Trusts Flashcards
Trusts - Concept
Fiduciary relation in which a settler/donor/grantor/trustor intentionally places legal title to property in the hands of a trustee to keep and administer for benefit of ascertainble beneficiaries
Trusts - Elements SITPA
1) Settlor/donor/grantor/trustor
2) Intent to create
3) Trustee
4) Property/”Res”
5) Ascertainable beneficiaries
Trusts - Effect of failure to SITPA
- Potential resulting or constructive trust
Trusts - Settlor/grantor/trustor - Gral
- Person who established trust
- Person/entity who can validly transfer property
Trusts - Intent to create trust - Requirements
- Objective manifestation + present intent to create trust in the benefit of another
- Not enough mere wish/ general intent
- Strong indication of lack of intention when no appointment of trustor, or lack of directions on how to appoint one.
Trusts - Intent to create trust - Undue Influence / grounds, presumption, effect
- Someone takes advantage of vulnerable situation to influence donative intent
- Presumption that wihout undue influence trustor wouldnt have created trust when LOAF (large device, opportunity, active participation, fiduciary relation) / Burden on contestant
- Effect: termination of trust and return of assets
Trusts - Intent to create trust - Exception for when no need to actual property transfer req (2)
1) If intent/res/beneficiary objectively and sufficiently ID
2) When trustor/trustee are the same person
Effect of trust with illegal purpose or requirement for beneficiary to commit crime
- Not enforceable
- violation of public policy
- i.e. divest interest unless beneficiary marries someone form different religion, or divorce someone
Trusts - Trustee - Gral
- Fiduciary agent
- Holds legal title / mgmt-adm authority: over res for benefit of beneficiaries
Trusts - Trustee - Requirements (2) + spouse rights as replacement
1) Legally capable (includes entities as possible trustee)(of age and capable to trasnfer property)
2) Be appointed: trust rarely fails bc of it - if not replacement method after refusal to serve/resignation/disclaimer court names one (no absolute right for spouse of deceased trustee to substitute on separate property
Trusts - Trustee - Merger rule
When only trustee is or becomes the sole beneficiary, the trust fails and terminates
Trusts - Property/Res - Reqs (3)
1) Owner by settlor
2) Presently exists: future interests ok if vested (i.e. right to life insurance proceeds) (not ok: anticipated inheritance, potential future profits)
3) ID’d: in written deed of trust or other doc with title transferred to trustee
Trusts - Ascertainable Beneficiaries - Gral / reqs, acceptance,”future”
- Identifiable OR with definitive method of selection
- Acceptance of beneficiary is irrelevant
- It is ok to establish “future” (unborn) beneficiaries (i.e. all my children)
Trusts - Types of beneficiaries (4)
1) Class beneficiaries
2) Remainder class
3) Surviving heirs
4) Animal beneficiaries
Trusts - Class Beneficiaries - entire/specific
If entire class: not too vague definition if not trust fails : i.e. “my friends”
If specific members and Trustee w/authority to select/ req :
1) well-defined class + 2) defined selection standard
Trusts - Remainder Class Beneficiaries - Gral / when, timing, heirs
- For trust with life estate - they take after income beneficairy dies
- Class of remainder needs to be defined at time of taking
- If beneficiary pre-deceased - heirs dont take
Trusts - Surviving Heirs Beneficiaries - Gral
- Trust with term income and her remainder
- Beneficiary pre-deceased, benefit passes to heirs
- i.e. “To my sister for 5 years after my death, then to my surviving children”
Trusts - Animal Beneficiaries - Gral
- Ok in many states as long as animal alive at time of taking
- After death of last the estate will be distributed according to terms of the will, trust instrument or by intestate scheme
Express Trust - aka “trust agreement” - SOF when (3)
1) Testamentary trust
2) Corpus os real estate
3) Expressly lasts > 1 year
Express Trust - aka “trust agreement” - Gral / interpretation , controlling auhtority, content
- Court looks at trustor “intent”
- specific provision control over statute UNLESS is about waiving good faith and fair dealing duty
- Trustee usually receives specific and binding instructions and authority.
