Trusts Flashcards
What is NY’s Savings Statute?
Creates a presumption that the vesting of an estate is contingent upon the occurrence of an event and that the trust creator intended that contingency to occur within 21 years from the date of the instrument. (Rescues from RAP)
E.g., implies “within 21 years” before a contingency that may violate RAP
What are the three types of trusts?
Three kinds:
(1) Express Trusts = created by express intention of the owner of property. Private express or charitable.
(2) Resulting Trusts
(3) Constructive Trusts
NYS presumes that a trust is [revocable/irrevocable].
Irrevocable and not amendable
Fertile Octogenarian Rule
For RAP
Generally: Presumes that any person can have children
NYS: Abolished the rule.. Presumes that a man over 14yo and women over 12yo are fertile. Presumes that women over 55yo is not fertile. Additional proof of infertility can be demonstrated and possibility of adoption is disregarded.
New York’s Suspension Rule
aka
“Rule Against Suspension of the Absolute Power of Alienation”
Voids any estate in which the conveying instrument suspends absolute power of alienation for longer than the lives in being plus 21 years.
To satisfy the rule, someone must have the capacity to convey the state in fee simple within a life + 21 years.
Tested along with RAP.
“Income to my daughter, B, for life and on the death of B, the income shall go to B’s children for the remainder of their lives” = violates Suspension Rule.
Trustee-Beneficiary Merger Rule
Generally: If the same person is a beneficiary and a trustee, title merges and the trust terminates.
NYS: Eliminated merger. Allows the trustee to be a beneficiary if there are others who hold a beneficial interest as well. If not, court may appoint a co-trustee.
Parties to a Trust
Creator = establishes the trust Trustee = manages the trust and holds legal title Beneficiary = benefits from the trust and holds equitable title. Can enforce the trust instrument. (NY law does not allow use of extrinsic evidence to determine the beneficiary. Instrument must name or sufficiently designate one.)
Private Express Trust Elements (Typical Trust)
(1) Intent. Expressed orally, in writing, or by conduct. (Unless lifetime trust, which must be in writing, notarized, and witnessed by two persons.) Ambiguities will destroy the trust.
(2) Trust property (“res”). Must be (a) specifically identified and (b) segregated.
(3) Valid trust purpose. Must be legal and not restricted by statute or against public policy.
(4) Ascertainable beneficiaries. Special allowance for unascertainable unborn children, class gifts, and charitable trusts.
(5) In new york, must be in writing, signed by settlor and trustee, and notarized or executed in presence of two witnesses.
What is needed to create an inter vivos trust?
Elements:
(1) in writing
(2) signed by settlor and one trustee
(3) either (a) notarized or (b) executed in the presence of two witnesses who also sign the instrument.
Pour-over trust
A trust established before or concurrently with a will. The will will contain a provision that distributes property to the trust.
Elements:
(1) Trust is identified in the will
(2) executed before or concurrently with the will.
Totten Trust
A designation given to a bank account in the depositor’s name as “trustee” for a named beneficiary. Depositor retains control of the account during his lifetime. Can be revoked by will.
Contrast this with a “joint and survivor” bank account, which gives beneficiary access to the proceeds during the account holder’s lifetime and is not revocable by will.
Life insurance trust
Grantor assigns a policy or the proceeds to the trust and names a beneficiary.
NY allows life insurance trusts to remain unfunded (no res) until the death of the grantor.
Testamentary Trusts
Trusts created in a will or a document incorporated by reference into a will. (Note: NY does not recognize incorporation by reference, so the trust must be in the will itself.)
Normally, will not be revocable or destructible unless the will authorizes them. NY law allows courts can terminate if it is no longer economically feasible to administer the trust.
If the trust fails the requirements of the statute of wills, can be turned into a constructive or resulting trust if “secret” or “semi-secret.”
Charitable Trust
Elements
(1) Stated charitable purpose
(2) exists for benefit of the community at large or a class of persons with varied membership
Supervised by supreme court or surrogate’s court
Not subject to RAP.
5 legitimate charitable purposes:
(1) The relief of poverty;
(2) The advancement of education or religion;
(3) The promotion of good health;
(4) Government or municipal purposes; and
(5) Other purposes benefitting the community at large or a particular segment of the community.
Cy pres doctrine
Allows a court to modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform. Must be “as near as possible” to original purpose.
Inefficiency is not enough to invoke cy pres
Honorary Trusts
Trust with no permissible private beneficiaries. Trustee is on their “honor” to administer the trust because there are no beneficiaries to enforce the trust. But Trustee is under no legal obligation.
To avoid RAP, NY limits honorary trusts to 21 years.
Remedial Trusts
Trust where the sole duty of the trustee is to convey property to the beneficiary. After that, trust terminates. Created by law as equitable remedy.
Types:
(1) Resulting Trust
(2) Constructive Trust
Resulting Trust
If a trust fails with incomplete disposition of property, court may create resulting trust that requires holder of the property to return the property to the settlor or the settlor’s estate. Prevents unjust enrichment.
NY does not recognize a purchase-money resulting trust.
Constructive Trusts
Requires wrongful conduct: settlor causes fraud, duress, undue influence, breach of duty, or detrimental reliance by a third party on a false representation. Also homicide.
Defense: Unclean hands
Evidentiary Standard: Clear and convincing
Elements:
(1) Sharing of confidential or fiduciary relationship between the transferor and transforee
(2) a promise
(3) a transfer in reliance of the promise
(4) unjust enrichment
Gift-over clause
Provides for disposition of property if the trust fails. NY honors gift-over clauses.
