Trusts

Question 1

What are the three different things using the name trust? Which is the only true trust?

Answer 1

The three “trusts” are (1) express trusts; (2) resulting trusts; (3) constructive trusts. The express trust is the only real trust; the other two are just equitable remedies.

Question 2

What is an express trust?

Answer 2

A legal device that allows an owner of property to make transfers of property and have those assets managed on behalf of someone else.

Question 3

What is a settlor?

Answer 3

The person who creates the trust.

Question 4

What is a trustee?

Answer 4

The person who the settlor gives legal title to to manage the money.

Question 5

What is the beneficiary?

Answer 5

The person who the settlor created the trust for - he or she have equitable title to enjoy the distributions from the trust.

Question 6

What are the 2 kinds of express trusts?

Answer 6

1. Lifetime trust: set up during the settlor’s lifetime. Also called a inter vivos trust.
2. Testementary trust, which is set up in a settlor’s will.

Question 7

What are the 8 requirements for a valid trust?

Answer 7

1. Settlor (also called a creator) who makes a….

The settlor can be anyone 18 or older, with the capacity to enter into contracts.

2. Delivery of legal title to…

Titled assets must be formally transferred for delivery to be valid.

3. **Property **(also called res, or corpus, or principal) to a…

The property can be almost anything, but must be property that the settlor currently owns, not just mear expectant property owned in the future. It must be identified property, not subject to future determination.

4. **Trustee **who holds legal title for the benefit of a…

For a inter vivos trust, almost anyone can be a trustee since no court involvement is needed for such trusts. For a testamentary trust created under court supervision, anyone except for those who can’t including those under the age of 18, judicially declared incompetents, convicted felons, and those incapable based on assessment by probate court. A non-resident “alien” can serve as trustee only if a NY resident serves as co-fidiciary. NOTE - failure to name a trustee in the trust does not matter; the court can appoint someone.

5. Beneficiary (or beneficiaries) with…

Beneficiaries must be definite and ascertainable; no ambiguity. If ambiguous, the trustee holds in a resulting trust for the residiuary beneficiary of a will or intestate heirs in absence of a valid will. However, a beneficiary listed as someone’s “family” or “next of kin” is considered definite and ascertainable.

6. **Intent **to create a trust for…

Settlor must intend to create an enforceable obligation, precatory language is not enough. Trustee must be given duties to perform; if trustee has no duties to perform it is called a passive trust, which is no trust at all.

7.** **A lawful purpose…

A trust cannot call for the commission of a crime, for the destruction of property or it cannot have a condition against public policy (e.g. restricting marriage or promoting divorce).

8. In a **validly executed **document.

For a lifetime trust, must be in writing, signed by both settlor and trustee and EITHER (a) acknowledged by a notary public, OR (b) signed by two witnesses.

No consideration is required to create a trust.

Question 8

What is the general rule about the revocability of a trust?

Answer 8

All trusts are presumed to be irrevocable unless the trust explicitly authorizes revocation.

Question 9

How does one create a revocable interir-vivos trust? What role can a settlor play in this situation?

Answer 9

The main requirement is that there is at least one beneficiary who is not the settlor; settlor cannot be the sole beneficiary when also named the sole trustee.

The settler can be a trustee or an income beneficiary for life, The settlor’s estate can be one of the beneficiaries of the principal, as long as there is at least one other beneficiary.

Settler can retain the power to terminate or amend the trust.

Question 10

What are the reasons to have or not to have revocable inter-vivos trusts?

Answer 10

Reasons to have:

Manages assets efficiently, particularly using a professional trustee,

Helps plan for possible inapacity by avoiding a guardianship proceeding,

Avoids probate process - no part of the principal of the trust goes through the settlor’s estate in probate.

Reasons not to have:

Does not avoid taxes

If settlor keeps an income or keeps a power to revoke, the full trust assets will be included in the settlor’s gross estate for federal estate tax purposes.

Question 11

What are pour-over gifts?

Answer 11

They are testamentary gifts to an existing revocable trust. Such a gift avoids will formalities in the trust. The trust can be changed during the lifetime of the settlor; somewhat easier then changing a will.

Key requirements for a “pour over” gift to a trust to be valid:

1. The trust must be in existence, OR
2. Executed before or concurrently with the will.

Question 12

What is a Totten trust?

Answer 12

This is also called a bank account trust. The Totten Trust is a bank account in the depositor’s name “as trustee for” a named beneficiary.

Depositor makes deposits and withdrawals 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.

No particular words are required to create a Totten Trust.

