Trusts Flashcards
1
Q
A trust is ____
A
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.
2
Q
The legal interest is held by ___
A
the trustee who has the responsibility of
ownership.
3
Q
The trustee receives ____ from the legal title (except possibly a fee for acting as trustee)
A
no benefit
4
Q
A trustee is a fiduciary and thus:
A
(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
5
Q
The equitable or beneficial interest is held by ____
A
the beneficiary who receives the benefits of ownership as set forth in the trust.
6
Q
The settlor is ___
A
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.
7
Q
A trust must have ____
A
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.
8
Q
The settlor creates a trust by ___
A
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).
9
Q
The trustee manages and invests the property in accordance with ___ duties and the _____ as contained in the trust instrument.
A
legal; settlor’s instructions
10
Q
When the trustee’s duties are completed, the trust ____
A
terminates and the trustee distributes any remaining property to the remainder beneficiaries
11
Q
PURPOSES AND USES OF TRUSTS
A
- 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
12
Q
BASIC CLASSIFICATION OF TRUSTS
A
Express Trusts and Trust Created by Operation of Law
13
Q
Express trusts are created by ____
A
the express intention of the settlor.
14
Q
Express trusts fall into two categories distinguished primarily by the identity of their beneficiaries:
A
- Private: private beneficiaries (certain ascertainable persons)
- Charitable: charitable beneficiaries (indefinite class of persons or the public in general)
15
Q
Types of Trusts Created by Operation of Law
A
- Resulting Trusts
- Constructive Trusts
16
Q
Resulting Trusts
A
Resulting trusts arise from the presumed intention of the owner of the property.
17
Q
Constructive Trusts
A
Constructive trusts are an equitable remedy used to prevent unjust enrichment.
18
Q
The first step in any trust question is to ____
A
ascertain whether the trust is valid.
19
Q
Elements of a valid trust:
A
- Intent
- Identifiable corpus
- Ascertainable beneficiaries
- Proper purpose
- Mechanics and formalities
20
Q
Express trusts are governed by the _____, which has been adopted by almost all states.
A
Uniform Trust Code (“UTC”)
21
Q
Elements required for an express trust are:
A
(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.
22
Q
_____ is not required for a valid trust.
A
Consideration
23
Q
The capacity required to create an inter vivos trust is _____, and the capacity to make a testamentary trust is _____.
A
the same as to make an inter vivos gift; the same as that required to make a will
24
Q
The settlor’s intention to create a trust is essential to the existence of an express trust. The settlor must intend to ____
A
split the legal and equitable title and to impose enforceable duties on the holder of the legal title.
25
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
26
An oral trust of ____ is valid in some states if certain conditions are met.
personal property
27
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
28
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.
29
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)
30
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).
31
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.
32
A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way is called ____
precatory language
33
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
34
Any split of title is sufficient so long as _____.
the sole trustee is not the sole
beneficiary
35
If the sole trustee and sole beneficiary are the same individual, the equitable and legal titles merge and ____
the trust terminates.
36
IDENTIFIABLE CORPUS
Because a trust is a type of property transfer, trust property is required.
37
The trust property must be ____.
ascertainble with certainty
38
Where there is no trust property, the trust _____
fails because the trustee has no property to manage.
39
The trust property must be an _____ in _____.
existing interest; existing property
40
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)
41
Future profits from an ____ can be a trust res.
existing contract
42
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
43
An unenforceable ____ promise cannot be the subject of a trust.
gratuitous
44
The res must be identifiable and segregated, but the res may be _____
a fractional or undivided interest in specific property.
45
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
46
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
47
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.
48
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.
49
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).
50
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.
51
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
52
Disclaimer
No one can be compelled to accept an interest in a trust against their will.
53
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)
54
If a valid disclaimer is made, the trust is read as though ____
the disclaimant was deceased as of the relevant date.
55
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.
56
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
57
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.
58
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.
59
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)
60
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.
61
There must be definite beneficiaries to have a ____
private trust (not required in charitable trusts).
62
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.
63
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)
64
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
65
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
66
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
67
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
68
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.
69
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.
70
A growing (but minority) number of states have abolished the Rule Against Perpetuities as it applies to ____
trusts, permitting the creation of “dynasty” trusts.
71
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.
72
The absence of a trustee may cause an ____ trust to fail for lack of delivery.
attempted inter vivos
73
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.
74
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.
75
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.
76
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).
77
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.
78
A court can remove a trustee on ____ or upon request by ____
its own motion; the settlor, a beneficiary, or a co-trustee.
79
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.
80
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
81
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.
82
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.
83
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.
84
MECHANICS AND FORMALITIES: A trust can be created by ____
inter vivos transfer, by inter vivos declaration of trust, or by will (testamentary trust).
85
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.
86
The present intent of an inter vivos trust required must be manifested by ____
conduct (delivery) or words (declaring oneself trustee).
87
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.
88
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.
89
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.
