Trusts Flashcards
1
Q
What are the (6) requirements for a valid trust?
A
- Settlor
- Property
- Trustee
- Beneficiary
- Intent
- Lawful purpose
- Duties to Trustee
- Same person CANNOT be sole benefiaicry and sole trustee
2
Q
What are the requirements for the settlor?
A
- Legal capacity - i.e., age 18 or older
- Proper capacity - i.e., competency
- Ability to convey title
3
Q
What are the requirements for trust property?
A
- Property must be certain and ascertainable
- Legal title must be fully conveyed to trustee
4
Q
What are the requirements for the trustee?
A
-
Legal capacity to exercise fiduciary duties:
- Age 18 or older
- Capacity to take and hold legal title
- Capacity to contract and execute deeds
- Acceptance
- Done by either:
- Written signature
- Conduct (i.e., performing duties of trust)
- But not merely inspecting property for potential environmental law liability
- Commences responsibilities of trustee
- Done by either:
HOLDS LEGAL TITLE - contrast to Beneficiaries that hold equitable title
5
Q
What is a testamentary trustee?
What are the limits on serving as one?
A
Definition
- Trustee appointed under a will
Limits
- Non-resident bank cannot serve as one
- Non-resident individual can serve as one, but must appoint Virginia resident as agent for service of process
6
Q
UTC Coverage (VA)
A
Covers:
Express Trusts & Testamentary Trusts
Does NOT cover:
Constructive trusts and resulting trusts (equitable remedies)
VA Land Trusts
Security Interest Deeds of Trusts
Pension Trusts, and
Church/Cemetery Trusts
7
Q
VA Trustees of Testamentary Trusts MUST….
A
Qualify before a clerk or court; provide a bond with surety unless waived; and file annual accountings unless waived
8
Q
What happens if a will establishes a trust, but does not name a trustee?
A
No trust fails for lack of a trustee, unless the settlor clearly stated that only one person could be trustee and that person is not available
Otherwise, the court will appoint a suitable trustee
9
Q
Does a trustee have to post bond?
A
Not unless the court finds it is necessary to protect the interests of beneficiaries
10
Q
What is required for intent to create a trust?
A
Settlor must attach enforceable duties that can be supervised as to the transfer of the property
Otherwise, it was just a gift to the purported trustee
11
Q
What are the requirements for beneficiaries?
A
Depends on type of trust:
-
Private trust
- Must have definite and ascertainable beneficiaries
- Interests must vest within the period of RAP
-
Charitable trust
- Must have indefinite group of beneficiaries
- Must have a charitable purpose
- Not subject to RAP
-
Honorary trust
- Must have beneficiaries that cannot complain
- May be pets and cemeteries
- Not subject to RAP
12
Q
What is the effect of RAP in Virginia?
A
Common law rule:
- If at the creation of any interest, there is a possibility that it will not vest within a life in being plus 21 years
Virginia’s adoption of USRAP
- The court may wait and see what actually occurs after 90 years from creation of the interest
- If at that point the interest still violates RAP, the court fixes it so it is vested
13
Q
What is the process for applying RAP in Virginia?
A
- Determine if interet violates common law RAP
- Kill off all lives in being
- After 21 years, could the interest still vest?
- If no common law RAP violation, interest is valid
- If common law RAP violation, wait 90 years
- If interest could still vest, fix it so it vests then
14
Q
What do you say if you think there is a RAP problem, but you are not confident?
A
There is no perpetuities problem. Virginia has enacted the Uniform Statutory Rule Against Perpetuities, which provides an alternate vesting period of 90 years.
All interests created by this will are almost certain to vest or terminate within 90 years after their creation, and therefore will likely be valid despite the common law RAP.
Even if the interests have neither vested nor terminated at the end of the 90 year period, USRAP requires the courts to fix the problem so that the interests do vest at that point.
15
Q
What is required for a trust to have a lawful purpose?
A
Trust cannot:
- Further commission of a crime
- Call for destruction of property
- Impose unreasonable conditions
16
Q
What constitutes an unreasonable condition of a trust?
What is not unreasonable?
A
Unreasonable
- Trust encourages divorce
- E.g., income to Betty, but also principal if she divorces
Reasonable
- Trust provides money until person remarries
- E.g., income to Betty until she remarries
- Trust encourages beneficiary to marry Jewish boy
- E.g., income to Betty if she marries a Jewish boy
17
Q
What is an oral trust?
A
A trust of either personal or real property, the terms of which can be proven by clear and convincing evidence
18
Q
What are examples of non-probate devices?
A
- Intervivos trust
- Joint tenancy
- Joint accounts
- Payable on death accounts
19
Q
What is the distinguishing characteristic of an intervivos trust?
A
It is created during the lifetime of the settlor
This is what makes it an effective non-probate transfer vehicle
20
Q
Are intervivos trusts revocable?
A
Yes. All inter vivos trusts are presumed revocable if:
- Created on or after July 1, 2006
- Not expressly made irrevocable by settlor
This is a reversal of the common law rule, and a result of Virginia’s adoption of the UTC
21
Q
Who can revoke a trust?
