Trusts Flashcards
Language that is not enough to create an express trust?
“Precatory language not clearly evidencing a Trust”
Precatory language are words in a will or trust (such as
“hope” or “request”) that merely express a settlor’s desire regarding the disposition of his property. Such words DO NOT create a legal obligation to act in accordance with that desire, and will not create a valid trust.
Instead, there MUST be specific settlor intent. When there is a familial or fiduciary relationship between the parties, the court may presume the settlor intended to create a legal obligation.
Elements for an Express Trust:
- Intent
- Delivery and Acceptance –> Settlor must deliver the goods, Trustee must take the goods and exercise legal control over them
- Trust Property –> This is called the “res.” The res can be anything that can be owned or transferred. Just must be (1) described with certainty, and (2) ascertainable
- Trustee –>
- Settlor –> who has mental and legal capacity
- ONE OR MORE BENEFICIARIES –> you need to have SOME way of figuring out who it’s for, now or in the future. natural persons, corporations and other organizations. The beneficiary doesn’t need to be able to “manage” the assets though and can be mentally incompetent. If a Trustee is given an indefinite class, no member of the class may enforce it.
- VALID TRUST PURPOSE – literally any legal purpose will work (support, tax planning, charity, etc.) –> If the Trust involves REAL PROPERTY aka Land, it must comply with the Statute of Frauds
Revocable versus Irrevocable Trusts
Under the Traditional rule a trust was presumed to be irrevocable unless stated otherwise. Today majority jurisdictions follow the UTC approach, and a trust is presumed revocable by default unless the document says otherwise.
Parties to a trust
Grantor/Settlor the creator of the trust. Trustee holds the legal interest or title to trust property.
Beneficiaries : receive the benefit of the trust.
Mandatory vs. Discretionary Trust:
A mandatory trust requires the trustee to distribute all trust income. In a discretionary trust, the trustee is given the power to distribute income at his discretion. The trustee does not abuse his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.
What is a trust?
A trust is a fiduciary relationship where the trustee is called upon to manage, protect, and invest certain property and any income generated therefrom for the benefit of one or more named beneficiaries.
The trustee holds the legal interest or title to the trust property. Should the trust be terminated, title would merge and would vest in the beneficiaries.
Creating a Trust:
A valid trust requires (1) Property (2) Beneficiaries (3) Trustee (4) Intent (5) Creation (6) Valid Legal Purpose.
Testamentary trust :
A testamentary trust is created in writing in a will or in a document incorporated by reference into a will. The will containing the trust must meet the attested or holographic will requirements.
Charitable Trust :
For a trust to be considered charitable, it must (1) have a stated charitable purpose and (2) it must exist for the benefit of the community at large or for a class of persons the membership in which varies. Purposes considered to be charitable include the relief of poverty, the advancement of education or religion, and other purposes benefiting the community at large or a particular segment of the community. It must actually be for indefinite group of beneficiaries it cannot be for specific.
If the original trust purpose cannot be satisfied or met under the cy pres doctrine a court may modify a charitable trust to seek an alternative charitable purpose if the original one becomes illegal, impracticable, or impossible to perform. The settlor’s intent controls.
Spendthrift Trust
Expressly restricts the beneficiaries right to transfer his or her interest in the trust. It does not allow beneficiary to actually promise or alienate his or her interest in the trust assets or income.
In this case creditors usually cannot reach that money because it was specifically created as a spendthrift trust with the exception that if money is owed for tax lien, child or spousal support or basic necessities the creditor might be able to reach the money for a trust.
A trust is created:
When (1) a settlor has the capacity to create a trust, (2) a settlor has present intent to create the trust, (3) a competent trustee with duties is appointed to administer the trust’s purpose, (4) the trust has an ascertainable beneficiary, and (5) property is transferred to the trust.
Claflin doctrine
A trustee can block a premature trust termination a trustee can prevent the beneficiaries from terminating the trust when a material purpose of the trust has not been completed yet, therefore it should not be terminated.
Removal of Trustee
Beneficiaries can remove a trustee if the beneficiaries believe that the trustee is not fulfilling its duties or violated a duty to them
Life tenant/Remainder beneficiaries
Gets income from the trust (income that the trust creates) such as cash divided, interest, rent income, net business income. And they pay expenses for interest on loans, taxes, minor repairs
Trustee Duties
Duty of loyalty —> no self dealing
- And if you fuck up, the beneficiaries are coming after you for full damages
Duty of care
Conflict of Interest
- No further inquiry
Prudent Investor
- Under UPIA
Diversify
Impartiality
NO LOANS AND SALES
KEEP RECORDS AND PROPER ACCOUNTING
BE A PRUDENT ADMINISTRATOR
DUTY OF CARE –> carrying out the directives of the Trust and protecting it
Power of appointment
Enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust.
Scenario: Mom gives son a gift in a Trust and the remainder will go to grandson when son dies. Son has a “power of appointment” which is just like a button he can press or exercise which can SHIFT that money from grandson to charity or some other person. It’s like a train lever and you can change the trains tracks and other people’s financial destinies.