90
Transfer (Delivery) of Property to Trustee (methods for inter vivos trust)
1. Declaration of Trust
2. Conveyance in Trust
91
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
92
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
93
Delivery means ____
placing the trust property out of the settlor’s control.
94
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
95
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.
96
Oral trusts of personal property may be established only by ____
clear and convincing evidence.
97
An otherwise invalid oral trust of land may be enforced by imposing a ____
constructive trust.
98
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.
99
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.
100
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).
101
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
102
Testamentary trusts are created ____
in the settlor’s valid will.
103
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.
104
“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.
105
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
106
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
107
“Semi-Secret Trust”
In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary.
108
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
109
Extrinsic evidence is not allowed for which secret trust situation?
The Semi-Secret Trust
110
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.
111
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
112
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.
113
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.
114
Creditors are usually allowed
to attach the beneficiary’s interest but may not ____.
compel the trustee to make a distribution.
115
If the trustee has notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must _____ unless _____
make those payments directly to the creditors
the beneficiary’s interest is protected by a spendthrift provision.
116
The court can force the trustee to satisfy a ____
judgment or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse.
117
The beneficiary cannot interfere with the exercise of the trustee’s discretion unless ____, in which case ___ will intervene.
the trustee abuses their power; the court
118
SPENDTHRIFT TRUSTS
A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims.
-> The purpose is to protect the beneficiary from their own improvidence.
119
Under spendthrift trusts the beneficiary may not transfer their interest. However, once the trustee pays the beneficiary, the beneficiary may ____
transfer the property received
120
Under spendthrift trusts the beneficiary’s creditors cannot reach the beneficiary’s trust interest until ____.
Of course, once the trustee pays the beneficiary, the creditors may reach the property.
income or principal has been paid to the beneficiary
121
A restriction permitting the beneficiary to voluntarily alienate their interest, but purporting to _____, is probably invalid.
deny creditors the right to reach the beneficiary’s interest
122
A beneficiary’s ___ 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 _____.
-> Likewise, the beneficiary’s creditors cannot force the trustee to pay them.
assignees; recommence payments to the beneficiary at any time, and the beneficiary may withdraw their direction to pay the assignee
123
Limitations on Enforcement on spendthrift clauses (high level)
- Ineffective If Settlor Is Beneficiary
- Ineffective Against Certain Creditors
124
In most states, a settlor 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, that is, the
_____
“domestic asset protection trust” or “DAPT.”
125
When it is unclear whether a beneficiary is the settlor, determine ____.
who furnished the consideration for the creation of the trust
-> If a person furnishes the consideration, they are the settlor even though the trust is created by another person.
126
Re: Creditors, typically, a spendthrift clause cannot be used to shield the beneficiary from:
- Judgments or court orders for support or maintenance of the beneficiary’s child, spouse, or former spouse
- Claims by the government
126
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.
127
Even under a spendthrift clause a creditor can reach a mandatory distribution of income or principal if ____
the trustee did not make it within a reasonable time.
127
A support trust may be ____.
mandatory or discretionary
-> If discretionary, the creditors’ rights are the same as they are for other discretionary trusts
127
Even without a spendthrift clause, the beneficiary’s interest in a support trust is such that ______; the beneficiary’s interest is not ____ by definition.
no one but the beneficiary can enjoy it; assignable
-> Support trusts are, therefore, impliedly spendthrift.
128
If the support trust is silent, the standard of support is ____. Whether the beneficiary’s other income or resources should be taken into account is a question of ____
the beneficiary’s accustomed standard of living; the settlor’s intent and is decided by courts on a case-by-case basis.
129
The creditors of the trustee cannot reach ____
trust property to satisfy their claims; they have only a personal claim against the trustee
130
A trust will terminate automatically upon ____
the expiration of the term
specified in the instrument or when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve.
131
The most common way for a trust to end is by ____
its express terms. A trust will terminate automatically upon the expiration of the term specified in the instrument.
132
Under the UTC, a settlor can revoke or amend a trust unless _____. However, some states, even some that have adopted the UTC, follow the traditional rule, which provides that a trust is irrevocable unless ____
the terms expressly state that it is irrevocable
the settlor expressly reserves the power to revoke or modify the trust.
133
Under the law of some states, the settlor may revoke an irrevocable trust upon _____
written consent of all living persons with vested or contingent interests
134
A trust may be terminated or modified upon the consent of ____, even if the modification or termination conflicts with a material purpose of the trust.
the settlor (or the settlor’s agent, conservator, or guardian) and all beneficiaries
135
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 (“Claflin Rule”).
136
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.
137
The following provisions in a trust are likely to prevent the beneficiaries from modifying or terminating as they are considered material purposes:
- Support of beneficiary
- Spendthrift provision
- Payment at certain ages
- Payment at certain dates
- Discretionary trust
138
All beneficiaries must consent, including ____ beneficiaries, as well as beneficiaries of ___, no matter how uncertain or contingent.
