Trusts Flashcards
What is a trust?
A fiduciary arrangement in which a settlor transfers property to a trustee and expresses an intent to benefit identifiable beneficiaries.
What are the elements necessary for a trust?
1) Settlor: person transferring prop
2) Trustee: given legal title to the prop
3) Beneficiary: equitable interest in the prop
4) Prop: identifiable and specifically described (not nec. land)
5) intent: manifest in terms of creating enforceable duties that take effect when trust commences.
Types of Trust
1) Express: created purposefully by settlor in writing
2) implied: created by the courts
What are the types of implied trusts?
1) resulting trusts
2) constructive trusts
Trust Categories..what are they?
1) Private Express: between people
2) Charitable: to charities
3) Honorary Trusts: if beneficiaries can’t complain then the trust = honorary. (Ex. dogs, cemetery)
When can trusts be created (at what time)
1) Inter vivos: created during settlor’s lifetime
2) Testamentary: created during settlor’s will
Inter vivos
May be created by
1) Declaration of trust: settlor declares a trust
2) deed of trust: settlor transfers prop with intent to create a trust
Testamentary trust capacity requirement
Same as the capacity to make a will
Inter vivos trust capacity requirement
Greater of the capacity to old and transfer prop (basically settlor must be able to completely transfer property during lifetime)
Trust Intent requirement
Settlor must intend to create a trust
How do you distinguish between a settlor intending to create a trust and merely the intent to give a gift
Look for any mandatory enforceable duties imposed on the trustee.
If these duties exist = creation of trust
If these don’t exist= mere gift
Look at the surrounding circumstances of the transfer.
Public Policy Restrictions
May limit trust intent.
A trust cannot promote divorce, unreasonable demands on a beneficiary, crime or unreasonable destruction of property or waste.
If it violates public policy, the provision is void.
Requirement of Trust property
Must have an ascertainable trust property
Must be specific, identifiable, and separable prop interest to which the trustee’s duties relate
Doesn’t have to be tangible
If no ascertainable property, then there is no trust,
A promise to create a trust in the future not supported by consideration is what?
A merely gratuitous promise.
Can a gratuitous promise become a trust?
Yes, if all the elements of a valid trust is met and the settlor had manifested an intention to create a trust at the time the gratuitous promise was made.
Ex: When a promise to hold prop in a trust is supported by consideration, a trust arises automatically.
Can a trust fail for want of a trustee?
No, the court can always appoint a trustee. Only exception is when the settlor has demanded that a specific/particular individual/entity serve as trustee.
Pour over trust
A revocable trust that is structured to receive and dispose of assets at the settlor’s death
Ascertainable beneficiary requirement for trusts
Private and honorary trusts must have ascertainable beneficiaries to be valid
Charitable trusts dont need this. The indefinite nature of the people contributing to the charity is implied.
How can you establish an ascertainable beneficiary?
1) read the language of the trust
2) extrinsic evidence
What happens if the trust fails for want of ascertainable beneficiaries?
A resulting trust will occur and the property resulting back to the settlor’s estate and will pass according to the residuary clause or intestate succession
Revocable Trusts
Type of express trust
Trusts are irrevocable unless the settlor has specifically reserved the power to revoke.
Any termination/modification must be in writing
Totten Trusts
The settlor of the trust places money in a bank account or security with instructions that upon the settlor’s death, whatever is in that account will pass to a named beneficiary.
Exception b/c this is revocable by having the intent to revoke.
Settler can withdraw $ from account during lifetime.
Discretionary Trusts
Used to protect beneficiary interest from beneficiary creditors.
That gives a trustee the power to decide which beneficiary receives the funds and up to what amount. The settlor of the trust may (through an informal memorandum or letter of wishes) seek to provide guidance to the trustee but any attempt to restrict trustee’s discretion invalidates the trust.
Since no asset is clearly identifiable with any beneficiary, creditors cannot attach the trust assets in payment of a loan or liability.
Spendthrift Trusts
Used to protect beneficiary interest from beneficiary creditors.
a trust that is created for the benefit of a person (often unable to control his spending) that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary
When can a creditor reach a beneficiary’s interest in a trust?
Creditor can reach 25% of beneficiary interest for
- tort claims
- taxes
- involuntary services rendered
Spendthrift Trusts and K Beneficiary
A K beneficiary (such as a department store) which had the ability to inquire into a beneficiary’s credit will not be allowed to pierce the spendthrift trust in order to satisfy a debt owed to the K beneficiary by the beneficiary in the trust.
Spendthrift Trusts and Disabilities
IF a beneficiary has a mental or physical disability that substantially impairs his ability to function, the spendthrift clause is 100% effective in isolating the trust assets from creditors
Charitable Trusts
Must be established for public benefiting purposes.
Ga recognizes these purposes:
1) poverty relief
2) education
3) religion and ethics
4) health and welfare
5) maintenance of cemeteries
6) prevention of cruelty to animals
7) government
Beneficiaries MUST be the public at large (an indefinite group), not private individuals
Not subject to RAP
Who enforces charitable trusts if trustee fails to do so?