A
- Settlor
- Conservator, guardian, or agent only if either:
- Expressly authorized by trust
- Authorized by court for good cause
22
Q
What is a pour over arrangement?
A
Either:
- Pour over will
- Non-probate vehicle pours over assets into a will
- Pour over trust
- Will pours over assets in an intervivos trust
23
Q
What is a self-declaration of trust?
A
Settlor makes himself both the trustee and beneficiary
But adds a remainder beneficiary
And a successor trustee, who takes over in the event of settlor’s incapacity or death
24
Q
What is the statue of limitations for contesting a revocable trust?
A
The earlier of:
- Two years after settlor’s death
-
Six months after trustee sent person commencing action:
- Copy of trust instrument
- Trustee’s name and address
- Notice of time allowed for contesting trust
25
When a trust is contested, can the trustee be subject to liability for distributing assets in according with the trust?
Only if trustee distributes assets while either:
1. Trustee knows of a _pending judicial proceeding_ contesting the trust
2. Trustee has received notice of a _possible judicial proceeding_ that actually commences within _60 days_ after the notice was sent
26
What happens if a beneficiary of a trust is determined to have been invalid after receiving assets?
Person must return any distribution received, but they have no further liability
27
What is a power of attorney?
What makes one durable?
What is a springing power of attorney?
When does a power of attorney terminate?
Definition
* Authorizes another person (i.e., agent) to act on behalf of the principal
Durable
* States that the power of attorney is not affected by the principal's incapacity or disability
Springing
* States that the power of attorney becomes effective upon the principal's incapacity or disability
Termination
* Upon principal's death
28
Who enforces the terms of a charitable trust?
Settlor, if alive, otherwise attorney general of the state
29
What happens when the stated charitable purpose of a charitable trust can no longer be accomplished?
May be reformed under doctrine of *cy pres*
Cy Pres - can save a charitable trust from failing when a charitable objective is originally or later becomes impossible or impracticable to fulfill.
30
What are restrictions on honorary trusts for pets?
Only animals alive during the settlor's life can be beneficiaries (i.e., trust terminates on death of animal)
31
What is a constructive trust?
What is required to create one?
Definition
* Not really a trust - equitable device meant to remedy a bad act
Elements
1. Wrongful conduct
2. Unjust enrichment
32
What is a resulting trust?
Similar to a constructive trust in that it does not require the formalities of a normal trust
When the purpose of a trust cannot be achieved, the money "results back" to the settlor
Purchase money resulting trust (PMRT)
* If A purchases land and title is put in B's name (_not a relative_) for no reason, there is a presumption that B holds the property in a resulting trust for A
* Presumption must be rebutted by _clear and convincing_ evidence that the purchase was a gift for B
33
What is a spendthrift trust?
Are they enforceable?
Trust that restricts the ability of creditors to reach the trust assets, but only if the beneficiary is not also the settlor
Enforceable unless violates public policy:
1. Beneficiary's Child support obligations
2. Fees to lawyer who protected beneficiary's interest
3. Claims by government
4. Mandatory distributions not made by trustee
34
What is it called when a settlor places his assets in a spendthrift trust but retains the right to receive future payments at the trustee's discretion?
Qualified self-settled spendthrift trust, or asset protection trust
35
What are the requirements for a qualified self-settled spendthrift trust in Virginia?
1. Valid trust
2. Irrevocable
3. Spendthrift clause
4. Qualified trustee
5. Additional beneficiary other than settlor when distributions made to settlor
6. Settlor cannot disapprove of distributions
36
When can the settlor of a qualified self-settled spendthrift trust challenge a trustee's refusal to distribute?
Only if clear terms that trigger distribution have been met (e.g., amount needed for financial support)
37
What is the trustee's obligation?
Act for benefit of beneficiaries, _unless_ beneficiaries provide consent after complete and full disclosure
No self-dealing:
* Buying or selling trust assets to himself
* Borrowing trust funds
* Loaning funds to the trust
* Profit from serving as trustee via confidential info
* Buy stock of corporation if corporate trustee
38
Do trustee beneficiaries have an action against third parties involved in self-dealing with the trustee?
Not if they are bona fide purchasers, which does not include parties that are either:
* Aware of the self-dealing
* Related to the trustee
39
What is the statute of limitations for an action against the trustee?
Under accounting
* _One year_ from when
* Trustee gives beneficiary report (accounting) that:
* Discloses facts that show existence of breach
* Informs beneficiary of time to bring action
Under termination
* _Five years_ from the earlier of:
* Trustee's removal, resignation, or death
* Termination of beneficiary's interest
* Termination of trust
40
Can the settlor waive the trustee's obligations?
Yes, after complete and full disclosure, unless:
1. Waiver of _legal purpose_ requirement
2. Waiver of trustee's obligation to act in _good faith_
3. Waiver of trustee's obligation to not _intentionally or recklessly act contrary to beneficiary interests_
4. Waiver of _statute of limitations_ to bring action
5. Waiver of _court's power_ to modify trust, remove trustee, require fiduciary bond, or deny trustee compensation
41
What are the specific duties of the trustee?
