property such that the trust takes effect immediately. Statements of hope, wish, or mere suggestion are insufficient.
Identifiable Corpus: Ascertainable trust property is required. The settlor must currently own the property.
Ascertainable Beneficiaries: A beneficiary must accept the trust benefits. Beneficiaries may disclaim their interest if they have not accepted any benefits. Beneficiaries must be ascertainable at the time they take the benefits. If the trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or their successors is presumed. At common law, if a private trust exists for the benefit of a class, the class must be reasonably definite. As long as the class is reasonably definite, the trust may authorize the trustee to exercise their discretion in selecting members to be benefited, or may provide that only those who meet certain requirements will benefit. Under the UTC, a settlor may empower the trustee to select the beneficiaries from an indefinite class. Failure to exercise the power gives rise to a resulting trust in favor of the settlor or their successors.
Trust Purpose: A trust purpose is invalid if it is (1) illegal, (2) contrary to public policy, (3) impossible to achieve, (4) intended to defraud the settlor’s creditors or based on illegal consideration.
Trustee: Trusts will not fail for lack of a trustee because a court can appoint one. A person accepts a trusteeship by: (1) signing the trust or a separate written acceptance; (2) substantially complying with the acceptance terms in the trust instrument; or (3) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance. 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) serious lack of cooperation among co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; or (4) a substantial change in circumstances.
Formalities:
Inter Vivos Trust: Inter vivos trusts are created while the settlor is alive either by the settlor declaring themself trustee for another or by the transfer of property to another as trustee. The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee). If a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and manifests trust intent.
Pour-Over Gift: Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust—even an amendable and revocable trust—established during their lifetime. The trust must be clearly identified from language in the will. Under the traditional rule, the pour-over provision is valid if the trust is in existence or executed with the will to be valid. Under the modern view, the pour-over provision is valid as long as the trust is established during the testator’s lifetime.
Testamentary Trusts: Testamentary trusts are created in the settlor’s valid will. Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will.
Secret Trust: In the case of a secret trust, the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else—and relies on the beneficiary’s promise—but the will does not state the trust nature of the gift. If the promise can be proven, a constructive trust is imposed on the property in favor of the intended beneficiary.
Semi-Secret Trust: In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest.
What are the different trusts?
Discretionary Trust: In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary. A beneficiary has nothing to transfer until the trustee decides to distribute money, so there is nothing for creditors to reach. Once the trustee distributes money, the trustee must first make payments directly to the creditors. However, a court can force a trustee to satisfy a judgment or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse.
Spendthrift Trust: In a spendthrift trust, the beneficiary may not transfer their interest. However, once the trustee pays the beneficiary, the beneficiary may transfer the property received. The beneficiary’s creditors cannot reach the beneficiary’s trust interest until income or principal has been paid to the beneficiary. In most states, a settlor-beneficary cannot use a spendthrift trust to protect their own property from their own creditors. However, a growing number of states allow self-settled spendthrift trusts. A beneficiary’s assignees cannot force the trustee to pay them directly. However, the trustee may choose to honor a purported assignment by the beneficiary, but the trustee may recommence payments to the beneficiary at any time, and the beneficiary may withdraw their direction to pay the assignee. Likewise, the beneficiary’s creditors cannot force the trustee to pay them.
Exceptions: A trustee will be required to pay creditors if: (1) the claims are brought by a beneficiary’s child, spouse or former spouse, (2) the claims are brought by the government, or (3) the trustee has failed to make a timely mandatory distribution of income or principal.
Support Trust: A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support. A support trust follows the same rules for creditors as a discretionary trust. A support trust may be mandatory or discretionary. The beneficiary’s interest is not assignable. If the instrument is silent, the standard of support is the beneficiary’s accustomed standard of living.
Note: Creditors of the trustee cannot reach trust property to satisfy their claims.
What are the rules for terminating and modifying a trust?
By the Settlor: Under the UTC, a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. However, some states, even some that have adopted the UTC, follow the traditional rule, which provides that a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust. Other states allow the settlor to revoke an irrevocable trust upon the consent of all living persons with vested or contingent interests.
