Trusts

Question 1

Trust

Answer 1

Settlor splits the legal title and equitable title in property.
* Legal title goes to trustee
* Equitable title goes to beneficiary

Settlor creates a fiduciary relationship with a trustee, where trustee is obligated under a fiduciary duty to manage, invest, and administer the trust assets and income for the benefit of the beneficiary.

Question 2

Express Trusts

Answer 2

Created by express intention of the settlor.
* Private: certain ascertainable private persons
* Charitable: indefinite class of persons or public in general for charity

Question 3

Implied Trusts

Answer 3

Created by operation of law.
* Resulting trusts: arise from presumed intention of the owner of the property
* Constructive trusts: equitable remedy used to prevent unjust enrichment

Question 4

Trustee

Answer 4

Holds legal title in the trust property and has responsibility of ownership.

Fiduciary duties include:
* Deal with property with reasonable care
* Maintain the utmost degree of loyalty
* Personally responsible if their conduct falls beneath required standards

When trustee’s duties are completed, the trust terminates and trustee distributes the legal and equitable title of any remaining property to remainder beneficiaries.

Question 5

Beneficiary

Answer 5

Holds equitable title in the trust property and directly receives benefits of ownership as set forth in the trust
* Enforces the trust
* To whom the trustee owes their fiduciary duties

Question 6

Requirements for a valid trust

Answer 6

1. Intent
2. Identifiable corpus (property)
3. Ascertainable beneficiaries
4. Proper purpose
5. Mechanics and formalities

Question 7

Required intent for valid trust

Answer 7

1. Intent to split legal and equitable title
2. Intent to impose enforceable duties on holder of legal title
   * If the settlor does not spell out duties for trustee, the court will imply duties if clear intention to make the trust exists

• Must have capacity for intent (same as will or inter vivos gift)
• Undue influence, fraud, or duress makes trust unenforceable
• Present intent for the trust to take immediate effect while settlor owns the property is required
• Precatory expressions (“I hope X uses the property for Y purpose”) is not sufficient to create trust

Question 8

How must title be split?

Answer 8

Can be split any way as long as there is not one person that is both the named trustee and beneficiary

Question 9

Identifiable corpus requirement for valid trust

Answer 9

Property must be ascertainable with certainty
* If settlor does not own the property (ex. property of another, future income, expected property in the future) = no trust
* If settlor is relying on expected property in the future to create trust, the trust comes into existence only when the settlor acquires assets and remanifests their intention
->Remanifestation of intent is not required if settlor makes a promise to create a trust and the promise is supported by valid consideration

Question 10

Disclaimers

Answer 10

Both trustees and beneficiaries can disclaim their title
* Beneficiaries: cannot have taken any benefit from the title prior to disclaimer

Question 11

Trustee’s acceptance

Answer 11

If the trustee refuses appointment, resigns later, or dies, the court will appoint a successor trustee as long as it is not clear that the settlor intended the trust to continue only if that trustee served

Trustee can accept either by
* Signing the trust or separate written acceptance
* Substantially complying with the acceptance terms (part performance)

Question 12

Removal of trustee

Answer 12

Court can remove trustee on its own or upon request by settlor, beneficiary, or co-trustee if
* Serious breach of trust
* Serious lack of cooperation with co-trustees
* Unfitness, unwillingness, persistent failure to administer
* Substantial change in circumstances

Question 13

Anti-lapse statutes

Answer 13

If beneficiary dies before qualifies for trust and the trust does not specify to whom the gift should go to, some states and UPC have anti-lapse statutes that allow beneficiary’s descendants to receive the gift if there is a close enough relationship b/w the settlor and beneficiary

Question 14

Divorce

Answer 14

Finalized divorces revoke all beneficial gifts and fiduciary appointments made in favor of the ex-spouse

Question 15

Requirements for delivery of specific trust property

Answer 15

• Must be delivered to trustee with intent to do it right now (not in future)
• Must be some certainty over what is the trust property
  
  • Can’t be mere expectation or unearned profits

Question 16

Ascertainable beneficiary

Answer 16

• Must be determinable when the trust is to be distributed

Class gifts
* As long as the class is ascertainable when they are to benefit, then the trustee must be able to determine who belongs to the class
* Ex. “Grandchildren” = valid vs. “friends” = invalid (which friends?)