If any beneficiaries are unborn or unascertained, there must
_____; otherwise, the trust may not be terminated or modified.
unborn and unascertained; future interests
be a party appointed to represent their interests or they must be virtually represented according to state law
139
If the trust is terminated by agreement of all beneficiaries, then the trustee must ___
distribute the trust property as agreed by the beneficiaries
140
Where all beneficiaries consent to termination, the trustee is not liable if ____ even if the termination violates a material purpose of the settlor.
the trustee accommodates them by distributing the
trust assets
141
As long as the beneficiaries have a right to terminate, the _____ are not a bar. However, joinder of the settlor may be deemed a waiver of ____
settlor’s objections (but may be evidence as to whether termination would defeat trust purposes)
a material purpose that would otherwise block termination.
142
A trust will terminate by operation of law if ___
the property has been exhausted or if the legal and equitable titles have merged.
143
If termination or modification is not available because not all of the beneficiaries consent, 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 non-consenting beneficiaries will be adequately protected.
Additionally, a court may terminate or modify a trust if:
- Unanticipated circumstances threaten the purposes of the trust
- Continuation of the trust on its existing terms is impracticable or wasteful; or
- The value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives
144
In some states, the court can reform the terms of a trust to reflect the settlor’s intent if ____
a mistake in the terms is shown by clear and convincing evidence.
145
In some states, a trustee can terminate a trust if the trust property is ____, as long as the trustee provides the qualified beneficiaries with notice.
less than $50,000 and the amount is insufficient to justify the cost of administration
146
Combination and Division of Trusts
- Absent contrary terms in the trust, the trustee can combine several trusts into one trust or divide one trust into several trusts, provided doing so does not frustrate any purposes of the trusts or impair the rights of any beneficiary.
- The trustee is not required to obtain the consent of the qualified beneficiaries prior to combining or dividing trusts, but the trustee must provide them with notice.
147
DUTY OF TRUSTEE UPON TERMINATION
1. Wind Up Trust Business: The trustee may continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust
2. Distribute to Remainder Beneficiaries: timely distribute trust property to the appropriate remainder beneficiaries.
148
The trustee can properly exercise only such powers as are expressly or impliedly conferred upon them. These include:
- Powers expressly conferred upon them by the terms of the trust (which control)
- Powers granted by state law; and
- Implied powers that are appropriate to achieve the proper investment, management, and distribution of the trust property
149
These implied powers of the trustee include the power to:
- Sell trust property (How else invest?)
- Lease trust property (How else earn income?)
- Incur reasonable expenses (How else carry out trust?)
- Hire agents (How else carry out trust?)
- Mortgage trust property (How else borrow money?)
- Repair (How else keep trust property valuable?)
150
Under the UTC A trustee, without authorization by the court, may exercise:
- Powers conferred by the terms of the trust (which control)
- Powers that an unmarried competent owner has over individually owned property
- Any other powers appropriate to achieve the proper investment, management, and distribution of trust property; and
- Any other powers conferred by the UTC
151
The UTC confers many powers on the trustee, including the power
to:
collect and hold trust assets; operate a business; acquire an undivided interest in a trust asset; invest trust assets; buy, sell, or encumber trust assets; enter into a lease; vote securities; pay taxes and assessments; insure assets; make distributions; prosecute and defend actions; etc.
152
Co-trustees who are unable to reach a unanimous decision may act by ____ in many states. If a co-trustee cannot perform because of, for example, absence or illness, the remaining co-trustees may ____
majority decision; act for the trust.
153
A power is “imperative” (sometimes called a “mandatory” power) if _____
the trust instrument requires its exercise
154
If a trustee fails or refuses to perform under an imperative power, a court will, upon petition, _____
order the trustee to exercise the power as required by the trust instrument (provided that exercising the power would not violate the law or be against public policy).
155
“Discretionary” powers are ones that ____. The trustee must exercise a discretionary power in ____
the trustee may or may not perform, as the trustee determines in their judgment to be the most appropriate.
good faith.
156
Exercise of a discretionary power is subject to judicial review for ___. The court will also intervene if a trustee has ____
abuse of discretion; completely failed to exercise judgment with regard to a discretionary power.
157
If the settlor grants the trustee absolute or uncontrolled discretion with regard to some matter, the trustee’s acts are _____
still reviewable by the court. Otherwise, there would be no trust because there are no enforceable duties.
158
Trustees owe their fiduciary duties to ____. In some states, a trustee of a revocable trust owes duties only to ____.
the beneficiaries of the trust; the settlor
159
Once the trustee accepts the position of trustee, the trustee is bound to follow the terms of the trust and will be ____
liable for noncompliance.
160
High level duties of trustee
- Duty to Administer Trust
- Duty of Loyalty
- Duty to Report
- Duty to Separate Trust Property and Keep Records—No Commingling
- Duty to Enforce Claims and Defend Trust from Attack
- Duty to Preserve Trust Property and Make It Productive
161
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 there is more than one beneficiary, the trustee must act impartially, taking into account any of their differing interests.
