Trusts Flashcards
What is a Trust
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 own equitable title
Trustee
A fiduciary who must:
1. deal with the property with reasonable care
2. maintain utmost degree of loyalty, and
3. is personally responsible if their conduct falls beneath required standards.
Equitable Interest
Held by the beneficiary who receives the benefits of ownership as set forth in the trust.
Elements of a valid Trust
I Identify A Proper Form
1. Intent to create a trust (words, writing, or conduct)
2. Identifiable corpus (trust property)
3. Ascertainable beneficiaries
4. Valid Trust purpose
5. Mechanics and formalities (Trustee)
Intent
- No formal words required
- Communication to intended Beneficiary not required unless settlor is also trustee then need to segregate trust assets or otherwise show trust intent.
- Must be manifested while settlor owns property and prior to conveyance to another.
- Must intent for trust to take effect immediately (not future time unless supported by consideration).
- Outright gift cannot be turned into a trust.
- Hopefull language does not create a trust unless:
Definate and precise directions
Directions addressed to fiduciary
unnatural disposition of property (close relative will take nothing) if no trust or
Extrinsic evidence showing that settlor previously supported intended beneficiary.
Spit of Title
Any split is sufficient so long as the sole trustee is not the sole beneficiary. If so, equitable and legal titles merge and trust terminates.
Identifiable Corpus
Sufficient Trust Property- existing interest in existing property (future interest okay) but must be existing property that settlor has the power to convey or assignable interest.
Must be segregated from other property.
Debtor cannot hold own debt in trust.
Beneficiaries
- must have capacity to take and hold tilte to property (need not be competent).
- notice to beneficiary not required but lack of notice may indicate that no trust was intended.
- Acceptance is required (generally presumed) but can happen after creation
Disclaiming Trust
- filing written instrument with trustee/probate court resulting in trust is read although disclaimant deceased as of that date
- Must be disclaimed within 9 months of creation or 9 months after 21 years of age but some states do not impose a time limit and may disclaim as long as not estopped from doing so.
- estoppel when they exercised any dominion or control over the interest or accepted any benefits under the trust.
- Disclaimants creditors in most states are defeated but not federal tax lien.
AntiLapse Statutes and Trusts
Some states and the UPC apply it to future interests created in trusts (even those contingent on survival) unless trust makes alternate gift in case of beneficiary’s non survival.
Class Gifts and Unascertained Beneficiaries
Beneficiaries may be “definite” although not ascertained but must be acertainable by the time their interest are to come into enjoyment
(must be able to determine who belongs to the class). (grandchildren ok friends not).
If trust fails for lack of beneficiary
Trust in favor of settlor or successors is presumed.
Purpose
Invalid if:
* illegal
* performance requires criminal or tortious act
* contrary to public policy (induce others engage in criminal/tortious acts, encourage immorality, or induce neglectful parenting, familial or civic duties.
* violates Rule of Perpetuities.
If Purpose fails
- settlor’s alternative desire controls if expressed
- if illegal condition is condition subsequent then condition invalidated but trust valid.
- If condition precedent then preferred view is to hold interest valid unless evidence that the settlor’s wish would be to void interest altogether if condition unenforceable.
Rule Against Perpetuities
nonvested property interest is invalid unless it is certain to vest or fail no later than 21 years after the death of a person who is alive when it is created.
Many states have adopted wait and see approach or alternative 90 year vesting period that would save the interest.
number of states have abolished the rule against perpetuities as it applies to trusts.
Trustee Qualifications
Capacity to
* acquire and hold property for their own benefit and
* to administer that property
Removal of Trustee
- Court - can remove or force to confirm appointment
- Grounds for removal whether continuatio in office would be detrimental to the trust - serious breach of trust, habitual drunkenness, conflice of interest
- Beneficiaries must have grounds to remove unless power granted to them by trust instrument.
Disclaimer/Resignation by Trustee
Must take all or nothing
Must have court’s permission to resign unless all beneficiaries consent or trust provides otherwise.
Inter Vivos trust Creation
- By Settlor declaring themself trustee for another or by transfer toanother as trustee.
- Present intent must be manifested by conduct (delivery- placing trust property out of settler’s control) or words (declaraing oneself trustee and segregating property). Real property should be conveyed by deed and personal by personal delivery or written assignment.
- Statute of Frauds applies so in writing for trusts of land AND part performance precludes statute of frauds (holder of legal title acts like trustee)
- Parol evidence rule does not apply where ambiguity appears on face of writing.