If a trust fails for lack of beneficiary, a resulting trust in favor of the settlor or their successors is presumed

If a private trust exists for a class, the settlor may authorize the trustee to exercise their discretion in selecting members to be benefitted or have certain requirements within the class of members to benefit

Question 17

Proper trust purpose

Answer 17

A trust can be created for any purpose except those that are illegal, intended to defraud creditors, or against public policy

If found to be against public policy, the court can either (1) remove the violative condition and give the beneficiary the property or (2) find the trust void

Question 18

Mechanics and formalities of valid inter vivos trusts

Answer 18

Inter vivos trusts can be made either by:
Present declaration of trust
* Settlor declares themself as trustee of a specific property for a beneficiary and keeps legal title
* Conveyance of personal property: no conveyance required as long as identified and segregated
* Conveyance of real property: must deed from settlor as individual to settlor as trustee

Transfer or conveyance in trust
* Settlor transfers legal title of property to a trustee (conveys legal title) and settlor can either retain or transfer equitable title
* Conveyance of personal property: physical delivery or appropriate written assignment
* Conveyance of real property: deed from settlor to beneficiary or from settlor as individual to settlor as trustee

Ex. Transfer or conveyance in trust: settlor acquires many different types of property, may want to hire someone to manage that property on their behalf (hold legal title)

Question 19

Do inter vivos trusts need to be made in writing per the Statute of Frauds?

Answer 19

Yes, unless
* In state that allows oral trusts to be made under specific cirucmstances
* Start acting as a trustee (part performance precludes SOF defense)

Question 20

Mechanics and formalities of valid testamentary trusts

Answer 20

Testamentary trusts are made through the settlor’s will
* Will itself must be valid
* Property must exist at the date of testator’s death, not when the will was executed
* Settlor can amend and revoke the trust during their lifetime
* Trust may remain unfunded during the settlor’s lifetime, and the pour-over property can be the initial trust funding if the trust is (1) identified in the will and (2) executed before the testator’s death

Trust may exist in a separate document from the will, but when the settlor dies and will goes into effect, the property will “pour” from the will to fund the trust

Question 21

Secret trusts vs. semi-secret trusts

Answer 21

Both are types of testamentary trusts that are implied from the circumstances.

Secret trusts: settlor agrees with a will beneficiary that the will beneficiary will hold the property in trust for someone else, the settlor relies on this promise, but the will itself does not state this promise, and the will beneficiary does not uphold this promise once settlor dies. If the intended trust beneficiary can use extrinsic evidence, and if they can show by clear and convincing evidence that the promise exists, the court will impose a constructive trust in favor of the intended beneficiary

Semi-secret trusts: will makes a gift in trust but fails to name the beneficiary. The gift will fail and the court will imply a resulting trust for the settlor’s successors in interest (the other will beneficiaries).

Question 22

Duration of trusts and violations of RAP

Answer 22

Common law: nonvested property interest cannot exceed 21 years after the death of a person who is alive when it is created (in violation of RAP)

Modern approach: many states either wait and see whether interest vests or have abolished RAP as it applies to trusts

Question 23

Source of trustee’s powers

Answer 23

• Express in trust instrument (control over other sources)
• State law
• Implied powers necessary to achieve purpose of the trust

If instrument prescribes mandatory power and trustee fails to perform = beneficiary can petition court to order trustee exercise power

Question 24

Trustee’s standard of care for exercising discretionary powers

Answer 24

Trustee must make determinations in good faith
* Abuse of discretion and failure to exercise judgment to make a decision are subject to review by court
* If settlor grants “unreviewable” or absolute discretion to make decisions, court will still review (no such thing as absolute b/c would mean the trustee has no enforceable duties)

Question 25

Trustee’s duties

Answer 25

1. Duty to administer trust
2. Duty of loyalty
3. Duty to report
4. Duty to not commingle
5. Investments

Question 26

Trustee’s duty to administer trust

Answer 26

Trustee is bound to follow terms of trust and liable for noncompliance
* Must personally administer in good faith and in prudent manner