Question 13

What are four ways to revoke a Totten Trust?

Answer 13

a. Withdraw all the money in the account.
b. Express revocation during lifetime by depositor making a writing naming the beneficiary and financial institution and having the revocation notorized and delivered to the bank.
c. Revocation in a will; must comply with same requirements for revocation during lifetime.
d. Death of the beneficiary; also results having the Totten Trust revoked and the money in the account goes free and clear to the depositor.

Question 14

Can creditors of the depositor reach the Totten Trust?

Answer 14

Creditors 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.

Question 15

What are constructive trusts?

Answer 15

It is a flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.

The “trustee’s” only duty is to convey the property to the person who, in equity, should have the property.

Question 16

What is a resulting trust?

Answer 16

This is an equitable remedy.

One that is not recognized in NY is a purchase money resulting trust (PMRT). It arises when a purchaser buys property and has title put in another person’s name, who is not a relative; later, purchaser claims no gift was intended and asks title holder for title to the property and the title holder refuses. Most states would find this situation to create a PMRT which allows the purchaser to compell the title holder to give up title, but not in NY.

Question 17

What is the exception to the no-PMRT rule?

Answer 17

If there is clear and convincing evidence that the grantee had expressly or impliedly promised to reconvey the land to the purchaser, then a constructive trust can be imposed to benefit the purchaser.

Question 18

What is the statutory spendthrift rule?

Answer 18

It protects a trust beneficiary’s interest from creditors by prohibiting voluntary or involuntary transfers of beneficiaries’ interests (keeps it from being alienable).

New York allows spendthrift clauses in trusts. NY has a special statutory rule that protects all income interests in trusts with spendthrift protection even if the trust instrument does not contain a spendthrift clause, but this just applies to income from the trust, but not the principal. To provide spendthrift protection for the remainder beneficiary (the person who gets the principal) the spendthrift clause must be expressly stated in the trust.

Question 19

What is typical spendthrift clause language?

Answer 19

No beneficiary of this trust shall have the power 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 20

What are the five major exceptions to spendthrift clauses?

Answer 20

1. Creditors who furnish necessities like food, clothing, or shelter.
2. Child support and alimony.
3. Federal tax liens.
4. Excess income beyond that needed for support and education.
   a. A last resort remedy; have to show all other possibile remedies have been exhausted.
   b. What is needed for support is based on the lifestyle of the beneficiary.
5. The 10% levy provided by CPLR § 5205(e) - all creditors share the levy (it is not 10% per creditor).

Question 21

What is the self-settled trust rule?

Answer 21

It is a big limitation on a spendthrift clause - 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 are fair game for settlor’s creditors; even if the settlor has no immediate financial interest in the trust, but settlor retained the power to revoke, then the trust offers no protection at all against creditors of the settlor.

Question 22

When can a trust be modified by the trustee and/or beneficiary?

Answer 22

It is appropriate only when the objectives of the trust would be defeated or substantially impared if the trust is not modified. The purpose of the trust comes first, overriding any specific directions in the trust. This is called the clafling doctrine.

Question 23

What is the two-level modification test?

Answer 23

1. Find out the primary intent of the settlor regarding trust purposes.
2. Look at specific directions in the trust instrumenost to determine whether, because of changes in circumstances, those specific directions in the trust that would now frustrate the primary intent of the trust; IF SO, then those directions can be changed by the court.

The court can authorize the invasion of the principal if the income is not enough to carry out the settlor’s purpose of the trust.

Question 24

How can a trust be terminated by the settlor?

Answer 24

Trusts are hard to terminate in NY; they are irrevocable and unamendable unless the power 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; this is often impossible because no one can give consent for any beneficiary who is a minor or who is mentally incompetent.

Beneficiaries must be born alive to count - for the purposes of trust termination a child in gestation is not regarded as a person.

Question 25

What can a trustee do? What can a trustee not do?

Answer 25

A trustee can do almost anything with some clearly-defined specific exceptions:

A trustee can: (a) sell any real or personal property, (b) mortgage property, (c) lease property, (d) make ordinary repairs, (e) contest, compromise, or settle claims, OR (f) do anything to need to manage the corpus of the trust.

A trustee cannot: (a) engage in self dealing, (b) borrow money on behalf of the trust, (c) continue running a business.

Question 26

What are the remedies for breach of a trustee’s fiduciary responsibilities?

Answer 26

1. Beneficiary can sue to remove the trustee;
2. Beneficiary can ratify the transaction and waive the breach;
3. Beneficiary can sue for any loss. An action to recover losses to the trust is called surcharge action.