1. Act prudently
2. Be impartial in relationship to beneficiaries
3. Control and protect trust property
4. Collect trust property and defend claims
5. Segregate trust property from own
6. Keep adequate records
7. Keep beneficiaries reasonably informed
8. Furnish copy of trust instrument on request
9. 60-day notice provision
10. Annual reports
42
What is the trustee's obligation with respect to the 60-day notice provision?
After the trustee accepts, he must notify beneficiaries of:
1. Trust's existence
2. Trust's settlor(s)
3. Beneficiaries' rights to request copy of trust
4. Beneficiaries' rights to annual report
5. Trustee's name, address, phone, and e-mail
43
What is a trust protector?
Someone other than the corporate trustee who makes sensitive personal decisions regarding the trust
44
How can a corporate trustee avoid a fiduciary duty breach from following the trust protector's directions?
1. Have settlor incorporate Virginia trust protector provisions in the trust instrument
2. Avoid instances of willful misconduct or gross negligence in following trust protector's instructions
45
What are a trustee's powers?
Virginia's trust code expressly a uthorizes a trustee to do whatever the fee simple owner of the property could do, so long as:
* No self dealing
* Settlor doesn't say otherwise
46
What is a trustee's responsibility with regard to prudent investing?
Virginia has adopted the Uniform Prudent Investor Act (UPIA) which utilizes a portfolio theory of investing (i.e., so long as the investment fits the portfolio, it is prudent - do not look at the investment individually)
47
What is a trustee's responsibility with regard to prudent investments when the trustee was selected based on his skills?
Trustee will be held to that level of expertise in evaluating his prudence
48
Under UPIA, how are investment returns measured?
Total return, including income, but also:
* Growth
* Capital gains
49
What is the trustee's responsibility with regard to allocating income between income and remaindermen beneficiaries?
Trustee must act _impartially_ between the two by either:
1. Adjustment powers
2. Unitrusts
50
How does a trustee exercise his adjustment power?
Trustee distributes income to the income beneficiary, but also some of the capital gains to promote fairness
Rule of thumb - 10% of capital gains can be allocated
51
How should the trustee distribute the followingexpenses between income and principal beneficiaries:
* Trustee's fees
* Ordinary expenses
* Capital expenses
Trustee's fees
* Half and half
Ordinary expenses
* Income beneficiary
Capital expenses
* Principal beneficiary
52
What is a unitrust?
Allows trustee to avoid having to allocate between income and remainder beneficiaries
Instead, income beneficiary gets between 3% and 4% of FMV of trust, remainder beneficiary gets everything else, regardless of amount of income generated
53
Who can the trustee delegate powers to?
Is the trustee liable for delgatee's actions?
Can delegate powers, including investment power, to agent
No liable for delegatee's actions so long as trustee exercised reasonable care in:
1. Selecting agent
2. Establishing terms of delegation
3. Reviewing agent's decisions
54
Is a trustee liable on contracts entered into as trustee?
No, so long as trustee:
1. Acted in fiduciary capacity
2. Disclosed fiduciary capacity
3. Contract does not say otherwise
55
Is a trustee liable for torts committed as trustee?
Yes, so long as trustee is personally at fault
56
Does a co-trustee have liability for actions taken by other trustees?
No, so long as the co-trustee:
* Dissented
* Did not join in the action
* Notified other trustees
57
How many co-trustees have to agree on a decision for it to be ratified?
Majority
58
Can an irrevocable trust ever be modified or terminated while settlor is alive?
Yes, if the settlor and all the beneficiaries consent and the court does the modification or termination
Even if the living settlor does not agree, the court may allow modification or termination
59
Can an irrevocable trust ever be modified or terminated after the settlor dies?
Yes, provided that:
1. All beneficiaries consent
* Modification or termination is not inconsistent with purpose of trust
2. Not all beneficiaries consent
* Court is satisfied that:
* Trust could be modified if all consented
* Interests of beneficiaries not consenting (e.g., unborn child) will be protected
60
When can a court modify or terminate a trust without all beneficiaries' consent?
1. Unanticipated circumstances
* Modification or termination will further purpose of trust based on unanticipated circumstances
2. Tax advantages
* Modification or termination will achieve settlor's tax objectives
3. Purposes
* Either:
* No trust purpose remains to be achieved
* Purposes of trust are now unlawful, contrary to public policy, or impossible to achieve
4. Uneconomic
* If value of trust is \< $10,000, trustee may petition for termination if administrative costs are too much to justify continuance
61
Can a trustee ever combine or divide trusts?
Yes, without court approval, so long as it does not frustrate the purposes of the trusts (e.g., to gain more investment ability)
62
Can a court reform the terms of a trust even if the terms are unambiguous?
Yes, if proved by _clear and convincing evidence_ that the settlor's intent and the trust terms were affected by a _mistake of fact or law_
E.g., allow sale of house despite trust restriction so that wife can get a new house in a more suitable zoning district
