Trusts Flashcards
What are the requirements for a valid trust?
- Writing (SoF)
- Parties (Settlor, Trustee, Beneficiary)
- Trust property
- Property delivered to Trustee
- Lawful purpose
Hypo:
- S sets up trust for Blackacre
- S executes a deed of trust to give X a mortgage on Blackacre.
- X forecloses on Blackacre.
Can S prevail?
- Yes, if the document conveying title to Blackacre in favor of the trustee was recorded. UNLESS the trust is revocable–THEN the mortgage operates to revoke the trust.
- No, if the document conveying title to Blakcacre was not recorded (and X didn’t have actual notice of the trust).
Is a trust presumed revocable or irrevocable?
Revocable
When does the presumption of a Purchase Money Resulting Trust (PMRT) arise?
Who owns (and can take) the property if it’s a PMRT?
- A pays the purchase price
- Takes title in B’s name
- A did not intend a gift (e.g. A and B aren’t related)
- A owns the property. A can force B to re-convey the property back to A at any time.
Charitable trusts - what happens if the trust can no longer carry out its charitable purpose (e.g. est to find a cure for polio, but it’s been found now)?
What if it’s just that the charitable beneficiary doesn’t exist anymore or ceases to qualify as a charity?
- Apply equitable cy pres doctrine—divert the funds to some other charitable purpose “as near as possible” to the original one. Must use a JUDICIAL PROCEEDING—trustee can’t divert funds unilaterally.
- Trustee can name a replacement beneficiary WITHOUT court approval, but must give notice to TXAG.
- If the replacement beneficiary is not the related to the same charitable purpose, have to get court approval under equitable cy pres to divert the funds to the new purpose.
Who has standing to enforce or modify a charitable trust in a judicial proceeding? Does the AG have to be involved?
- ONLY the TXAG and the Settlor
- AG is a always a proper party, but not necessary. But they have to be NOTIFIED every time so they can determine if they want to intervene.
What are the grounds for removing a trustee?
Who can bring suit to remove trustee?
(terms of the trust govern)
- Violating terms of trust resulting in material financial loss to the trust
- Incapacity
- “other grounds” (catch-all)
- Any interested party
JURISDICTION, VENUE, PARTIES
Concurrent jurisdiction:
Venue
- One trustee:
- More than one trustee:
- IF suing the CORPORATE T:
- S is deceased:
JURISDICTION, VENUE, PARTIES
Concurrent jurisdiction:
- District courts
- Statutory probate courts
Venue
- One trustee:
- Where T resides, or
- Where T’s principal office of admin is maintained
- More than one trustee:
- Principal office of the administration
- IF suing the CORPORATE T, can sue where the corp’s PPB is.
- S is deceased
- Where the S’s estate admin proceedings are pending
JURISDICTION, VENUE, PARTIES
Parties:
NECESSARY parties:
**TX AG:
JURISDICTION, VENUE, PARTIES
Parties
- ANY INTERESTED PERSON
- NECESSARY parties:
- People so designated in the trust
- People actually receiving distributions from the trust at the time
- *TX AG is a PROPER party, but not a necessary party (but often needs NOTICE).
CREATION OF TRUST
CREATION OF TRUST
- Settlor
- Delivers
- Trust property
- To a trustee
- With intent to create a trust
- For the benefit of beneficiaries
- For a lawful purpose
CREATION OF TRUST
Beneficiaries
Beneficiaries
- Must be ASCERTAINABLE
- “Relatives” “family” is okay
- “Friends” is not okay
Can S be the sole B or sole T?
- The settlor CAN be a beneficiary—even the SOLE beneficiary. “Hey Trustee, take care of this property for me.”
- The settlor CANNOT be the SOLE TRUSTEE. “Hey Me, take care of this property.” X
STATUTE OF FRAUDS
ORAL trust is okay only if:
STATUTE OF FRAUDS
Generally, must be in WRITING
ORAL trust is okay only if:
- Names someone other than S or B as the trustee
- Expression of intent to create a trust is SIMULTANEOUS or PRIOR TO the TRANSFER of property.
