Trusts Flashcards
Trust Basic Rule
A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.
Requirements for a valid express private trust
A valid express private trust requires:
(1) Settlor with capacity
(2) Present intent to create a trust (manifested by settlor’s words, writing, or conduct)
(3) Competent trustee with duties (inter vivos trusts only; a testamentary trust will not fail for lack of a trustee)
(4) Definite/Ascertainable beneficiary(ies) (NOTE: same person cannot be sole trustee AND sole beneficiary; class gift okay if beneficiaries in class are ascertainable and it doesn’t violate RAP)
(5) Trust property (res) (future interests are okay, but it must be property that settlor has the power to convey and that is identifiable and segregated)
(6) Valid trust purpose (one that is not illegal, against public policy, or impossible to achieve, and does not violate the Rule Against Perpetuities)
Note: a settlor MAY declare himself as trustee (would still have to transfer trust property to himself as trustee though).
Secret Trust
A “secret trust” situation arises when a settlor secretly agrees with a will beneficiary that the beneficiary will hold the property IN TRUST FOR SOMEONE ELSE, BUT the will does NOT state the trust nature of the gift.
If the intended beneficiary can prove by clear and convincing evidence that
(1) the will beneficiary promised to hold the property in trust and
(2) the settlor relied on that promise,
a constructive trust will be imposed on the property in favor of the intended trust beneficiary.
This is true EVEN IF the will beneficiary did not make the promise until AFTER the will was executed. Furthermore, it does not matter whether the will beneficiary intended to perform the promise when they made it; all that matters is that the settlor relied on the promise.
Semi-Secret Trust
A semi-secret trust is when a gift in a will is to a person “in trust,” but the trust beneficiary is not named. In such a situation, extrinsic evidence is NOT allowed. The result is that the “trustee” holds the resulting trust for testator’s legatees or heirs.
What duties does the trustee have?
Trustees have a duty:
(1) To administer the trust: trustee must act prudently, in good faith, and impartially in administering the trust.
(2) Of loyalty: trustee cannot represent both his personal interest and the iterest of the trust (i.e., trustee must avoid conflicts of interest and cannot self-deal).
(3) To report: trustee must respond to beneficiaries’ requests and provide accounting.
(4) To separate and earmark property: trust assets must be kept physically separate from trustee’s personal assets and assets of other trusts (i.e., no commingling)
(5) To preserve and make trust property productive: trustee must use reasonable care to invest the property (prudent investor rule), collect claims due, lease or manage land, record documents, pay taxes, and secure insurance.
Can a trustee delegate her duties?
A trustee also has a duty to perform her trust duties personally. Traditionally, this meant that the trustee could not delegate investment decisions. Under modern statutes, however, a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. When delegation is proper, the trustee must exercise reasonable care, skill, and caution in selecting the agent, establishing the scope of the delegation, and periodically reviewing the agent’s actions to monitor the agent’s performance and compliance with the terms of the delegation. Delegation of certain discretionary functions, such as making discretionary distributions, usually is not permissible.
Precatory Language & Settlor’s Present Intent
Precatory expressions (hope, wish) result in an inference that no trust was intended (i.e., result in a failed trust), BUT the inference may be overcome by other evidence of:
- Definite and precise directions
- Directions addressed to a fiduciary
- A resulting “unnatural” disposition of property if no trust imposed; and
- Extrinsic evidence showing that the settlor previously supported the intended beneficiary.
Inter Vivos Trust Creation Formalities
Inter vivos trusts are those created during settlor’s life by:
- Settlor’s declaration they are trustee of specific property for a beneficiary. In such a situation, settlor keeps legal title. If trust property is personal property, no transfer needed. However, if trust property is real property, it should be conveyed from settlor as individual to settlor as trustee.
- OR, settlor’s transfer of propery to the trustee. In such a situation, settlor conveys legal title. Personal property is conveyed by physisical delivery or written instrument. Real property is conveyed to the trustee by deed.
Testamentary Trust Creation Formalities
Testamentary trusts are those created by the settlor’s will
- Essential terms must be ascertained from will, incorporated document, facts of independent significance, or exercise of power of appointment
- Secret trust (absolute gift but trust intended) – if elements proved, constructive trust imposed.
- Semi-secret trust (gift in trust without beneficiary) – no extrinsic evidence allowed. Result is a resulting trust for testator’s heirs.
