Trusts Flashcards
Trust Administration
Rule of Suspension
Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 yrs, that is (i.e. no persons alive & identifiable can transfer fee simple title). If present & future interests are alive - they can convey full fee simple. Future interests not yet born – suspension problem b/c spendthrift rule keeps interests from being transferred during their lifetimes (i.e. beyond any lives in being plus 21 yrs.) Look for contingent remainder for life in open class of persons - “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.
éNOT about vesting - only concerned w/ possible suspension of ability to transfer a fee simple
Trust Administration
Personal liability of trustee in tort & contract claims.
Trustee signed only on behalf of trust - no personal liability (Jim Jones Trust, by Mary Jones, trustee; Mary Jones, as Trustee of the Jim Jones trust, and not individually)
Trustee signed personally & merely mentioned trust - personal liability (Mary Jones, trustee of the Jim Jones Trust)
Even if there is personal liability - trustee will be reimbursed from the trust if (1) K was w/in the powers of the trustee, and (2) Trustee was acting in the course of proper administration of the trust.
Trustee is personally liable for all torts by trustee or trustee’s employees (absolute rule) - should buy liability insur. & charge cost to the trust.
Can be reimbursed from the trust for tort claims if: (1) Trustee was acting within trustee’s powers, and (2) Trustee was not personally at fault.
Trust Administration
Rule Against Perpetuities
Interest is vested when there is no condition that has to be satisfied & the exact identity of the taker is known
Perpetuities Reform Statute - automatically reduces all age contingencies to 21 years, thus saving the gift
Does not apply to charitable trusts.
NY does not follow the “wait & see” reform except for powers of appointment - look at the facts to see if the power of appt is exercised during the time period of the Rule – if so no RAP violation.
Trust Administration
Remedies for breach of fiduciary responsibilities? The “No Further Inquiry” Rule? B actions against 3rd party purchaser? Indirect self-dealing?
Trustee breaches…beneficiary can:
sue to remove the trustee
ratify the transaction & waive breach
sue for any loss (*action called “surcharge”)
“No Further Inquiry” Rule - breach of fiduciary duty by engaging in self-dealing is an automatic wrong, & no further inquiry need be made (GF or reasonableness no defense)
Cannot sue 3rd party if he was a BFP without notice à B must show TP knew he was dealing w/ a trustee and knew he was engaged in self-dealing
Indirect Self-Dealing – S-D rules apply to loans/sales to relative of trustee, or a business of which the trustee is an officer, employer, partner, or principal shareholder
Trust Administration
Trustee Investment Power
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.
Trustee can exercise adjustment power & allocate capital gains to income (if nec. to protect income beneficiary)
End goal is fairness to all beneficiaries
Trust Administration
Trustee’s Powers
NY Fiduciary Powers Act controls - sets out powers that can be exercised by a trustee w/o ct. order & w/o express authorization in the trust
Trustee can – sell, mortgage or lease any real or personal property, make ordinary repairs, & contest, compromise, or settle claims (anything to manage the corpus of the trust)
Trustee cannot - engage in self-dealing, borrow money, continue a business
Trustee is liable for losses incurred by the business unless trustee has court approval to continue the business
Trust Administration
What are the 2 affirmative duties on trustee self-dealing?
2 affirmative duties on self-dealing:
Duty to segregate trust assets from personal assets
Asset goes down in value – presumption that personal funds used
Asset goes up – conclusive presumption that trust funds used
Duty to earmark trust assets by titling them in trustee’s name
Trust Termination
Termination by the settlor.
Trusts are presumed irrevocable & unamendable unless power to revoke/amend is expressly reserved in trust instrument BUT, settlor can terminate an irrevocable trust if all beneficiaries-in-being consent
Often impossible b/c NO ONE can give consent for any beneficiaries who is a minor or who is incompetent (kids in gestation don’t count)
If trust gives property to beneficiary’s “heirs” & “next of kin”, that interest is not considered a beneficial interest, & no consent is needed from them.
