Trusts Flashcards
Three Types of Trusts
- Express trusts (true trust)
- Resulting trusts (equitable remedy)
- Constructive trusts (equitable remedy)
Express Trust - Defined
A legal device allowing an owner of property to make transfers of property and to have those assets managed on behalf of someone else.
Who is the person who creates the trust?
the settlor
What does the settlor do?
Gives LEGAL TITLE to a TRUSTEE to manage the assets on behalf of the BENEFICIARY
Two Types of Express Trusts
- Lifetime/inter vivos trusts
2. Testamentary trust
8 Requirements for a Valid Trust
- SETTLOR who makes a
- DELIVERY of legal title to
- PROPERTY to a
- TRUSTEE who holds legal title for the benefit of a
- BENEFICIARY with?
- INTENT to create a trust for
- a LAWFUL PURPOSE
- in a VALIDLY EXECUTED document
Is consideration required to create a trust.
No. It’s a gift.
Who can be a Settlor?
Anyone over 18 with the mental capacity to enter into contracts.
Delivery Requirements for Titled Assets
Titled assets must be FORMALLY transferred to the trustee for the delivery to be valid.e.g. cars, planes, houses, stock certificates
Property - Current Ownership
The Settlor must actually own the property - NOT merely have an expectation of ownership in the future (no remainderman!)
Property - Identification
Property in the trust must be specifically identified.
Who can be a trustee for a lifetime/intervivos trust?
Almost anyone can be a trustee.
Who can be a trustee for a testamentary trust?
Anyone EXCEPT:
- under 18
- Judicially declared incompetent
- Convicted felons
- Incapable because of drunkenness, dishonesty, lack of understanding, or improvidence
Can a non-resident alien serve as a trustee?
ONLY IF
- that person is related; AND
- A NY resident serves as co-fiduciary
What effect if the Settlor fails to name a trustee?
Doesn’t matter - the court will appoint a trustee.
Beneficiaries - Requirements
Must be DEFINITE and ASCERTAINABLE
What happens if the beneficiary is ambiguous?
The trustee holds in a RESULTING TRUST for the RESIDUARY BENEFICIARY of a will (or intestate heirs)
Beneficiaries - Are relatives such as “family” definite and ascertainable?
Yes - you look to the intestacy statutes.
Intent Requirements
- Settlor must intend to create an ENFORCEABLE obligation.
2. Trustee must be given DUTIES to perform
Intent Requirements - Precatory Language
It is non-binding language that does not fulfill the intent requirement
Intent - Lack of Trustee Duties
It becomes a PASSIVE trust, which is NO TRUST AT ALL.
Lawful Purpose (3 Limitations)
Trust cannot call for the
- commission of a crime
- destruction of property
- acts that are against public policy
Lawful Purpose - Examples of acts that are against public policy
A trust restricting marriage or promoting divorce
Lawful purpose - permitted type of marriage restriction
OK to make conditional upon marriage to a certain religion
Trust Execution Requirements
Must be IN WRITING signed by BOTH SETTLOR AND TRUSTEE
i. acknowledged by a notary public, OR
ii. signed by two witnesses
Are trusts revocable?
Trusts are PRESUMED irrevocable UNLESS the trust explicitly authorizes revocation.
Revocable Lifetime/Intervivos Trusts - Requirements
At least one beneficiary who is not the settlor; Settlor CANNOT be the sole beneficiary when also named as the SOLE trustee.
Revocable Lifetime/Intervivos Trusts - What roles can the settlor have?
- Can be A trustee
- Settlor can be an INCOME beneficiary
- Settlor’s estate can be one of the beneficiaries of principal so long as there is at least ONE other beneficiary.
- Settlor can retain the power to TERMINATE or AMEND the trust.
Reasons for having a revocable lifetime/intervivos trust
- Manages assets efficiently, particularly using a professional trustee.
- Plan for possible incapacity by avoiding an incompetency proceeding.