Charitable Trust Requirements
(1) Settlor must have a charitable purpose to benefit the public (poverty relief, education, the arts, science, health, etc.); and
(2) Indefinite beneficiaries (Note: settlor can name a particular organization as the beneficiary (i.e., the Red Cross), who is indefinite is who specifically the organization aids though).
NOTE: RAP does not apply to limitations that shift beneficial interst from one charity to another. Rap does apply, however, to a limitation shifting the interst from private use to charitable or from a charitable use to a private use.
Cy Pres Doctrine
With a charitable trust, if settlor’s intended purpose is impracticable, unlawful, or wasteful, a court will apply the cy pres doctrine to substitute a new charitable purpose.
To do so, the court must find settlor had general charitable intent, not just interested in the named charity. Under the Uniform Trust Code (UTC), however, general charitable intent is conclusively presumed.
Court will select another purpose as near as possible to the settlor’s primary intent.
NOTE: this also applies for wills!
Who can enforce a charitable trust?
The settlor, a qualified beneficiary, or attorney general can enforce a charitiable trust.
Honorary Trust
An honorary trust is a trust for an honorary purpose, often for care of a pet or maintenance of a grave.
Enforcement:
There are no private beneficiaries to enforce an honorary trust. Under common law, trustee “on their honor” carries out the terms. Under the UTC, an honorary trust is enforceable by someone named in the trust or appointed by court.
Duration:
- Some states, trust void if duration violates RAP
- Under UTC, enforceable for 21 years or for life of the animal
Transferability of Beneficiary’s Intererst GENERAL RULE
Absent restrictions in the trust instrument or by statute, a beneficiary may voluntarily transfer interest in trust, and creditors may levy on the beneficiary’s interest.
Spendthrift Trusts
If a trust has a spendthrift provision, the beneficiary is precluded from voluntarily or involuntarily transferring their interest.
- A beneficiary cannot sell or give away interest in a spendthrift trust, and creditors cannot reach it. (BUT, once trust income/principal distributed, beneficiary can transfer and creditors can reach)
- In most states, not valid if settlor is also a beneficiary (some states allow it though).
- In most states, unenforceable against claim brought by government or by child, spouse, or former spouse with support order.
- In a few states, unenforceable against tort creditors
Discretionary Trusts
A discretionary provision gives the trustee discretion to pay or withhold income or principal.
- Before trustee makes discretionary payment, interest cannot be reached by creditors.
- After trustee elects to make payments, must pay creditors directly if has notice – unless there is a spendthrift restriction.
Support Trusts
A support provision directs the trustee to pay only so much of income or principal (or both) as is necessary for beneficiary’s support.
- Beneficiary’s interest cannot be assigned or reached even without spendthrift clause.
- Standard of support is beneficiary’s accoustomed standard of living, unless trust provides otherwise. Whether beneficiary’s other income or resources are considered in how much support is needed depends on settlor’s intent (i.e., is it meant to be extra money, or just to fill in the gap).
Trust Modification & Termination by Settlor
A settlor’s ability to modify and revoke a trust depends on the jurisdiction.
- Many states and the UTC: trusts presumed revocable and modifiable unless terms expressly state otherwise.
- Traditional rule (even in some UTC states): must reserve right to revoke or modify.
The power to revoke includes the power to modify.
Trust Modification & Termination by Beneficiaries
Beneficiaries may terminate or modify if:
- Settlor and all beneficiaries consent, even if it conflicts with a material purpose; or
- All beneficiaries consent, and no material purpose would be frustrated.
Examples of material purposes precluding termination: support of beneficiary, distribution at specific age or specific date, spendthrift protection, discretionary trust.
When determining consent of all beneficiaries, watch for remote unborn beneficiaries - representative can be appointed to represent interests of minor, unborn, or unascertained beneficiaries.
Trust Modification & Termination by the Court
A court may modify or prematurely terminate a trust in certain circumstances:
- May modify if trust could have been modified if all beneficiaries had consented and interests of nonconsenting beneficiaries will be protected.
- May terminate or modify if circumstances unanticipated by settlor threaten trust purpose.
- May modify if continuation of trust is impracticable or wasteful.
- May modify or terminate if value is insufficient to justify administration cost or achieve tax objective.
- May reform to reflect settlor’s intent if clear and convincing evidence shows settlor’s intent and trust were affected by a mistake.
Trust Modification & Termination by Trustee
Under the UTC, trustee may terminate if trust property is less than $50,000 and is insufficient to justify administration cost.
