Trusts Flashcards
What is a trust?
A fiduciary relationship where the trustee holds legal title to property for the benefit of another.
What is an implied trust?
A constructive trust - imposed by a court to fix a wrong
A resulting trust - imposed by a court where circumstances require, even if no wrongdoing
What is a settlor?
The party who sets up the trust.
What is a trustee?
The one who receives legal title to the trust assets, the one who controls the trust.
A trust must have a trustee, but failure to appoint one will lead the court to appoint a trustee.
What is a beneficiary?
The person who receives equitable title to the trust assets and enjoys the property.
There must always be a beneficiary in existence who can enforce the trust against the trustee.
What are the types of beneficiaries to a trust?
Income beneficiary - present interest in the trust
Remainder beneficiary - remainder interest in the trust, typically the principal. Intended to take effect after the natural termination of the trust.
Where a trust remainder is given to a class, when does the class close?
When there is no outstanding income interest and at least one member of the class is entitled to demand possession of their share of the remainder.
What is an inter vivos trust?
One created during the settlor’s lifetime, and usually as a gift.
What is an illusory trust?
Appears to be a trust, but because of overwhelmingly broad powers retained by the settlor over the trust fund, it is not a trust.
How is a trust created?
The settlor creates the trust by transferring assets to the trustee with manifest intent to create a trust relationship.
What are the rights of the beneficiaries of a trust?
Equitable, beneficial owners of trust assets, but cannot affect or alter the dispositive or administrative provisions of the trust.
What are the elements necessary to create a trust?
- a settlor with capacity who expresses a present intent to create a trust
- delivery of specific trust property
- an ascertainable beneficiary
- active duties imposed on the trustee
- a proper trust purpose
- a trustee
What kind of property can be subject to a trust?
Almost anything, except mere expectation or unearned profits.
Must be some certainty over what is the trust property.
What are ascertainable beneficiaries of a trust?
Must be determinable when the trust is to be distributed, must include some sort of objective standard or criteria that provides a reasonable basis for identification.
What is a valid trust purpose?
Anything that isn’t illegal, fraudulent, or against public policy - like encourage divorce or discouraging marriage.
Try to construe to avoid public policy violations, delete offending language or reinterpret.
What is a Totten trust?
An arrangement with a bank that allows the depositor to open a bank a count in the depositor’s own name, as trustee for other parties. Beneficiary has the right to take whatever is in the account when the depositor dies.
What trusts are exempt from the Rule against Perpetuities?
- purely charitable purpose
- charity-to-charity
What powers do trustees have?
Express and implied
- Settle or abandon trust claims
- Borrow money
- Sell or lease trust assets
- Incur reasonable expenses, including the purchase of insurance, that are necessary to maintain trust property
What is the standard for trustee discretion?
Generally not attacked unless abuse of discretion.
Standard of the beneficiary’s health, education, maintenance, and support.
What duties do trustees have?
Duty of loyalty and good faith
- avoid self-dealing
- avoid even apparent conflicts of interest
Affirmative duty to preserve and enhance trust property
What is the principal of the trust?
The amount originally received, plus capital gains and minus debts, expenses, and capital losses
What is the income of a trust?
The interest, receipts, dividends, and other income earned on the principal
What charges are taken from the income?
Ordinary expenses incurred in connection with the preservation of trust property, including ordinary repairs
What gains are allocated to the income?
Rents and cash dividends received
What gains are allocated to the principal?
Sales proceeds and stock dividends
What charges are taken from the principal?
Extraordinary repairs, beyond the usual or customary kind
What is the prudent businessperson rule for trusts?
In investing, trustees must use the degree of skill, care, and prudence that would be reasonably used by a business person in their own personal affairs.
Trustees are held to a superior standard when they possess superior business expertise.
May a trustee delegate duties?
Generally no, but can (and must if lacking background) delegate investment functions.
What is a trustee liable for if he breaches the duty of care in investing?
Must personally compensate trust for loses if the trust declines in value
When is a trustee liable for a prior trustee’s breach?
When the trustee:
- knew or should have known of prior trustee’s breach
- failed to take appropriate action to minimize effects/pursue appropriate remedies
What is an exculpatory clause in a trust and when it is a valid waiver?
A provision in the trust instrument that relieves the trustee of liability for potentially wrongful acts.
Acts as a waiver when a beneficiary has full knowledge of the material facts and expressly approves of the action by the trustee.
When can a trustee be removed?
For cause
When can a trustee resign?
At any time
Can a beneficiary alienate their interests?
Yes, can assign.
Unless there’s a restrictive covenant that is reasonable and doesn’t violate public policy.
Can a beneficiary alienate their interests?
Yes, can assign.
Unless there’s a restrictive covenant that is reasonable and doesn’t violate public policy.
What is a support provision in a trust?
Directs the trustee to provide only so much as is necessary for the beneficiary’s support, measures in terms of the lifestyle to which the beneficiary has become accustomed.
What is a discretionary interest in at trust?
Trustee pays as much income as the trustee believes desirable.
Cannot be attacked unless abuse of discretion or bad faith.
What is a spendthrift provision in a trust?
A beneficiary cannot voluntarily transfer their property nor can creditor attack it. Unalienable until actually distributed to beneficiary free of trust.
-> settlor cannot make their interest subject to a spendthrift provision
When are trusts revocable?
Presumed irrevocable.
UTC - opposite
When can an irrevocable trust be terminated?
With consent of all beneficiaries who must be living at the time.
When can trusts in will be revoked?
Whenever the will itself can be revoked or amended.
When is a trust terminated by merger?
When a sole trustee becomes the only beneficiary.
When is a trust terminated by operation of law?
- the trust property is consumed, destroyed, or lost
- the purposes of the trust have been fully accomplished
- accomplishment of the purpose is illegal, impossible, or impractical
What happens to a trust upon settlor’s death?
Trust cannot be terminated at settlor’s death before the time specified by settlor, even if all the beneficiaries agree, if the material purpose has not yet been accomplished.
What is a resulting trust?
When an express trust makes an incomplete disposition of assets or fails after property has been entrusted to trustee.
Rights will merge and transfer title back to those with equitable rights - settlor, heirs, etc.
What is a constructive trust?
Equitable remedy whereby a trust is imposed to redress wrongdoing or prevent unjust enrichment
What are the differences between a private trust and a charitable trust?
Charitable trust does not need ascertainable beneficiaries, not subject to RAP, doesn’t necessarily end when the purpose has been accomplished or is impracticable or impossible.
What is cy pres for charitable trusts?
If settlers exact charitable purpose cannot be met, the court mau direct the application of the trust property to another charitable purpose that approximates the settlor’s intent.
What is an honorary trust?
For the care of an animal or gravesite. Lacks definite beneficiaries, and violates rule against perpetuities.
But can stand, trustee only has moral or honorary obligation.
