Trusts

Question 1

When is it appropriate for a trustee/beneficiary to modify a trust?

Answer 1

It is appropriate ONLY WHEN the objectives of the trust would be defeated or substantially impaired if the trust is NOT modified Claflin doctrine/American rule: the purpose of a trust comes first, overriding any specific directions in the trust

Question 2

What are the 2 steps that a ct should take to tell if it should allow modification?

Answer 2

STEP 1: Find out the primary intent of the settlor re: trust purpose STEP 2: Look at specific directions in the trust instrument to determine whether, b/c of changes in circumstances, those specific direction in the trust would NOW FRUSTRATE the primary intent of the trust IF SO, then those directions can be changed by the ct Ct has the pwr to authorize the invasion of the principal if the income is not enough to carry out the settler’s purpose of the trust

Question 3

When can a settlor terminate a trust?

Answer 3

Trusts are HARD to terminate in NY. They are IRREVOCABLE and UNAMENDABLE, unless the pwr to revoke and amend is EXPRESSLY reserved in the trust instrument. EXCEPTION: A settlor CAN terminate an irrevocable trust if ALL beneficiaries in being consent Often impossible b/c NO ONE can give consent for any beneficiary who is a minor or mentally incompetant NOTE: for the purposes of trust termination, a child in gestation (the Womb rule) is NOT regarded as a person (Cf. RAP) If a trust gives property to “heirs” or “next of kin” that interest is NOT considered a beneficial interest; THUS, no need to obtain consent from them (as they can’t be ascertained until the decedent’s death)

Question 4

What is the common law Rule Against Perpetuities?

Answer 4

No interest is valid IF it could vest LATER than any life in being (LIB) at the time of the creation of the interest, PLUS 21 yrs An interest is vested when there is NO CONDITION that has to be satisfied, and the EXACT IDENTITY of the taker (if anybody) is KNOWN If there is ANY possibility, no matter how remote, that an interest could vest LATER than LIB + 21 yrs, it’s VOID

Question 5

How has NY modified the Rule Against Perpetuties?

Answer 5

NY’s reform statute AUTOMATICALLY reduces all age contingencies to 21 yrs, thus SAVING the gift

Question 6

What is the NY Rule Against Suspension of the Pwrs of Alienation?

Answer 6

Any interest is VOID, if it suspends the pwr of alienation for a pd LONGER than lives in being (LIB) PLUS 21 yrs (i.e. there are NO persons who could, TOGETHER, transfer fee simple title) This is a concern with… 1) Spendthrift income interests that are in the trusts (REMEMBER: NY has automatic attachment of spendthrift protection); OR 2) A life estate is created in an unborn person, or in an open class that MAY possible include unborn persons E.g…. “On Jane’s death, to pay income to Jane’s children for their lives” Interest to Jane’s children is subject to the suspension rule and is VOID b/c Jane could have potential children that couldn’t sell their interest (b/c of Spendthrift Rule)

Question 7

What body of law determines the scope of a trustee’s pwr?

Answer 7

New York Fiduicary Pwrs Act (FPA) sets out pwrs that can be exercised by a trustee without ct order AND without express authorization in the trust FPA cntrls not only what a trustee can do, BUT ALSO what an executor or administrator of the a decedent’s estate can do

Question 8

What are 6 specific pwrs that a trustee has?

Answer 8

Generally: a trustee can do ALMOST ANYTHING, like… 1) Sell any real or personal property 2) Mortgage property 3) Lease property 4) Make ordinary repairs 5) Contest, compromise or settle claims 6) Do almost anything to manage the corpus of the trust

Question 9

What are 3 key prohibitions for trustees?

Answer 9

1) Engage in self-dealing 2) Borrow money 3) Continue a business A trustee is liable for losses incurred by the business UNLESS trustee has ct approval to continue the business

Question 10

What are 5 key self-dealing prohibitions for trustees?