DIVORCE
DIVORCE
Revokes all provisions in favor of former spouse and his/her relatives
CHARITABLE TRUSTS
Cy pres
CHARITABLE TRUSTS
Cy pres
- If the CHARITABLE PURPOSE is no longer possible or practicable, the court will direct identify a substitute beneficiary as close as possible to the original charitable intent.
CHARITABLE TRUSTS
Trustee power to name replacement beneficiary (same charitable purpose):
- How is this DIFFERENT from cy pres?
CHARITABLE TRUSTS
Trustee power to name replacement beneficiary (same charitable purpose)
- Trustee can do so WITHOUT court approval
- Must send NOTICE to the TXAG
- This is DIFFERENT from cy pres, because cy pres applies when the very PURPOSE can no longer be served by simply replacing the beneficiary. The court has to get involved to designate a new charitable purpose as close as possible to the original one.
RESULTING TRUST
Purchase money resulting trust
RESULTING TRUST
This is NOT A REAL “TRUST” — the Trust Code does NOT apply.
Based on the PRESUMED / IMPLIED INTENT of the settlor.
Purchase money resulting trust
- A buys property (supplies the “purchase money”), B takes title to it.
- This is PRESUMED to be a PMRT:
- B is holding the property in trust for A
- A can force B to re-convey at ANY TIME
- Presumption can be rebutted by showing that A gave B a GIFT.
- E.g. A and B are related
RESULTING TRUST
Failure of an express trust
- If the “trust” fails, and it’s not clear what to do with the property
- T holds the property “in trust” for S—a resulting trust
- But nothing else really happens.
RESULTING TRUST
Resulting trust by REVERSION
RESULTING TRUST
Resulting trust by REVERSION
- When the trust’s purpose is complete, but there’s still property left in the trust
- Property remains in a resulting trust in favor of S
- So T still has to take care of the property, but doesn’t have to do anything specific with it.
SPENDTHRIFT CLAUSES
Prevents B from transferring (voluntarily or involuntarily) his interest.
These are generally valid in TX. What are the EXCEPTIONS?
EXCEPTION—the trust is REVOCABLE by S
EXCEPTION—S designates himself as B (S can revoke or modify the trust at any time)
EXCEPTION—contracts for necessaries
- CR’s can attach to B’s interests if they supplied food, rent, etc.
EXCEPTION—child support obligations
EXCEPTION—federal tax liens
DISCRETIONARY TRUSTS
CREDITORS’ RIGHTS
- PURE DISCRETIONARY
- SUPPORT TRUST
DISCRETIONARY TRUSTS
CREDITORS’ RIGHTS
- PURE DISCRETIONARY
- If B only receives distributions are the PURE DISCRETION of T, then creditors CANNOT attach to the interest. B doesn’t really have control over when the $$$ flows in, so CR’s cannot attach like they could garnish actual wages.
- SUPPORT TRUST
- CR’s who supplied necessaries can attach to the support interest to the extent that B can reach it.
TERMINATION
T may continue beyond termination IF:
Uneconomical trusts:
TERMINATION
Automatically according to its terms
T may continue beyond termination as reasonably necessary for winding up.
Uneconomical trusts
- IF trust value is LESS THAN $50,000
- And is losing money
- T can terminate
- Must give NOTICE to B’s
DECANTING POWER
Transferring trust assets to a new trust
When can this be done?
DECANTING POWER
Must be done in GOOD FAITH in order to:
- Respond to changes in the law
- Correct a drafting error or ambiguity,
- Enable a disabled B to qualify for gov’t assistance
Must give NOTICE to current and presumptive remainder B’s
Can be done WITHOUT court order
DUTIES OF TRUSTEE
General duty?
DUTIES OF TRUSTEE
Administer the trust in GOOD FAITH
DUTIES OF TRUSTEE
Duty to ACCOUNT
DUTIES OF TRUSTEE
Duty to ACCOUNT
- Only upon demand, unless the trust requires otherwise
- Not obligated to account more than ONCE PER YEAR
- Settlor CANNOT LIMIT a B’s right to demand an accounting—CAN limit a “remainder” or “contingent” B’s right to demand accounting
DUTIES OF TRUSTEE
Investment:
Trustee may DELEGATE investment power if:
Investment
- MODERN PORTFOLIO THEORY
- Reasonable care, skill, caution
- Look at the ENTIRE PORTFOLIO
- Consider the OVERALL INVESTMENT STRATEGY
- Exclusively for the benefit of the trust
- T is permitted to consider all kinds of things:
- General economic conditions
- Tax consequences
- Inflation, deflation
- etc.