Express Trust - Distribution to beneficiaries (beneficiary accounting distribution)
Good faith + reasonableness:
- Instrument can give total discretion to trustee
OR
- Allow trustee to distribute (“sprinkle”) among eligible member of defined benefited class
Express Trust - Corpus Invasion
- allowed for trustee to take a portion of corpus/ppal under certain circumstances
- i.e. maintain trustor’s wife lifestyle and health
Implied Trust - Types (2)
1) Resulting: unsuccessful and good faith effort to create trust (created by court to satisfy settlor intent)
2) Constructive: created by court to mitigate inequity and/or avoid unjust enrichment
Implied Trust - Constructive Trust - situations
- When wrong-doing in acquiring property interest with fraud/theft/deception/duress/breach of fiduciary duty.
- When trust is oral or secret: needs to show clear and convincing intent
Utility of trust - 4 purposes
1) Reduce estate taxes
2) Use of living trusts
3) Protect Assets beyond reach of creditors/govt/beneficiaries (“spendthrift restriction”)
4) Avoid Probate administration
Utility of trust - Reduce estate taxes
- Assets gifted valued at time of gift and not at time of death - Hence, not taxation to appreciation btwn time of git and death
Utility of trust - Use of “living trust”
To avoid inheritance issue regarding assets in mx states or will being contested
Utility of trust - Avoid Probate adm
More privacy and less delay in property distribution
Trust formation - Rules about promise to create future trust
- Gral rule: Unenforceable
- UNLESS: promise supported with consideration sufficient to form contract (pre nuptial agreement)
Trust formation - Types of formation (2)
1) Intervivos
2) Testamentary
Trust formation - Intervivos - Gral / when, revocability, conflicting provision
- Grantor alive with immediate effect
- Irrevocable upon grantor’s death
- Provisions control over will w/inconsistent designation
Trust formation - Testamentary - Gral/ effective, reqs
- Take effect only upon death of grantor
- Created by will
- Needs to satisfy SITMA and SITPA
Trusts - Revocation / Modification - Types (4)
1) By trustor (CL vs UTC rules)
2) By agreement btwn trustor and all beneficiaries (if it doesnt defeat material purpose of trust)
3) By petition for judicial procedure
4) Equitable deviation doctrine (by court)
Trust Revocability (CL vs UTC)
- CL: irrevocable unless express reservation by donor of power to revoke/amend/substitute
- UCT: revocable unless expressly provided otherwise - creation of “grantor’s trust” where settlor can withdraw assets at any time
Trust - Petition for court’s trust modification - standing, notice, E + interpretation / ADR
- any party with interest (PR, trustee, settlor, beneficiary + attorney general for charitable trusts)
- All interested parties notified
- Court will hear all evidence/assert intent of trustor/effect on creditors and heirs: decide to direct trustee to act or refrain from acting
(Usually avoided by ADR provision in trust)
Trust - Modification by Court - Equitable Deviation Doctrine
Allows court to modify trust provisions on equity when unanticipated change of circumstances
Trust - Uniform Transfer Minors Act - gral - Minors’ custodian
- Irrevocable custodian trusts for minor beneficiaries
- Ownership vested in minor but control/mgmt/investment on custodian/trustee (even donor himself)
- Minor can request trustee removal for a cause
- Minor’s creditors usually able to reach assets in trust
Trust - Minors’ custodian - personal liability
- Contractual liability: Custodian no personal liability to 3rd parties in the contract, UNLESS concealment of custodian quality
- Tort liability only w/personal fault
Trust - Minors’ custodian - Termination
- Minor comes to age + - Receives corpus
Trusts - RAP for wills and trusts - Gral
Non-vested property interest invalid UNLESS at time of creation there is certainty of vesting/termination within 21 years from death of individual then alive (measuring life) or 90 years after creation
Trusts - RAP - General Scope of application (4)
1) Executory interest
2) Open Class Remainder
3) Contingent Remainder
4) Non-charitable trusts (in most states)
Trusts - RAP - Time - Legal Effects / start time, effects (2)
- Clock starts for intervivos irrevocable transfer once property delivered to trustee OR revocable at time of death of settlor
Effects:
1) Court strikes down portion of conveyance
2) If conveyance as fee simple subject to condition subsequent (“but if”) or if fee simple determinable (“so long as”) = then trust will be deemed as fee simple absolute