162
Under the duty to administer the trust of a trustee has ____, they will be held to a higher standard.
special skills or expertise
163
Generally, a trustee may not delegate ____
discretionary functions (such as the decision to make or not to make distributions).
-> To do so would make the trustee a guarantor for any losses caused by the improper delegation.
164
Duty of Loyalty (generally)
- Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which the trustee is
dealing with the trust in their individual capacity.
- A trustee owes a duty of undivided loyalty to the trust and its beneficiaries.
165
The duty of loyalty precludes the following actions:
- A trustee cannot buy or sell trust assets even if the price is a fair one.
- A trustee may not sell property of one trust to another trust of which they are also trustee.
- A trustee may not borrow trust funds nor loan their personal funds to the trust (except to protect the trust), and any interest paid on such a loan must be returned to the trust.
- A trustee cannot use trust assets to secure a personal loan.
- A trustee cannot personally gain through their position as trustee.
- 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, provided
that retention of the stock meets the prudent investor standard.
- Self-employment can constitute a form of prohibited dealing.
--> However, if the trustee renders extraordinary services to the trust,
the trustee may be entitled to additional compensation.
166
When faced with a question involving a self-dealing trustee, remember that a trustee’s ____ is irrelevant.
good faith or actual benefit to the trust
167
Indirect self-dealing: The trustee presumably violates their duty of loyalty if ____
the trustee enters into a transaction with their spouse, close relatives, attorney, or corporation in which they own a significant interest.
168
The duty of loyalty extends ___
equally to all beneficiaries, unless the trust instrument specifies otherwise.
169
Trustee 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.
170
A transaction involving trustee self-dealing is ____ unless:
voidable by the beneficiary affected by the transaction
(1) a court or the terms of the trust approved it;
(2) the beneficiary failed to bring suit within the prescribed time period;
(3) the beneficiary gave their consent, ratification, or release; or
(4) it involves a contract or claim arising before the trustee became trustee.
171
A trustee may not commingle trust property with _____. The trustee must also ____ trust property by labeling it as trust, rather than individually owned, property.
their own property or that of another trust
“earmark”
172
If the trustee commingles trust property with their own, losses are charged to _____, and gains are credited to ____.
the trustee; the trust
173
The trustee must keep ____
records of the trust’s administration.
174
The trustee has a duty to enforce _____
claims of the trust and to defend
the trust.
175
Duty to Preserve Trust Property and Make It Productive
- The power to invest is normally implied from the duty to make trust property productive.
- The trustee is expected to take actions to, for example, lease land, collect claims, and invest money.
176
The measure of damages for breach of this duty (to Preserve Trust Property and Make It Productive) is ____
the amount of income that would normally accrue from proper investments.
177
In virtually all states, a trustee’s investment responsibilities are governed by ____
the Uniform Prudent Investor Act (“UPIA”).
--> The trust terms can expand or limit the trustee’s powers—UPIA provisions apply only if there is no contrary provision in the trust instrument.
178
If the trust instrument provides that investments may be made in the trustee’s discretion, it is a question of interpretation whether _____. Although the investment power may be broadened, such language will be ____.
the trustee’s power is expanded beyond the UPIA; strictly construed
179
The following phrases in a trust invoke the prudent investor rule (note that some of them clearly appear to invoke a much different
standard):
- “Prudent person rule”
- “Prudent man rule”
- “Legal investments”
180
Uniform Prudent Investor Act - Standard of Care
A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.
181
Uniform Prudent Investor Act - Approach to the Standard of Care
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.
-> Thus, some speculation may be appropriate or even required.
182
Uniform Prudent Investor Act - Type of Investment Permitted
The UPIA permits a trustee to invest in any kind of property or any type of investment provided the trustee acts prudently; no particular type of investment is inherently imprudent.
183
The following circumstances are relevant and must be considered by the trustee in making investment decisions (under Uniform Prudent Investor Act):
- General economic conditions
- The possible effect of inflation or deflation
- The expected tax consequences of investment decisions or strategies
- The role that each investment plays within the overall trust portfolio
- The expected total return from income and the expected appreciation of capital
- Other resources of the beneficiaries
- Needs for liquidity, regularity of income, and preservation or appreciation of capital
- An asset’s special relationship or value to the purposes of the trust or to one or more of the beneficiaries (for example, a family
home or heirloom)
184
A trustee must ____ the investments of the trust unless they reasonably determine that the purposes of the trust are better served without it (i.e., family heirlooms and businesses)
diversify
185
Watch for a fact pattern containing a revocable trust and a settlor directing the trustee to make nondiverse investments. Because the trustee of a revocable trust owes their duties to the settlor in many states, such a directive may ____
relieve the trustee of their duty to diversify.
186
Compliance with the UPIA is determined in light of the facts and circumstances existing at ____. A trustee who acts in _____ with the Act will not be held liable.
the time of the trustee’s decision or action; substantial compliance
187
A trustee cannot excuse a breach by proving the trustee possesses and exercises in the trust’s private affairs _____
subnormal business judgment (lower skills).