By the Beneficiaries: A trust may be terminated or modified upon the consent of the settlor (or the settlor’s agent, conservator, or guardian) and all beneficiaries. A trust also may be terminated or modified on the consent of only all beneficiaries (that is, without consent of the settlor), but only if no material purpose of the trust would thereby be frustrated. Under the UTC, a court may modify a trust even without the consent of all of the beneficiaries if (1) the trust could have been terminated had all of the beneficiaries consented, and (2) the interest of a beneficiary who does not consent will be adequately protected.
By the Court: A court may terminate or modify the trust if: (1) the trust could have been modified if all beneficiaries had consented; and (2) the interests of any nonconsenting beneficiaries will be adequately protected. A court may also terminate or modify a trust if (1) unanticipated circumstances threaten the purpose of the trust, (2) continuing the trust would be impracticable or wasteful, and (3) the value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives.
By the Trustee: In some states, a trustee can terminate a trust if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice.
What are the duties the trustee owes to the beneficiary?
Duty to Administer Trust: The trustee has a duty to personally administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries. If a trustee has special skills or expertise, they will be held to a higher standard.
Duty of Loyalty: A trustee owes a duty of undivided loyalty to the trust and its beneficiaries. This means (1) a trustee cannot buy or sell trust assets, (2) a trustee cannot sell property of one trust to another trust, (3) a trustee may not borrow trust funds nor loan their personal funds to the trust (except to protect the trust), (4) a trustee cannot use trust assets to secure a personal loan, (5) a trustee cannot personally gain through their position as trustee, and (6) a corporate trustee cannot invest in its own stock as a trust investment. But it can retain its own stock if such stock was a part of the original trust res when the trust was established.
Duty to Report: A trustee must: (1) provide the qualified beneficiaries with the trustee’s name, address, and telephone number; (2) respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested; and (3) furnish an annual accounting of the trust.
Duty to Separate Trust Property and Keep Records: A trustee may not commingle trust property with their own property or that of another trust. The trustee must also “earmark” trust property by labeling it as trust, rather than individually owned, property.
Duty to Enforce Claim and Defend Trust from Attack: The trustee has a duty to enforce claims of the trust and to defend the trust.
Duty to Preserve Trust Property and Make it Productive: The power to invest is normally implied from the duty to make trust property productive.
What are the rules for trustee investments?
In virtually all states, a trustee’s investment responsibilities are governed by the Uniform Prudent Investor Act (“UPIA”). A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets. Investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust. A trustee must diversify the investments of the trust unless they reasonably determine that the purposes of the trust are better served without diversification.
Trustees with special skills or expertise, or who have represented themselves as having such knowledge, have a duty to use such skills or expertise. A trustee cannot excuse a breach by proving the trustee possesses and exercises in the trust’s private affairs subnormal business judgment.
Delegation: A trustee may delegate investment and management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee must act prudently in: (1) selecting an agent, (2) establishing the scope and terms, and (3) periodically reviewing the agent’s actions.
What are the liabilities of the trustee?
Remedies for Breach of Trust: If the trustee commits, or is about to commit, a breach of trust duties, the court may: (1) enforce specific performance of the trustee’s duties, (2) enjoin the trustee from committing a breach of trust, (3) compel the trustee to pay money or restore property, or (4) suspend or remove the trustee.
Damages to Beneficiaries for Breach: If a trustee commits a breach of trust, the trustee is liable to the beneficiaries for the greater of: (1) The amount necessary to restore the trust property and distributions to what they would have been absent the breach, or (2) the trustee’s profit from the breach.
Remedies for Self-Dealing: In the case of self-dealing, the beneficiary may have a choice of the following remedies: (1) affirm the transaction if the trust profited, (2) set aside the transaction if the trust lost money, and (3) trace profits from the trustee if the trustee profited.
Removal of Trustee: A court may remove a trustee if the trustee’s continuation in office would be detrimental to the trust (taking into consideration both the settlor’s intent and the interests of the beneficiaries).