- Avoid probate upon SETTLOR’s death
Reasons to NOT have a revocable lifetime/intervivos trust
It does not avoid federal estate taxes if the settlor keeps
- an income interest, or
- a power to revoke
What is a pour-over gift?
Gifts made in a will to an existing revocable trust
Pour-over Gift to a Trust - Requirements
- The trust me be in existence, OR
2. executed concurrently with the will
Is the pour-over limited to trusts created by the Settlor?
No i t can be to ANY then existing trust, including those executed by other persons.
Does a trust have to be funded for the pour-over gift to be valid?
No. It can be empty upon the trust creation because it will get property on the death or the testator.
Life Insurance Proceeds as a Pour-Over Gift - 2 Ways to Accomplish this
- Insured can create an unfunded revocable insurance trust and name the trustee of the trust as the policy beneficiary
- Have the trust be a testamentary trust and have the life insurance policy contract name be “the trustee name in my will” as the life insurance policy beneficiary.
Totten Trust - What else is it called?
A bank account trust
Totten Trust - Defined
A bank account in the depositor’s name AS TRUSTEE FOR a named beneficiary.
Totten Trust - Account Name & Words Required
X as Trustee for Y”X ITF Y - “in trust for”
No particular words required
Totten Trust - What does it permit?
- Depositor makes DEPOSITS and WITHDRAWLS as he or she wishes during the depositor’s lifetime
- Beneficiary has no beneficial interest during the depositor’s lifetime, but gets whatever is in the account when the depositor dies.
Totten Trust - What does the beneficiary get?
Whatever is in the account when the depositor/settlor dies.
How to Revoke a Totten Trust? 4 Ways
- Withdraw all money in the account before death
- Express revocation during depositor’s lifetime in writing naming the bank, beneficiary, notarized, and delivered to the bank.
- Revocation in a will, but with express direction in the will
- Death of beneficiary
Can CREDITORS reach a Totten Trust?
Creditors of the DEPOSITOR can always reach the Totten Trust either BEFORE or AFTER the depositor’s death.
Joint Bank Accounts - When survivorship language be set aside?
Clear and convincing evidence that
1. a right of survivorship was not intended by the decedent; AND
2. Account was set up merely for convenience.
[Hard to satisfy this requirement]
Joint Bank Account - How much does each account holder own?
Each owns 1/2, regardless of who deposits the money.
Joint Bank Account - if one party withdraws more than his share during lifetime of both
Can be liable to return money beyond his proportionate share (“lifetime gift”)
Uniform Transfers to Minors Act - 3 Benefits
- It avoids a guardianship proceeding
- it avoids a trust
- It qualifies for the $14k per donee annual exclusion from federal state gift tax
Who are UTMA gifts made to?
A “custodian”, NOT a trustee.
Can UTMA gifts be made in a will?
Yes, so long as there is the required UTMA language.
Duties of an UTMA custodian?
- Hold, manage, and invest the property under the PRUDENT person standard.
- Custodian can pay over to the minor or for the minor’s needs what part of the property that the custodian deems advisable; AND
- Pay what is left of the property to the minor when the minor turns 21.
* *turns 18 if gift was made pre-1997
Does an UTMA custodian hold legal title?
No, the minor holds legal title.
UTMA Tax Considerations - What if donor is the custodian?
Then the gift amount is included in federal and state estate taxes.
Charitable Trusts - Beneficiaries
Beneficiaries must be INDEFINITE and be a REASONABLY large group.
*Can’t have specifically named persons as beneficiaries.
EXC: Masses for relatives
Charitable Trusts - Rule Against Perpetuities
Doesn’t apply. It may exist in perpetuity.
Charitable Trusts - Cy Pres
If the stated purpose can’t be accomplished or designated charity goes out of existence the court can use cy pres to make the trust as close as possible to what the settlor intended.
Charitable Trusts - Attorney General
AG has the duty of representing the beneficiaries of charitable trusts in the state.