188
Duty to Review Trust Property
- When the trustee assumes office, the trustee must review the trust assets to bring them into compliance with the prudent investor rule.
--> If imprudent investments are discovered by a successor trustee, the successor trustee may need to sue the prior trustee for breach of
duty
189
A trustee must act exclusively for the beneficiary when investing and managing trust assets. Accordingly, ____ may be problematic, especially if the returns from a “politically correct” investment are ____.
social investing (refers to the consideration of factors other than the monetary safety of the investments and their potential to earn income and appreciate in value).
lower than from other investments
190
If there is more than one beneficiary, the trustee must act ____ when investing and managing trust assets.
impartially and not favor one beneficiary over another
191
A trustee may delegate investment and management functions but only if ____
a prudent trustee of comparable skills could properly delegate under the circumstances.
192
When permissible to delegate investment and management functions the he trustee must act prudently in:
- Selecting an agent
- Establishing the scope and terms of the delegation; and
- Periodically reviewing the agent’s actions
193
If delegation is proper, the trustee is ____ for the decisions or actions of the agent.
not liable to the beneficiaries
194
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.
195
Damages for breach: If a trustee commits a breach of trust, the trustee is liable to the beneficiaries for the greater of:
- The amount necessary to restore the trust property and distributions to what they would have been absent the breach, or
- The trustee’s profit from the breach
196
A trustee is liable to a beneficiary for any profit arising from administration of the trust, even if ____
there was no breach.
197
In any action in which trust beneficiaries are parties, a minor, incapacitated, or unborn beneficiary may be ____
represented by another beneficiary with substantially identical interests under the law of many states.
198
In the case of self-dealing, the beneficiary may have a choice of the following remedies:
- Affirm the transaction if the trust profited
- Set aside the transaction if the trust lost money
- Trace profits from the trustee if the trustee profited
199
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.
200
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).
201
Generally, 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 of trust or compelling the co-trustee to redress the breach.
202
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).
203
There are numerous grounds upon which a trustee may be removed, including the following:
- Incapacity
- Unfitness (for example, convicted of a crime or chemically dependent)
- Commission of a serious breach of trust
- Serious conflict of interest
- Insolvency (because a trustee is more likely to embezzle if they are in financial trouble)
- Extreme hostility between the trustee and beneficiaries but only if it would interfere with proper trust administration
- Refusal to post any required bond
- Refusal to account
- Lack of cooperation among co-trustees that substantially impairs
trust administration
- Unwillingness or persistent failure to administer the trust
- Substantial change of circumstances so that removal is in the best interest of all beneficiaries
204
Courts will consider the settlor’s intent when considering removal of a trustee, if the settlor knew _____
the trustee was in a conflict of interest situation but selected the trustee regardless.
205
Trustee’s Liability to Third Parties: Contracts on Behalf of Trust Estate
- The general rule is that a trustee may be sued on the contract in the
trustee’s fiduciary capacity.
- A third party may sue the trustee person-ally 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
206
Trustee Indemnification or Reimbursement from Trust Property from lawsuits on a contract
If the contract was properly entered into for the trust and the trustee was not in breach, the trustee is entitled to indemnification or reimbursement from trust property.
207
Trustee’s Liability to Third Parties: Tort
- A third party injured in tort can sue the trust estate by proceeding against the trustee in their fiduciary capacity.
- The third party may also sue the trustee personally if the trustee is personally at fault, but not by reason of respondeat superior.
208
LIABILITY OF THIRD PARTIES TO THE TRUST: Property Improperly Transferred to Non-Bona Fide Purchaser
A beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a bona fide purchaser (“BFP”)
209
Transfer to BFP ____ Beneficiaries’ Interests
Cuts Off
210
A third party is a BFP if the party acquires the property for value and without notice of ____.
A person who knows of facts requiring ____, which if pursued would have revealed ____, is not a BFP.
the trust
an inquiry; the existence of a trust
211
An innocent donee of trust property is not liable for damages but ____
must restore the property, its value, or its substitute to the trust.
212
A ____ in a breach of trust is liable for the resulting loss to the trust estate.
knowing participant
213
Direct suits by ____ are not permitted against third parties who damage trust property; the ____ alone can sue.
beneficiaries; trustee
214
The beneficiaries’ remedy against third parties is _____
to bring suit in equity to compel the trustee to sue the third party.
215
(exception rule) Direct actions by beneficiaries against third parties are permitted where the trustee:
(1) participated in the breach,
(2) has left the jurisdiction and no successor trustee is appointed, or
(3) fails to sue a third person liable in tort or contract.
216
ALLOCATION OF RECEIPTS AND EXPENSES BETWEEN INCOME AND PRINCIPAL ACCOUNTS: A majority of states have enacted the ____
Uniform Principal and Income Act (“UPAIA”).