Contracts on Behalf of Trust Estate: A third party may sue the trustee personally only if the trustee, in entering into the contract, failed to reveal the fiduciary relationship either by indicating their role as trustee in their signature or by referring to the trust.
When is a trustee not liable for breach?
A trustee is not liable to a beneficiary for a breach of trust if: (1) the trustee acted in reasonable reliance on the terms of the trust; or (2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.
Exculpatory clauses are void if they: (1) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference; or (2) appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor (unless the trustee can show that the clause is fair and was adequately communicated to the settlor).
What are the rules for the allocation of receipts and expenses between income and principal accounts?
A majority of states have enacted the Uniform Principal and Income Act (“UPAIA”). This Act, which applies to all trusts and estates unless the governing instrument provides otherwise, gives the trustee or personal representative an adjustment power to reallocate investment portfolio return.
Allocation of Receipts: Ordinary receipts from use or investment of trust property (e.g., rents, interest), cash dividends, proceeds from contract insuring trustee against loss, 10% of payments from a deferred compensation plan, 10% of proceeds received from liquidating assets, and 10% of proceeds received from a working interest are classified as income. Extraordinary receipts, stock dividends, proceeds from a life insurance policy naming the trust or trustee as a beneficiary, 90% of payment from a deferred compensation plan, 90% of proceeds received from a liquidating asset, and 90% of proceeds received from a working interest are classified as principal.
Allocation of Expenses: 50% of regular compensation of the trustee and any person providing investment services, 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests, ordinary expenses, and insurance premiums covering loss of principal are classified as expense. 50% of regular compensation of the trustee and any person providing investment services, 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests, expenses of a proceeding that concerns a principal interest, payments on the principal of a trust debt, estate taxes, and disbursements related to environmental matters are classified as principal.
What are the rules for resulting and constructive trusts?
Resulting trusts arise by implication from the settlor’s conduct. Resulting trusts are of three types: (1) purchase money resulting trusts (i.e., Beneficiary X furnishes consideration for the acquisition of real or personal property, but title is taken in the name of trustee Y), (2) resulting trusts arising on failure of an express trust, and (3) resulting trusts arising from an incomplete disposition of trust assets (that is, excess corpus). The settlor and the settlor’s successors in interest are the beneficiaries.
A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and (1) the trust is void or unenforceable, or (2) the beneficiary is dead or cannot be located. A resulting trust may also apply on failure of a charitable trust where cy pres is inapplicable. In such event, the express trust terminates and the settlor becomes the beneficiary of the resulting trust.
A resulting trust will not be implied where: (1) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed or been completed; (2) the settlor was given consideration for their original transfer in trust; (3) the settlor created the trust for an illegal purpose; or (4) cy pres is applicable in cases of charitable trusts.
A constructive trust is not really a trust but rather is a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of a fiduciary duty. Generally, a mere breach of a promise will not raise a constructive trust. However, a constructive trust will be imposed in the following cases: (1) a fraudulent promise, (2) a breach of promise in a confidential relationship, (3) breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third person, (4) breach of promise by the decedent to devise property to one rendering services in reliance thereon, and (5) breach of promise to the debtor by the buyer at the foreclosure sale to hold the property for the debtor, causing the debtor to forgo bidding at the sale (but in many jurisdictions no constructive trust if damages adequate.
What are the rules for charitable and honorary trusts?
Charitable Trust: A charitable trust must (1) be for charitable purposes, (2) express an intent to create a charitable trust, and (3) have indefinite beneficiaries. Charitable trusts are not bound by the Rule Against Perpetuities and thus may be perpetual. When a charitable purpose selected by the settlor is impracticable, unlawful, impossible to achieve, or wasteful, the court may select an alternative under the doctrine of cy pres, which means “as near as possible,” by ascertaining the settlor’s primary purpose.
Honorary Trust: An honorary or purpose trust is a trust that is not for a charitable purpose and has no private beneficiaries. Under the common law, because there is no human beneficiary to enforce an honorary trust, the trustee is “on their honor” to carry out its terms. However, under the UTC, the trust is enforceable by someone named in the trust instrument or appointed by the court.