Answer 10

1) Trustee (absolutely) cannot BUY/SELL trust assets to himself 2) Trustee (absolutely) cannot BORROW trust funds 3) Trustee (absolutely) cannot LEND money to the trust Interest earned on any such loan must be returned to the trust, and any secuirty given to the loan is invalid 4) Trustee cannot PROFIT from serving as a trustee (EXCEPT for appropriate trustee fees) Can’t take advantage of confidential information received while trustee 5) Corporate trustee cannot buy its OWN STOCK as a trust investment ———— No Further Inquiry Rule = a breach of a fiduciary duty by engaging in SELF-DEALING is an AUTOMATIC wrong and no further inquiry need be made Good faith is NOT a defense Reasonableness is NOT a defense

Question 11

What are 2 affirmative duties for trustees re: self-dealing?

Answer 11

1) Duty to segregate trust assets from personal assets Violation = if commingled funds are used to buy an asset (i) and the asset goes DOWN in value, there is a conclusive presumption that personal funds were used; (ii) and the asset goes UP in value, there is a conclusive presumption that trust funds were used (it gets ALL the profit) 2) Duty to earmark trust assets by titling them in trustee’s name AS TRUSTEE (i.e. “John Jones, as trustee”)

Question 12

What are 3 remedies for breach of a trustee’s fiduciary duty?

Answer 12

1) Beneficiary can sue to remove the trustee 2) Beneficiary can ratify the transaction and WAIVE the breach (i.e. if it’s in the beneficiary’s interest) 3) Beneficiary can sue for ANY loss (i.e. a “surcharge” action)

Question 13

What are remedies against 3d parties implicated in a trustee’s self-dealing?

Answer 13

If trustee engages in a prohibited trxn, such a self-dealing, and sells trust property to a 3d party, the beneficiary CANNOT sue the 3d party purchaser IF he was a BFP for value BFP ≠ one who (i) knows that she was dealing with a trustee; AND (ii) that the trustee was engaged in self-dealing

Question 14

Do self-dealing rules apply to the associates of the trustee?

Answer 14

YES! Self-dealing rules ALSO apply to loans or sales to…. a relative a business of which the trustee is an officer, emp, partner or SH

Question 15

Can a trustee use an exculpatory cl to shield itself from liability?

Answer 15

Depends… 1) An exculpatory cl CANNOT be used to shield a trustee from liability for breach of a fiduciary duty in a testatmentary trust b/c relieving an executor or testamentary trustee from liability for negl is VOID against public policy 2) An exculpatory cl CAN be used in a lifetime (inter vivos) trust

Question 16

When can atrustee be PERSONALLY liable in K?

Answer 16

1) If trustee signed ONLY on behalf of the the trust, then there is NO personal liability 2) HOWEVER, if trustee signed personally and MERELY MENTIONED the trust, then trustee ISpersonally liable LIABLE =”Mary Jones, Trustee of the Jonathan Jones Trust” NOT LIABLE = “Jonathan Jones Trust, by Mary Jones, Trustee” “Mary Jones, as Trustee of the Jonathan Jones Trust and not individually”

Question 17

When can a trustee be reimbursed for personal liability in K?

Answer 17

Two things must be satisfied… 1) The K must be w/in the pwrs of the trustee; AND 2) The trustee was acting in the course of proper administration of the trust

Question 18

When can a trustee be personally liabile for tort?

Answer 18

Trustee is personally liable for all torts by (i) the trustee; AND (ii) the trustee’s emps Absolute rule, no exceptions Liability can be dealth with by using liability insurance (charged to the cost of the trust)

Question 19

When can a trustee be reimbursed for liability in tort?

Answer 19

Two reqs… 1) Trustee must have been acting w/ the trustee’s pwrs at the the commission of the tort; AND 2) Trustee was not PERSONALLY at fault NOTE: the trustee’s emp CAN be at fault and the trustee still be eligible for reimbursement

Question 20

What body of lawgoverns the trustee’s invesment decision making pwr?