Question 27

Trustee’s duty of loyalty

Answer 27

Trustee has duty of undivided loyalty to trust and its beneficiaries, where absent court approval or express waiver in the trust, the trustee cannot self-deal regardless of whether transaction was fair or in good faith

Trustee cannot:
* Personally benefit from trust
* Purchase property from trust
* Sell own property to trust
* Borrow from trust
* Claim excessive compensation from the trust

Question 28

Trustee’s duty to report

Answer 28

• Trustee must keep records
• Trustee must render accounting when requested by a beneficiary or the court

Question 29

Trustee’s duty to not commingle

Answer 29

Trustee may not commingle trust property with their own property or that of another trust

Question 30

Trustee’s obligations in investments

Answer 30

Trustee must invest in the same manner as a prudent investor under the Uniform Prudent Investor Act (UPIA)
* Must view investments in the context of the entire trust portfolio and as part of overall investment strategy
* Take reasonable amount of risk in investing
* Must consider the purpose of the trust, conditions of the economy, tax consequences, etc.
* Must diversity investments unless trust purposes are better served w/out diversification (ex. keeping family farm that has been left to children)

If trustee has special skills or expertise
* Duty to act with such skills or expertise (held to higher standard)

Social investing
* If wanting to invest for social causes (environmental, humanitarian, etc.), must show that socially invested portfolio is just as profitable as alternative, non-social portfolio

Question 31

If the trustee takes on the role of a prior trustee (is a successor) and discovers imprudent investments were made by the prior trustee, what may they do?

Answer 31

Successor trustee must review the investments made by the prior trustee and bring them into compliance with the prudent investor rule
* Successor trustee may need to sue the prior trustee for breach of duty if imprudent investments are found

Question 32

If the trustee lacks the requisite knowledge to act as a prudent investor, what can they do?

Answer 32

Trustee may delegate investment to another person with the expertise necessary to meet the standard

While trustee is not personally liable to beneficiaries for the delegate’s actions, the trustee must still act prudently in
* Selecting the delegate
* Establishing the scope and terms of the delegation
* Periodically reviewing the agent’s actions

Question 33

Types of damages that beneficiaries can recover for trustee’s breach of duty

Answer 33

1. Lost profits: recover profits that trust would have earned but for the trustee’s breach (even if trustee did not personally gain from their breach)
2. Depreciation in value of trust property (even if trustee did not personally gain from their breach)
3. Any profits that trustee gained from breach must be returned to the trust

Question 34

Remedies available to beneficiaries when trustee self-deals

Answer 34

• If transaction gained the trust money = beneficiaries can keep the transaction
• If transaction lost money for the trust = force the trustee to give back the property trustee purchased by setting aside the transaction
• If transaction gained a profit for the trustee = force trustee to put profits back in the trust

Question 35

When is trustee not liable for breaches of their duties?

Answer 35

• Trustee acted in reasonable reliance on the terms of the trust
• Beneficiary consented to the conduct
• Exculpatory clause exists in trust that relieves trustee from liability for breaches (courts only exculpate negligent conduct)

If co-trustee commits breach, a trustee will not be liable if
* trustee did not join in the action; and
* exercised reasonable care in preventing the breach or compelled co-trustee to redress the breach

Question 36

Removal of trustee

Answer 36

Court has broad discretion to remove and re-appoint a new trustee (unless trust instrument shows intent to make only allow selected trustee to be the trustee of the trust)

May remove trustee for
* Incapacity
* Unfitness (chemically dependent, convicted of crime, etc.)
* Insolvency (more likely to embezzle)
* Extreme hostility
* Etc.

