Trusts Flashcards
A trust is ____
a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.
The legal interest is held by ___
the trustee who has the responsibility of
ownership.
The trustee receives ____ from the legal title (except possibly a fee for acting as trustee)
no benefit
A trustee is a fiduciary and thus:
(1) must deal with the property with reasonable care;
(2) must maintain the utmost degree of loyalty; and
(3) is personally responsible if their conduct falls beneath required standards
The equitable or beneficial interest is held by ____
the beneficiary who receives the benefits of ownership as set forth in the trust.
The settlor is ___
the person who causes the trust to come into existence by supplying the initial trust property. Other terms for the settlor include trustor, grantor, and donor.
A trust must have ____
trust property, that is, the settlor must supply property so the trustee has property over which to exercise duties. Other terms for trust property include the principal, corpus, trust estate, and res.
The settlor creates a trust by ___
transferring legal title to the trustee (for example, a person with good investment skills) and equitable title to a beneficiary (a person or charity deserving of a windfall).
The trustee manages and invests the property in accordance with ___ duties and the _____ as contained in the trust instrument.
legal; settlor’s instructions
When the trustee’s duties are completed, the trust ____
terminates and the trustee distributes any remaining property to the remainder beneficiaries
PURPOSES AND USES OF TRUSTS
- Providing for and Protecting Trust Beneficiaries
- Flexibility of Asset Distribution
- Protection Against Settlor’s Incompetence (may be a better option than an expensive and embarrassing guardianship)
- Professional Management of Property
- Probate Avoidance
- Tax Benefits
BASIC CLASSIFICATION OF TRUSTS
Express Trusts and Trust Created by Operation of Law
Express trusts are created by ____
the express intention of the settlor.
Express trusts fall into two categories distinguished primarily by the identity of their beneficiaries:
- Private: private beneficiaries (certain ascertainable persons)
- Charitable: charitable beneficiaries (indefinite class of persons or the public in general)
Types of Trusts Created by Operation of Law
- Resulting Trusts
- Constructive Trusts
Resulting Trusts
Resulting trusts arise from the presumed intention of the owner of the property.
Constructive Trusts
Constructive trusts are an equitable remedy used to prevent unjust enrichment.
The first step in any trust question is to ____
ascertain whether the trust is valid.
Elements of a valid trust:
- Intent
- Identifiable corpus
- Ascertainable beneficiaries
- Proper purpose
- Mechanics and formalities
Express trusts are governed by the _____, which has been adopted by almost all states.
Uniform Trust Code (“UTC”)
Elements required for an express trust are:
(1) a settlor with capacity to convey,
(2) a present intent to create a trust relationship,
(3) a competent trustee with duties,
(4) a definite beneficiary, and (5) the same person is not the sole trustee and sole beneficiary.
+ Additionally, there must be a present disposition in trust of specific property then owned by the settlor, and the trust must have a valid trust purpose.
_____ is not required for a valid trust.
Consideration
The capacity required to create an inter vivos trust is _____, and the capacity to make a testamentary trust is _____.
the same as to make an inter vivos gift; the same as that required to make a will
The settlor’s intention to create a trust is essential to the existence of an express trust. The settlor must intend to ____
split the legal and equitable title and to impose enforceable duties on the holder of the legal title.
Intent may be manifested by written or spoken words or by the conduct of the settlor—unless ______. No ____ words are required; the settlor does not even have to call the arrangement a trust.
the Statute of Wills or the Statute of Frauds applies.
formal
An oral trust of ____ is valid in some states if certain conditions are met.
personal property
Communication of intent to _____ is not necessary; delivery of the property to ____ is sufficient because acceptance of gifts is normally presumed.
the beneficiaries; the trustee
An intention to create a present trust must have been externally manifested by the settlor at ____ and prior to _____.
the time they owned property; its conveyance to another
*-> However, the conduct of the parties subsequent to the conveyance may be evidence of an earlier intent.
The settlor’s intent must be that the trust take effect ____, not at _____
immediately; some future time (although a future interest can be trust property)
A promise to create a trust in the future, like a promise to make any future gift, is not enforceable unless ____
the promise is a binding contract (that is, supported by consideration).
