Trusts Flashcards
valid trust rule statement
Rule: to create a valid trust, there must be a settlor who, intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one of more beneficiaries. If there are no trust assets when the trust instrument is executed, the trust arises in the future only if, when the assets come into existence, the settlor manifests anew an intention to create the trust. However, a promise to create a trust in the future is enforceable if supported by consideration.
Pour Over Rule Statement
Rule: to create valid pour over gift from a will to a revocable trust, the trust must be in existence or be executed at the time of the will’s execution. However, a will can devise property to trustee of a trust established or to be established during testator’s lifetime. Pour Over gifts are valid even if the trust is unfunded during testtator’s lifetime
Valid Trust Elements
(1) trust intent (to split legal and equitable title)
(2) identifiable corpus
(3) Ascertainable Beneficiaries
(4) Proper Purpose
(5) Formalities (Creation, Funding, Delivery)
Trust Creation Methods
Inter Vivos (living trust) When settlor alive
* Declaration of trust: settlor and trustee are the same person
* Transfer or conveyance in trust: settlor transfer legal title to someone else (might retain equitable title)
Testamentary Trust (created in T will when settlor dead)
Discretionary Trusts (definition and impact)
Substituted judgement, trustee decides how much beneficiary receives.
Creditors cant reach until trustee distributes money to beneficiary, EXCEPT for claims for family law (child support, spousal support and alimony)
Spendthrift Provisions (rule and limitations)
the beneficiary cannot transfer their trust interests and creditors cannot attach to trust interest. once paid out, beneficiary can transfer funds and creditors can attach.
Limitations:
Ineffective if settlor is beneficiary
certain creditors like family law or tort might still attach
Support Trusts
Use of trust property is limited to beneficiary’s support (health, education, maintenance, or support); presumptively to maintain standard of living
Consider First Dollar vs. Last Dollar
Removal of Trustee if
- Incompetence
- Unfit
- Serious Breach of Duty
- Serious Conflict of Interest
- Insolvency bc then more likely to embezzle
- Extreme hostility between trustee and beneficiaries
- Refusal to post bond
- Refusal to account
what is a trust (definition)
a trust is a fiduciary relationship in which the trustee holds legal title to specific property and has a fiduciary duty to manage, invest, safeguard, and administer the trusts assets/income for the benefit of the designated beneficiary, who holds the equitable title.
How can you Fund a Trust
with an actual conveyance and delivery
OR
with a pour over from your will (which can be the initial funding)
Discretionary Trust
the trustee is the substituted judgement of the settlor and will decide how much each beneficiary will receive, if anything
Creditors do not take unless for child or spousal support
Modification of Trust By Beneficiary with Settlor Consent
Go for it
Modification of Trust by Beneficiary WITHOUT Settlor Consent
Possible if
1) beneficiary obtains consent of all other beneficiaries (see issue with unascertained beneficiaries)
AND
2) settlor’s intent would not be frustrated (see frustration test)
Consent to Modification By Unascertained beneficiaries
virtual representation of unascertained beneficiaries allowed by:
1) current beneficiaries
2) in simular situations
3) and without conflict of interests
Test for Settlor Frustration
frustrated if the changes wuold upset a material purpose of the trust
examples: spendthrift provision, payouts at certain dates, discretionary trusts, etc…
Express Termination of a Trust
typically when the beneficiary dies, graduates, or reaches specified age
Court Ordered Trust Termination
- value of trust is too low
- accomplished purpose of trust
- unanticipated circumstances
Trustee Modification
trustee can modify by
(1) terminating a noneconomic trust (under 50k then can terminate)
(2) Decanting: combining trusts with the same terms into one trust or divide
note: trustee maintains power to windup
Trustee Powers (Listed)
Express: granted by court, stated in trust instrument or in a statute
Implied: power to do what is necessary and appropriate to carry out terms of the trust
Implied Trustee Powers
power to do what is necessary and appropriate to carry out the terms of the trust
Mandatory vs. Discretionary Trustee Powers
Mandatory: you have to do it (duh)
Discretionary: exercise power as see fit, but trustee is liable if (1) they abuse their discretion OR (2) fail to use their discretion at all
Multiple Trustees - Power
can exercise power by majority vote
Trustee Duties (LIST)
General: manage, invest, safeguard, and administrate
Loyalty
Keep records
render accountings