Spendthrift Trust
Spendthrift trusts expressly restrict beneficiary’s power to alienate, both voluntarily and involuntarily. Offers the dead-hand control of the mandatory trust but combines it with the asset protection (from creditors) of the discretionary trust. NY gives beneficiaries no right to alienate or assign interest unless grantor provides otherwise. Thus, most trusts are spendthrift trusts.
Prevents beneficiary’s creditors from getting at trust. Also prevents beneficiary’s interest from bankruptcy proceedings.
Spendthrift Exceptions
NY provides exceptions to spendthrift restrictions:
(1) children and spouses entitled to support
(2) individuals providing basic necessities to the beneficiary
(3) holder of federal tax liens
(4) excess income beyond that needed for support and education
(5) 10% levy to judgment creditors in any case against the beneficiary. This 10 percent is shared by all creditors
(6) transfers containing a fraudulent conveyance with the purpose to delay, defraud, or defeat creditors.
Chaflin Doctrine
Trustee can block trust termination when the trust has an unfulfilled material purpose.
Some trusts have intrinsic unfulfilled purposes:
(1) discretionary trusts
(2) support trusts
(3) spendthrift trusts
(4) age-depedent trusts
How can you modify / revoke / terminate a trust?
Two ways:
(1) Settlor expressly reserves the right to modify or terminate the trust
(2) Settlor AND all beneficiaries give consent (Minors and incompetent individuals cannot give consent.) (Those with remainder interests are not required to give consent in NY.)
Beneficiary remedies for trustee breach
(1) Ratify the action and waive breach of trust
(2) Bring surcharge action and sue for resulting loss
(3) Bring action to remove trustee
Allocation of Principal and Income
In general:
life beneficiaries = income
remaidermen = principle
Modern approach: trustee can recharacterize items and reallocate as long as reasonable and comports with trust purpose.
Expenses charged to income
(1) 1/3 of regular compensation to any who provide investment, advisory, or custodial services to the trustee
(2) Accounting costs, court costs, and costs of other matters
(3) all ordinary expenses
(4) insurance premiums that over loss of a trust asset
Expenses charged to principal
(1) 2/3 of regular compensation to those to advise the trustee
(2) all trustee compensation
(3) all payments on the principal of any trust debt
(4) expenses of any proceeding that concerns an interest in principal
(5) estate taxes
(6) payments related to environmental matters
Trustee’s Duty of Loyalty
Trustee must act (1) reasonably (objective standard) and (2) in good faith (subjective standard). Trustee generally cannot act for personal gain.
Defense: Trustee can try to prove that the transaction was (1) objectively fair and reasonable and (2) was not affected by a conflict of interest.
If self-dealing is proven, an irrebuttable presumption is created that the trustee breached the duty of loyalty. No further inquiry except measuring damages.
Exculpatory clauses are strictly interpreted and complete exculpatory clauses are void as against public policy.
Trust investments
Under Uniform Prudent Investor Act (UPIA), trustee must act as a prudent investor would with his own property. Must exercise reasonable care, caution, and skill when investing unless trustee has special skills or expertise. If special expertise, he has a duty to utilize such assets.
Duty to adequately diversify assets unless administrative costs would outweigh benefits.
Duty to make property productive.
Some commingling of funds allowed for diversity. But if commingles with own property and property is lost, presumption that the loss was from the trustee’s property and presumption that any increase in value belongs to the trust.
Duty of impartiality (Trustee’s duties)
Duty to balance conflicting interest of the present and future beneficiaries by investing property that produces reasonable income while preserving principal.
Duty to Disclose (Trustee’s duties)
Trustee must disclose complete and accurate information about the trust property, including access to trust records and accounts, to the beneficiaries. Must identify possible breaches of trust and disclose.
Must disclose to beneficiaries intent to sell major assets.
Duty to Account (Trustee’s duties)
Trustee must account for actions taken on behalf of the trust so his performance can be assessed. Any attempt to relieve a trustee of this duty is void.
Duty to secure possession (Trustee’s duties)
Trustee must secure possession of the property in a reasonable time.
Duty to maintain (Trustee’s duties)
For real property, trustee must maintain and repair as a normal owner would.
Duty to segregate (Trustee’s duties)
Trustee must separate his personal property from trust assets.
Trustee liability for agents
Trustee is not liable for breaches of agents unless the trustee:
(1) directs, permits, or acquiesces to agent’s act
(2) conceals the agent’s act
(3) negligently fails to compel the agent to redress the wrong
(4) fails to exercise reasonable supervision
(5) permits agent to perform duties that the trustee was not entitled to delegate
(6) fails to use reasonable care in selecting agents.
Trustee third-party liability
Trustee is liable for any contract or tort claims. If he acted within the scope of duties as a trustee, he is entitled to indemnification from the trust.
Precatory Language
Intent problem: expresses a wish or desire by the settlor instead of an intent to create a trust.
Remember: Intent to create a trust must be unambiguous.
Failed Gifts
Intent problem: sometimes failed gifts can be reconstrued as trusts. (But remember, they must be in writing.)
Watch for failure of delivery of a gift. Could be construed as one person holding property for benefit of the gift recipient.
Valid trust purpose
Element of trust: a trust purpose can by anything that is not illegal or against public policy.
Note: Absolute restrains on marriage are invalid.
UTMA Account (Uniform Transfers to Minors Act)
Permits gifts to minors by setting up a custodial account (not strictly a trust, but very similar) to manage the property until the minor reaches 21yo.
Grounds for Trustee Removal
(1) Incapacity
(2) Breach
(3) Conflict of interest (unless apparent at time trust was established)
(4) Serious disagreement
(5) Poor performance
Trustee Self-Dealing
Self-dealing by a trustee is absolutely prohibited. A trustee may not buy or sell trust assets for herself in her personal capacity. Self-dealing is subject to the “no further inquiry” rule. Under this rule, if the trustee self-deals, the trustee is liable.