Attorney general acts through the local county district attorney.
Cy Pres Doctrine
Means “Like Purpose”
Charitable trusts may be modified using this doctrine.
When the original objective of the settlor or the testator became impossible, impracticable, or illegal to perform, the cy-près doctrine allows the court to amend the terms of the charitable trust as closely as possible to the original intention of the testator or settlor to prevent the trust from failing.
Ex: if a trust initially was set up for a homeless organization but that organization no longer exists, the courts will modify the trust to apply to another homeless organization that is in existence thus conferring with the settlor’s intent.
Modification or Termination of Express Trusts
A trust is irrevocable (can’t be modified/terminated) unless settlor specifically and expressly retains the right to revoke (terminate) or modify.
Judicial Modification of Express Trusts
Cts may direct/permit modification if its established by clear/convincing evidence that, owing to circumstances not known or anticipated by settlor, compliance with trust terms would defeat or substantially impair accomplishment of trust’s purpose
Judicial Termination of Express Trusts
A court will terminate upon finding that
1) cost of administration = defeats trust purpose OR
2) trust purpose have been fulfilled or have become illegal/impossible to fulfill OR
3) due to to unanticipated circumstances continuation would defeat/substantially impair trust purpose
Judicial Division or Consolidation of Express Trusts
Upon a showing of good cause and notice to all beneficiaries, a court may direct the division or consolidation of two or more trusts if the division/consolidation
1) is not contrary to settlor’s intent OR
2) will facilitate trust management OR
3) is in beneficiaries’ best interest
Resulting Trusts
Implied trusts
arises upon
1) failure of express trust OR
2) trust purpose = accomplished and trust assets remain OR
3) purchase money resulting trust arises
Beneficiaries of Resulting Trusts are who?
1) any contingency contained in the trust agreement
2) result back to settlor
3) settlor’s successor in interest
Purchase Money Resulting Trust
Presumed to arise when consideration for the purchase of property is paid by a person other that the person who accepts title
Can be rebutted by preponderance
Constructive Trust
Implied trusts
Imposed when the person holding prop cannot continue to hold it without violating some rule of equity
Used to prevent unjust enrichment
Beneficiaries of constructive trust
the person who would have been beneficiaries absent the wrongdoing by the trustee
Fraud by Trustee
Results in a constructive trust if fraud is proved by clear/convincing evidence
Simple Promise Broken by Trustee
Does not result in a constructive trust.
Only remedy would be at law, such as breach of K
Breach of Fiduciary Duty by Trustee
Results in a constructive trust
Unclean Hands
No remedy
In order to seek a constructive trust, the claimant must have clean hands
Breach of Promise concerning a Will
Results in a constructive trust (this is an exception to the rule that constructive trusts aren’t available for broken promises)
It would be unjust not to fulfill this promise.
Secret Trust
Occurs when the will contains NO trust language
arises when property is left to a person (the legatee) under a will on the understanding that they will hold the property as trustee for the benefit of beneficiaries who are not named in the will.
Semi-secret trust
Will contains trust language But here, only the enforceable duties are in secret.
How must co-trustees act?
Unanimously unless instrument indicates otherwise or an emergency arises
Resignation of trustee
Trustee may resign pursuant to instrument or can petition to resign through the court if
1) trustee is unable to continue due to illness, etc
2) trust requires greater responsibilities than originally anticipated
3) disagreement with a beneficiary that is detrimental to trust
4) trustee’s resignation results in financial benefits/savings
5) another co-trustee (so resignation = not harmful)
6) resignation would not substantially disadvantage trust
Trustee’s Duty of Loyalty
Duty of Loyalty: fiduciary duty = act with UNDIVIDED LOYALTY
Required to avoid any appearance of conflict of interest
Prohibited from self dealing even if it would benefit the trust
(Benefit doesn’t excuse breach of duty)
Good faith is not a defense to breach
Can trustee commingle funds?
Cant commingle trust fund with private assets or other trusts for which they are managing
Commercial may commingle accounts to maximize investment profit.
Duty of Trustee and Discretionary provisions in the Trust
If settlor advises through a discretionary provision that trustee can use trust $ to provide for health, support or maintenance of the trustee, then the trustee can use the trust $ to accomplish these goals only without violating the duty of loyalty.
Duties of the Trustee
1) keep beneficiaries informed/render accountings annually
2) distribute trust income @ least annually unless otherwise provided
3) duty not to delegate any investment/managerial duty unless trustee uses reasonable care, skill, and caution in selecting the agent and in supervising agent activities
4) duty to use reasonable business judgment in administering the trust and to use any special skills trustee may have (trustee standard of prudence rises with the skill level advertised by the trustee–>ex: JP Morgan has a higher prudence level than Uncle Bob from down the road)
Trustee Investment Duties
Must be a prudent trustee
- exercise judgement and care
- of a prudent, discrete, intelligent person
- no speculation
- consider probable income/safety to capital
must use special skills if trustee has them
Ct will look at the entire portfolio investment when judging the trustee’s investment decisions.
