Trusts Flashcards
Trust Formation
Formation of a valid trust requires (SPIRIT BC):
1) A settlor;
2) A valid purpose;
3) An intent to create a trust;
4) Res;
5) A trustee - If one is not named at formation in testamentary trust, the court can assign;
6) A beneficiary; and
7) Compliance with state formalities.
Types of Trusts
1) Inter vivos trusts are trusts created during the lifetime of the settlor. Intervivos trusts are revocable during the settlor’s lifetime unless it is created as an irrevocable trust.
2) Testamentary trust are trusts created via provisions found within a will. Testamentary trusts are irrevocable.
Resultant Trust
If a trust fails or there is an incomplete disposition of the res, a court may create a resultant trust to return the res to the settlor in order to avoid unjust enrichment. This is appropriate when a beneficiary is not using the assets as the trust dictates.
Discretionary trust
A trust is a discretionary trust if the trustee has authority to distribute trust assets at their discretion so long as the distribution is in good faith.
Charitable Trust
A trust is a charitable trust if it has a charitable purpose and exists for the benefit of the community at large, or a class of persons with continually changing membership.
Cy Pres
If the original beneficiary of a charitable trust ceases to exist, the court may designate an alternate beneficiary. The court will try to designate a beneficiary whose goals are as close as possible to those of the original beneficiary. If there is none, then the res returns to the settlor’s estate.
Duty of Care
A trustee must exercise that degree of care, skill and caution exercised by a reasonably prudent person in managing their own affairs. The trust must prudently invest assets, including diversification, make real property productive, and make informed investment decisions. If a trustee has special skills that are applicable to the administration of the trust, they will be required to use such skills and be held to a higher standard of care.
Duty of Loyalty
A trustee is required to remain loyal to the beneficiaries, to refrain from self-dealing, administering the trust in the best interest of the beneficiaries, and acting impartially towards each beneficiary.
Duty to Diversify Assets
A trustee is required to invest trust assets in varying classes of investments to minimize risk
Duty to Distribute In Accordance With the Trust Instrument
A trustee has a duty to invest and expend trust resources only in accordance with the trust instrument.
Duty to Make Property Productive
A trustee is required to invest trust assets to produce income relative to assets invested.
Duty to Make Informed Decisions
A trustee must perform responsibitlities with the due diligence required to invest trust assets only after developing the requisite knowledge of the investment landscape.
Duty to Inform and Account
A trustee is required to annually report to the beneficiaries the value, employment and usage of all trust assets. Additionally, beneficiaries are entitled to an accounting within reasonable time upon request.
Modification of Trust
A settlor may modify a trust only if they have reserved the power to do so. A trust can be modified due to unforessen circumstances, if all the beneficiaries of the trust agree to the modification in writing, and as long as the modification does not go against the stated purpsoe of the trust.
In California, a trust may be modified on petition by the trustee, or by the court may modify a trust if the trust will be substantially impaired due to unknown or unanticipated circumstances of the settlor.
Termination of Trust
An irrevocable trust may be terminated if 1) the settlor and all beneficiaries agree while the settlor is alive, or 2) all the beneficiaries agree and the termination will not frustrate the purpose of the trust, or 3) the trust ends as stipulated in the formation.
A revocable trsut may be termiated in any way specified in the trust, or in any writing signed by the settlor.
Creditor Access to Trust Assets
Creditors cannot reach irrevocable trust assets.
Creditors can attach revocable trust assets until the settlor’s death.
Remedies Against Trustee
A trustee can be removed, and can be held liable for any loss or depreciation of the trust value. Additionallly, the trustee may be disgorged of any profit made by the trustee due to personal use of the trust assets, and may be liable for any lost profits caused by the breach of fiduciary duties.