217
The UPAIA, which applies to all trusts and estates unless ____, gives the trustee or personal representative an ____ power to reallocate investment portfolio return.
the governing instrument provides otherwise; adjustment
218
This adjustment power authorizes the trustee to ____
characterize items such as capital gains, stock dividends, etc., as income if the trustee deems it appropriate or necessary to carry out the trust purposes.
219
If the trust calls for distribution of trust income to a beneficiary, the
trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc., to the beneficiary.
-> If the resulting distribution effectuates the settlor’s intent and the purposes of the trust, then _____.
-> If, however, the trustee determines that by distributing only the trust’s income the trustee is unable to comply with _____, the trustee may adjust between principal and income to the extent necessary.
nothing further needs to be done
the requirement that all beneficiaries be treated fairly
220
In deciding whether and to what extent to exercise the adjustment power, the trustee must consider the following factors:
(1) the nature, purpose, and expected duration of the trust;
(2) the intent of the settlor;
(3) the identity and circumstances of the beneficiaries;
(4) the needs for liquidity, regularity of income, and preservation and appreciation of capital;
(5) the nature of the trust’s assets; (6) the net amount allocated to income under the other sections of
the Act and the increase or decrease in the value of the principal assets;
(7) whether and to what extent the trust gives or denies the trustee the power to invade principal or accumulate income;
(8) the actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and
(9) the anticipated tax consequences of an adjustment.
221
The trustee may not make an adjustment if _____, as this would give the beneficiary a general power of appointment for estate tax purposes, and the trust assets would be taxed in the beneficiary’s estate.
the trustee is a beneficiary of the trust,
222
An adjustment cannot be made if the adjustment power would disqualify the trust for a ____
federal estate tax marital or charitable deduction.
223
In general, the allocation rules follow ____; for example, net rental income is income and the proceeds of sale of a trust asset are principal.
traditional accounting rules
224
Allocation of receipts from entity
- Money received from an entity such as a corporation (for example, cash dividends) is characterized as income unless the money is characterized as a capital gain for federal income tax purposes, or is received in partial or total liquidation of the entity.
- All property other than money received from an entity (for example, stock dividends) is characterized as principal.
225
Allocation of Insurance Policies and Other Contracts
- Proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to principal.
- If a contract insures the trustee against a type of loss, the proceeds are allocated to income.
- Dividends on an insurance policy are allocated to the account from which the premiums are paid.
226
Allocation of Deferred Compensation
- For periodic receipts from a deferred compensation plan (for
example, a pension plan), the receipt is income to the extent that the payment is characterized by the payor as income, and the balance is principal.
- If no part of the payment is characterized as income or as a dividend, 10% of the payment is characterized as income and the balance is principal.
227
Allocation of Liquidating Assets Such as Patents, Copyrights (an asset whose value will diminish over time because the asset is expected to produce receipts over a limited period)
Proceeds from such liquidating assets (for example, patents, copyrights) are allocated 10% to income and 90% to principal.
228
Allocation of Mineral Interests
For most oil, gas, mineral lease, and water right payments, receipts are allocated 10% to income and 90% to principal.
229
Allocation of Unproductive Property
Under the former law, if a particular trust asset produced little or no income, on the asset’s sale, the income beneficiary was entitled to a portion of the sale proceeds under the principle of “delayed income.”
Because the UPIA looks to the total return from the overall portfolio,
the unproductive property rule was repealed except for certain trusts that are intended to qualify for the estate tax marital deduction.
230
Summary - Receipts Allocated to Income
- Ordinary receipts from use or investment of trust property (e.g., rents, interest)
- Cash dividends
- Proceeds from contract insuring
trustee against loss
- 10% of payment from a deferred compensation plan (e.g., pension plan), unless otherwise characterized
- 10% of proceeds received from a liquidating asset (e.g., patents, copyrights)
- 10% of proceeds received from a working interest (e.g., oil and gas interests)
231
Summary - Expenses Charged to Income
- 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
- Insurance premiums covering loss of a principal asset
232
Summary - Receipts Allocated to Receipts
- Extraordinary receipts (e.g., proceeds from sale of trust assets)
- Stock dividends
- Proceeds from life insurance policy naming trust or trustee as beneficiary
- 90% of payment from a deferred
compensation plan (e.g., pension plan), unless otherwise characterized
- 90% of proceeds received from a liquidating asset (e.g., patents, copyrights)
- 90% of proceeds received from a working interest (e.g., oil and gas interests)
233
Summary - Expenses Charged to Principal
- 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
- Disbursements related to environmental matters
234
The rules are basically the same for private and charitable trusts, but the rules governing charitable trusts differ from those applicable to private trusts in three important ways:
a charitable trust must have indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies.
235
A charitable trust must have a purpose considered to ____. Charitable purposes include:
benefit the public
- The relief of poverty
- The advancement of education or religion
- The promotion of health
- The accomplishment of government purposes (such as parks, museums, and playgrounds)
236
The charitable purpose may be expressed in _____. A charitable trust will be implied when ____
very general terms; the settlor’s charitable purpose
is clear.