Powers of Trustee
The trustee has the following sources of power:
- powers expressly conferred by trust
- powers an individual has over own property unless limited by trust
- powers appropriate to achieve investment, management, and distribution of trust property not forbidden by trust
- powers conferred by UTC unless limited by trust
What are the trustee’s duties?
The trustee has these specific duties:
Duty to administer trust—must act in good faith and in prudent manner, in accordance with trust’s terms and purposes and beneficiaries’ interests
Duty of loyalty—no self-dealing absent court approval or express waiver in trust. Trustee’s good faith or the fact that the trust benefited are immaterial!
- Cannot buy assets from or sell assets to the trust
- Cannot borrow from trust or loan to trust
- Cannot personally gain through position
- Corporate trustee cannot buy (but may retain) own stock
Duty to report—keep beneficiaries reasonably informed
Duty to separate trust property—no commingling with own property or other trusts’ property
- Losses on commingled property charged to trustee; gains credited to the trust
Duty to enforce claims and defend trust from attack
Duty to preserve property and make it productive
- Investments must be prudent (reasonably prudent investor standard); trustee must use reasonable care, skill, and caution. Trustees with special skills held to higher standard. Trustee must diversify investments unless trustee reasonably determines trust purposes better served without diversification. Investment decisions may be delegated if a prudent trustee would do so
- Prudence evaluated in terms of overall strategy (portfolio approach).
What remedies do beneficiaries have if a trustee breaches their duties?
If trustee commits breach of trust
Court can:
- order specific performance of trustee’s duties;
- issue injunction against trustee;
- compel trustee to pay money or restore property; and
- suspend or remove trustee
Trstee liable to beneficiaries for greater of:
- amount necessary to restore trust property and distributions to what they would have been absent breach, or
- trustee’s profit from breach
If trustee commits self-dealing, beneficiary has choice of remedies:
- Affirm transaction if trust profited
- Set aside transaction if trust lost
- Trace profits from trustee if trustee profited
What defenses may a trustee have for an alleged breach?
Trustee can raise defenses:
- Trustee acted in reasonable reliance on trust terms
- Benificiary consented, released trustee from liability, or ratified transaction
Exculpatory clauses are void if they relieve trustee of liability for breach committed in bad faith or reckless indifference or appear in trust because of trustee’s abuse of confidential relationship with settlor.
Trustee not liable for acts of co-trustees if did not join in action and exercised reasoanble care in preventing breach or compelling co-trustee to redress breach.
Trustee’s Duty to Allocate Receipts & Expenses
If assets are received, did the trustee allocate them to principal or income while acting impartially to treat all beneficiaries fairly?
Adjustment power
- Trustee has adjustment power under Uniform Principal and Income Act (“UPAIA”): If distribution following traditional trust accounting rules does not effectuate trust purpose and is unfair, trustee may adjust between principal and income
Allocation of receipts
- Income —rental income, interest on bond or CD, money received from entity, liquidating assets and mineral rights—10% rule
- Principal—proceeds of sale of asset, eminent domain awards, capital gains, property other than money received from entity, insurance proceeds where trust is beneficiary, liquidating assets and mineral rights—90%
Allocation of expenses
- Income—one-half trustee and consultant compensation; one-half accounting and legal expenses; ordinary expenses (interest payments on debt, ordinary repairs, taxes, insurance premiums)
- Principal—one-half trustee and consultant compensation; one-half accounting and legal expenses; principal payments on debt; environmental costs
Resulting Trusts
Resulting trusts may be implied by law in the following situations:
- Purchase money resulting trusts: person taking title did not supply consideration; sole duty is to convey title to one furnishing consideration. No resulting trust presumption if parties closely related (then its viewed as a gift).
- Failure of express trust: resulting trust arises with settlor as beneficiary.
- Excess corpus: if trust property remains after purpose fulfilled, resulting trust for settlor arises.
Constructive Trusts
A constructive trust is an equitable remedy to prevent unjust enrichment, and may be imposed in the following situations:
- Theft or conversion
- Fraud, duress, undue influence, mistake, or interference with contract relations
- Breach of fiduciary duty (i.e., attorney/client, director/corporation, trustee/beneficiary)
- Breach of fraudulent promise, promise by one in confidential relationship, promise concerning will or inheritance (i.e., contractual wills in certain circumstances), promise to forgo foreclosure bid.