Once an outright transfer of property occurs, it is too late for _____
the alleged settlor to go back and claim the transfer was really one in trust.
A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way is called ____
precatory language
The usual inference is that precatory expressions ____ create a trust because the settlor must impose a legal obligation on the transferee, not merely a moral one. This inference can be overcome by:
do not
- Definite and precise directions
- Directions addressed to a fiduciary (for example, executor under a will)
- A resulting “unnatural” disposition of property (for example, close relative will otherwise take nothing) if no trust imposed; or
- Extrinsic evidence showing that the settlor previously supported the intended beneficiary
Any split of title is sufficient so long as _____.
the sole trustee is not the sole
beneficiary
If the sole trustee and sole beneficiary are the same individual, the equitable and legal titles merge and ____
the trust terminates.
IDENTIFIABLE CORPUS
Because a trust is a type of property transfer, trust property is required.
The trust property must be ____.
ascertainble with certainty
Where there is no trust property, the trust _____
fails because the trustee has no property to manage.
The trust property must be an _____ in _____.
existing interest; existing property
A future interest may be held in trust, but an interest _____ cannot be held in trust.
not yet in legal existence (that is, a mere expectancy such as the right to inherit from
a person who is still alive)
Future profits from an ____ can be a trust res.
existing contract
The trust res must be existing property that the settlor has ____, including intangibles (for example, promissory notes) in which the settlor has _____.
the power to convey; an assignable interest
An unenforceable ____ promise cannot be the subject of a trust.
gratuitous
The res must be identifiable and segregated, but the res may be _____
a fractional or undivided interest in specific property.
A debtor cannot hold ____ in trust, but the debtor can declare themself trustee of ____; and the debt can be held in trust by _____.
their own debt; particular property from which the debt is to be paid; another person
A trust cannot exist without someone to ____. Thus, an ____ beneficiary is necessary to the validity of every trust except ____ trusts.
enforce it; ascertainable
charitable and honorary
A qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is:
(1) a current beneficiary, or
(2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of a
beneficiary’s interest or of the trust itself to occur on the qualification date).
-> Qualified beneficiaries may have additional rights compared to remote beneficiaries as discussed later.
Capacity Required of Beneficiary
Any person or entity capable of taking and holding title to property can be a beneficiary of a private trust. The beneficiary need not be competent.
Not everyone who benefits from a trust is considered to be a beneficiary (Incidental and Indirect Beneficiaries). The trust must _____
operate directly to benefit the person (for example, an attorney designated by the trust instrument is not a beneficiary).
Notice to a beneficiary is not essential to the validity of a trust. Lack of such notice may indicate, however, that ____
no trust was intended.
Acceptance by the beneficiary is required, but can take place _____. Acceptance may be express or implied and is generally ____.
after a valid trust is created; presumed
Disclaimer
No one can be compelled to accept an interest in a trust against their will.
Under the law of most states, a beneficiary may disclaim an interest by ____.
filing a written instrument with the trustee (or, if a trust created by will is involved, with the probate court)
If a valid disclaimer is made, the trust is read as though ____
the disclaimant was deceased as of the relevant date.
Time for Making Disclaimer
Many state disclaimer statutes require that a disclaimer be made within nine months of the interest’s creation, and that is the relevant period for federal gift tax purposes.
- Some states do not impose a time limit; the beneficiary may disclaim as long as the beneficiary is not estopped from doing so.
Exceptions to disclaimer timing rules
The time limit does not apply to a beneficiary who is under age 21.
- A disclaimer is timely if made within nine months after the beneficiary attains age 21
A beneficiary may be estopped from making a disclaimer if ____
they have exercised any dominion or control over the interest or accepted any benefits under the trust.
Under most state disclaimer statutes, a disclaimer relates back to the date of the transfer for ____
all purposes.
-> In these states, a disclaimer by an insolvent beneficiary can be used to defeat creditors’ claims but not a federal tax lien.
The anti-lapse statutes in most states apply only to ____ and come into play only if a will beneficiary within a certain degree of relationship predeceases the testator. (See Wills outline.)
Several states and the UPC apply the anti-lapse statute to ____ created in trusts unless the trust makes an alternate gift in case of a beneficiary’s nonsurvival.
wills
future interests (even to future interests expressly made contingent on survival)
Divorce Impact on Trusts
- A final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse.
