Trusts Flashcards
Express Trust
Express trust arises when the settlor expressly indicates the intent to create a trust
Elements:
- Intent (“trust words”) -
- Trust res - the property in the trust
- Trust purpose - must not be illegal or contrary to public policy
- Ascertained beneficiary - except for unborn children
Oral trusts
Valid in most cases, but SOF applies to trusts conveying real property or pour-over-trusts (trusts created by will)
Testamentary trusts
A testamentary trust is created in writing in a will or in a document incorporated by reference into a will.
Trust must exist or be created at the time the will was executed
Intent
Intent may be manifested orally, in writing, or by conduct.
Manifestation of intent must occur prior to or simultaneously with transfer of property
Trustee
Court will appoint if none is named
Charitable Trust
Must (1) have a stated charitable purpose, and (2) exist for the benefit of the community at large or for a specific segment of the community
Mandatory trust
Trustee has no discretion as to when to make distribution.
Trust governs when and how trust property is to be distributed
Discretionary trusts
Trustee is given complete discretion as to whether she will make a distribution
Support trust
Directs trustee to pay income or principal as necessary to support trust beneficiary
Creditors cannot reach trust property because beneficiary cannot demand payment
Alienability - General Rule
Beneficiary’s equitable interest in trust res is freely alienable (unless trust instrument or statute restricts alienation)
A creditor cannot reach the trust principal or income until such amounts become payable to the beneficiary or are subject to the beneficiary’s demand
Spendthrifth trusts
Trust expressly restricts beneficiary’s power to alienate her interest
Creditors cannot reach until trustee makes a paymetn
Creditors who can reach trust property
Creditors usually cannot reach the trust interest unless money is owed for child or spousal
support, basic necessities, or tax lien holders.
Revocable trust
Settlor has right to modify or terminate
In CA, trusts are presumed to be revocable
Irrevocable trust
Modification or termination while settlor is still alive can occur only with (1) the
consent of all beneficiaries and (2) if the proposed change will not interfere with a primary purpose of the trust.
Unfulfilled Material Purpose
A trustee can block a premature trust termination by the beneficiaries if the trust is shown to have an unfulfilled material purpose.
Termination of trust
(1) Automatically when trust purpose has been accomplished
(2) by court if purpose becomes illegal, impracticable, or impossible,
(3) Settlor can terminate - if revocable, without anyone’s consent; if irrevocable - with consent of all beneficiaries
(4) if settlor is deceased and all beneficiaries consent (but look out for unfulfilled material purpose!!)
(5) changed circumstances - a court may modify or terminate a trust if, because of circumstances not anticipated by the settlor, termination will further the purposes of the trust. To the extent practicable, the modification or termination must be made in accordance with the settlor’s probable intention.
Trustee does not have power to terminate unless such power is reserved for trustee
Removal of a trustee
A court can remove a trustee if purpose of the trust would be frustrated by the trustee’s continuance or if trustee violated a fiduciary duty
Fiduciary Duties of Trustee
Duty of Care (includes numerous subduties) - duty to act as a reasonably prudent person in managing the trust. Must treat trust property as if it were his/her own.
Duty of Loyalty
Duty to act in good faith, avoid conflicts of interest (including self dealing), and in the best interests of beneficiaries.
Duty to disclose/inform beneficiaries - must disclose information about trust property to beneficiaries
Duty to Account - Must periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed
Duty to make property productive - must preserve trust property and work to make it productive by pursuing all possible claims, driving maximum amount of income, and selling assets when appropriate.
Duty of care
Reasonable Prudent Person -
Follow trust directions
Investments
- Prudent investor Rule - when investing trust assets, trustee must act as a reasonably prudent investor would if investing his/her own assets. Must exercise necessary care, diligence, and skill when investing.
- Duty to diversify - trustee must diversify trust investments to spread risk of loss under a total performance portfolio approach
Duty to make property productive
- must pursue all possible claims
- derive maximum amount of income from investments
- sell assets when appropriate
- secure insurance and pay expenses
Duty of impartiality
- must balance interests of present beneficiaries and future beneficiaries (cannot favor one over the other). This includes investing assets to produce a reasonable income for present beneficiaries while preserving principal for remainder beneficiaries
Duty of loyalty
Self-dealing
- prohibited transactions - cannot do anything for personal gain
- self-dealing is a per se breach (courts apply no further inquiry rule where in they do not assess the reasonableness or good-faith of the transaction)
Non-self-dealing transaction
assessed under reasonable and good-faith test
Remedies of breach of fiduciary duty
Lost profits or interests resulting from breach of trust
other damages
removal of trustee
More on duty of care
General duty to act as a reasonably prudent person and treat the trust property as if it was his/her own.
Duty to follow the trust directions and carry them out in accordance with the trust.
Lack of trustee
A designated trustee may decline to serve as trustee for a trust. In such cases, the trust does not fail; rather, the court may appoint an alternative trustee unless the settlor expressly intended for the trust to fail without the designated trustee
Private Express Trust
A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries. To be valid, there must be a settlor, a trustee, intent, trust res, ascertainable beneficiaries, and a valid trust purpose.
Trustee powers
A trustee can only act in accordance with the express powers and instructions provided by the settlor
Duty of a co-trustee
Must make decisions jointly with other trustee
Charitable Trust Standing
Typically the AG of the state of a charitable trust’s creation and members of the community who are more directly affected that the general community have standing to enforce the terms of a charitable trust.
Duty to notify
Must disclose intent to sell a significant portion of trust assets
Omitted Spouse
An omitted spouse is one who marries the settlor after the creation of a trust (or marries a testator after the creation of a will) - spouse is entitled to intestate share of settlor’s estate unless
(1) omission was intentional
(2) spouse was provided for outside of trust or will and such provision was intended to be in lieu of devise or trust gift
(3) there was a valid agreement waiving right to spouse’s estate
