Trusts

Question 1

TX Trust Code Application

Answer 1

• applies to express trusts created on or after Jan. 1, 1984 & to all transactions occurring on or after that date that relate to express trusts created before that date

Question 2

TX Trust Code Creation

Answer 2

Trust may be created by:

1) property owner’s declaration that owner holds property as trustee for another person
2) property owner’s inter vivos transfer of property to another person as trustee for transferor or a 3rd person
3) property owner’s testamentary transfer to another person as trustee for a 3rd person
4) an appointment under a power of appointment to another person as trustee for the donee of the power or for a 3rd person
5) a promise to another person whose rts under the promise are to be held in trust for a 3rd person

Question 3

SoF provision in TX Trust Code

Answer 3

A trust in either real or personal property is enforceable only if there’s a written evidence of trust’s terms bearing signature of settlor or settlor’s authorized agent.

Question 4

Express Trust Requirements (SPITS)

Answer 4

1) Settlor w/ capacity
2) Proper trust purpose
3) Intent to create trust
4) Trust res (body, trust property)
5) Sufficiently identifiable beneficiary

Question 5

Purpose

Answer 5

• may be created for any purpose that isn’t illegal
• terms may not require trustee to commit a criminal or tortious act or an act contrary to public policy
• trust will fail if: 1) created to defraud creditors; 2) absolute prohibition on marriage by a beneficiary (against public policy); 3) encourages beneficiary to refrain from marrying or to obtain a divorce (restraints on remarriage of a settlor’s spouse ordinarily upheld)

Question 6

Time Restrictions

Answer 6

• B’s interest in a noncharitable trust is void (under RAP) unless interest vests, if at all, w/in 21 yrs after some life in being at creation of trust
• private trust may accumulate income for only period of RAP, but a charitable trust may accumulate income beyond that period if found reasonable

Question 7

Cy Pres (only applies to charitable trusts)

Answer 7

• w/in limits of RAP, a ct will reform or construe an interest in real/personal property that violates RAP to effect the ascertainable general intent of creator under doctrine of cy pres
• ct will liberally construe & apply provision to validate an interest to the fullest extent consistent w/ creator’s intent
• if an instrument that violates RAP may be reformed, a ct will enforce provision of instrument that doesn’t violate RAP & reform provision that violates or might violate RAP
• when the specific charitable purpose of a trust can no longer be accomplished, or some other change in circumstances renders it impracticable to administer the trust as provided by the settlor, a ct may, under the cy pres doctrine, apply the gift to another charitable purpose as near as possible to the settlor’s original intent, unless the trust indicates that under these circumstances the trust property should revert to the settlor or his estate

Question 8

Charitable Trusts

Answer 8

• favored in the law b/c of their benefit to society
• may be created by any methods for creating a private express trust (requirements of a settlor w/ capacity to convey, properly expressed intent, & specific trust res)
• to qualify: persons to be benefited must be uncertain (members of an indefinite class)
• RAP and Rule Against Accumulation don’t apply
• essence to accomplish 1 or more charitable purposes
• Cy pres - may be reformed by ct when purpose has been accomplished or can no longer be accomplished, when object of gift has ceased to exist, or when some other change in circumstances renders administration of trust impossible, impracticable or illegal

Question 9

Spendthrift Trusts

Answer 9

• created w/ purpose of providing a fund for support & maintenance of beneficiary & at same time securing it against B’s own improvidence or incapacity for self-protection
• settlor may provide in terms that the interest of a B in income, principal, or both may not be voluntarily or involuntarily transferred before payment or delivery of interest to B by trustee
• to prevent fraud on creditors, TX law doesn’t allow a person to create a spendthrift trust for his own benefit (such a trust will be found valid, but the attempted restraint against transferees & creditors of settlor will be found invalid)

Question 10

Trust Administration Powers

Answer 10

• powers & duties of trustee established by trust instrument by statute

Question 11

Statutory Trust Administration Powers

Answer 11

1) power of sale
2) power to invest
3) power of appointment
4) power to invade principal

Question 12

Trustee Duties

Answer 12

1) duty of loyalty & GF
2) duty of reasonable care & skill
3) duty to collect, preserve, & segregate trust property
4) duty to make property productive
5) duty to account
6) duty to defend suit

Question 13

Termination of Trust By Settlor (Revocation)

Answer 13

Settlor may revoke trust unless it’s made irrevocable by express terms in instrument creating it or in an instrument modifying it. Settlor may modify or amend trust that’s revocable. If trust was created by written instrument, revocation must be in writing (provision in a will can serve this purpose).

