Trusts

Question 1

Express Trusts - Generally

Answer 1

Definition: Allows an owner of property to transfer and have those assets managed on behalf of someone else.

Two kinds:

1) Lifetime
2) Testamentary

Requirements

1) Settlor
2) Delivery
3) Property
4) Trustee
5) Beneficiary
6) Intent
7) Lawful Purpose
8) Validly Executed

Question 2

Revocable Lifetime Trusts (i.e., Inter-vivos trusts)

Answer 2

Must have at least 1 beneficiary who is not the settlor.

Benefits

• Plans for possible incapacity–avoids guardianship proceeding
• Avoids probate

No protection against creditors of settlor

Question 3

Pour Over Gifts

Answer 3

Testamentary gifts to an existing revocable trust.

Requirements

1) Trust must be in existence or be executed concurrently with the will
2) Trust must be identified in the will

Benefits

• Avoids will formalities in trust
• Trusts can be changed during the lifetime of settlor, easier than changing a will

Life Insurance Proceeds

Question 4

Totten Trust

Answer 4

Bank account in the depositor’s name “as trustee for” a named beneficiary.

• Depositor makes deposits/withdrawal during life.
• Beneficiary gets whatever is in the account when depositor dies

Revocation

1) Withdraw all money in the account
2) Manifest an explicit intention to revoke during life
3) Revoke in a will
4) Death of the beneficiary

Creditors can always reach before or after depositor’s death. Treated as a revocable trust.

Question 5

Joint Bank Accounts

Answer 5

Each joint account holder owns 1/2 of the account.

Right of survivorship

Challenging the money from going to survivor:
- If clear and convincing E shows that survivorship was not intended when the account was established, and that it was only opened as a matter of convenience

Question 6

UTMA

Answer 6

Gifts must be made to a custodian, and must specify that they’re made under UTMA.

• Can be made in a will
• Duties of custodian
• Not a trust b/c custodian doesn’t hold legal title (minor does)
• Tax consequences

Benefits

1) Avoids guardianship proceeding
2) Avoids court imposed trust
3) Qualifies for $14k per donee annual exclusion from federal and state gift tax

Question 7

Charitable Trusts

Answer 7

1) Must have indefinite beneficiaries, and must be reasonably large groups.
2) Must be for charitable purpose
3) Must be perpetual
4) Cy pres can be used to change trust
5) AG has duty of representing the beneficiaries

Question 8

Honorary Trusts

Answer 8

Not a trust!

Definition: Where no human is the beneficiary of a private trust

Exceptions:

1) Pet Trusts - Exempt from RAP
2) Cemetery Trusts - Called charitable trusts, no RAP problem

Question 9

Constructive Trusts

Answer 9

Not a trust!

A flexible equitable remedy to disgorge unjust enrichment that results from wrongful conduct.

Question 10

Resulting Trust

Answer 10

Not a trust!

Equitable remedy that arises if either:

1) Express trust fails
2) When Purchase Money Resulting Trust is created

Question 11

Spendthrift Rule

Answer 11

Protects beneficiary’s interest from creditors by prohibiting transfer of interest.

Must be expressly stated in the trust.

Exceptions

1) Creditors who furnish necessities
2) Child support and alimony
3) Federal tax liens

Does not apply to interest retained by the settlor.

Question 12

Modification by Trustee/Beneficiary

Answer 12

1) All beneficiaries must consent
2) Find out the material purpose of the settlor
3) Determine whether, because of changes in circumstances, specific directions in the trust would frustrate the material purpose (Claflin Doctrine)

Question 13

Termination by Settlor

Answer 13

Trusts are hard to terminate. Irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust.

Question 14

Trustee’s Power

Answer 14

Powers can be exercised pursuant to:

1) terms of the trust
2) terms of a statute
3) by court decree

Trustees can do just about anything, except:

1) engage in self-dealing
2) borrow money
3) continue a business

Question 15

Trustee’s Self-dealing

Answer 15

Prohibitions

1) Can’t buy or sell trust assets to himself
2) Can’t borrow trust funds
3) Can’t lend money to trust
4) Can’t profit from serving as trustee
- can’t take advantage confidential info
5) Corporate trustee can’t buy its own stock as a trust investment

Affirmative duties

1) Duty to segregate trust assets from personal assets
2) Duty to earmark trust assets by titling them in trustee’s name

No further inquiry! Good faith or reasonableness is not a defense

Reach dealing to relative or

Question 16

Remedies for breach of fiduciary responsibilities

Answer 16

1) Can sue to remove the trustee
2) Can ratify the transaction and waive the breach
3) Can sue for losses (surcharge)

Question 17

Exculpatory clauses

Answer 17

Cannot be used to shield trustee from all liability b/c against public policy.

In particular, can’t shield liability for:

a) bad faith
b) intentional breach of trust
c) recklessness
d) abuse of confidential relationship

Question 18

Trustee Liability in Contract

Answer 18

Personally liable to third parties on contracts made related to trust property.

Will be reimbursed if:

1) contract was within the powers of the trustee; AND
2) trustee was acting in the course of proper administration of the trust

Question 19

Trustee Liability in Tort

Answer 19

Personally liable for all torts by trustee and trustee’s employees.

Reimbursed if:

1) Must have been acting within trustee’s powers, only taking on risks that are a normal incident trustee conduct; AND
2) Trustee was not personally at fault

Question 20

Trustee’s Investment Power

Answer 20

1) Trustee must consider the role each investment plays within the overall trust portfolio
2) Trustee must consider the expected total return from income and capital gain