Answer 20

Uniform Prudent Investor Act (UPIA) gives broad latitude to trustees to choose investments Can pursue the “modern portfolio theory of investment, where the trustee creates a custom-tailored investment strategy for this particular trust Must consider role each investment plays w/in overall trust portfolio Must consider the expected total return from income & capital gain No need to justify prudence of each investment by itself - can balance risky w/ safe If investment prudent at the time it was made in context of overall strategy then okay (hindsight performance doesn’t matter) Trustee can exercise adjustment power & allocate capital gains to income (if nec. to protect income beneficiary) End goal is fairness to all beneficiaries and maximizing the TOTAL return

Question 21

What is an express trust?

Answer 21

= legal device that allows an owner of property to make transfer of property & to have those assets managed on behalf of someone else the ONLY REAL trust Person who CREATES a trust = “settlor” Person who MANAGES assets on behalf of beneficiaries = “trustee” Beneficiaries have “equitable title” to enjoy the distributions from the trust

Question 22

What are 2 types of equitable trusts?

Answer 22

1) Lifetime trust = set up during the lifetime of the settlor A/k/a inter vivos trust 2) Testimentary trust = set up in the settlor’s will

Question 23

What are the 8 elements of a valid trust?

Answer 23

1) Settlor (i.e. creator) who makes a… 2) Delivery of legal title of… 3) Property (a/k/a res, corpus or principal) to a… 4) Trustee who holds legal title for the benefit of a…. 5) Beneficiary (or beneficiaries) with… 6) The intent to create a trust for… 7) A lawful purpose… 8) In a validly executed document NOTE: NO consideration is needed!

Question 24

Who can be a settlor (of property into a trust)?

Answer 24

ANYONE who… 1) Is ≥ 18; AND 2) Has CAPACITY to enter into Ks

Question 25

What is necessary for “delivery” (for trust purposes) to be valid?

Answer 25

Titled assets must be FORMALLY transferred to the trustee e.g. stock certificates must be re-registered in trustee’s name

Question 26

What can constitute trust property?

Answer 26

A/k/a “res” or “corpus” or “principal” Almost anything, BUT must be the property that the settler owns (NOT just the mere expectancy of ownership in future) It must be IDENTIFIED property, not subject to future determination (e.g. NOT “whatever property that I may choose to contribute to the trust over X yrs”)

Question 27

Who can be a trustee for a lifetime trust?

Answer 27

Almost ANYONE can be a trustee (since no ct involvement is needed for such trust) NOTE: failure to name a trustee does NOT matter (the ct can appt someone)

Question 28

Who can be a trustee for a testamentary trust?

Answer 28

ANYONE, except… 1) Those UNDER 18 2) Judicially declared incompetants 3) Convicted felons 4) Those INCAPABLE b/c of drunkeness, dishonesty, want of understanding, or improvidence 5) Non-resident aliens NOT related to the decedant (spouse, grandparent, etc) NOTE: if a non-resident alien IS related to decedent, a NY resident must serve as CO-FIDUCIARY NOTE: failure to name a trustee does NOT matter (the ct can appt someone)

Question 29

Who can be a trust beneficiary?

Answer 29

Beneficiaries must be DEFINITE and ASCERTAINABLE (i.e. NO ambiguity) If ambiguous, the trustee holds in a RESULTING trust for the residuary beneficary of a will (or intestate heirs in abscene of a valid will) EXCEPTION: a beneficiary listed as someone’s “family” or “next of kin” IS considered definite and ascertainable and the trust does NOT fail (must consult the intestacy statutes)

Question 30

What is the necessary form of intent to form a trust?

Answer 30

Settlor must intend to create an enforecable obligation Precatory (i.e. suggestive), non-binding language is NOT enough NO: “I WOULD LIKE the trust income to be paid to…” Trustee MUST be given duties to perform (if trustee has NO duties, then it’s a “passive” trust, which is NOT a trust) NOTE: just using the word “trust” does NOT show intent to creat a trust (must look at ALL of the language/facts to determine)

Question 31

In creating a trust, what CAN’T be the purpose of a trust?