- The UPC and several states have extended the “divorce revokes” rule to beneficiary designations of individuals who are related to the former spouse but not the settlor.
–> The governing instrument is read as though the former spouse (and their relatives) is deceased.
There must be definite beneficiaries to have a ____
private trust (not required in charitable trusts).
Beneficiaries may be “definite” even though not yet ____. Beneficiaries must be ascertainable by the time ____
ascertained (for example, unborn children)
their interests are to come into enjoyment.
Class Gifts
- Beneficiaries may be designated by generic descriptions such as “children.” - Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit, for example, “to my children and upon their death, to my then surviving grandchildren.”
- The trustee must be able to determine who belongs to the class. (i.e., “friends” is not enough)
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).
-> Broad power to choose beneficiaries, however, may constitute a gift or a power of appointment rather than a trust
Under the UTC, a settlor may empower the trustee to select the beneficiaries from an ____ class. Failure to exercise the
power gives rise to a resulting trust in favor of ____.
indefinite; the settlor or their successors
If a trust fails for lack of a beneficiary (for example, because the beneficiaries are not ascertainable), a resulting trust in favor of _____ is presumed.
the settlor or their successors
The general rule is that a settlor may create a trust for ____. However, a trust purpose is invalid if it is:
any purpose
- Illegal
- Contrary to public policy
- Impossible to achieve
- Intended to defraud the settlor’s creditors or based on illegal consideration
Public policy is violated if the purpose of a trust is to:
induce others to engage in criminal or tortious acts; encourage immorality; or induce a person to neglect parental, familial, or civic duties.
If a condition attached to an interest is against public policy:
- The settlor’s alternative desire controls if expressed.
- If the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid.
- If the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable.
A growing (but minority) number of states have abolished the Rule Against Perpetuities as it applies to ____
trusts, permitting the creation of “dynasty” trusts.
Once established, a trust will not fail because the trustee ____. The court will _____ so long as ____.
dies, refuses to accept appointment, or resigns
appoint a successor trustee unless it is clear that the settlor intended the trust to continue only; a particular trustee served.
The absence of a trustee may cause an ____ trust to fail for lack of delivery.
attempted inter vivos
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.
The person designated as trustee may still act to preserve the trust property without accepting the trusteeship, provided they ____. If the trusteeship is not accepted within a reasonable time, it is presumed to be ____
send notice of rejection to the settlor or a qualified beneficiary
rejected.
The settlor must intend to impose ____ on the trustee.
If duties are not spelled out in the trust instrument, the court will _____
enforceable duties; usually imply duties if there is an intention to create a trust, a res, and an identified beneficiary.
Anyone who has capacity to ____ may be a trustee.
State statutes limit the right of some persons or ____ to serve as trustee.
acquire and hold property for their own benefit and has capacity to administer that property (Minors and insane persons can hold property, but cannot admin-
ister.)
corporations (for example, foreign corporations).
Compensation and Reimbursement rules for Trustee
- A trustee is entitled to reasonable compensation or to whatever compensation is specified in the trust instrument.
- A trustee is entitled to reimbursement for expenses incurred in the trust’s administration and any other expenses that resulted in a benefit to the trust.
A court can remove a trustee on ____ or upon request by ____
its own motion; the settlor, a beneficiary, or a co-trustee.
Grounds for removal of a trustee 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.
–> The basic factor considered is whether continuation in office would be detrimental to the trust.
Before acceptance, a trustee can disclaim or refuse appointment for any reason. However, a trustee cannot ____
accept a trust in part and
disclaim it in part
Relation Back of Trustee Acceptance
A testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date.
-> It is thus possible for a trustee, by accepting, to become liable (in their fiduciary capacity) on tort claims arising prior to the time the trustee accepted.
Under the UTC, once an appointment has been accepted, the trustee can resign by either:
(1) giving 30 days’ notice to the qualified beneficiaries, settlor (if living), and co-trustees; or
(2) obtaining court approval.
A successor trustee succeeds to ____
all of the rights, powers, and privileges of the original trustee and is subject to all of the original trustee’s duties, liabilities, and responsibilities.