237
For a charitable trust The class to be benefited may be limited, but may not be so narrow as to _____. However, just because ____ be benefited (for example, a trust to provide parks in the city where the
family lives) does not keep the trust from being charitable.
only benefit a few individuals whom the settlor wishes to aid
personally
some family members might
238
Beneficiaries of a charitable trust must be ____
indefinite.
--> this rule does not mean that the beneficiary cannot be a specific charitable entity, such as the American Red Cross or the Humane Society. The ultimate beneficiaries (the individuals the specified charity serves) are indefinite, even though the entity is specific.
239
The court can select a charitable purpose or beneficiary if none is specified in the trust instrument, so long as ____
the selection is consistent with the settlor’s ascertainable intention.
240
CY PRES application to charitable trusts
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.
-> This doctrine applies to outright charitable gifts as well as to charitable trusts.
241
Under the UTC, the settlor’s general charitable intent is ____. Thus, unless the trust terms
expressly provide otherwise, application of the cy pres doctrine is ____. The court has discretion to _____
conclusively presumed
mandatory, and the court must reform the trust
determine the settlor’s primary charitable intent.
242
Charitable trusts are not bound by the _____ and thus may be perpetual.
Also, the Rule Against Perpetuities does not apply to the shifting of the beneficial interest in a trust from ____. The Rule does apply, however, to shifts between ____.
Rule Against Perpetuities
one charity to another on the happening of a condition; private and charitable uses
243
Suit to enforce a charitable trust can be brought by _____
the settlor (but some states require the settlor to have an interest in enforcing beyond merely being the settlor), a qualified beneficiary, or the
state’s attorney general
244
HONORARY TRUSTS OR PURPOSE TRUSTS
An honorary or purpose trust is a trust that is not for a charitable
purpose and has no private beneficiaries.
Any excess property is distributed to the settlor or their successors unless the governing instrument provides otherwise.
245
HONORARY TRUSTS
Honorary trusts are commonly established for the benefit of pets or for the maintenance of burial places.
- 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.
- Under the UTC, the trust is
enforceable by someone named in the trust instrument or appointed by the court.
- The trust property may be applied only to carry out the terms of the trust.
246
Absent special statutes, many jurisdictions will void an honorary trust (not for the care of animals) on the basis of the Rule Against
Perpetuities if its duration may be _____. The UTC, however, expressly provides that an honorary trust (not for the care of animals) may not be enforced for ____
more than a (human) life in being
plus 21 years
more than 21 years.
247
A trust for the care of an animal alive during ____ is valid. The trust terminates when ____
the settlor’s lifetime; the animal dies.
248
Resulting trusts involve ____ and are based on the presumed intent of the settlor.
reversionary interests
249
Constructive trusts are used to
prevent ____
unjust enrichment.
250
Resulting trusts arise by implication from ____
the settlor’s conduct
251
Resulting trusts are of three types:
(1) purchase money resulting trusts,
(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).
252
Beneficiaries of Resulting Trust
- The settlor is the beneficiary of a resulting trust.
- If the settlor is deceased, the settlor’s successors in interest (heirs or beneficiaries under the settlor’s will) are the beneficiaries.
253
The purpose of a resulting trust is ___
to do what the settlor would have done had the settlor put their intent into words.
254
Circumstances Giving Rise to Resulting Trust (on Failure of Express Trust) = 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.
255
Circumstances Where Resulting Trust NOT Implied (on Failure of Express Trust)
(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
256
Resulting Trust Implied from Excess Corpus
- A resulting trust in favor of the settlor also arises when the trust purpose is fully satisfied and some trust property remains.
- There could be a resulting trust of part of the corpus even before the trust is terminated if it is clear that there is excess trust corpus.
257
Purchase Money Resulting Trusts
A purchase money resulting trust is presumed whenever X (the
“beneficiary”) furnishes the consideration (usually money, but any other valuable consideration suffices) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”).
258
In a Purchase Money Resulting Trust situation, there are three possible explanations for the
relationship between the parties:
- Settlor-beneficiary of PMRT/Trustee of PMRT
- Donor/Donee
- Creditor—Debtor
259
For a Purchase Money Resulting Trust The consideration paid by X must be for ____ of the property.
purchase
-> Sums paid by X to make improvements on the property or to pay taxes on it do not give rise to a trust.
260
For a Purchase Money Resulting Trust the consideration (or obligation to pay) must be supplied _____
at or before the time Y takes title.