Answer 31

A trust CANNOT… 1) call for the commission of a crime 2) call for the DESTRUCTION of property 3) have a condition against public policy (e.g. trusts restricting marriage OR promoting divorce) NOTE: marriage restrictions to members of a certain RELIGION or ETHNIC GROUP are valid as permissible partial restraints on marriage BUT, if a (ANY) purpose can be found that is NOT offensive to public policy, then it IS valid (e.g. a trust that gives income to a spouse until that remarries is OK)

Question 32

What is needed to validly execute a trust document (execution ceremony)?

Answer 32

1) Instrument MUST be in writing & signed by settlor AND trustee PLUS 2) Acknowledged by a notary public OR signed by 2 witnesses

Question 33

What are the 6types of trusts and trust-like alternatives?

Answer 33

1) Lifetime (inter vivos) trust: trust created during settler’s lifetime Can be revocable ONLY IF expressly stated in trust instrument 2) Testamentary trust: a trust that is created by will Gifts made in a will to an existing revocable trust is OK (A “Pour-Over” Gift) 3) Charitable trust: an indefinite life trust for a reasonably large group of beneficiaries ————— 4) Totten trust: a/k/a a bank account in the depositor’s name “as trustee” for the named beneficiary 5) Joint bank account: a joint account w/ right of survivorship (NOT a Totten trust) 6) NY Uniform Transfers to Minors Act (UTMA): holds property in trust for a minor, supporting the minor and desolving at age 21

Question 34

What are 3 non-trusts?

Answer 34

1) Honorary trust: no human being is the beneficiary in a non-charitable trust 2) Constructive trust: designed to disgorge unjust inrichment 3) Purchase money resulting trust (PMRT): results when a purchaser buys property in someone else’s name & expects a later takeback, which is disputed NOT recognized in NY

Question 35

When is a lifetime trust revocable?

Answer 35

General rule: ALL trusts are PRESUMED to be irrevocable, UNLESS the trust explicitly authorizes revocation Req for revocable lifetime (inter vivos) trust =at least 1 beneficiary who is NOT the settler To be clear: Settlor’s estate CAN be one of the benefiicaries of the pricnipal so long as there is at least 1 other

Question 36

What roles can a settlor play in a revocablelifetime trust?

Answer 36

1) Settlor can be a trustee 2) Settlor can be an income beneficiary 3) Settlor’s estate can be ONE of the beneficiaries of the principal SO LONG AS there is at least 1 other beneficiary 4) Settlor can retain the pwr to TERMINATE or AMEND the trust

Question 37

What are good reasons for having a lifetime trust be revocable?

Answer 37

1) Manages assets efficiently (can use a professional trustee) 2) Helps plan for a possible incapacity by avoiding a guardianship proceeding by the ct 3) Avoids probate (i.e. the process of proving a will to be valid) NOT GOOD reasons… 1) Does NOT avoid taxes 2) If settlor keeps an interest income, or keeps a pwr to revoke, then the FULL trust assets will be incl’d in the settlor’s gross estate for federal estate tax purposes

Question 38

What is a “pour-over” gift?

Answer 38

A testimentary gift (made in a will) to (i)an EXISTING revocable trust; OR (ii) a trust executed CONCURRENTLY with the will Trusts can be changed during the lifetime of the settlor in ways that are somewhat easier than changing a will “Pour over” is not ltd to trusts created by the settlor, BUT it can be to ANY existing trust (inc 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 Life insurance proceeds: Insured can create an unfunded recovable insurance trust AND name the trustee of the trust as the insurance policy beneficiary Insured can setup a testamentary trust and have the life insurance policy K name “the trustee in my will” as the life insurance policy beneficiary Proceeds from saving accts or pension plans: can be handled like insurance

Question 39

What is a Totten Trust?