Question 14

Termination of Trust By Court

Answer 14

On petition of trustee or a B, ct may order trust be terminated if purpose of trust has been fulfilled or has become illegal or impossible to fulfill; or there’s been changed circumstances rendering continuance of trust unnecessary to achieve material purpose of trust (ct may not terminate unless all B’s have consented to order).

Question 15

Duty of Loyalty & GF

Answer 15

The fiduciary’s duty is more than a negative duty prohibiting certain transactions; it is also an affirmative duty to always act in the best interests of the trust (not necessarily the beneficiaries). TX statute expressly prohibits a trustee from borrowing the assets of a trust.

Question 16

Trustee Breach of Duties

Answer 16

A trustee who commits a breach of trust is chargeable with any losses resulting from that breach, including any loss or depreciation in value of the trust estate. It is not likely that the trustee will also be charged with additional damages – beyond those that compensate the trust for the loss in value after failing to act in the best interest of the trust.

Question 17

Liability of Trustee to Beneficiaries (Duties) Bar Notes

Answer 17

1) General duty to act w/ care (prudent investor rule)
2) Duty to follow instructions of trust (if trustee, reasonable person, should realize following instructions would result in loss, it would then be a breach to follow the instructions; when in doubt check w/ ct)
3) diversify assets
4) unless specifically instructed, duty to keep the trust going (keep property productive)
5) Earmark assets: trust property must be kept separate from trustee’s own property
6) Duty to avoid self-dealing (variation on duty of loyalty), extends to spouse & immediate family (can’t profit from trust assets)
7) Accounting: must account every 12 months on status of trust, unless otherwise instructed (beneficiaries can also demand accounting)

Question 18

Duty to Avoid Self-Dealing (Loyalty)

Answer 18

The cases in which a fiduciary deals with himself in two conflicting capacities (e.g., as both trustee and lender) and, those in which trustee deals openly & directly with beneficiaries. The latter type of alleged self-dealing is only prima facie voidable, and the transaction may be sustained if trustee can establish full disclosure & adequacy of price.

Question 19

Uniform Prudent Investor Act

Answer 19

A trustee must invest & manage trust assets as would a prudent investor, considering the purposes, terms, distribution requirements & other circumstance of the trust. In satisfying this standard, trustee must use reasonable care, skill & caution.

Question 20

Trust Res

Answer 20

Need identifiable trust corpus; must contain identifiable & segregated other property (existing interest in real or personal property). Can’t be an expectancy. Although the res of a trust may be a contingent interest, a trust corpus that is merely an expectance or a mere possibility will not create a valid trust. No trust will arise later if the person actually acquires the property. A debt can be valid depending on who is debtor; trustee has to be able to enforce the trust, so trustee has to be someone other than the debtor.

Question 21

Inter Vivos Transfer Creation

Answer 21

No trust fails for lack of a trustee. If settlor fails to designate a trustee or trustee otherwise fails, ct shall appoint a trustee on petition of any interested person. An inter vivos trust can be created by will; a will may pour the assets of an estate into an inter vivos trust, even though the trust was not formally created.

Question 22

Secret Trust

Answer 22

If the face of the will doesn’t indicate the existence of a trust, and it’s later established, the prevailing rule: extrinsic evidence can come in to establish the existence of the trust.

Question 23

Semi-Secret Trust

Answer 23

The face of the will indicates the existence of a trust, but not all the necessary terms are laid out (usually missing B’s) (says how to be used but not for who); prevailing rule: extrinsic evidence DOESN’T come in and B takes free & clear ie trust fails.

Question 24

Pour Over Trust

Answer 24

Settlor makes a trust. Testator makes a will that gives $ to trust established by settlor. That provision is the pour over provision. (more a pour over from a will)

Question 25

Uniform Testamentary Addition to Trusts Act

Answer 25

TX has adopted. If a trust existed before the execution of the will or comes into existence afterwards or is amended afterwards, it doesn’t matter – pour over provision still valid.

Question 26

Community Property in Trust

Answer 26

To protect a spouse’s interest, TX provides that community property that is transferred into a revocable trust remains community property. Unless the trust expressly provides otherwise, a power to revoke the trust as to the community property may be exercised by either spouse acting alone, & any community property withdrawn from the trust remains community property.

Question 27

Totten Trust

Answer 27

Inter vivos trust. Does not require notice to B of revocation. Person establishing the trust, the settlor/depositor, may revoke the trust anytime before death, at which time the balance vests in B. B has no interest in a Totten trust account until the depositor dies. Prior to the depositor’s death, the trust account is completely revocable & the depositor has no fiduciary duty to the beneficiary. Furthermore, a withdrawal of all funds from a Totten trust account will act as a complete & permanent revocation of the trust.