Trusts Flashcards
Definition of Trust
Fiduciary relationship whereby a trustee is given legal title by the settlor to hold and protect property for the benefit of the beneficiary, who takes equitable title/interest
4 Main Types of Trust
- Express - Private
- Express - Charitable
- Implied - Resulting
- Implied - Constructive
Elements of Private Express Trust (6)
- Settlor
- Trustee
- Ascertainable Beneficiaries
- Intent
- Trust Property
- Valid Trust Purpose
Secret Trust (definition and standard of proof)
- What appears to be an outright gift in a will actually based on promise to devisee (trustee) to hold property for another’s benefit
- Clear and convincing evidence
Remedy of secret trust
Constructive (implied) trust to avoid unjust enrichment to the devisee (secret trustee)
Result of semi-secret trust (CL remedy)
CL: No extrinsic evidence, so trust fails
- Remedy: Resulting (implied) trust in favor of T’s heirs
Modern trend: Constructive trust in favor of intended beneficiary if determinable
Semi-Secret Trust
Will directs gift to be held in trust without naming a beneficiary
Charitable trust (definition & elements)
Trust created for a charitable purpose benefiting the community
- Charitable purpose
- Large class of unidentifiable beneficiaries
Support trust
Directs T to use discretion to pay income/principal as necessary to support B
Creditors could feasibly attach to trust property
Transferability of B’s interest (generally)
Right to receive P/I freely transferable unless limited by trust or law.
Cy Pres doctrine
Allows court to modify the terms of a charitable trust when it can’t be performed as written, so long as consistent with S’s intent
Court seeks similar charitable purpose if original becomes illegal, impossible or impracticable
Types of distributions (2)
Mandatory
Discretionary
Spendthrift trust/clause
Restricts B’s power to transfer equitable interest. Cs can’t reach assets until property paid out
Exceptions to spendthrift/support trusts
Child/spousal support, tax liens, some necessities
Ways a trust may automatically terminate (3)
- Revoked or expires per terms
- No remaining purpose
- Purpose becomes unlawful, impossible, contrary to public policy
Modifying/terminating revokable trust (2 ways)
- Substantial compliance with terms; or
- If no method, by later will/codicil/any method evidencing C&CE of intent
Modifying/terminating irrevocable trust (noncharitable)(2 ways)
- Consent of all Bs and S
- Consent of all Bs if termination/modification consistent with trust terms/purpose (e.g., purpose fulfilled)
Clafin doctrine/Unfulfilled material purpose
If S dies and all Bs agree to terminate, T can block if contrary to material trust purpose
Reasons for Modification/termination by court (4)
- Unanticipated changes prevent purpose or effective administration
- Uneconomic
- Correct mistakes of law/fact
- Achieve S’s tax objectives
Modification/termination by Trustee
Cannot modify/terminate by himself unless terms provide
Resignation/Removal of Trustee (each)
Resignation: T may resign on 30 days notice to Bs, S (if alive) and any co-Ts, OR with court approval
Removal: Unless terms provide only court can remove for breach of duty, bad acts, etc
Principal and income allocations (Common Law and UPAIA)
Common Law: Income to lifetime beneficiary, principal to remainderholder
UPAIA: Focus on total return, T can re-characterize and reallocate between P/I to fulfill purposes, so long as fair and reasonable
Factors of P/I allocation
- Intent of Settlor
- Terms of trust
- Nature, duration and purpose of trust
- identities and circumstances of Bs
- Anticipated effect of economic conditions and taxes
Test approach for administration & duties (3 steps)
- Was conduct authorized by trust/law
- If yes, did T perform up to requisite duties?
- What are the remedies
General fiduciary standard for trustee
Fiduciary duty to administer trust in the best interests of the beneficiaries
Two types of powers of trustee
- Express: Powers set forth in trust
- Implied: Implied power to do what’s best for Bs and powers necessary to do so
Duty of care standard (subjective)
Administer trust in good faith, in accordance with terms, for best interests of Bs
Duty of loyalty breaches (objective)
- Conflict of interest
- Self-dealing
Prudent investor rule (UPIA)
Duty to invest and manage as prudent investor would when investing in own property, including using special skills
General duties of trustee
- Care
- Loyalty
- Impartiality
- Inform
- Account
Can self-dealing be permissible
Yes but only if trust permits or Bs authorize, and fair/reasonable
Can conflict of interest be permissible
Yes, if T acted reasonably and in good faith
B’s remedies for T’s breach
- Remove T
- Damages (gains can’t offset loss)
- Ratification
- Tracing - force T to sue 3P to recover if not BFP
3P rights against T
T may be personally liable in contract/tort to 3P but can seek indemnity if acting within scope of duties
Co-trustee liability
Liable unless no knowledge and couldn’t prevent
Successor trustee liability
Not liable for prior bad acts unless knew/should have known, and did nothing to correct
Resulting Trust (purpose and circumstances
Purpose: Avoids unjust enrichment
Circumstances: T required to convey property to S if
- failure of express trust
- incomplete disposition of assets
Constructive Trust (purpose and elements - 5)
Purpose: Avoid unjust enrichment caused by bad conduct
Elements
- Defendant holds title to property subject to CT
- Wrongful conduct caused S to convey property
- Proved by C&CE
- If subject matter transferred to non-BFP 3P, B may trace property and recover
- Defenses: Unclean hands; laches (unreasonable delay in asserting claim)