Answer 39

A trust-like alternative, which is a bank account in the depositor’s name “as trustee for” a named beneficary No particular words are req’d to create a Totten Trust account (i.e. CAN open an account w/ “Dan Depositor ITF Ben Beneficiary”) Depositor makes deposits and withdrawals as he wishes during the depositor’s lifetime (NO restrictions) Beneficiary has NO beneficial interest during the depositor’s lifetime, BUT get whatever is in the account when the depositor dies

Question 40

What are 4 ways to revoke aTotten Trust?

Answer 40

1) Withdraw all the $$ in the account 2) Express revocation during lifetime by depositor making a writing naming (i) the beneficiary + the bank; (ii) notorizing the writing; AND (iii) delivering it to the bank 3) Revocation in a will (MUST comply with the same reqs for revocation during lifetime, above) 4) Death of the beneficiary (money goes free/clear to depositor)

Question 41

How can a Totten Trust depositor change the beneficiary?

Answer 41

Same method as express revocation: 1) Notorized stmt; 2) Delivered to the bank; AND 3) Naming the OLD beneficiary and the NEW beneficary

Question 42

Are the depositor’screditors allowed to access the $$ in a Totten Trust account?

Answer 42

YUP! Creditors of the depositor can ALWAYS reach the Totten Trust account balance EITHER before OR after the depositor’s death

Question 43

What is a joint bank account?

Answer 43

An accountw/ the right of survivorship created by SPECIFIC WORDS of survivorship (NOTE: this is NOT a Totten Trust) Ea. joint acct holder owns 1/2 of the account, NO MATTER who deposits the money (i.e. if ONE person makes 100% of the deposits, it’s considered a gift of 1/2 to the other party) Account is irrevocable to the extent the right of survivorship remains in tact If one of the parties dies, a creditor would need CLEAR and CONVINCING evidence that survivorship was NOT intended by the parties (very hard req to satisfy) Withdrawal of more than 1/2 by a depositor w/o the other’s consent destroys the right of survivorship

Question 44

What is the Uniform Transfers to Minors Act (UTMA)?

Answer 44

The UTMA allows giftsto benefit minors and transfer principal once they turn 21 (or 18 for pre-1997 gifts) UMTA gifts are NOT part of a trust! Avoids:guardianship proceedings, the trust structure and ct supervision of a trust Gifts under UTMA are made to a CUSTODIAN (although legal title remains with minor) AND it MUST specify that it is made under the NY UTMA UTMA gifts CAN be in a will so long as the statutory language (above) is made Tax considerations: 1) Qualifies for the $14k per donee annual exclusion from federal and state gift tax 2) If the donor names himself as custodian, then the amt of the gift is includible in the custodian’s gross estate for federal/state tax purposes (BUT if he names someone else, then it’s NOT included as a part of the estate)

Question 45

What are the 3 duties of the custodian p/t the UMTA?

Answer 45

1) Hold, manage and invest property under a “prudent person” std 2) Pay over to the minor to provide for needs whatever the custodian deems advisable 3) Pay residual balance of property to the minor when he turns 21 (OR 18 for pre-1997 gifts)

Question 46

What are 4 key aspects of charitable trusts?

Answer 46

1) Charitable trusts must have INDEFINITE beneficiaries, and they must be a reasonable LARGE group CANNOT have specific, named persons as beneficiaries CAN have a trust for Masses for relatives GOOD LANGUAGE = “to benefit all orphans in Syracuse” “to pay for the costs of Masses for the repose of souls of the testator, his deceased parents, and other relatives” BAD LANGUAGE = “to provide schollys for the benefit of the decendants of the settlor” “all my children” “to benefit all the orphans living next door to me” 2) Charitable trusts must be for a CHARITABLE purpose Health, education, and religion Cy Pres doctrine can be used to change the trust If the stated purpose can no longer be accomplished, the ct may use its pwr to make the trust “as near as possible” to what the settlor wanted 3) Charitable trusts MAY be PERPETUAL They are NOT subject to the Rule Against Perpetuities (carveout) 4) The Atty General (AG) has the duty of representing the beneficiaries of charitable trusts in the state AG is an indispensable party to any suit on construction or enforcement AG and the donor have proper standing to sue to enforce the trust’s terms

Question 47

What is an honorary trust?

