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Trusts Flashcards

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1
Q

Who is a trustee and what title in property do they have? To whom do they owe duties?

A

A trustee is one to whom a grantor grants legal title to property. They owe fiduciary duties to beneficiaries.

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2
Q

Who is a beneficiary in Trust law? What do they enforce?

A

One who holds equitable/beneficial title to trust property.
- The benes enforce fiduciary duties.

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3
Q

What are the elements needed to establish a Trust’s validity?

A

(1) Capacity (2) Intent; (3) Identifiable Corpus (trust property); (4) Ascertainable/definite Beneficiaries (can’t have sole ttee be sole bene); (5) Proper Purpose; (6) Formalities and Mechanics.
- A trust will not fail for lack of a trustee.

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4
Q

When do trust beneficiaries need to be identified? May classes be used? What discretion may trustees be given in these circumstances?

A

Beneficiaries do not need to be identified at the time a trust is created, but must be susceptible of identification by the time their interests are to come to enjoyment.
Trust beneficiaries may be a class, so long as the class is sufficiently definite. In this case, the settlor can give the trustee discretion to select class members as long as the class is REASONABLY DEFINITE. If it is too broad, the trust will be invalid to the extent that this affects it.

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5
Q

What Intent is required for Trust formation?

A

Need:
- Intent to split legal and equitable title.
- Intent to impose enforceable duties on holder of legal title.
- A present intent to create a trust.

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6
Q

What formal words are required for the creation of a trust?

A

No formal words are required. You don’t even technically need to call it a trust.

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7
Q

Is a promise to create a trust in the future enforceable?

A

Unless there is a contract, it is not enforceable (need mutual assent and consideration).

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8
Q

What effect does precatory language have on trust creation?

A

Precatory language (expression of hope, wish, or suggestion) generally does not create a trust.

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9
Q

What are the rules for ascertainability of beneficiaries at the time of trust creation (EX: class gifts)?

A

Beneficiaries may be unascertainable when the trust is created but must be ascertainable when the property is to be distributed.

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10
Q

For what purpose(s) may a trust be created?

A

A trust may be created for any purpose that is not illegal or against public policy.

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11
Q

What is a declaration of trust?

A

The creation of an inter vivos trust in which the settlor and the trustee are the same person.

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12
Q

What is a Transfer/Conveyance in Trust?

A

The creation of an inter vivos trust in which the settlor transfers legal title to someone else.

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13
Q

What is a Secret Trust?

A

The settlor agrees with Will beneficiary that the beneficiary will hold property in trust for someone else.
- The Will does not state the trust nature of gift.
- Courts allow trust benes to present extrinsic evidence and seek a constructive trust remedy.

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14
Q

What is a Semi-Secret Trust?

A

A Will makes a gift in trust but fails to state the beneficiary.
- This will not create a trust because there is no ascertainable beneficiary.

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15
Q

What are Discretionary Trusts? What does this mean for creditors?

A

A trustee can determine how much the beneficiary receives.
The beneficiary has nothing to transfer until the trustee decides to distribute something, so there is nothing for the creditors to reach (exceptions for child and spousal support).

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16
Q

What is a Spendthrift Provision?

A

A provision that makes it so that a beneficiary cannot transfer an interest in the trust (exception for children and spousal support).
- Trustee can pay for things directly.
- Creditors cannot attach to the beneficiary’s interest.

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17
Q

Can a settlor protect their own property from their own creditors with a spendthrift trust (self-settled trusts)?

A

Generally no, but some states allow for this.

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18
Q

What are Support Trusts?

A

The use of the trust property is limited to the beneficiary’s support.
- May be mandatory or discretionary.
- Impliedly spendthrift.

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19
Q

What level of support is presumed with a Support Trust when the instrument does not specify this?

A

It will be the lifestyle to which the beneficiary is accustomed.

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20
Q

Is a silent trust presumed to be revocable or irrevocable??

A

Under modern law, a settlor may modify or revoke a trust for any reason unless the trust instrument expressly states that it’s irrevocable.

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21
Q

What power do the beneficiaries have to modify a trust?

A
  • When benes and settlor agree, modification is permitted.
  • Benes may modify without settlor consent if (1) all beneficiaries agree and (2) the changed would not upset a material purpose of the trust.
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22
Q

For what reasons may a court modify or terminate a trust?

A
  • The trust’s purposes are accomplished, illegal, or impossible.
  • Unanticipated circumstances arise.
  • The value of the trust is too low.
  • Some states: fix scrivener’s errors shown by clear and convincing evidence.
23
Q

When may a trustee modify a trust?