Trusts - RAP - Rule for charitable trusts
Doesn’t apply when all vested interests are charitable
-it might when first (income) interest was not, but remainder one was charitable
Trusts - RAP - Wait and See Rule
Trust is not declared invalid upon creation, but its allowed to operate until last possible minute for a possible vesting
Trustee - Duties/Liabilities - PINCALL (7)
- Properly Administer - “total asset mgmt” approach (duty of care, safeguard, productivity)
- Inform beneficiaries
- No delegation of discretional decisions
- Commingling of assets (w/ other trust OR trustee’s personal assets) prohibition
- Account to beneficiaries
- Litigate on behalf of trust (Sue/Defend)
- Loyalty duty to trust
Trustee duties - Properly Administer- Gral /how, duty owed to whom, 1vsmx benf, content
- Follow instructions consistent with grantor’s intent
- Fiduciary duty to trust NOT to beneficiary
- Higher duty when only 1 beneficiary and even more if its a minor
- Standard of care in adm + duty to safeguard corpus
Trustee duties - Properly Administer- Standard of care
- “Prudent business person when managing own affairs or investments” (higher than reasonable person) (similar to corp director)
Trustee duties - Properly Administer- Mx trustees
- 2 trustees: agree on adm decisions , if not by court when irreconciliable hostility substantially impairs adm (enough grounds for appointing new trustee)
- 3 or more: majority controls + all potentially liable UNLESS written dissent
Trustee duties - Properly Administer- Duty to Safeguard Corpus - Gral
- may control over goal of productivity
- special scrutiny when transactions are significant + non routine
- Gives grounds for obtaining insurance
- Allows for diversification of trust portfolio to reduce risk
Trustee duties - Properly Administer- Productivty of Assets rule
- Trustee duty to maximize return on ppal amount in trust
- Limit: Not heavily invest in speculative ventures (comply with standard of care)
Trustee duties - Properly Administer- Total Asset Mgmt Standard Rule
Trustee with duty to consider “overall portfolio of assets”
-i..e probable income, safety of capital, investment marketablitliy, economic condition, trust duration, liquidity, taxes
Trustee duties - Inform Beneficiaries - Gral
- Give legal notice to all benf. and other notices (unless provided differently by grantor)
- Keep detailed records about administration of trust
- For transaction >25% of assets, notice to all beneficiaries and to grantor
Trustee duties - No delegation - Gral
- Restriction for discretionary decisions: i.e. invest
- No restriction for ministerial fx BUT review and supervision required
Trustee duties - Account to Beneficiaries - Gral - What/When, liability
- to each benf at least annually (+ possible request by benf) written statement of receipts/disbursements - Separately report of trustee’s compensation
- Possible grounds for claims from class member because of breach of allocation duty bc of over-allocation of expenses or under-allocation of income.
- i.e. sale of real property: must be done in open market or w/appraisal
Trustee duties - Litigate on behalf of trust - JDX/venue rule (3)
1) “Situs of trust”
OR
2) Trustee’s regular business address
OR
3) Trustee’s residence
Trustee duties - Loyalty duty of trust (breach of SOB) (3)
1) Self dealing (unless alowed)
2) Opportunity from trust (not take advantage of it when it was for trust)
3) Borrowing from trust or use assets as collateral for personal loan
Trustee’s Liabilities - Gral Rules / Purpose, mx trustee, standing for action, trustee’s agents
- Action can be brought by beneficiaries or grantor (when also beneficiary)
- Purpose: to enforce the terms of trust
- For co-trustees joint and several liabilities
- For agents of trustee when: improper delegation, failure to properly select or supervise
Trustee’s Liabilities - Legal Remedies/Effects (4)
1) Specific Performance
2) Injunction
3) DX
4) Removal of trustee (easier that above 3)
Trustee’s Liabilities - Removal by Court- gral / grounds, next steps
For “significant cause”
- i.e. unfitness, unwillingness to serve, PINCALL violation
Makes appointment of new trustee needed
Trustee’s Liabilities - New appointed trustee
Liability for failure to pursue prior trustee inproper performance
Trustee’s Liabilities - Defenses (3)
1) SOL /laches (undue dealy in seeking relief)
2) Consent by beneficiary
3) Exculpatory provision from instrument
Trustee’s Liabilities - Defenses - Consent / req, presumption, mx benf
- Knowingly by beneficiary (as estoppel)
- Implied for those benefited from wrong act