Question 37

Trustee liability for breaches of contract

Answer 37

Trustee is personally liable for contracts they enter into in their representative position as trustee

Trustee can escape liability if they include a provision in the contract that only allows the other party to sue for the trust property
* In some states, if sign contract with “as trustee” = presume intended to exclude personal liability

If trustee is held personally liable but the breach of contract was not a breach of trust = entitled to indemnification or reimbursement from the trust (assuming funds exist in trust)

Question 38

Trustee liability for torts

Answer 38

Third party can sue trustee for torts committing in their fiduciary capacity as trustee
* If trustee’s employees or delegate is personally at fault = cannot hold trustee liable (no respondeat superior)

Question 39

Uniform Principal and Income Act (UPAIA)

Answer 39

Trusts are usually income and principal trusts
* Income = goes to X during trust
* Principal = when trust ends, goes to Y

UPAIA lists rules that determine whether to trustee makes expenses or allocates receipts into either the income or principal funds

Question 40

Trustee’s adjustment power

Answer 40

Trust instrument can give trustee adjustment power to deviate from the UPAIA’s characterization of assets as either principal or income if the trustee deems it is necessary to carry out the trust’s purposes

Adjustment power cannot exist if:
* Trustee is also beneficiary of trust
* Prohibited by the tax instrument
* Would cause adverse tax consequences

Ex. Trust gives income to X to pay for her education, and principal goes to X’s grandchildren at the end of her education. As part of principal is condo building, where the rent has remained the same for many years and is not bringing much profit. Meanwhile, the income funds are running low and will not cover X’s education. If trust includes adjustment power for trustee, trustee can increase the rent on the condos (principal) and put this increased profit into the principal allocation to fulfill the trust’s purpose of funding X’s education.

Question 41

UPAIA’s allocation of receipts

Answer 41

Income
* Rent received on asset
* Interest on trust investments
* Cash stock dividend

Principal
* Sale of asset in trust (both amount paid for investment and appreciation)
* Eminent domain rewards
* Insurance proceeds if principal is destroyed
* Stock dividends, stock splits, or shares received b/c of reorganization
* Sale of unproductive property (property that has not been earning income)

10% income, 90% principal
* Mineral assets (oil, gas, minerals)
* Wasting assets (depreciating in value the longer they are held, such as copyrights, patents, etc.)

Question 42

UPAIA’s allocation of expenses

Answer 42

Income
* Ordinary tax income
* Ordinary repairs
* Depreciation

Principal
* Capital gains tax (tax when sell an asset at a gain)
* Extraordinary repairs and capital improvements (ex. adding pool to house)

50% income, 50% principal
* Trustee’s compensation
* Trustee’s accounting expenses

Question 43

Can a beneficiary transfer their property interests in a trust?

Answer 43

Yes, beneficiary may freely transfer their interest in the trust absent any restrictions by statute or by the trust itself

Question 44

Spendthrift trust

Answer 44

Clause included in trust that prohibits the beneficiary from transferring their interest until the trustee transfers payments to the beneficiary
* Creditors cannot reach into beneficiary’s trust interest until the trustee has paid the beneficiary
* Trust may give the trustee the ability to pay creditors directly to avoid beneficiary’s misuse of the property interest (ex. pay bills, tuition, etc.)
* Exception: if the beneficiary owes payment for child support, spousal support, etc. as ordered by the court, or has lost a tort claim, the court may reach into the beneficiary’s interest to satisfy those payments

If the settlor is a beneficiary (whether as trustee and beneficiary or just as beneficiary)
* In most states, settlor cannot use spendthrift clause to protect their own property from creditors
* In some states, settlor can use spendthrift clause, known as a “domestic asset protection trust”

Question 45

Discretionary trust

Answer 45

Trustee has discretion whether to apply or withhold payments of the income or the principal (or both) to the beneficiary
* Creditors cannot reach beneficiary’s interest until the trustee uses their discretion and makes payment to the beneficiary
* Exception: if the beneficiary owes payment for child support, spousal support, etc. as ordered by the court, the court may reach into the beneficiary’s interest to satisfy those payments

Question 46

Support trust

Answer 46

Trustee pays only so much of the income or principal (or both) as is needed for beneficiary’s support
* Can be mandatory or discretionary
* Beneficiary’s interests are not assignable = support trusts are impliedly spendthrift trusts
* If trust is silent on what the standard of support is = living standard that beneficiary is accustomed to

Question 47

How do trusts normally end?