A
  • Terminate an uneconomic trust.
  • Combine or divide trust (decanting).
24
Q

What are the sources of trustee powers?

A
  • Express powers granted by the settlor in trust instruments.
  • Powers provided by state statute.
  • Powers granted by the court.
  • Implied powers necessary or appropriate to carry out the terms of the trust.
25
Q

What is the majority rule on how many trustees are needed to exercise power?

A

A majority of trustees are required under modern law.

26
Q

What is the standard of care when a trustee is exercising power under a Discretionary trust?

A

The trustee is only liable for an abuse of discretion or the failure to exercise reasonable discretion (in the case of an omission).
- There’s no such thing as absolute discretion (need enforceable duties to have a trust.

27
Q

What are a trustee’s general duties?

A
  • To administer the trust according to its terms.
  • Duty of loyalty (no self-dealing). NOTE: good faith and reasonableness are not relevant.
  • Duty of accounting (keep records and render accountings to beneficiaries)
  • Earmark trust property
  • Segregate trust property
  • Duty to invest (+ Duty to diversify)
  • Duty to review trust property (especially for new successor trustees)
    Duty of Impartiality (administer trustee exclusively for beneficiary’s interest; must act impartially and not favor one beneficiary over another)
  • Duty to Monitor (other trustees)
28
Q

What is the Prudent Investor Rule? What approach is taken?

A

A trustee must invest in the same manner as a prudent investor.
- Even statutes that seem to say something else are considered to mean this.
- Portfolio Approach: View investments together in the context of the entire trust portfolio and part of an overall investment strategy.

29
Q

What factors are considered when making investment decisions?

A
  • Trust purposes
  • Economic conditions
  • Tax consequences
  • Role of each investment in the portfolio
  • Income and appreciation
  • Other resources available to the beneficiaries.
  • Need for liquidity, regularity of income, or preservation of capital
  • Asset’s special relationship to beneficiary.
30
Q

If a trustee has higher skills, is a different standard applied to them? What about trustees with lower skills?

A

A trustee with higher skills has the duty to use those skills.
Trustees with lower skills must comply with the prudent investor rule.

31
Q

May a trustee delegate investment and management functions?

A

Yes, a trustee may delegate investment and management functions if a reasonable trustee with comparable skills would properly delegate.

32
Q

If a delegated agent of a trustee acts imprudently, when can the trustee be protected from liability?

A

A trustee is protected from liability if they acted prudently in:
- Selection the agent
- Establishing the scope and terms of the delegation.
- Periodically reviewing the agent’s actions.

33
Q

What types of damages may a trust beneficiary recover from a breaching trustee?

A
  • Lost profits
  • Depreciation in value of trust property
  • Trustee’s profits from the breach
34
Q

What are the remedies for self-dealing? What options does a beneficiary have?

A
  • Affirm the transaction if the trust profited.
  • Set aside the transaction if the trust lost money (force ttee to return property)
  • Trace profits from trustee and get those back from the trustee (another situation where the transaction was a good one)
  • Remove trustee from office
35
Q

How may a trustee be relieved of liability for their breach of a duty?

A
  • They reasonably relied on the terms of the trust.
  • The beneficiaries consented or ratified the transaction.
  • The settlor or instrument allowed the conduct.
  • An exculpatory clause relieves the trustee from liability for breaches (only exculpates negligent conduct–not bad faith, abuse of a confidential relationship, etc.)
36
Q

What rule(s) apply for the liability of trustees for their co-trustees breaches of duty?

A

A trustee will not be liable for the acts of co-trustees if the trustee did not join in the action and exercised reasonable care in preventing the breach or compelling the co-trustees to redress it.
- Need to monitor the other trustees.

37
Q

What are the grounds for removing a trustee from office?

A

Options:
- Incompetence
- Unfitness
- Serious breach of duty
- Serious conflict of interest
- Insolvency
- Extreme hostility between the trustee and beneficiaries
- Refusal to post bond
- Refusal to account
NOTE: Pay attention to the trust instrument’s instructions (settlor may have recognized one of these)

38
Q

Is a trust a legal entity? What does this mean for lawsuits?

A

No.
- Cannot sue. Always need to sue in a trustee’s representative capacity.

39
Q

What personal contract liability do trustees have for contracts that they’ve signed while carrying out their representative capacity?

A

Trustees are personally liable for contracts they sign, but can avoid liability by a contract provision (best option) or indicating their role as trustee by signature (some states have this presumption).