The UTC says if you have an interest in a company or stock you invest in as a Trustee it’s a
Presumptive breach of the duty of loyalty.
The Trustee can defend by showing the transaction was fair or would have been made by an independent party or was ratified by the beneficiaries somehow though.
Trustee Duty to Act Impartially
A trustee has the duty to act impartially cannot treat beneficiaries unfairly over one another and allow their personal biases to affect their duties.
Trustee must be impartial to income beneficiaries and remainder beneficiaries, to treat them equally, can’t favor the people getting the income of a trust if it’s going to hurt the people who ultimately take the rest of the trust.
As a trustee you’re bound to treat all beneficiaries equal whether remainder or whether they are income beneficiaries.
Revoking a trust under the UTC
(1) Unanimous agreement of the Settlor and all the beneficiaries
- But wait… what if the Settlor is dead?
—–> The court will try to substitute their own judgment for the Settlors. They will look to see if the material purpose of the Trust has been achieved (whatever original objective the Settlor had in mind)
Once a trust is terminated –> how does the distribute?
The Trustee just distributes in a way that is consistent with the purposes and goals of the Trust
There are GENERAL and SPECIAL powers of appointment.
General: No restrictions and you can appoint the remainder to ANYONE.
“Special” powers of appointment: The donor will leave restrictions on who you can appoint it to.
SPECIAL TESTAMENTARY POWER OF APPOINTMENT
Mom gives daughter some “special power of appointment” where she can’t exercise it in favor of herself, her creditors or her estate and she also can only give it by will
“permissible objects” scenario
MEE say the daughter is only allowed to appoint her Trust principal when she dies to her “Heirs.”
So then her heirs are called “permissible objects” of the Trust principal when she dies (her lover Pierre would be an impermissible object).
If someone with a special power of appointment FAILS to exercise it the Trust will usually state takers in default and if those aren’t specified then it just actually passes to who the permissible objects of the will are that were listed (aka the HEIRS).
What if I only get the income from a Trust… can I invade the Principal? I want way more money to pursue my dreams of becoming a Formula One racer.
It can be invaded sometimes if there’s only one beneficiary or the Trustee has discretion to invade or the beneficiary suffers some huge injury and the invasion just makes sense based on what happened.
Can I create a fake Trust where I’m the sole trustee and I can just withdraw whenever I want?
No. This is an illusory Trust and will be deemed invalid.
What happens if I have no beneficiary in my Trust?
It becomes a “Resulting” Trust and all trust property returns to the Settlor or their estate.
What if the Trust is just becoming impractical or wasteful? Can the courts step in?
Yes. They can apply this doctrine called the equitable deviation doctrine - this just allows the court to modify the Trust procedures or administration if they think it would be more fair.
What happens after a Trust is terminated?
Split amongst beneficiaries and settlor
Totten Trust
Bank account where the Settlor leaves instructions for it to be left to a beneficiary after he dies
Can I have a Trust only for my kids education or support or healthcare?
Yes. You can have a support Trust for a single purpose. There was one problem where some kid wanted the Trustee to pay for his Playstation 5 or some shit and the Trustee only had discretion to give him money for education. So the beneficiary and Trustee got in this big fight haha.
Class gifts
If a Trust gave property to “Jimmy for life, then Karen and her heirs” and KAREN dies… her remainder Trust interest passes to her kids.
Under the UPC they came out with this crazy provision out of NOWHERE in 1990 called 2-707(b)
2-707(b) (which everyone in Trust law hates) basically says… no. If Karen dies, her kids aren’t getting shit. And it also says if one of Karen’s kids dies before Jimmy dies… THEIR heirs get nothing (grandkids of Karen get nothing). It just lapses everyone in a massive lapse attack.
Charitable Trusts can last
into PERPETUITY forever and are not subject to RAP
All future interests from property apply to Trusts, including RAP. RAP example:
Crazy rich grandma who gives a Trust to her kids, then the Trust says that when the kids die it goes to her grandkids, then her great grandkids - and it always says at the time of the Settlor’s death, she was survived by no children, no great grandchildren, and only one granddaughter/grandson. When there is ONE GRANDKID ALIVE… IT DOESN’T VIOLATE RAP. This is because at the time of Settlor’s death the only income beneficiary is the great granddaughter, and you got it, that is the life in being.
So when Settlor dies, she can’t have ANYMORE kids, and the granddaughter can only have kids during her life, so all interests will vest within 21 years of the granddaughters DEATH and the Trust vesting. One grandkid alive = no RAP violation.
Parties to a trust:
One person (“the Trustee”) holds a property interest at the request of another (the “grantor”, “Settlor”, or “Creator”) for the benefit of a THIRD party (the “beneficiary”)
The Trustee holds “legal” title to the property and controls it, but the beneficiary holds “equitable title” and gets the financial benefits.