Trust Administration
What are the 5 prohibitions on trustee self-dealing?
5 Prohibitions on Self-Dealing
Cannot buy or sell trust assets to himself (absolute rule)
Cannot borrow trust funds (absolute rule)
Cannot lend money to the trust (absolute rule) – any interest earned must be returned to trust
Cannot profit from serving as trustee (except for appropriate trustee fees) – i.e. cannot take advantage of confidential info received while trustee
Corporate trustee cannot buy its own stock as a trust investment
Types of Trusts
Statutory Spendthrift Rule & Protection from Creditors
*All trusts in NY are spendthrift unless affirmatively assert it is not.*
Protects trust beneficiary’s interest from creditors by prohibiting (in)voluntary transfers of beneficiary’s interest. (i.e. B cannot assign interest either) - creditors can’t get at income or principal until it is paid to beneficiary.
Income – presumed to be spendthrift
Principal - to provide spendthrift protection to the residuary beneficiary (one who gets principal) spendthrift clause must be expressly stated in the trust
Spendthrift clause does NOT apply to any interest retained by the settlor (but will protect 3rd party named under trust).
Trusts are considered irrevocable unless they are made revocable à all revocable trusts are fair game for settlor’s creditors.
Trust Modification
When is modification appropriate & what is the appropriate test?
Only appropriate when the objectives of the trust would be defeated or substantially impaired if the trust is not modified.
Primary purpose of trust overrides specific directions.
Ex – primary purpose to provide income, sell stock b/c stock is just incidental.
Two level modification test:
Determine primary intent of settlor re: trust purpose
Look at specific directions in the trust instrument to determine whether, because of changes in circumstances, those specific directions would now frustrate the primary intent of the trust.
The court (by statute) can authorize the invasion of the principal if the income is not enough to carry out the settlor’s purpose of the trust.
Non-Trusts
Resulting Trusts & Purchase Money Resulting Trusts
An equitable remedy used when trust fails for some reason.
Beneficiary ambiguous à trustee holds on a resulting trust for residuary beneficiary
Purchase Money Resulting Trust – purchaser buys property & has title put in another’s name & later claims no gift & asks for title back but title holder won’t – most states impose PMRT, allowing purchaser to compel title holder to give up title
NY does NOT recognize PMRT UNLESS – C&C evidence G’ee expressly or impliedly promised to reconvey the land to the purchaser (then constructive trust can be imposed)
Types of Trusts
What are the 5 exceptions to spendthrift clauses?
Five Major Exceptions to Spendthrift Clauses:
Creditors for furnish necessities (food, clothing, shelter, health services)
Child support & alimony
Federal tax liens
Income beyond that needed for beneficiaries for support & education (must show all other remedies exhausted before using this)
The 10% levy under CPLR 5205(e) – judgment creditors can use – all share 10% levy together
é Ex – P was income beneficiary under a trust. She ran up high debts & four of her creditors sued her & gained judgments against her. The creditors can use the 10% levy against the trust even when it is spendthrift.
Non-Trusts
Honorary Trusts
Honorary Trusts
Private trust must have a human beneficiary so failed honorary trust falls to residuary EXCEPT:
Pet Trusts - a valid pet trust can last for no more than 21 years
Cemetery trusts - trusts for perpetual care & maintenance of cemeteries & burial plots are classified as charitable trusts & are OK (no RAP)
Non-Trusts
Oral Trusts
Deed of land by G’or to G’ee & claim that G’ee orally promised to hold the land in trust for G’or à NO constructive trust is imposed to give effect to any alleged oral trust UNLESS:
Fraud in the inducement - C&C evidence that G’ee agreed to hold property in trust & at the time of agmt had no intention of carrying out the trust, then a constructive trust imposed for intended beneficiaries
Confidential relationship tra G’or & G’ee – C&C evidence of oral agmt
“Confidential relationship” – family, business partner, attny-client, priest, etc.
éBeneficiaries could still get quantum meruit for the value of services rendered.