earmark trust property/keep separate
investing
Investing Duties
standard: invest as a reasonably prudent investor would. BUT, if trustee with higher skills, then have to use higher skills
Don’t look at each transaction - take a “portfolio approach”
Duty to diversity unless property is better served without diversification (i.e. family farm)
Can delegate to agent to manage duties and will be protected from liability
Protecting Trustee from Liability in Delegation
protected if the trustee acted prudently in:
(1) selecting an agent
(2) establishing the scope and terms of the delegation
(3) periodically reviewing the agent’s actions
Can recover damages from the trustee breach if:
(1) Lost profits (Which would not have occured but-for the breach; even if trustee themselves didn’t gain anything, the the trust didn’t earn what it was supposed to)
(2) Depreciation in Value of trust Property and Trustee is responsible
(3) Trustee’s profits from breach
Remedies for Self-Dealing
(1) AFFIRM the transaction if the trust profited
OR
(2) set aside the transaction if the trust LOST money
Trustee Not Liable for the Breach When
(1) reasonably relied on the terms of the K
(2) beneficiary consents/ratifies
(3) action was expressly allowed in the trust
(4) exculpatory clause for negligent action (but NOT for any actions taken in bad faith or as an abuse of confidential relationshi)
Trustee Liability to Third Parties (all of it, the whole thing)
Contracts: trustee personally liable, BUT can avoid liability by (1) contract provision OR (2) by indicating role as trustee in the signature
* trustee can be reimbursed by trust if sufficient trust property
Torts: everyone is liable for their own torts, but trustee is not liable for the agents’ or employees’ actions
Liability of Third Parties: property in the hands os someone who is not a bonda fide purchaser for value, then court can set aside the transaction and get it back for the trust. can pursue third party if they engaged in a breach of trust transaction.
Trustee Liability for Contracts
Contracts: trustee personally liable, BUT can avoid liability by (1) contract provision OR (2) by indicating role as trustee in the signature
* trustee can be reimbursed by trust if sufficient trust property
Trustee Liability for Torts
Torts: everyone is liable for their own torts, but trustee is not liable for the agents’ or employees’ actions
third party liability to trust
Liability of Third Parties: property in the hands os someone who is not a bonda fide purchaser for value, then court can set aside the transaction and get it back for the trust. can pursue third party if they engaged in a breach of trust transaction.
Allocation of Receipts: Principal
(1) all money received (return on investment and capital gains)
(2) eminent domain awards
(3) insurance for the destruction of the principle
(4) stock dividend/split
(5) sale of unproductive property
Allocation of Receipts: Income
(1) Rent
(2) interest on trust investment
(3) cash stock dividend
Allocation of Receipts: Wasting Assets
for patents/copyright/etc
10% income and 90% principal
Allocation of Expenses: Principal
Principal pays
(1) capital gains tax
(2) extraordinary repairs
Allocation of Expenses: Income
Income pays
(1) ordinary income tax
(2) ordinary repairs
(3) Depreciation
Requirements to Create a Charitable Trust
settlor must exhibit sufficient altruistic intent to provide benefits for the community good (can benefit family, but they cannot be the sole beneficiaries)
What counts as charitable
court makes final determination on charitable purpose but generally:
1. the relief of poverty
2. religion
3. education
4. promotion of health
5. government purposes such as parks and museums
Charitable Trusts Enforcement
enforced by the charitable organization (ha standing) or by the state attorney general
Cy Pres Doctrine
if the charitable purpose cannot be carried out, then the court may select an alternative by ascertaining the settlor’s primary purpose (doctrine of equitable approximation)
Doctrine of Equitable Approximation
if the charitable intent is broader than the one organization we can no longer carry out, then substitute an equitable equivalent charity (and have them fight about it)
Resulting Trust if
implication by settlor conduct - will impose a resulting trust to carry out actual intent
Give rise to resulting trust if
(1) failure to create a valid trust
(2) excess corpus and no provision for the remaining, then find for settlor or successors in interst
(3) Purchase Money Trust - if you give seller money and seller, with your permission, gives title to third person for them to hold for you
Who Can Benefit from a resulting trust
only the settlor (if alive) or, if settlor deceased, then settlor’s successors in interest
Constructive Trust
equitable remedy to prevent unjust enrichment
impose if rectifying some evil, like fraud or duress etc