- Consent from one benf doesn’t bind the others
Trustee’s Liabilities - Defenses - Exculpatory provision
- Enforced by courts when breach is N + w/good faith
- Not when breach is intentional, grossly N, w/bad faith, or extreme recklessnes
Trust -Beneficiaries Rights - Ownership -Quality
- Absolute unless otherwise indicated AND can be transferred
Trust -Beneficiaries Rights - Ownership - Transfer of interest / assignee rights/restrictions
- When interest is vested by intervivos or testamentary
- Grantee w/= rights as original beneficiary but w/possible alienation restrictions (ok if not against public policy)
Trust - Beneficiary Creditors - Spendthrift Clauses
- Makes “charge order” against trust assets ineffective
- Limit assignment from beneficiary or attachment of trust assets by creditors (make charing order ineffective)
- Doesn’t proceed when settlor is also beneficiary (“self serving trust”)
“Support Trust”
- Trustee obligated to pay support for beneficiaries out of trust fund
- Only for “reasonable necessities”
“Discretionary Trust”
- Trustee’s sole discretion to make/withhold distribution
- Beneficiary have no vested rights on them (cannot be attacked by his creditor)
Beneficiary’s Creditors - Exceptions that allow for attachment of trust assets (4 + 1)
1) Vendor creditors for life necessities
2) Support trust: to children/spouses and even former spouses for family support owed by beneficiary
3) Beneficiaries tax liabilities
4) Self serving trusts (no spendthrift when grantor is beneficiary bc of public policy) (case law extends to trust created by another by res provided by beneficiary)
+
1) Fraudulent trasnfer of debtor into trust to limit creditor’s claim
Beneficiary’s Creditors - Fraudulent Transfer
- Debtor cant transfer to trust to hinder/delay/defraud creditor claim’s
- Can allow for creditor recovery
Charitable Trusts - gral / purpose, formalities, standing, RAP
- To benefit public good
- need state registration
- Attorney Gral with standing to bring action
- Exempt from RAP
Charitable Trusts - Cy Pres doctrine
- Court can substitute charity taker (beneficiary) WHEN purpose of trust becomes illegal/impossible/impracticable
ALSO
- if specifically named charity as beneficiary: gift then becomes part of residuary
- if charity is one of class, court can divide share among other class members
3rd party claims vs Trust / grounds (2), effect
1) contract w/trust
2) Tort by trustee (when acting within scope)
- Potential judicial attachment of trust assets
3rd party claims vs Trustee - Contractual -Gral Rule
Gral Rule: No personal liability if good faith of agent
3rd party claims vs Trustee - Torts / personal liability grounds (3)
- Personal liability for:
a) own torts,
b) fail to supervise,
c) Failure to ensure property - Posible indemnification when tort from normal trust activties and w/o fault
3rd party claims vs Beneficiaries
No rights against beneficiaries for trust/trustee actions
3rd party liability to trust/beneficiaries
- When knowingly receives trust property for less than fair/full value (trustee who authorizes also liable fro SOB breach)
Trust - Termination Grounds (7+1)
1) Consolidation of mx trusts
2) Term Expiration
3) Purpose accomplished/illegal/impossible
4) Merger
5) Income Interest Terminates
6) Donor termination - unilateral if possible under agreement
7) Court Petition
+
1) Trust formed under undue influence on trustor
Trust Termination - Consolidation
- when mx trust/trustees/grantors w/the same purpose OR same beneficiaries
- Court can consolidate them in 1 trust
Trust Termination - Term Expiration / gral, instructions
- when date specified in instrument
- potential specific instruction to distribute assets or transfer to another entity to administer probate
Trust Termination - Merger
- All benfs + trustee become the same bc legal equitable title has merged
Trust Termination - Income Interest Terminates / when, effects, doctrine of acceleration
- Corpus distributed among remainder beneficiaries bc last of income (ppal) beneficiary dies
OR
- Doctrine of acceleration: allow for prior distribution when there is disclaimer by income beneficiary that there is no harm caused by earlier distribution
Trust Termination - Petition to court / standing, grounds-restrictions (2)
- By all beneficiaries (guardian ad litem for minors)
- Granted when:
1) showing it will not defeat material purpose of trust at time of creation
OR
2) When agreement from donor and all beneficiaries even against material purpose
Trust - Regulation
- CL - Uniform Trust Code
- UTC (2005) - updates some CL rules