- AG is indispensable to any suit
- AG has standing to bring a suit on beneficiary’s behalf
Non-Trusts (3 Types)
- Honorary Trusts
- Constructive trusts
- Resulting trusts
Non-Trusts: Honorary Trusts
Where no human being is the beneficiary of a private, non-charitable, trust.
What happens to honorary trusts?
that property named in an honorary trust falls into the residuary estate.
Can a pet be a trust beneficiary?
Yes, but only for the lifetime of that pet.
Can a cemetery be a trust beneficiary?
Yes, they are charitable trusts and can run in perpetuity.
Non-Trusts: Constructive Trusts Defined
An equitable remedy intended to disgorge UNJUST ENRICHMENT that results from WRONGFUL CONDUCT.
Constructive Trusts - Trustee’s Duty
To convey the property to the person who, in equity, should have the property.
(Eg. heir kills testator, becomes trustee in constructive trust for other heirs)
Non-Trusts: Resulting Trust Defined
An equitable remedy when the trust fails for some reason.
Purchase Money Resulting Trust (“PMRT”) in NY
Not recognized in NY.
PMRT - Defined
PMRT arises only when a purchaser buys property and has title put in someone else’s name WHO IS NOT a relative, and later the purchaser claims that no gift was intended.
(Yigal and Pyotrikovsky)
PMRT - In Most States
The PMRT allows the purchaser to regain title to the property
PMRT - Result in NY
Giftee retains title because the PMRT isn’t recognized.
PMRT - Exception in NY
A CONSTRUCTIVE TRUST results when there is CLEAR AND CONVINCING EVIDENCE that the grantee expressly or impliedly promised to reconvey the land to the purchaser.
Statutory Spendthrift Rule and Protection from Creditors - Defined
Protects a trust beneficiary’s interest from creditors by PROHIBITING VOLUNTARY or INVOLUNTARY transfer of the beneficiary’s interest.
- Beneficiary cannot sell or transfer interest in the trust
- Creditors can’t get to the trust assets
Spendthrift Rules in NY
All INCOME INTERESTS in trusts have automatic spendthrift protection
Spendthrift Rule - How can it protect the principal?
A spendthrift clause must state it expressly in the trust.
Exceptions to Spendthrift Clauses (5)
- Creditors that provide NECESSITIES
- Child support and alimony
- Federal tax liens
- Excess income beyond that needed for SUPPORT and EDUCATION.
- 10% levy provided under the CPLR for judgments (cumulatively, not per creditor)
Self-Settled Trust Rule
Spendthrift protection does not apply to any interest retained by the SETTLOR
Spendthrift Clauses - Revocable Trusts
The SETTLOR’S creditors can reach into revocable trusts even if the settlor has no immediate interest in the trust.
Modification by Trustees and/or Beneficiaries - When allowed?
ONLY WHEN the objectives of the trust would be defeated or substantially impaired absent modification.
Modification of Trust - Claflin Doctrine
The objectives of the trust comes first, overriding any specific directions in the trust.
Modification - Two Level Test
- Find the primary intent of the settlor
- Examine specific directions in the trust instrument to determine, whether, because of changes in circumstances, those specific directions would frustrate that primary intent.
Trust Termination by the Settlor - General Rule
In NY, trusts are irrevocable and unamendable UNLESS the power to revoke and amend is expressly reserved in the trust instrument
Trust Termination by the Settlor - Exception
A settle can terminate an irrevocable trust ONLY IF ALL beneficiaries consent
- Beneficiaries must be able to consent (no minors, incompetents, guardians)
- Child in gestation not required to give consent
New York Fiduciary Powers Act (“FPA”) - What does it provide?
Sets out powers that can be exercised by a trustee WITHOUT
- court order; and
- express authorization in the trust
New York Fiduciary Powers Act (“FPA”) - Who does it apply to?
Trustees, executors, and administrators.
NY FPA: Executor Defined
Carries out the will’s directions regarding disposition of testator’s estate
NY FPA: Administrator Defined
Without an executor, the administrator is court appointed to administer the estate.