261
Burden of Proof on One Claiming as Beneficiary For a Purchase Money Resulting Trust
The burden is on X, the party claiming to be the beneficiary of a resulting trust, to prove by clear and convincing evidence that they supplied the consideration
262
Once X proves that they supplied the consideration, a resulting trust is presumed; but Y can rebut by showing that _____. Recitals as to _____ are not conclusive.
no trust was intended (for example, payment was a gift or loan to Y or satisfaction of
a debt owing to Y)
who paid consideration
263
If X, the person providing the consideration, expects to be reimbursed, the relationship is a ____ rather than a purchase money resulting trust. In a purchase money resulting trust, X expects to receive an interest in the property, not the consideration back.
loan
264
Exceptions to purchase money resulting trust
1 - No Trust Presumption Where Parties Closely Related (a gift is presumed rather than a trust)
--> rebuttable
--> The normal presumption of a trust applies where the person furnishing consideration is the uncle, aunt, brother, sister, child, or grand- child of the person receiving title.
2 - Unlawful Purpose
- Modern cases suggest that the implied trust is still proper where X’s misconduct is slight compared to the unjust enrichment Y will enjoy if permitted to keep the property.
3 - Transferee Obtained Title Wrongfully
--> No resulting trust arises when the transferee obtained title wrongfully (for example, by fraud), although a constructive trust may be imposed.
265
Where X supplies only part of the consideration, the resulting trust in their favor is only for ______.
a pro rata portion of the property
266
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.
-> Equity turns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest in the property.
267
The constructive trustee’s only duty is ____
to convey the property to the person who would have owned it but for the wrongful conduct.
268
A constructive trust must be ____.
requested as a remedy in a court action (A constructive trust is not automatic; it must be pled and proved.)
269
Proof of the facts necessary to establish a constructive trust must be made by _____ rather than a preponderance of the evidence in some states.
clear and convincing evidence
270
For a constructive trust remedy, the plaintiff must be able to ___
identify particular property as the trust res.
-> The mere proof that a defendant has been guilty of wrongdoing against the plaintiff and that the defendant has assets that could be used to satisfy the plaintiff’s claim is not a sufficient basis for imposing a constructive trust.
271
Constructive Trust Arising from Theft or Conversion
- If Y steals property from X, title remains in X; there is no need to
imply a trust.
- But if Y uses the property to acquire other items, Y takes title to the items and holds them in constructive trust for X
272
Constructive Trust Arising from Fraud, Duress, Etc.
- Where Y acquires property from X by fraud, duress, mistake of fact, or by breach of a fiduciary duty owed to X, Y holds the property in constructive trust for X’s benefit.
--> If property is conveyed to a third
party who is not a BFP, the third party can be declared a construc-
tive trustee.
- If Y takes property under a forged or fraudulent will, Y holds it in constructive trust for its rightful inheritor.
--> This is true even if Y is innocent.
273
Constructive Trust Arising from Breach of Fiduciary Duty
The fiduciary’s duty forbids them from taking title to property belonging to a beneficiary and from seizing for themself an opportunity to acquire property that comes to them in their capacity as fiduciary --> If the fiduciary violates this duty, courts may impose a constructive trust in favor of the person to whom they owe the duty.
274
Constructive Trust Arising from Homicide
In states without a slayer statute, if Y kills X and is convicted of murder or manslaughter, Y holds any property acquired from X by will or intestacy as constructive trustee in favor of whomever would have taken the property had Y predeceased X.
275
Constructive Trust Arising from Homicide - Where Victim and Killer Held Property in Joint Tenancy
Where X and Y were joint tenants, the killer Y may be trustee of only a one-half interest and own the balance free of trust, or Y may hold the whole interest in constructive trust less his life estate in one-half
(depending on the jurisdiction).
276
Constructive Trust Arising from Breach of Promise - General Rule
The general rule is that a mere breach of a promise will not raise a constructive trust.
-> Thus, where A transfers real property to B on B’s oral promise to hold it for C, some jurisdictions consider the Statute of Frauds a bar. But the trend is to impose a constructive trust for C.
277
Constructive Trust Arising from Breach of Promise - Exceptions General Rule
A constructive trust will be imposed in the following cases:
- Fraudulent promise (promisor never intended to keep it)
- Breach of promise by one in a confidential relationship (which can include attorney-client, doctor-patient, business partners, family relations, and friendships)
- Breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third person (secret trust)
- Breach of promise by the decedent to devise property to one rendering services in reliance thereon (but no constructive trust here if damages adequate)
- 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)
278
Constructive Trust - Standard of proof
The burden of proof is on the party seeking the constructive trust to establish facts relied upon by clear and convincing evidence rather than a preponderance of the evidence in some states.
279
OBLIGATIONS OF TRUSTEE OF CONSTRUCTIVE OR RESULTING TRUST
- Once the court has declared such a trust to exist, the trustee’s sole duty is to convey legal title to the beneficiary.
- The trustee must also account for profits taken from the property or fair rental value of the trustee’s use of it from the time of the occurrences raising the implied trust.
- There is no duty on the trustee to invest trust property.
280
Actions to impress constructive or resulting trusts are in ____.
However, the rule that an ____ bars equitable relief is not applicable—except to ____
equity (and most equitable principles are fully applicable)
“adequate remedy at
law”; the breach of an oral promise to make a will, or to hold property purchased at a foreclosure sale for the benefit of the promisee.