Ga allows trustees to consider what when investing?
1) general economic decision
2) anticipated tax consequences
3) anticipated duration of account
4) needs of the beneficiary account
5) size of trust corpus
6) intent of settlor
7) nature/duration of trust
What does Ga allow a trustee to invest in?
Every kind of investment, real, personal and mixed
Allocation
allows a trustee to adjust income and principal in order to balance responsibility to both income and principal beneficiaries
What is income for allocation purposes?
The return in money
What is principle for allocation purposes?
it is property derived from use
If assets in the trust are sold/condemned or if proceeds are recieved from a life insurance policy owned by the trust, all these proceeds are allocated to who?
The principle and will one day be paid to the remainder beneficiaries.
If the trust owns stock which pays cash dividends, these dividend are allocable to what/who?
Its allocable to income
Distributions from the corporation to the trust (like stock dividends, stock splits) are allocable to what/who?
Allocable to the principal.
This does NOT include stock that the trust owns because that is allocable to income.
Georgia Flexible Trust Income Act
allows a trustee greater discretion in seeking to balance the interest of the income and principal beneficiaries.
Trustee can characterize assets as income whenever income portion of the trust is so small that it would be unfair to income beneficiary.
Trustee has two options:
1) power of adjustment
2) power to convert to unitrust
Power of Adjustment
Power held by trustee
can allocate property that is technically income to principal and vice versa in a manner that is fair/impartial to all beneficiaries.
Adjustment not permitted if it brings out adverse tax consequences or would disqualify the trust for either martial/charitable deductions or trust’s income would generate income tax.
Power to convert to unitrust
Power held by trustee.
Unitrust = a trust that pays out a % of the assets every year regardless of whether that % represents actual income earned. (4% rate is provided by statute–But, trustee can request a rate between 3-5%)
Conversion Requires court approval or approval by all beneficiaries.
What charges are paid from the income and what is paid from the principal of the trust?
Paid from income:
1) ordinary expenses of administration
2) one-half trustee’s compensation
3) income taxes
4) one half of cost of any accountings
Paid from principal = everything else
Causes of action for breach of trust
1) recover damages
2) compel trustee to perform
3) enjoin trustee from breach
4) compel trustee to redress breach
5) appoint temp trustee
6) remove trustee
7) deny trustee compensation
Beneficiary could, instead, ratify the breach & keep benefits
Damages for which the trustee may be charged
1) loss/depreciation in value caused by breach
2) any profit made by trustee
3) any amt that would have accrued absent the breach
4) court costs/atty fees (in cts discretion)
Exculpation clause: can a clause in the trust relieve a trustee from liabilty?
No clause can relieve the trustee for a breach that is committed
1) in bad faith
2) intentionally
3) with reckless indifference
–If the three situations aren’t present, Exculpation clause may relieve liability
Trusts and RAP
Wait and See
Rule: no interest is valid unless it must vest if at all no later than 20 years after some life in being at the time of creation of the interest.
But, in Ga, for 90 years we wait and see if there is a violation. If no violation in 90 years, then nothing happens.
If there is a violation during the 90 years, then ct applies Cy Pres to fix the violation to accommodate the intent of settlor.
Requirements for a valid gift
1) donor with donative intent
2) delivery
3) acceptance by donee
Delivery of a Gift
Accomplished when donor relinquishes all dominion & control of prop.
MUST be actual (if actual = impossible–> can be constructive or symbolic)
Gift Causa Mortis
Causa Mortis = in contemplation of death
Is a gift made by a donor who is dying that is intended to take effect ONLY IF DONOR ACTUALLY DIES.
Delivery = more stringent and constructive = generally not allowed
Can only be made of personal property
Must be proved by at least 1 witness.
Powers of Attorney
CL: a power of atty. ceases upon incompetency of prin, thereby creating a durable power of attorney to remain effecter after incompetency. (incompetency of prin = incompetency of the person who granted the power of atty)
GA: all powers of atty = automatically durable without saying so (doesnt matter if the person granting the powers is or becomes incompetent)
Powers of atty act as agents–upon death of one granting the power, the agency relationship ceases
Revocable upon written revocation delivered to agent and anyone dealing with the agent.
Can make someone a medical power of attorney (make med decisions for me) or can make someone a health care power of atty (carry out my wishes considering life termination or life prolonging procedures)
Guardians
Management in the event of disability
If an individual is found by the ct to be unable to care for herself to the extent that her health/safety = endangered, then probate will appoint a guardian.
Responsibilities: make med decisions, however if the now incapacitated person has a health care power of atty before the appointment of the guardian, then the power of atty has priority over the guardian in med decisions.
Conservator
Management in the event of disability
if an individual is found by the ct to be unable to manage her financial affairs, probate ct may appoint a conservator.
Responsibility = take over the management of individual’s property.
The appointment of conservator INVALIDATES any pre-existing financial power of atty.