NY FPA: General Approach to Trustee’s Power
Trustee can do ALMOST anything with some clearly-defined exceptions
NY FPA: Trustees CAN
- sell any real or personal property
- mortgage property
- lease property
- make ordinary repairs
- contest, compromise, or settle claims
- Do almost anything to MANAGE the principal of the trust
NY FPA: Trustees CANNOT
- Engage in self-dealing
- Borrow money on behalf of the trust
- Continue a business placed in the trust without court approval (if no approval - trustee liable for losses)
NY FPA: Self Dealing (5 Prohibitions)
Trustees:
- Can’t buy or sell trust assets to himself (self-dealing)
- Can’t borrow from the trust
- Can’t lend money to the trust
- Can’t profit from confidential information
- Corporate trustee can’t buy its own stock as a trust investment
NY FPA: Self Dealing Affirmative Duties (2)
- Duty to segregate trust assets from personal assets (no commingling)
- Duty to earmark by titling trust assets in trustee’s name as a trustee.
NY FPA: Commingled Funds Remedies
If purchased assets goes down in value, presumption that trustee used personal funds
If purchased assets goes up in value, presumption that trustee used trust funds.
NY FPA: Remedies for Breach of Fiduciary Duties
- Beneficiary can sue to REMOVE trustee
- Beneficiary can RATIFY the transaction and waive the breach
- Sue for any loss to the trust in a “surcharge action”
NY FPA: “No Further Inquiry” Rule
Breach of a fiduciary duty by engaging in self-dealing is an AUTOMATIC WRONG and no further inquiry need be made.- good faith, reasonableness are NOT defenses.
NY FPA: Indirect Self Dealing Rule
Self-dealing rules also apply to loans or sales to relatives fo the trustee, or to a business of which the trustee associated with the trustee.
NY FPA: Exculpatory Clauses
Only in lifetime/inter vivos trust.
NOT in testamentary trust (cluase voided)
When does a trustee have personal liability in a contract?
When the trustee signed personally and merely mentions the trust.
Eg “by AJ, Trustee for XYZ”
When doesn’t a trustee have personal liability in a contract?
Trustee signed ONLY ON BEHALF of the trust
When will a trustee who is personally liable for a contract be reimbursed by the trust?
- The K was within the fiduciary powers of the trustee; and
2. Trustee was acting in the course of proper administration of the trust
When will a trustee have personal liability for torts?
Trustee is always personally liable for ALL TORTS committed by the trustee or trustee’s employees.
How can a trustee circumvent personal liability for torts?
Buy liability insurance and charge it to the trust.
How can a trustee get reimbursed for tort liability by the trust?
- Trustee must have been acting within trustee’s fiduciary powers; and
- Trustee was not personally at fault.
(If his employee was at fault - can still be reimbursed)
Trustee’s Investment Power - Source of Authority?
The Uniform Prudent Investor Act (“UPIA”)
What is the UPIA’s Allowable Investment Strategy Called?
The Modern Portfolio theory of investment
Modern Portfolio Theory of Investment
A custom-tailor investment strategy for that particular trust, including:
1. consideration of the role each investment will play in the overall trust portfolio
2. Trustee must consider the expected total return from income and capital gain
OK to have some risky investments that are balanced by safer ones.
UPIA: How to allocate capital gains
Trustee has the FLEXIBILITY to exercise ADJUSTMENT power by allocating capital gains to income or principal as he sees fit to benefit the beneficiaries.
The Rule Against Perpetuities - NY Reform Statute
Reduces ALL AGE CONTINGENCIES to 21 years old
NY Rule Against Suspension of the Power of Alienation - Defined
Any interest is void if it suspends the power of alienation for a period longer than LIVES IN BEING + 21 YEARS.
NY Rule Against Suspension of the Power of Alienation - What is a suspension fo the power of alienation?
When there are no persons who could, together, transfer fee simple absolute.
When is the suspension of the power of alienation a concern?
- Whenever there is a spendthrift income interest
2. A life estate created in an unborn person or an open class that could include an unborn person