40
Q

What result when a trustee has to pay a judgment as a result of personal liability for contracts on behalf of the trust?

A

A trustee is entitled to indemnification or reimbursement from the trust.

41
Q

What tort liability for trustees?

A

Trustees are liable if personally at fault (most states don’t allow for respondeat superior application to trusts).

42
Q

What is the Uniform Principal and Income Act? What issue does it address?

A

It addresses the issue of where to allocate incoming funds (to income vs principal beneficiaries) and how to pay expenses (again, income vs principal).
The UPIA gives a lengthy description of how to allocate principal and income. The settlor can alter and the trustee has adjustment powers (EX: long-term leases and not enough income to support income beneficiary).
MONEY RECEIVED:
- Money from selling asset –> principal.
- Rent –> income.
- Interest on trust investments –> income.
- Eminent domain awards –> principal.
- Insurance proceeds if principal is destroyed –> principal.
- Cash stock dividend –> income.
- Stock dividend, stock split, or shares received because of reorganization –> principal.
- Wasting assets (natural resources, intellectual property, etc.) –> 10% income, 90% principal
- Sale of unproductive property –> principal.
- Business –> use “generally accepted accounting principles.”
ALLOCATION OF EXPENSES:
- Ordinary income tax –> income.
- Capital gains tax –> principal.
- Ordinary repairs –> income.
- Extraordinary repairs and capital improvements –> principal.
- Depreciation –> income.
- Trustee compensation and accounting expenses –> 50% income; 50% principal.

43
Q

When is a trustee unable to exercise their adjustment power under the UPIA?

A
  • They’re prohibited by the trust instrument.
  • The trustee is also a beneficiary.
  • It would cause adverse tax consequences.
44
Q

What is a Unitrust? What are its benefits?

A

Instead of being entitled to income, the current beneficiary is entitled to a certain percentage of the trust each year.
This trust is less complicated (compared to the UPIA) and aligns everyone’s goal (make the trust more valuable). Becoming more popular than P&I (Principal and Income) trusts.
- Can be stated in the trust instrument or computed in a certain way (or statute?).

45
Q

What purposes are charitable for purposes of charitable trusts?

A

Any goal that is beneficial to the community at large (determination made by the court based on a community standard of what is considered charitable–for religion the standard is whether it’s against the law or public policy). The settlor must be sufficiently altruistic (can’t be JUST to benefit your family–though they can also be benefited). EX:
- Relief of poverty.
- Advancement of education, science, or art.
- Advancement of religion.
- Promotion of health.
- Governmental purposes such as parks and museums.

46
Q

What is the Cy Pres Doctrine?

A

If a charitable purpose cannot be carried out, a court may select an alternative by ascertaining the settlor’s primary purpose (equitable approximation).
- Usually won’t go back as a reverter.

47
Q

How does the Rule Against Perpetuities apply to charitable trusts?

A

The RAP doesn’t apply (even at common law!), so they can go on in perpetuity.

48
Q

Who enforces charitable trusts?

A

The state attorney general.

49
Q

What are Honorary/Purpose trusts?

A

This is a trust that doesn’t have human beneficiaries, but it has a charitable purpose. EX:
- Pet trusts (widespread acceptance)
- Gravestones
- Maintain a monument
NOTE: depends on state

50
Q

What intent is required for the creation of a charitable trust?

A

General charitable intent (specific charitable intent would prevent the application of cy pres).

51
Q

What are the types of trust that arise by operation of law?

A
  • Resulting Trust: Arises by implication from settlor’s conduct. The beneficiaries are the settlor or the settlor’s successors in interest (if the settlor has died). The purpose is to do what the settlor would have done.
  • Constructive Trust: This is not a trust, but rather an equitable remedy to prevent unjust enrichment resulting from wrongful conduct. It must be requested as a remedy in a court action. The requesting party must show that particular property was involved in improper conduct. The constructive trustee’s only duty is to give legal title back to the person who would have owned it but for the wrongful conduct.
52
Q

What are the grounds to impose a constructive trust?

A

Fraud, duress, mistake, homicide (in states that lack a slayer statute), breach of fiduciary duty, abuse of a confidential relationship, and breach of promise.

53
Q

What is Merger of Title? How can it be prevented?

A

Merger of Title will result in the termination of a trust when the sole trustee is also the sole beneficiary.
- NOTE: This does not occur when there are remainder beneficiaries (EX: a settlor is the sole trustee and the current beneficiary of a revocable trust but there are remainder beneficiaries after the settlor dies).

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