TRUSTS

Question 1

Creation of Trust

Answer 1

A valid express trust requires: 1) trust res; 2) trustee with duties; 3) a definite beneficiary; 4) manifestation of intent to create a trust by a settlor with capacity; and 5) a valid trust purpose.

Trustee with Duties - Generally, a trust will not fail for lack of a trustee. The court will appoint a trustee to carry out the settlor’s intent. However, failure to name a trustee may cause an intervivos trust to fail because there can be no delivery of the trust property to the trustee.

Question 2

Intervivos Trust

Answer 2

Under California law, a valid inter vivos trust requires (1) intent to create a trust, (2) trust res (property to be placed in the trust; (3) named ascertainable beneficiaries; (4) a trustee with duties, and (5) a valid trust purpose.

Intent - shown by: (1) declaration of trust by settlor that he holds the property as trustee in trust; or (2) transfer of property to another as trustee. Trustee takes legal title upon delivery of deed or other document of title.

Trustee - Unless there is a declaration of trust, the settlor is required to deliver the trust res to the trustee. As such, a intervivos trust may fail if no trustee is named because there can be no delivery of the trust property to the trustee.

• If a trustee is named after execution, there is no question of the trust’s validity at the time of settlor’s death.

Question 3

Testamentary Trust

Answer 3

A trust created by will. Settlor’s intent to create the trust, identification of the beneficiaries, trust res, and trust purpose must be ascertainable by either: (1) the terms of the will; (2) an existing writing incorporated by reference into the will; or (3) the exercise of power of appointment created by the will (i.e. T bequeaths property in trust for the benefit of “such persons as A shall appoint by deed or will”).

Question 4

Charitable Trusts

Answer 4

Requirements:

Present Intent

Trustee

Trust Res

Purpose: must confer a benefit to society (help sick, help poor, advance education, promote religion, accomplish government purposes - build parks, museum, playground).
Beneficiary: no ascertainable person or group, b/c society is beneficiary. Effect of the gift is controlling – not motive of the settlor. If trust benefits only few ppl, split in authority as to whether Charitable or Private Express, so argue both.

• Ex. S creates trust to alleviate poverty among his poor relatives
  
  • Private express b/c only a few ppl are getting benefit
  • Charitable trust b/c whenever poverty is eliminated, society benefits

RAP Inapplicable to charitable trusts.

Question 5

Cy Pres

Answer 5

If the purpose of the trust becomes impossible or impracticable, the court can direct the trust property to be applied to another charitable purpose as close as possible to the settlor’s general intent. Court will admit extrinsic (trust) and intrinsic evidence to ascertain intent. However, if settlor is found to have a specific charitable intent, there can be no modification and the trust fails and becomes a resulting trust.

Question 6

Trustee Powers

Answer 6

Include:

1. Powers expressly enumerated in the instrument;
2. Implied powers necessary to carry out the granted powers;
3. Power to sell and lease unless limited by trust;
4. Power to incur necessary and ordinary management expenses
5. Power to borrow money must be expressly granted

Question 7

Trustee Duties - Duty to Administer Trust

Answer 7

The trustee has a duty to administer the trust in good faith and in a prudent manner in accordance with the trust terms and purposes.

Question 8

Trustee Duties - Duty to Account

Answer 8

Trustee is required to keep and render accounts, and furnish statement of income and expenses of the trust at the beneficiaries request.

Question 9

Trustee Duties - Duty of Care

Answer 9

Trustee must act as a reasonably prudent person would in managing her own property

Question 10

Trustee Duties - Duty not to Delegate

Answer 10

Trustee cannot delegate the entire administration of trust. Under the modern rule trustee may delegate investment and management functions. Trustee may rely on advice of professionals on other matters that cannot be delegated, but cannot delegate decision making authority to them.

Trustees must act by majority decision.

Remedy - Trustee is liable for the amount of actual loss to the trust

Question 11

Trustee Duties - Duty to Earmark

Answer 11

Trustee must label trust property as trust property. If breached:

• Common Law - Trustee is personally liable for loss even if loss was not due to failure to earmark.
• Modern Approach - Trustee liable for loss only if caused by failure to earmark.

Question 12

Trustee Duties - Duty of Impartiality

Answer 12

Trustee must administer the trust impartially and must be fair to all beneficiaries. When a trust has successive beneficiares, the trustee has a duty to the income beneficiary to ensure the trust property produces income, and duty to remainderman to ensure the trust property will not depreciate in value.

Irrevocable Trust - The trustee must administer the trust for the sole benefit of the beneficiaries.

Revocable Trust - A trustee’s duties are owed excusively to the settlor.

Question 13

Trustee Duties - Duty to Invest & Diversify

Answer 13

Trustee’s must use reasonable case in their investment decisions. Trustees with special skills will be held to higher standard. Trustee must diversify investments so that if there is a loss, the entire portfolio will not be wiped out. Reasonableness is measured in context of entire trust portfolio.