Answer 47

An “honorary” trust is a non-trust that is NOT for charitable purposes and has no individual beneficiaries (e.g. $1k to Fred as trustee, “to use the trust income to maintain my rose garden”) An attempt to put money into an “honorary” trust leads to the funds being included in the residuary estate (i.e. whatever remains in the probate estate after the pmt of specifcially designated gifts of items or cash) NOTE: A private trust normally must have a human being as beneficiary;EXCEPT… Pet Trusts: a valid pet trust can last for no longer than the duration of the pet’s lifetime Someone designated in the will, or appt’d by the ct, can enforce the trust and make sure the trust’s purposes are carried out Ceremony Trusts: for the perpetual care and maintenance of ceremonies and burial plots (classified as charitable trusts to avoid RAP even tho no human beneficiaries)

Question 48

What is a constructive trust?

Answer 48

= an equitable remedy imposed in cases involving fraud/unconsionable conduct and unjust enrichment The sole role of the constructive trustee is to transfer title and possession of the property to the person who would have owned it but for the wrongful conduct Unjust enrichment = (i) beneficiary kills the testator; (ii) a beneficiary suppresses a later will; OR (iii) a promise to keep a life insurance policy in force is breached E.g.: child kills parent & normally would take under intestacy – property goes in constructive trust & is then transferred as if wrongdoer predeceased decedent (note, this means child-killer’s issue get property)

Question 49

What is a purchase money resulting trust (PMRT)?

Answer 49

PMRT arises when a purchaser buys property and has the title put in someone else’s name (who is NOT a relative); later, the purchaser claims NO GIFT was intended and asks title holder for title to the property (who THEN refuses) The PMRT would then allow the purchaser to compel the title holder to give up title NOTE: This form of resulting trust DOES NOT EXIST IN NEW YORK EXCEPTION: if there is clear and convincing evidence that the grantee EXPRESSLY or IMPLIEDLY promised to reconvey the land to the purchaser, then a CONSTRUCTIVE trust can be imposed to benefit the purchase

Question 50

What is the NY statutory spendthrift rule?

Answer 50

Protects a trust beneficiary’s interest from creditors by prohibiting VOLUNTARY or INVOLUNTARY transfer of the beneficiary’s interest AUTOMATIC attachment (even w/o an express cl): NY protects all INCOME interests in trusts w/ spendthrift protection EVEN IF the trust instrument does not contain a spendthrift cl The spendthrift rule does NOT apply to PRINCIPAL interests To provide spendthrift protection to the remainder beneficiary (i.e. the one who gets the principal), the spendthrift cl must be EXPRESSLY stated in the trust

Question 51

What is typical spendthrift cl language?

Answer 51

“No beneficiary of this trust shall have the pwr to assign his or her interest, nor shall such interest be reachable by the beneficiary’s creditors by attachment, garnishment, or other legal process”

Question 52

What are 5 major exceptions to spendthrift cl protection from creditors?

Answer 52

Creditors CAN go after trust assets in certain circumstances… 1) Creditors who furnish necessities (e.g. food, clothing, shelter, or health) 2) Child support and alimony 3) FEDERAL tax liens 4) Excess income beyond that needed for support and education A last resort remedy; have to show all OTHER possible remedies have been exhausted What’s needed for support is based on the lifestyle of the beneficary (i.e. very subjective) 5) The 10% levy provided by the CPLR ALL creditors together share the levy; this is NOT 10% per creditor

Question 53

What is the Self-Settled Trust Rule?

Answer 53

Principle: spendthrift protection does NOT apply to any interest retained by the settlor Settlor(s) cannot hide out from their own creditors, but they CAN protect other beneficiaries ALL revocable trusts have NO protection from creditors EVEN IF the settlor has no immediate financial interest in the trust