trusts Flashcards
what is the definition of a trust
A trust is a fiduciary relationship in which one party (trustee) holds legal title to property for the benefit of designated beneficiaries
what is an express trust
Created with property owner’s express intent
Private trust — created for the benefit of certain defined and/or ascertainable persons
- May be created inter vivos (during settlor’s life) or as a testamentary trust (created by will)
- beneficiary –> equitable title,
- trustee –> legal title
what is a resulting trust and when does it happen
trust implied or imposed by law, most often when an express trust fails for some reason (e.g., beneficiary is dead, trust is unenforceable or void, been revoked)
Settlor usually becomes beneficiary and trustee conveys title back to settlor or, if settlor has died, settlor’s estate is beneficiary
what is a constructive trust
not a trust, but rather an equitable remedy used in cases to rectify unjust enrichment or wrongful conduct
Court imposes constructive trust on property in wrongdoer’s possession
what are the elements needed to create a valid express trust
TIPCAP
1) comepetent trustee w/ duties
2) clear present intent by the settlor to create a trust
3) property (e.g., corpus/res) sufficiently described
4) capacity to convey
5) ascertained beneficiary
6) valid trust purpose
what is the level of capacity settlor needs to create a trust
same capacity as to make a will (suitable age, knows what they’re giving away, who they’re giving it to, etc.)
what constitutes a “clear/present intent” such that a trust was validly created
Intent must be absolutely clear and settlor must understand the nature of their act (i.e., what a trust is)
- must intend for trust to take effect immediately
- but precatory expressions like “i hope/wish/etc.” aren’t good enough (could be explained by clear/convincing extrinsic evidence)
Writing not required unless as required by the Statute of Wills or Statute of Frauds (e.g., real property)
what constitutes a “competent trustee” such that a trust was validly created
- Settlor must name a trustee, but once established, a trust will not fail solely b/c trustee does not exist
- In such cases, a trustee will be appointed
- Trustee capacity — in most states anyone who can hold title to property can act as a trustee
what constitutes a “ascertainable beneficiary” such that a trust was validly created
Definite beneficiary — at time of trust creation, settlor must either:
- Specifically identify the beneficiaries by name, or
- Sufficiently describe how beneficiaries will be ascertained
- can be a class gift but the class must be reasonably definite
Does not apply to charitable trusts
Sole trustee cannot be a sole beneficiary of a trust
what constitutes a “corpus” such that a trust was validly created
- I.e., owner has specific property they want to place in trust
- Trust property (corpus, res, etc.) must be specifically described or ascertainable with certainty from its description; if there’s no identifiable property the trust fails
- the corpus must be existing property (tangible or intangible) that the settlor has the power to convey
what is a “valid trust purpose” such that a trust was validly created
can be for any purpose that is not illegal, impossible, or contrary to public policy
what are the ways a person can create an inter vivos trust
Two ways:
1) Declaration of trust - settlor is trustee
2) Conveyance in Trust — settlor creates the trust by transferring legal title of property to a trustee
what is involved with creating a “declaration of trust”
A trust can be created by a person declaring themself trustee of specific property (must be in existence at time of creation) for a beneficiary (themselves or others). The settlor keeps legal title.
Type of inter vivos trust
- Must have a clear/present intent to create
- Does not have to be in writing
If a trust was created by a declaration of trust, no conveyance of personal property is needed as long as the property is identified and segregated. Real property should be conveyed from the settlor as an individual to the settlor as a trustee.
what needs to happen for creating an inter vivos trust with person other than settlor as the trustee
Must have clear/present intent to create
Transfer of property — property owner transfers property to another as trustee
- Delivery — property must be delivered to trustee/ placed out of settlor’s control
- if real property, must transfer deed
- if personal property must be physically delivered or written assignment
what happens if a settlor promises to create a trust in the future/trust assets don’t exist at the time they’re intending to make the trust
it won’t be valid unless:
1) it’s supported by consideration OR
2) when the assets come into existence later on, they remanifest intent to creat the trust
what is the split of title required to create a valid trust
any split of title is ok so long as the sole trustee is not the sole beneficiary
- ex. Trustees are A and B, Beneficiary is A, that’s ok
- Trustees are A and B, beneficiaries are A and B, that’s ok
- Trustee is A and beneficiary is A, that’s not ok
what are the formalities for the creation of an inter vivos trust
Inter vivos trusts are created while the settlor is alive either by the settlor declaring themself trustee for another or by the transfer of property to another as trustee.
The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee). If a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent.
