Trusts Flashcards
Trust Formation Elements
A valid express trust requires: (1) a definitive beneficiary (the beneficiary can be ascertained now or in the future); (2) a settlor with capacity; (3) an intent to create a trust; (4) a trustee; (5) a valid trust purpose; (6) trust property (the res); AND (7) compliance with any State formalities (i.e. signed in front of notary).
Inter Vivos & Testamentary Trusts
An Inter Vivos Trust is a trust created during the settlor’s lifetime.
A Testamentary Trust is created through the provisions of a settlor’s will, and does not take effect until the settlor’s death.
Revocable & Irrevocable Trusts
The trust instrument may state whether the trust is irrevocable or revocable by the settlor.
The majority view that a trust is revocable by default UNLESS stated otherwise.
The minority view is opposite trusts are irrevocable by default UNLESS expressly stated otherwise.
Generally, an irrevocable trust CANNOT be modified or revoked by the settlor after its creation.
A revocable trust becomes irrevocable upon the death or incapacity of the settlor.
Charitable Trusts
A Charitable Trust is one created by a settlor to confer a substantial benefit to society. The beneficiary may be indefinite or contain a class of persons described by the trust. The rule against perpetuities DOES NOT apply to charitable trusts.
Discretionary Trusts
A Discretionary Trust occurs when a trustee has absolute discretion and power to determine when and how much of the trust property is distributed to the beneficiaries of the trust.
The trustee’s exercise of discretion MUST be in good faith. A court will generally not interfere with a trustee’s exercise of discretion, unless the trustee is abusing such power.
Cy Pres Doctrine
Cy pres is an equitable doctrine that applies to charitable bequests and charitable trusts.
Courts will apply cy pres to modify a charitable trust to be consistent with and “as near as possible” with the settlor’s or testator’s intent, if the purpose of the trust or bequest is frustrated (the trust becomes unlawful, impracticable, impossible, or wasteful).
The cy pres doctrine only applies if the testator had a general charitable intent
Spendthrift Trusts
A spendthrift provision in a trust is one preventing the transfer of a beneficiary’s interest.
A spendthrift interest means that the interest cannot be sold or assigned by the income beneficiary, nor may any creditors reach it (but it may attempt to collect directly from the beneficiary after a payment is made from the trust).
It is valid only if it restrains both voluntary AND involuntary transfers.
Spendthrift Trust Exceptions
There are five exceptions when a creditor CAN reach the beneficiary’s income interest. They are:
(1) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust;
(2) a creditor who furnishes necessities;
(3) an order for child support or alimony;
(4) any claim by the state or federal government (i.e. federal tax liens); or
(5) a self-settled trust where the settlor retains an interest (i.e. a revocable trust).
Spendthrift trusts DO NOT provide protection for mandatory distributions of trust property.
Rights of Creditors to Beneficiary Assets
If a beneficiary’s interest is not subject to a spendthrift provision, then the court may authorize a creditor to reach the beneficiary’s interest by attachment of present or future distributions to the beneficiary.
If a beneficiary’s interest is subject to a spendthrift provision, a creditor is generally prohibited from attaching that interest, and may only attempt to collect directly from the beneficiary after a payment is made.
If the debtor is a remainder beneficiary, the creditor will need to wait until the trust terminates to receive the trust property.
Creditors Rights to Discretionary Trusts Distributions
Whether or not a trust contains a spendthrift provision, a creditor cannot compel a distribution to a beneficiary that is subject to the trustee’s discretion.
However, if the Trustee chooses to make a payment after receiving notice from a beneficiary’s judgment creditor(s), then he must make the payment to such creditors.
Creditors of the Settlor and Trusts
Creditors of the settlor generally CANNOT reach the assets held within an irrevocable trust (certain exceptions exist for claims relating to child support, alimony, and federal/state taxes). Creditors MAY generally reach assets of a revocable trust.
Modification of a Trust By Settlor
A trust may only be modified by a settlor:
(a) who expressly reserved the power to modify the trust; OR
(b) who has the power to revoke the trust (a power of revocation includes the power to amend).
Additional Modification Rules
A trust may also be modified in the following instances:
(1) A court may also modify a trust when modifications are necessary to preserve the trust due to unforeseen circumstances;
(2) all beneficiaries consent and the court determines that the modification is not inconsistent with the trust purpose.
Termination of an Irrevocable Trust
An irrevocable trust may be terminated if:
(a) the settlor and all of the beneficiaries agree to do so while the settlor is still alive;
(b) all of the beneficiaries agree and it will not frustrate the purpose of the trust; OR
(c) by operation of law through merger (where the trustee has become the sole beneficiary) or through a passive trust (all trust property has been transferred to the beneficiary).
Termination of a Revocable Trust
A revocable trust may be revoked by:
(a) compliance with any method of revocation provided in the trust instrument; OR
(b) if the trust instrument does not explicitly provide for a method of revocation, then the trust can be revoked by a writing signed by the settlor (or any other person holding the power of revocation) that is delivered to either the trustee during the lifetime of the settlor or the person holding the power of revocation (the signed writing for revocation CANNOT be a will).
