Trusts Flashcards
1
Q
Three Types of “Trusts”
A
A trust arises from the expression intention of the owner of property to create a trust with respect to property. The trustee holds legal title to specific property under a fiduciary duty to manage, invest, and safeguard the trust assets for the benefit of the designated beneficiaries, who hold equitable title.
- Express trusts;
- Resulting trusts; and
- Constructive trusts
Only express trusts are “real” trusts; resulting and constructive trusts are *equitable remedies. *
2
Q
Express Trust
(Generally)
A
- A legal device that allows the owner of property to make transfers of property and have those assets managed on behalf of someone else (rather than have the beneficiary manage money on behalf of him or herself).
- Operation: the settlor (creator of the trust) gives **legal title to a trustee to manage the money, and the beneficiaries **have **equitable title **to enjoy the distributions from the trust, for alawful purpose. No consideration is required.
- Express tusts can be of two types:
- **Lifetime **trusts, set up during the lifetime of the settlor (also called inter vivos)
- **Testamentary **trusts, set up in the settlor’s will (court trust: Surrogate’s Court supervision)
3
Q
Requirements to Create a Valid Trust
A
**No consideration is necessary to create a trust. **
- **A settlor **(person 18+ with capacity to enter into contracts)
- Delivery of legal title to property (must be formally transferred to the trustee to be valid. Things like real property, cars, stock certificates must have formal conveyance).
- Property **can consist of almost anything, but must be property that the settlor *presently owns, not a mere expectancy of future ownership and is readily *identifiable, not subject to future determination (can’t be “whatever money/property I choose to contribue over the next ten years”)
- **Trustee **(failure to name does not defeat trust; court can appoint someone. Court can appoint to replace as well as long as no express intention that it is personal to trustee)
- Lifetime **- can be almost anyone of legal age not incapacitated (no court involvement)
- **Testamentary **- anyone over 18, except judicially-declared incompetents, convicted felons, and those incapable b/c of drunkenness, dishonesty, want of understanding, or improvidence.
- For either type, a non-resident “alien” can serve as trustee only if a New York resident serves as co-fiduciary.
- **Beneficiary **(must be definite and ascertainable; no ambiguity. If there is ambiguity, the trustee holds in a resulting trust for the residuary beneficiary of a will or intestate heirs in the absence of valid will. Exception: when “family” or “next of kin” words are used, these are recognizable beneficiaries based on the intestacy statutes).
- **Intent **(settlor must intend to create trust; precatory (non-binding) language is insufficient. Trustee must be given duties to perform; no duties = passive trust/not really a trust. Just using the word “trust” does not show intent to create a trust; look to all of the language and all of the facts to determine intent).
- **Lawful purpose **(a trust cannot call for the commission of a crime, the destruction of property, or have conditions against public policy such as provisions calling for the destruction of property, or those restricting marriage/promoting divorce [unless those purposes are to provid support for single persons or restrictions to marriage between certain ethnic groups (ok partial restraints)]).
-
Valid Execution
- Lifetime trust **(in writing, signed by both settlor and trustee, and either acknowledged by notary public or signed by two witnesses).
- **Testamentary trust **(must be created by will)
4
Q
Nature of Trustee’s Estate
A
- A trustee’s creditors cannot satisfy claims from the trust’s assets.
- On the death of the sole surviving trustee, the trust estate vests in the Surrogate’s Court, whihc names a successor.
- Conveyance to two or more trustees creates joint tenancy.
5
Q
Resignation and Removal of Trustee
A
- Unless trust instrument expressly permits resignation, once a trustee has accepted the trust, he cannot resign nless the court permits resignation for good cause shown.
- The court may REMOVE a trustee for:
- violating / threatening to violate the trust;
- insolvency or imminent insolvency of trustee;
- unsuitability to serve as trustee
- A beneficiary can REMOVE a trustee only when:
- grounds for removal
- power is granted to them by trust instrument
- mere fricton/hostility is not suficient grounds unless it interferes with proper administration of the trust
6
Q
Situations in Which No Trust Arises
A
- A transfer “in trust” but with NO TRUST TERMS;
- A gift of income with no time limit and no disposition of the principal
- Note that a trust is NOT invalid because the settlor or another person is the sole trustee and sole current beneficiary, as long as at least one other person holds a beneficial interest in the property (such as a vested or contingent remainder interest).
