Trusts Flashcards
What is a trust?
A fiduciary relationship wherein one (trustee) is given legal title/interest by the creator (settlor) to hold and protect the property for the benefit of another (beneficiary) who takes the equitable title/interest.
What are the two main types of trusts?
- Express trusts
- Implied trusts
Under the UTC, what is the presumption regarding the revocability of trusts?
Trusts are presumed to be revocable.
What is the role of the settlor in a trust?
The creator of the trust; must have capacity the same as for making a will.
What happens if the same person is both the sole trustee and sole beneficiary?
The trust will terminate.
How can a trustee be removed?
- By the court
- By the settlor on several grounds
- By beneficiaries if the trust provides
What intent must the settlor have to create a trust?
The settlor must intend to make a gift in trust.
What is required for a writing to create a trust?
A writing is required if created in a will or if the subject matter is land.
What type of language is insufficient to create a trust?
Ambiguous language such as precatory words like ‘hope’ or ‘desire’.
What is ‘trust property’?
Presently identifiable property that is not a mere expectancy.
What is a valid trust purpose?
Cannot be illegal or against public policy; must be possible to achieve.
What is the difference between mandatory and discretionary distributions in a trust?
- Mandatory: The terms dictate payments
- Discretionary: Trustee controls whether or when to apply payments
What is a support trust?
A trust that directs the trustee to use discretion to pay income/principal as necessary to support the beneficiary.
What is a spendthrift trust?
A trust that restricts the beneficiary’s power to transfer his equitable interest.
What is the Rule Against Perpetuities (RAP)?
No interest in property is valid unless it must vest, if at all, within 21 years after some life in being at the creation of the interest.
What is a secret trust?
What appears to be an outright gift in a will is based upon a promise by the devisee to hold the property for another’s benefit.
What happens if a beneficiary disclaims their interest?
The beneficiary will be treated as having predeceased.
What are the elements of a charitable trust?
- Charitable purpose
- Large class of unidentifiable beneficiaries
- Not subject to RAP
What is the Cy Pres Doctrine?
Allows the court to modify the terms of a charitable trust when it cannot be performed as written, consistent with the settlor’s intent.
What is a Totten trust?
A fully revocable designation on a bank account where the depositor is named ‘trustee’ for one or more named beneficiaries.
What is the typical duration of an honorary trust?
Terminates on the death of the last surviving animal or is limited by statute.
What is a testamentary trust?
A trust created according to the terms of a will; funded independently of the will.
What is a pour-over gift from a will?
A will directs property be distributed to a trust upon the happening of an event.
What is the effect of a spendthrift provision?
It prevents creditors from reaching the assets until the property has been paid out to the beneficiary.
What must happen for a trust to be modified or terminated?
The trust must be revoked or expire pursuant to its terms, have no remaining unfulfilled purpose, or its purpose must become unlawful.
What are the duties of a trustee?
To administer the trust according to its terms and for the benefit of the beneficiaries.
What is a declaration of trust?
The settlor declares herself trustee and is paid income during her life with the property going to the beneficiaries at her death.
What is a semi-secret trust?
A will directs a gift be held in trust without naming a beneficiary.
What is a right of entry in trusts?
Follows a fee simple subject to a condition subsequent.
What is a remainder in trusts?
If possession goes to a third party after a life estate, the third party takes a remainder.
Who can enforce a charitable trust?
Enforced by the Attorney General.
What do traditional accounting rules state regarding amounts received in exchange for trust property?
Amounts received in exchange for trust property = principal; amounts received for the use of trust property = income.
How are expenses allocated in trust accounting?
Accounting costs and compensation to T and advisors are split 50-50.
What types of expenses are considered income expenses?
- Ordinary expenses
- Insurance premiums
What types of expenses are considered principal expenses?
- Payments on debt going to the principal
- Estate taxes
What is the general approach to trust administration and duties?
Spot issues by looking at action verbs and determine if T’s conduct was authorized and performed with the required standard of care.
What is the fiduciary duty of a trustee?
To administer the trust in the best interests of the beneficiaries; breach may result in personal liability.
In a trust with multiple trustees, how must decisions be made?
Two trustees must agree; if there are three or more, a majority agreement suffices.
What protects a third party dealing with a trustee in breach of duty?
The third party is protected if they had no knowledge, acted in good faith, and gave valuable consideration.
What are the two types of powers a trustee has?
- Express powers set forth in the trust
- Implied powers necessary to manage the trust
What is the duty of care for a trustee?
T must administer the trust in good faith, in accordance with its terms, and in the best interests of the beneficiaries.
Under what conditions can a trustee’s discretionary decisions be challenged?
If T failed to exercise good judgment or if decisions were based solely on personal reasons.
What is the duty of loyalty in trust administration?
No fraud or bad faith is required for a breach.
List some actions that constitute self-dealing by a trustee.
- Buy or sell trust assets for themselves
- Transfer property between trusts
- Borrow funds from or make loans to the trust
- Use trust assets to secure a personal loan
- Engage in prohibited transactions with friends or relatives
- Act for personal gain through the trustee position
What happens if a trustee engages in self-dealing?
The court will not inquire further into T’s motives as it is a per se breach of duty.
What exception exists for self-dealing by a trustee?
If authorized, the transaction must be fair and reasonable; otherwise, T will be in breach.
How is a conflict of interest that is not self-dealing reviewed?
To analyze if T acted reasonably and in good faith.
Under modern law, when can a trustee delegate duties?
If it is unreasonable to expect T to perform the task, but T must oversee the decision-making.
What does the Prudent Investor Rule require of a trustee?
T has a duty to invest and manage as a prudent investor would when investing their own property.
What is the duty to diversify for a trustee?
T must diversify unless the costs would outweigh the benefits.
What is the duty of impartiality for a trustee?
T must balance the interests of present and future beneficiaries.
What is the modern rule regarding allocation between principal and income?
Allocation must be balanced and fair.
What are the duties of a trustee regarding informing beneficiaries?
T must keep beneficiaries informed about the trust property and allow access to records and accounts.
What is the duty to account for a trustee?
T must periodically account to the beneficiaries unless waived by S.
What remedies do beneficiaries have for a breach of trust?
- Remove the trustee
- Sue for damages
- Ratify T’s actions
- Force T to trace and recover property
What are the third-party rights regarding a trustee’s breach?
T may be personally liable but can seek indemnity if acting within the scope of duties.
What is the liability of co-trustees?
Liable unless they had no knowledge and could not have prevented the breach.
Under what conditions is a successor trustee liable?
Not liable unless they knew or should have known of the prior trustee’s breach and did nothing to correct it.
What is a remedial trust?
Imposed by law; requires the trustee to convey the property.
What is a resulting trust?
A trust to avoid unjust enrichment; requires conveyance to the settlor under specific circumstances.
What constitutes a constructive trust?
An equitable remedy to avoid unjust enrichment caused by wrongful conduct.
What must a beneficiary prove to establish a constructive trust?
Must prove by clear and convincing evidence.
What defenses exist against a constructive trust claim?
- Unclean hands
- Laches