Pour-Over Gift Will to Trust
- Trust must be established in Testator’s lifetime
- Can be initial funding if identified in will and executed before testator’s death.
Testamentary Trusts
Created in Settlor’s valid will
* trust intent and essential terms (res, benes, purpose) must be ascertained from will itself/incorp into will or exercise of a power of appointment created in the will
* Secret Trust - settlor agrees with a will beneficiary that bene will hold property in trust for someon else and relies on that promise but will does not state nature of the trust. Beneficiary may present extrinsic evidence of the will bene’s promist to hold property in trust. If promise proven by clear and convincing evidence a constructive trust imposed in favor of intended trust beneficiary. Timing not an issue just testator’s reliance on promise.
* Semi Secret Trust - Gift in will to a person in trust but does not name beneficiary then extrinsic evidence not allowed and trustee holds on resulting trust for testator’s successors in interst.
Transfer of Beneficiaries Interest
Voluntary - generally free absent statute or trust instrument
Involuntary (creditors) - unless statute or trust provides otherwise beneficiary creditors may reach inteterst in trust and interest is subject to judicial sale. Court may order trustee to pay beneficiary’s income tot he creditors until the debt is satisfied.
Discretionary Trusts
Trustee given discretion whether to apply or withhold payments of income or principal to a beneficiary.
prior to which beneficiary’s interest is not assignable and cannot be reached by creditors.
Creditors are usually allowed to attach beneficiary’s intererst but cannot compel trustee to make distribution. If they have notice, trustee must make payments directly to creditors unless protected by spendthrift provision.
Beneficiary has no rights to enforce against truste unless trustee abuses power then court will intervene.
Spendthrift Trust
Precludes beneficiary from transferring interest in trust and creditors are precluded from reaching it to satisfy their claims.
Most courts uphold them. Generally invalid for settlor to create. (look to who furnished consideration) some states allow bc out of country places started to allow.
Exceptions: dependants, gov’t , persons supplying necessities, and in a few states tort collectors.
Support Trusts
Directs trustee to pay only so much of income necessary for beneficiary’s support similar to spendthrift: not assignable , standard of support if not stated is accostomed standard of living. Whether other resources taken to account is a question of settlor’s intent and decided by courts on case-by-case basis.
Modification/Termination
- Express terms
- By Settlor - Unless terms expressly state irrevocable (but some states are the opposite, irrevocable unless expressly stated )
- Revocation of irrevocable trust - upon written consent of all living persons with vested or contingent interests and settlor.
- By Beneficiaries but only if all the following true:
* all beneficiaries agree (if unascertainable then may be impossible but may be aloowed if party appoited to rep their interests or virtually repped according to state law)
* all beneficiaries legally competent
* Settler’s inten tnot frustrated (settlor consents or does not impair any material trust purpose) - By operation of law -early termination where complete, illegal, impossible. Changed circumstances unanticipated by settlor authorize a deviation from administrative terms to achieve trust purpose.
Duty of Trustee upon Termination
Wind up Trust business (may continue to exercise powers for a reasonable period of time)
Distribute to remainder beneficiaries
Sources of Trustee’s Power
Express - Trust instrument, state law, court decree
Implied: all powers necessary or. appropriate to carry out terms of the trust if not expressly forbidden in trustdocument.
Powers of Trustee
Imperative/Mandatory - trust instrument requiers exercise court steps in on petition to order exercised.
Discretionary - trustee’s good faith judgment. Only reviewed for abuse of discretion
Duties of Trustee
**Duty of Undivided Loyalty **to trust and beneficiaries and cannot enter into any transaction in which trustee is dealing with trust in individual capacity.
**Duty to Account **- must keep accurate records of all trust transactions and render accountings to the beneficiaries or court upon demand.
General Standard of Care Degree of care, skill and caution that would be exercised by a reasonably prudent person managing their own property but if greater or special skill then highre.
Duty to Separate and Earmark Trust Property
Duty to Perform Personally- Only delegate acts tahtt would be unreasonable to require them to perform personally - cannot be all. may delegate invesntment and management functions. They become guarantor of the fund and are responsible for actual losses no matte what the cause of the loss.
Duty to Defend Trust from Attack unless welfounded
Duty to preserve Trust Property and make it productive
Beneficiaries Rights in Breach of Duty
- set aside transaction
- recovery any profit made by trustee (trace profits)
- affirm transaction
Except if beneficiariees consetned to or joined in the breach.