Question 14

Trustee Duties - Duty of Loyalty - Self Dealing

Answer 14

A trustee cannot enter into any transaction in which she is dealing with the trust in her individual capacity. Trustee cannot represent her personal interest and interests of the trust estate in the same transaction. Trusee cannot:

1. Buy assets from or sell assets to the trust
2. Borrow funds from the trust or loan to the trust
3. Personally gain from her position as trustee
4. Corporate trustee cannot buy own stock

If duty is breached, beneficiary may:

1. set aside transaction
2. recover profit (constructive trust on gains); or
3. ratify the transaction

Question 15

Trustee Duties - Duty to Separate Trust Property

Answer 15

Trustee must not commingle trust funds with own property or commingle one trust fund with another.

Commingled property lost or destroyed is presumed to be trustee’s assets.

If portion of commingled assets increases in value, presumed to be trust assets.

If portion of commingled funds decreases in value, presumed to be trustee’s assets.

Question 16

Resignation of Trustee

Answer 16

Once a trustee has accepted appointment, she cannot resign without permission of all the beneficiaries, or authorized by the trust or the court.

Question 17

Removal of Trustee

Answer 17

Beneficiaries must have grounds to compel the court to remove the trustee unless the power is granted to them in the trust. Grounds for removal include: (1) serious breach of trust; (2) incapacity to administer trust; (3) unfitness for position (i.e. habitual intoxication, commission of a crime involving dishonesty, permanent absence from state); (4) Refusal to account; (5) significant conflict of interest exists; (6) trustee’s insolvency jeopardizes the trust; (7) extreme friction/hostility between trustee and beneficiaries

Question 18

Trustee Liabilities to Beneficiaries

Answer 18

When a trustee breaches his duties, the beneficiaries may seek to have the trustee surcharged (pay losses) or removed as trustee. Losses from one breach may not be offset against gains from another.

Defenses - Laches; express or implied consent by beneficiaries

Exculpatory clauses relieving trustee of all liability, bad faith, or recklessness are invalid.

Question 19

Trustee Liabilities for Acts of Agents/Co-Trustees

Answer 19

Trustee is not liable for the acts of agents/co-trustees unless the trustee: (1) improperly delegated her authority to agent/co-trustee; (2) participated, approved, or acquiesced in the breach; (3) concealed or failed to reasonably redress the breach; or (4) failed to exercise reasonable care in selection or supervision of agent.

Question 20

Trustee Liabilities to Third Parties

Answer 20

Trustee is personally liable to third parties for contracts and torts, but are usually entitled to indemnification if trustee was acting properly within her trustee powers (did not breach trustee duties) and not personally at fault.

Question 21

Resulting Trust

Answer 21

Trusts that are implied by law or imposed by the courts. If decreed by the court, trustee will transfer property back to settlor or S’s estate. Arises when (1) Private Express Trust ends by its own terms, and no provision for aftermath, (2) Private Express Trust fails for lack of beneficiary or becomes illegal; (3) excess corpus in Private Express Trust (some trust property remains after trust purpose is fully satisfied – resulting trust for settlor’s estate), (4) Charitable Trust ends because of impossibility/impracticability, and cy pres unavailable, (5) Purchase Money Resulting Trust, or (6) semi-secret trust where will makes a gift to a person to hold as trustee, but does not name the beneficiary.

Trust property will pass by way of resulting trust to residuary beneficiary if there is a will; or to settlor’s estate by instestate succession.

Question 22

Constructive Trust

Answer 22

Not a trust, but an equitable remedy to prevent unjust enrichment. Wrongdoer is deemed trustee and must transfer property to intended beneficiary as determined by court. Arises when: (1) breach of fiduciary duty; (2) fraud in inducement, duress, or undue influence; (3) theft or conversion; (4) oral real estate trust; or (5) a Secret Trust.

Oral Real Estate Trust - settlor transfers title to property to A on oral condition that it be used for the benefit of B. From four corners of deed, looks like A owns the property free from any trust. Normally, A can invoke SOF, but no defense when: (1) S & A in fiduciary relationship, (2) A committed fraud in inducement, or (3) beneficiary detrimentally relied (took possession and made improvements). Results in a constructive trust and A must transfer property to B
Secret Trust - will on its face makes outright gift to A, but on basis of oral promise by A to use property for benefit of B. Parol evidence is admissible to show that intended beneficiary was B, not A.

Question 23

Honorary Trust

Answer 23

A trust which has no ascertainable beneficiary and not for a charitable purpose (trusts for pets, grave).

Trustee not required to carry out intent, but has power to do so. Trustee is on his honor to carry out trust. If trustee does not carry out intent, a resulting trust is imposed.
RAP is applicable. Some court void trust at inception imposing a resulting trust; other courts allow endurance for 21 years, followed by resulting trust.