- General duty to DIVERSIFY investments, unless T thinks it’s better not to
- Trustee may DELEGATE investment power
- Must act prudently in selecting an agent
- Establish scope and terms of delegation
- Periodically review agent’s actions
ALLOCATION
Should consider:
CANNOT use adjustment power IF:
ALLOCATION
T allocates incoming $$$ (receipts) to either PRINCIPAL (stays in the trust) or INCOME (can be distributed to B’s)
T has discretion—ADJUSTMENT POWER. T has a duty to administer the trust IMPARTIALLY.
Should consider:
- Nature, purpose, and expected duration of the trust
- Intent of the settlor
- The circumstances of the B’s
- The need for liquidity, regularity of income
- Nature of the trust’s assets
- Trust terms—whether they allow T to distribute PRINCIPAL $$$
- etc.
CANNOT use adjustment power IF:
- Adverse TAX consequences
- Would BENEFIT the TRUSTEE
- Including if T is a BENEFICIARY of the trust
ALLOCATION
CHARGES against INCOME
CHARGES against PRINCIPAL
CHARGES against INCOME
- 50% of T’s compensation
- Ordinary admin costs
- Mortgage INTEREST
- Insurance premiums that insure trust assets
CHARGES against PRINCIPAL
- 50% of T’s compensation
- Mortgage PRINCIPAL
- Capital improvements
- Estate taxes
TRUSTEE SELF-DEALING
T owes a duty of ________________ to the trust.
S CAN/CANNOT AUTHORIZE self-dealing?
Self-dealing:
TRUSTEE SELF-DEALING
T owes a duty of UNDIVIDED LOYALTY to the trust.
S CAN AUTHORIZE self-dealing.
Self-dealing:
- Gaining a personal advantage from being a trustee (other than the compensation)
- Buy/sell trust assets
- Borrow or loan money from/to the trust
- BUT T can loan TRUST funds to a BENEFICIARY if in trust’s best interest
- Secure a personal loan with trust assets
TRUSTEE SELF-DEALING
Good faith, benefit to the trust ARE / ARE NOT defenses?
ARE NOT
TRUSTEE SELF-DEALING
“No further inquiry rule”
“No further inquiry rule”
- B’s only BOP is to show T engaged in self-dealing
- T can offer NO DEFENSE.
- The only remaining issue is DAMAGES.
TRUSTEE SELF-DEALING
Commingled funds
Commingled funds
- T uses trust money and some personal money to buy an asset
- If the asset GOES UP in value»_space;> Presume it was bought only with trust money
- If the asset GOES DOWN in value»_space;> Presume it was bought only with T’s money
TRUSTEE LIABILITY TO BENEFICIARY
SOL = __________
- Begins when:
- TOLLED:
TRUSTEE LIABILITY TO BENEFICIARY
SOL = 4 years
- Begins when:
- T REPUDIATES THE TRUST
- An accounting reveals the breach
- The trust relationship has come to an end
- TOLLED until P discovers if FRAUD
TRUSTEE LIABILITY TO BENEFICIARY
Judicial remedies for breach of trust
Judicial remedies for breach of trust
- Remove/suspend T
- Reduce/delay T’s compensation
- Compel T to perform her duties
- Enjoin from committing a breach
- Compel T to redress a breach
- Order an accounting
- Appoint a receiver
- Void T’s act
- Impose a lien or constructive trust
- ANY OTHER APPROPRIATE RELIEF
TRUSTEE LIABILITY TO BENEFICIARY
Measure of damages
- Depreciation in estate value
- Profits wrongfully earned by T
- Unrealized profits of the trust
TRUSTEE LIABILITY TO BENEFICIARY
T’s DEFENSES
T’s DEFENSES
- B may RELEASE T
- Must be in WRITING
- Not liable for actions taken PRIOR to knowledge of facts affecting the distribution of income or principal
- Co-trustee can protect herself by not joining and DISSENTING IN WRITING
TRUSTEE CONTRACT LIABILITY
Contract within T’s powers:
May be personally liable if:
TRUSTEE CONTRACT LIABILITY
Contract within T’s powers»_space;> Sue T in REPRESENTATIVE CAPACITY (not personally liable)
May be personally liable if the contract does not exclude personal liability
- E.g. “trustee” or “as trustee”»_space;> NOT PERSONALLY LIABLE
TRUSTEE TORT LIABILITY
Committed in the course of trust admin:
T gets reimbursement ONLY IF:
TRUSTEE TORT LIABILITY
Committed in the course of trust admin»_space;> Not personally liable
T gets reimbursement ONLY IF:
- COMMON INCIDENT of proper activities on behalf of the trust
- Neither T nor officers/employees were guilty of actionable negligence or int’l misconduct
OR
- Tort’s commission INCREASED THE VALUE of the trust property
THIRD PARTIES
BFP’s are protected from liability for transactions with T IF:
THIRD PARTIES
BFP’s are protected from liability for transactions with T that are later determined to be misconduct by T.