note: most states do not require a writing for trust of personal property, BUT if land is the corpus, writing required under Statute of Frauds
what are testementary trusts and what’s required for them
Trust created by the settlor’s valid will
Trust intent, essential terms, and identification of beneficiaries must be ascertainable by either:
- Terms of the will itself,
- Incorporation by reference — an existing writing properly incorporated by reference into the will, or
- Power of appointment
what’s a secret trust
absolute gift in a will made in reliance on will beneficiary’s promise to hold the property in trust for trust beneficiary, but the will doesn’t expicitly call it a trust
- trust beneficiary can show extrinsic evidence to prove be clear/convincing evid that it’s theirs
What is a pour-over provision
A provision in a will that devises property to a previously existing trust
The trust must either be in existence at the time the will is executed or executed at the same time the will is executed
- note: the corpus of the pour-over provision can be the initial funding for the trust
what powers does the trustee have
DIM (distribute, invest, manage)
Trustee has powers necessary and appropriate to properly:
- distribute trust property
- invest, and
- manage
Trustee can only exercise powers expressly or impliedly conferred (most often conferred by trust terms)
what are the duties of the trustee
PEARLS
1) preserve/keep productive
2) enforce/defend against claims
3) administer
4) report
5) loyalty
6) separate trust property/keep records
what’s involved in the trustee’s duty to administer
trustee must administer trust in good faith, in a prudent manner, and impartially (if there are multiple beneficiaries) in accordance with trust terms and beneficiary’s interest
what’s involved in the trustee’s duty of loyalty
no self-dealing
- Trustee cannot enter into a transaction in which he is dealing with the trust in his individual capacity, absent court approval or a contrary trust provision
- if they do, the beneficiaries can affirm the transaction if they like it or set aside
what’s involved in the trustee’s duty to report
trustee must keep beneficiaries reasonably informed of the trust and its administration and should furnish an annual accounting of the trust
what’s involved in the trustee’s duty to separate trust property/keep records
trustee must not commingle trust property with his own or another trust’s
what’s involved in the trustee’s duty to enforce claims/defend trust
trustee must enforce claims the trust has and defend the trust against claims
what’s involved in the trustee’s duty to make property productive
trustee must preserve trust property, including the duty to make property productive (e.g., invest funds, lease or manage land, collect claims)
- need to follow prudent investor rule and view the trust as a portfolio when making investments, not each thing in a silo
what are the contours of a trustee delegating functions to agents
A trustee can reasonably delegate functions to people who are have superior skill than the trustee (like an investment expert) and if the trustee delegates reasonably, the trustee won’t be personally liable to beneficiaries if the agent messes up
what is a discretionary trust
trustee has absolute power and discretion to make decisions regarding distribution of trust property to beneficiaries
Beneficiaries have no right to income/alienation until trustee exercises discretion to distribute property or income
- Beneficiary’s creditors — cannot reach the trust b/c beneficiary cannot compel payment from the trust
- But if creditors serve trustee with process, trustee must first satisfy creditor’s claims when distributing funds to beneficiary
- Only way for beneficiary can interefere with trustee’s discretion is to show abuse of power
Note: court can compel payment for things like child support/alimony
what is the difference between “mandatory” and “discretionary” powers vested in a trustee
Mandatory - trustee is required to exercise
Discretionary - trustee may or may not perform the duty, it’s in their good faith discretion
what is a support trust
A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support.
NOTE - a trust to pay “all the income to A for his support” is not a support trust because it is not limtied to amounts necessary for support
A support trust may be mandatory or discretionary. If discretionary, the creditors’ rights are the same as they are for other discretionary trusts
- Even without a spendthrift clause, the beneficiary’s interest in a support trust is such that no one but the beneficiary can enjoy it; the beneficiary’s interest is not assignable by definition. Support trusts
are, therefore, impliedly spendthrift - standard of support is beneficiary’s accustomed standard of living (unless trust instrument says otherwise)
what is a spendthrift trust
prohibits beneficiaries from transferring their interests in the trust, either voluntarily or involuntarily
Usually included to protect beneficiary from his own carelessness
- Beneficiary’s creditors — cannot reach beneficiary’s interest in the trust, but distributions to beneficiary are reachable
if the settlor is also the beneficiary, they can’t use a spendthrift provision to keep thier own creditors from reaching their assets, so it would be invalid
when will a spendthrift trust be invalid
if the settlor is the beneficiary; can’t create just to protect your own property from creditors
- growing number of states allow for this though bc so many people were using offshore accounts to make this
what is a charitable trust and what are it’s distinguishing characteristics
Trust that has the purpose of benefitting an unascertained group of people or the public at large
Characteristics:
- unascertainable (e.g., indefinite) beneficiaires are required
- charitable purpose
- can be perpetual (not subject to RAP)
What does it mean to have “unascertainable beneficiaries” with regard to a charitable trust?
Test — beneficiaries are unascertainable if they are unnamed and changing over time
- Must be created in favor of a reasonably large class of indefinite beneficiaries
- Cannot be for the benefit of identifiable individuals, although a trust benefitting a single charitable organization whose activities meet these requirements is acceptable
what is a charitable purpose suitable for a charitable trust
Must be considered to benefit the public; effect of gift, not motive of settlor, controls
- e.g., trust to build a public swimming pool on land next to settlor’s house is acceptable even if settlor’s motive was to use the pool
Trust for supporting political initiatives can be charitable, including a present change in law (although cannot be a trust in favor of a political party)
what’s the cy pres doctrine for charitable trusts
Allows courts to modify terms of a charitable trust to as near as possible as settlor’s original intention
Can arise where the trust’s original purpose is accomplished or becomes impractical, unlawful, or wasteful
when will a trust terminate
Trusts will terminate:
- automatically at the expiration of a specified trust term or
- purposes have become accomplished or
- purposes unlawful, impossible, or contrary to public policy
when can the settlor revoke/modify a trust
settlor can modify or revoke unless the terms expressly prohibit modification or revocation
- note: the power to revoke also includes the power to amend the trust property
when can the beneficiary(s) modify/revoke a trust
beneficiaries can modify or revoke upon consent of settlor and all beneficiaries
- Without settlor consent — all beneficiaries can consent to modify or revoke if doing so would not frustrate a material purpose of the trust
- “All beneficiaries” includes unborn or unascertained beneficiaries, which can preclude obtaining required unanimous consent (Note: Some states allow appointment of a representative for minor, unborn, or unascertained beneficiaries)
what are grounds for removal of a trustee
- serious breach of trust
- serious lack of cooperation among co-trustees
- unwillingness/persistent failure
- substantial change in circumstances