7
Q
Revocability of Trusts
A
- All trusts are presumed to be irrevocable, unless the trust explicitly authorizes revocation.
-
Revocable Lifetime Trusts:
- Must have at least one beneficiary who is not the settlor;
- The settlor cannot be a beneficiary when also named the sole trustee (but settlor can be *an *income beneficiary for life and *a *trustee).
- Settlor’s estate can be the beneficiaries of the principal so long as there is at leat one other beneficiary.
- Settlor can retain power to terminate/end the trust
-
Benefits
- Manages assets efficiently, particulary using professional trustee;
- Helps plan for possible incapacity of settlor by avoiding guardianship proceeding;
- Avoids probate process (process of proving a will)
-
**Drawbacks **
- Does not avoid taxes
- If settlor keeps income interest, or keeps a power to revoke, the full trust assets will be included in the settlor’s gross estate for federal estate tax purposes.
8
Q
Pour-Over Gifts
A
- Testamentary gifts made to an existing revocable trust are okay as long as the trust is either ALREADY IN EXISTENCE or is EXECUTED CONCURRENTLY* *with the will.
- Trusts are easier to change during the lifetime of the settlor than a will is.
- Pour-over is not limited to trusts created by the settlor; can be to *any *existing trust, including those executed by other persons.
- Pour-over gifts are valid even if the trust was unfunded or only partially funded during the settlor’s lifetime (because their will be identifiable property at the moment of settlor’s death).
-
Life insurance proceeds (also savings accounts, pension plans) can be payable to a trust by:
- Insured can create an unfunded revocable trust and name the trustee as the policy beneficiary; OR
- Have the trust be a testamentary trust and have the life insurance police contract name the “trustee named in my will” as the life insurance policy beneficiary.
9
Q
Totten Trust
A
- Also called a “bank account trust”: a bank account in the depositor’s name “as trustee for” a named beneficiary.
- E.g., “Mary as Trustee for John Smith”
- Key Characteristics
- Depositor makes withdrawal as he or she wishes during the depositor’s lifetime.
- Beneficiary has *no *beneficial interest during the depositor’s lifetime, but gets whatever is in the account when the depositor dies (but no guarantees).
- T-sub subject to elective share rights (see WILLS)
- if minor/incompetent: where gift is >$10,000 payment must be made to legal guardian; less than $10,000 payment MAY be made to legal guardian.
- Creation of Totten Trust
- No particular WORDS are required as long as intent is clear (e.g., Joan Cohen ITF Rose Cohen).
- Revoking Totten Trust Account
- **Withdrawal **
- of all money in the account
-
Express revocation
- during lifetime through writing naming the beneficiary and financial institution and having the revocation **notarized and delivered to the bank. (All** of these elements must be met for revocation to take effect).
-
Revocation in a will
- same requirements for revocation during a lifetime but stated in will EXPRESSLY stating beneficiary’s name.
- **Death of beneficiary **
- Revokes Totten Trust; money free and clear to depositor.
- **Withdrawal **
- Change in Beneficiary
- Same way as a revocation (notarized statement sent to the financial institution naming the old beneficiary and the new one).
- Creditor of the Depositor
- can always reach the Totten Trust account balance either before or after* **the depositor’s death, since it is a form of revocable trust revoked partially each time a withdrawal is made. ***
10
Q
Joint Bank Accounts
A
-
joint bank accounts are a trust-like alternative (but they are not Totten Trusts)
- “John and Jame with Right of Survivorship”
- The money in the bank account will go to the survivor of the joint tenancy unless there was *clear and convincing evidence *that a survivorship account was not intended when the account was opened and it was only meant for convenience of parties. If clear and convincing evidence is produced, then the survivorship language can be set aside.
- Characteristics
- Each joint account-holder owns one half of the joint account no matter who deposits the money, and if one person makes the entire deposit it is considered a gift of one-half to the other account holder.
- Irrevocable to the extent of one-half. Taking more than one’s fair share from the account while the JTs are alive severs the joint tenancy in the account and gives non-withdrawing party the right to recover withdrawal in excess of one-half.
11
Q
Uniform Transfers to Minors Act
A
UTMA is a trust-like alternative
- UTMA is not a trust, it is a special statutory conservatorship where the custodian does not hold legal title (minor holds legal title): Transfer of property by deed, will, or power of appintment to “[name of custodian] as custodian for [name of minor] under the NY UTMA”
- Why make a gift to a minor under UTMA?