Must sue within reasonable time or estopped by doctrine of laches.
Mere failure to object does not constitute consent.
Investments
Uniform Prudent Investor Act UPIA (expanded or limited by trust terms) (discretion is unclear whether trustee’s power expanded beyond UPIA).
Standard of Care - reasonable care, skill, and caution when investing and managing trust assets.
Portfolio Approach - prudence for overal strategy.
Any type of investment permitted but must be prudent
Diversification - unless reasonable determine that purposes of trust better served without diversification.
Loyalty and Impartiality - no social investing if returns are lower
Delegation is permitted - but must act prudently in 1. selecting agent, establishing scope and terms, periodically reviewing agent’s actions.
Liabilities of Trustee
Beneficiaries may seek to have trustee surcharged (pay damages suffered by trust) or removed from office.
Prior to actual breach court of equity will compel trustee to perform dutiees and enjoin from committing breach
Removal of Trustee
Trust document first then go to court.
Court removes if continuation would be detrimental to the trust considering both settlor’s intent and intersets of beneficiaries
Trustee’s liability for acts of others
Agents - if they direct/conceal/or fail to compel agent to redress wrong, improperly selects/delegates or fails to exercise reasonable supervision over agent.
Co-Trustees- approved/agreed/participated in breach or negligently disregarded their own duties, concealed or failed to compel redress, improperly delegated authority.
Predecessor Trustee- should have/knew about breach and failed to compel redress or negligent in determining what property should have been delivered to them.
Trustees and Exculpatory Clauses
Breach of Trust - strictly construed but enforceable where - no bad faith, intentional breach, or recklessness involved, or not inserted in trust as result of trustee’s abuse of confidential relationship with settlor.
Trustee’s Liability to 3rd parties
Contract: Unless contract provides trustee is personally liabile. Trustee is entitled to reimbursement from the trust, if K wihtin poweres and trustee acted with reasonable prudence.
Tort - indemnification only if trustee was not personally at fault and tort occurred as normal incident to activity in which trustee was properly engaged.
Liability of 3rd Parties to the Trust
- Property Improperly transferred to non-BFP can be set aside.
- knowing participants in breach of trust
- Beneficiaries must compel Trustee to sue cannot sue on own. Except where Trustee participated in breach, has left jurisdiction and no successor trustee appointed, fails to sue a third person liable in tort or contract
Charitable Trust Rules
must be for charitable purposes (benefit the public)
must have indefinite beneficiaries (the public or a class within the public)
may be perpetual (not bound by RAP)
cy pres doctrine applies (as near as possible- general charitable intent and ascertain primary pupose)
Enforcement of Charitable Trust
Duty to enforce on state attorney general OR under UTC settlor and qualified beneficiaries have standing
Honorary Trust or Purpose Trusts
commonly used for pets or maintenance of burial places. Courts uphold as long as trustee is willing to perform duties. Absent special statutes may be voided bc of RAP but sometimes allowed to go fo 21 years.
Resulting Trusts
Arise by implication from settlor’s conduct :
* purchase money resulting trusts
* resulting trusts arising on failure of express trust
* resulting trusts arising from incomplete disposition of trust assets (excess corpus)
Settlor is beneficiary (or if deceased their settlor’s succeessors)
Purpose - to do what settlor would have done had settlor put purpose into words
Resulting Trust: Failure of Express Trust
Yes: trust void/unenforceable; beneficiary dead/unavail; cy pres inapplicable
No: trust instrument provides for disposition fo trust property in event of failure/completion; settlor given consideration for original transfer in trust; settlor created trust for illegal purpose; cy pres applicable.
Purchase Money Resulting Trusts
Presumed whenever the X furnishes consideration for the acquisition of real or personal property but with X’s consent title is taken in name of Y.
Consideration must be supplied at or before the time Y takes title.
Burden on Proof is on X by clear and convincing evidence that they supplied consideration –> rebuttable presumption of resulting trust but Y can show gift/loan/satisfaction of debt.
X expect interest not consideration back.
Constructive Trusts
Flexible equitable remedy to prevent unjunst enrichment resulting from wrongful conduct (fraud etc..)
Equity turns holder of legal title into trustee when they maynot in good conscience retain beneficial interest in property - only duty is to convey property to person who would have owned it absent wrongful conduct.
Must be requested as remedy in court action - must be pled and proved by clear and convincing evidence.
requires particular property