Answer 47

• Expiration of the term specified in the trust instrument
• Express terms of the trust

Question 48

Modification and termination of trust by settlor

Answer 48

• Can revoke or amend trust unless terms expressly state that trust is irrevocable
• In some states, settlor can revoke irrevocable trust upon written consent of all living persons w/ vested or contingent interest in trust

Question 49

Modification and termination of trust by beneficiary

Answer 49

• W/ settlor and all other beneficiaries consent even if modification or termination conflicts w/ a material purpose of the trust
• W/out settler’s consent only if all beneficiaries consent and no material purpose of the trust would be frustrated

Examples of material purposes:
* Support provisions
* Spendthrift provisions
* Discretionary trusts
* Payment at certain ages
* Payment at certain dates

Question 50

Modification and termination of trust by operation of law

Answer 50

Court may modify or terminate if
* Trust’s purpose has been accomplished, illegal, or impossible
* Unanticipated circumstances threaten purpose of the trust
* Value of trust is to low to justify the costs of administering it
* In some states, courts will fix a mistake if mistake is shown by clear and convincing evidence

Question 51

Modification and termination of trust by trustee

Answer 51

• In some states, trustee can terminate if trust property is less than $50k, where the amount is insufficient to justify cost of administration and beneficiaries are given notice
• Trustee can combine several trusts into one or divide one trust into several as long as does not frustrate any purpose of the trust, impair rights of any beneficiary, and trust itself does not prohibit in its terms

Question 52

Duties of trustee when the trust terminates

Answer 52

• Trustee may continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust
• Timely distribute trust property to appropriate remainder beneficiaries

Question 53

Resulting trust

Answer 53

Arise by implication from settlor’s conduct, where the trust goes to back to the settlor (if alive) or to settler’s successors in interest (heirs if intestate, beneficiaries if have valid will).

Conduct giving rise to resulting trusts:
* Fail to create valid trust (ex. no ascertainable beneficiaries)
* Beneficiary cannot be located or is dead
* Trust’s purpose if fully satisfied but some trust property remains leftover
* Purchase money resulting trust

• Settlor is left holding the equitable interest in a resulting trust

Purchase money resulting trust: When the beneficiary gives money to a seller for real or personal property, and with the beneficiary’s consent, the seller delivers title to property directly to another person (the trustee). As long as beneficiary can show they intended to receive the actual property, rather than give the property as a gift or receive the money paid for the property as a type of loan, then they can recover the actual property. (Ex. I pay Amazon for an item and have them send it to X person’s house while I am out of town).

If the trustee given the property is a family member w/ close relationship to beneficiary = courts assume it was a gift.

Question 54

Constructive Trust

Answer 54

Not an actual trust, but a remedy to prevent unjust enrichment resulting from wrongful conduct
* Constructive trustee only has the duty to convey the property to the person who would have owned the property but for the wrongful conduct (say “unjustly enriched party holds a constructive trust for appropriate party’s benefit”)
* Constructive trust must be requested by showing of clear and convincing evidence (not automatic)
* Plaintiff must be able to identify a particular property (not general belonging of settlor)

Arises in many circumstances, including:
* Fraud, duress, mistake, breach of fiduciary duty
* Homicide in states w/out slayer statutes
* Abuse of confidential relationship (attorney-client, doctor-patient, friend, family)
* Breach of promise (secret trust)

Question 55

Distinguishing characteristics of charitable trusts

Answer 55

1. Purpose to benefit the public
   * Settlor must have clear charitable purpose (no special language necessary)
   * Court (not settlor) decides whether purpose is clearly charitable per community’s standards
   * Beneficiaries are indefinite
2. Cy pres
   * If settlor is found to have general charitable intent but purpose is impracticable, unlawful, impossible, already achieved, wasteful, the court may ascertain what the settlor’s primary purpose was and select an alternative “as near as possible” to that purpose
   * Ex. Testator executed trust to leave money for polio vaccine, now that polio vaccine has been made, have to decide what the primary purpose was (discover vaccines for childhood diseases, polio vaccine specifically, muscular diseases, etc.) and apply the rest of the trust funds to that purpose
3. Not bound by RAP
4. Suits to enforce can be brought by the settlor, qualified beneficiary, or state’s attorney general
5. Honorary trusts or purpose trusts
   * Not charitable trust but not private trusts (no human beneficiaries but no charitable purpose)
   * Depends on state whether allow for such trusts to exist (ex. trust to care for pet)