MECHANICS AND FORMALITIES: A trust can be created by ____
inter vivos transfer, by inter vivos declaration of trust, or by will (testamentary 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 of an inter vivos trust 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 remanifests trust intent.
Present Declaration of Trust—Settlor Is Trustee
A trust can be created by a person declaring themself trustee of specific property for a beneficiary. The settlor keeps legal title.
Transfer or Conveyance in Trust—Settlor Is Not Trustee
The settlor creates the trust by transferring legal title of property to a trustee. The settlor may retain or transfer the equitable title, but the settlor conveys legal title.
Transfer (Delivery) of Property to Trustee (methods for inter vivos trust)
- Declaration of Trust
- Conveyance in Trust
If a (inter vivos) trust was created by a declaration of trust, no conveyance of ____ property is needed as long as ____.
_____ property should be conveyed from the settlor as an individual to the settlor as a trustee.
personal; the property is identified and segregated
Real
If the (inter vivos) trust was created by a conveyance in trust, the settlor must
_____.
____ property is conveyed by deed. ____ property is conveyed by physical delivery or an appropriate written assignment.
convey the property to the trustee
Real; Persona
Delivery means ____
placing the trust property out of the settlor’s control.
Failure to ____, or a promise to _____, may evidence a lack of present intent and prevent delivery of the res.
name a trustee; name a trustee in the future
Formal Requirements—Statute of Frauds for inter vivos trust
- Most states do not require a writing for a trust of personal property.
- For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the Statute of Frauds.
Oral trusts of personal property may be established only by ____
clear and convincing evidence.
An otherwise invalid oral trust of land may be enforced by imposing a ____
constructive trust.
What precludes SOF defense to real property trust
If the holder of the legal title acts as if they are a trustee, part performance will preclude the Statute of Frauds defense.
-> The Statute of Frauds is to protect the donee of a gift from false claims that the donee is really a trustee.
Under the Uniform Testamentary Additions to Trusts Act, a settlor can ____ to a trust—even an amendable and revocable trust—established during their lifetime. The trust must be ____
make gifts by will
clearly identified from language in the will.
Pour-Over Gift from Will to Trust: Property goes into the trust as the trust exists at the date of ____, not how the trust was written at the date when ____.
the testator’s death; the will was executed
-> Thus, trust amendments made after the will execution are effective to govern the poured-over property. If the
trust is revoked, the gift fails (lapses).
The trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the ____ trust funding if:
initial
- The trust is identified in the will, and
- The trust is executed before the testator’s death
Testamentary trusts are created ____
in the settlor’s valid will.
Formalities of testamentary trusts
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.
For “secret trust” allegations the intended trust beneficiary may present extrinsic evidence of _____. If this can be proven by clear and convincing evidence, a ____ will be imposed on the property in favor of the intended trust beneficiary
the will beneficiary’s promise to hold the property in trust.
constructive trust
A constructive trust will be imposed in a secret trust case even if the will beneficiary did not make the promise until ____.
Furthermore, it does not matter whether the will beneficiary intended to ____; all that matters is that the testator ____.
after the will was executed
perform the promise when they made it; relied on the promise
“Semi-Secret Trust”
In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary.
Where there is a semi-secret trust the gift ____
fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest
Extrinsic evidence is not allowed for which secret trust situation?
The Semi-Secret Trust
Re: Voluntary Transfers—Gifts and Sales
Absent restrictions by statute or by the trust instrument, a beneficiary may ____. The assigned interest remains subject to ____
freely transfer their interest in the trust; all previous conditions and limitations.
Re: Involuntary Transfers—Creditors
Unless statute or the trust provides otherwise, the beneficiary’s creditors ____ beneficiary’s interest in the trust. The interest is
subject to ____ sale.
To avoid this, a court may order the trustee to _____.
may reach the; judicial
pay the beneficiary’s income to the creditors until the debt is satisfied
DISCRETIONARY TRUSTS
In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary.
Before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is ____
not assignable and cannot be
reached by their creditors.
-> Put simply, the beneficiary has nothing to transfer and no interest for creditors to reach—the beneficiary merely has an expectancy to be a beneficiary.