Question 24

Totten Trust

Answer 24

Not a trust, but a bank account in depositor’s name “as trustee” for named beneficiary. Trustee-Depositor has full rights during lifetime and remains owner of the funds.

May be revoked by withdrawals, by will, or any lifetime act that manifests an intent to revoke.

Subject to Depositor’s creditor’s claims b/c it is part of his estate at death.

Always a type of savings account w/ bank:

• Ex. Totten trust reads “Mary smith as trustee for John Jones”

May be elevated to Private Express Trust if settlor manifests trust intent.

• Ex. “I have created this trust for you”

Question 25

Spendthrift Provision

Answer 25

A provision in the trust that prohibits a beneficiary from voluntarily transferring his right to future payment of trust income or principal and prohibits creditors from attaching beneficiary’s right. However, there is an exception that allows preferred creditors, such as the government, child or spousal support payments, and those who provide for the beneficiary’s necessaries of life to attach beneficiary’s right after proper legal proceedings. Some courts allow creditors to attach to the surplus of trust income or principal measured by the beneficiary’s “station in life.”

Question 26

Spendthrift Provision - Settlor as Beneficiary

Answer 26

Settlor cannot protect his own retained interests in the trust income or principal from his creditors by the inclusion of a spendthrift provision. Settlor’s creditors can reach his right to the trust income as if the spendthrift clause had not been included.

Question 27

Discretionary Provision

Answer 27

Provides the trustee with sole and absolute discretion to make payments of the trust income and principal to the beneficiary, if any, and when to make such payments. If the trustee has not exercised his discretion, the beneficiary may not assign his interests and creditors may not attach to the interest because the beneficiary has no right to payment. If the trustee exercises his discretion to pay the beneficiary, T must make payments directly to creditors and assignees if T has notice of assignment or attachment unless beneficiary’s interest is protected by a spendthrift provision.

Question 28

Support Provision

Answer 28

Provision that allows trustee to pay to beneficiary only as necessary for his health, support, maintenance, or education.

Even without a spendthrift provision the beneficiary cannot assign nor can creditors attach because the character of the interest is such that no one but the beneficiary can enjoy it.

A trust to pay “all income to B for his support” is not a support trust because there is no limitation in amount.

If provision has both support and discretionary language, note that it could be either, and discuss both.

Ex. “Trustee in his sold and absolute discretion, shall pay the amount needed for the beneficiary’s support and maintenance”

Question 29

Modification and Termination of Trust by Settlor

Answer 29

In the majority of states, the settlor must expressly reserve the right to revoke or modify in the trust. In some states the trust is presumed revocable unless the trust expressly provides that it is irrevocable.

Question 30

Modification or Termination of Trust by Beneficiaries

Answer 30

Beneficiaries may modify or terminate trust if: 1) ALL existing and potential beneficiaries (unborn/unascertained) consent; and 2) the modification or termination must not impair a material purpose of the trust.

If all Bs consent, Trustee will not be held liable even if termination of the trust violates an essential purpose.

Spendthrift trust cannot be terminated without settlor’s consent.

Question 31

Material Purpose of Trust

Answer 31

Distribute Principal at designated age - T creates trust to pay income to B until he is 30 - no early termination

Preserve property for remaindermen - To A for life, remainder to B. B dies. A could probably terminate trust because it would not obstruct purpose of trust. If A and B are still alive and both agree to terminate, court will allow because trust purpose was successive enjoyment.

Protect B from poor management or judgment - B would not be allowed to terminate.

Question 32

Modification or Termination by Court

Answer 32

Court can modify trust if changed circumstances make compliance of trust purpose impossible/impracticable (Ex. Trust will go broke).

Court can terminate trust if trust purposes: (1) are accomplished; or (2) become illegal.

Court cannot change beneficiaries.

Question 33

Pour Over Will

Answer 33

In CA, a testator can make gifts by will to a trust so long as the trust was executed before or concurrently with the will and is sufficiently described in the will.

Here, the will expressly identifies the trust in the pour-over gift and settlor executed the will and trust at the same time. Thus, the will created a valid pour over into the trust.

Question 34

Grounds for Invalidating Trust/Will

Answer 34

1. Defective Execution
2. Lack of testamentary Capacity
3. Lack of testamentary Intent
   
   • Intent is measured at the time of execution. Later statements/evidence that settlor became close, developed friendship is not evidence of intent.
   • Although settlor “reluctantly” executed the will, nothing in the facts indicate that she did not intend the instrument to operate as her will.
4. Trust/Will has been revoked
5. Trust/Will was a product of Undue Influence
6. Trust/Will was procured by Fraud

Question 35

Undue Influence

Answer 35

A will or devise therin is invalid if it is obtained by undue influence - mental or physical coercion that deprives tetator of his free will and substitutes the desire of another for his. Undue influence is proven by the following factors: (1) opportunity to exert influence; (2) the susceptibility of the testator (grieving, sick, old); and (3) the dispositions are unnatural.

Revocation procured by undue influence may be declared void.