- BFP = good faith, value, no notice of misconduct (e.g. buys trust property from T that violated trust terms—but there was no deed on record showing that the property was owned by a trust)
THIRD PARTIES
How can T can provide PROOF of authority as trustee?
- Certification of trust
- Trust exists and hasn’t been revoked
- Identifies settlor
- Sets out relevant trustee powers, or states that T has powers of a trustee under the Trust Code
- States that T has authority to sign or authenticate necessary documents
THIRD PARTIES
- Only the TRUSTEE can SUE THIRD PARTIES
- With TWO EXCEPTIONS:
THIRD PARTIES
- Only the TRUSTEE can SUE THIRD PARTIES
- With TWO EXCEPTIONS:
- T is not able to bring the action or refuses to do so
- TP participated with T in a breach of trust
TRUSTEE COMPENSATION
T is entitled to REASONABLE COMPENSATION
CONSTRUCTIVE TRUST
CONSTRUCTIVE TRUST
This is NOT A REAL “TRUST” — the Trust Code does NOT apply.
Arises when a party is UNJUSTLY ENRICHED as a result of WRONGFUL CONDUCT.
The property they gained by their wrongful conduct is considered to be held “in trust” in favor of the person they wronged.
TRACING
- If property in a constructive trust is sold, P can sue to obtain the proceeds, as long as they can be traced back to the original property.
IRREVOCABLE TRUSTS
IRREVOCABLE TRUSTS
Trusts are presumed to be revocable.
Can be made irrevocable by express language.
CREDITORS’ RIGHTS
- Creditors cannot attach to interests in an IRREVOCABLE trust that has VESTED remaindermen (they have a vested interest in the property)
MERGER DOCTRINE
MERGER DOCTRINE
The same person cannot be SOLE T and the SOLE B. Then, the equitable and legal titles merge, and the trust fails.
ALLOCATION
What statute governs the allocation of receipts into either INCOME or PRINCIPAL?
General characterizations:
- Liquidating trust assets
- Operating a business
- Profits =
- Recuperating operating costs =
- Pension/IRA
- Periodic payments from a deferred cont plan =
- Interest in corp/partnership/etc.
- Money =
- Not money =
- Insurance policies
- Proceeds =
- Minerals
- Delay rental =
- Interest on production pmts =
- Production pmts =
Uniform Principal and Income Act
General characterizations:
- Liquidating trust assets
- 10% goes to income
- 90% goes to principal
- Operating a business
- Profits = Income
- Recuperating operating costs = Principal
- Pension/IRA
- Periodic payments from a deferred cont plan = Income
- Interest in corp/partnership/etc.
- Money = Income
- Not money = Principal
- Insurance policies
- Proceeds = Principal
- Minerals
- Delay rental = Income
- Interest on production pmts = Income
- Production pmts = Principal
INVESTMENTS
What statute governs the Trustee’s standard of care for investing trust assets? What’s the standard it sets out?
Uniform Prudent Investor Act
- Modern portfolio theory
- Time of investment, not hindsight
- Total return
WAIVERS AND DISCLAIMERS
WAIVERS AND DISCLAIMERS
- NO WAIVERS FOR BAD FAITH, RECKLESS, INTENTIONAL, ETC *
S can waive liability for SELF-DEALING.
CANNOT shorten SOL for judicial proceedings.