- Avoids a guardianship proceeding;
- Avoids a trust;
- Qualifies for the $14,000 per donee annual exclusion from federal and state gift tax.
- Gifts under UTMA must be made to a custodian and must specify that it is made under the NY UTMA. UTMA gifts can be made in a will so long as the same required statutory language is used.
- Duties of a UTMA custodian:
- Hold, manage, and invest property under a prudent person standard;
- Pay over to the minor, or for the minor’s needs, what part of the property that the custodian deems advisable (minor’s best interests or whatever specified in transfer language; >$50,000 requires court approval); and
- Pay what is left of the property to the minor when:
- Post-Jan 1, 1997 gift: minor turns 21
- Pre-Jan 1, 1997 gift: minor turns 18
- Tax Consequences
- If donor names himself as custodian then the amount of the gift is includable in the custodian’s gross estate for federal and state estate taxes;
- If the donor names someone else as custodian, then the amount of the gift is not includable.
12
Q
Powers of Attorney
A
- Springing power of attorney: arises only on the happening of a specified future event.
- Special power of attorney: limited to only specific transactions.
- General power of attorney: covering all legal acts on principal’s behalf.
Characteristics
- Survives disability unless expressly provides that it will terminate upon principal’s incapacity.
- Terminates on death unless it expressly provides it will survive death.
- Gift by agent to himself –> presumption of improper self-dealing, overcome only by clear showing of principal’s intent to make a gift.
13
Q
Accumulation Trust and Trust for Disabled Persons
A
- Accumulation trusts: directors to accumulate trust income within the perpetuities period are permissible, but accumulations may be reached for the support/education of beneficiary. When income is not disposed of or no validdirection given for its accumulation, it passes to the person presumptively entitled to the next eventual estate.
- Trusts for benefit of a person with servere chronic disability: In addition to other specific terms, trust must prohibit trustee from spending or distributing trust assets in a way that supplants, impairs, or diminishes medicaid or other gov’t benefits for which the beneficiary is elligible.
14
Q
Charitable Trusts
A
-
Indefinite Beneficiary Requirement. Charitable trusts must have indefinite beneficiares and they must be a reasonably large group. Cannot be specific named persons.
- NOT OK
- “to all my children” to improve health/education
- “to provide scholarships for descendants of settlor”
- “to benefit all orphans living next door to me at 815 Albany Avenue, Syracuse” (too small)
- OK
- “to benefit all orphans in Syracuse”
- Masses for relatives
- NOT OK
-
CHARITABLE PURPOSE REQUIREMENT.
- Health, education, religion most common; trusts for dissemination of ideas may be charitable even if purpose is to accomplish change in present law.
-
DURATION
- __Charitable trusts may be indefinite/perpetual and therefore are _not_ subject to the Rule Against Perpetuities, which indirectly limits the duration of trusts (Except to extent of shifting interest between private and charitable uses).
-
CY PRES
- Can be used to change the trust, if the stated purpose of the chariable trust can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust be as near as possible to what the settlor wanted.
-
ATTORNEY GENERAL REPRESENTATION
- AG has the duty of representing the beneficiaries of charitable trusts in the state. The AG is an indispensable party to any suit on construction or enforcement of a charitable trust. The AG and the donor have standing to sue to enforce the trust’s terms.
- NY AG or a trustee, beneficiary of the trust may petition for termination if market value of trust asset is <$100,000 and expenses are too high in relation to income (assets then distributed to designated beneficiary). If any settlor is alive, termination action cannot be brought w/o consent.
15
Q
Non Trusts
(honorary trusts)
A
-
honorary trusts: where no human being is the beneficiary of a private (i.e., non-charitable trust), New York does not recognize a trust, and the money designated for such trust falls into the residuary of the estate.
- **exceptions: **
- pet trusts. a valid pet trust can last no longer than the duration of the pet’s lifetime. Someone designated in the will or appointed by the court can enforce the trust and make sure the trust’s purposes are carried out. Terminates on death of last surviving animal.
- cemetery trusts. trusts for the perpetual care and maintenance of cemetaries and burial plots are classified as charitable trusts and are okay (can last indefinitely) even though they have no human beneficiaries. Since they are called charitable trusts there is no RAP problem.
- **exceptions: **
