Trusts Flashcards
What are the two legal interests created by a trust?
- Legal title trustee
2. Equitable/beneficial title beneficiary.
Who holds the legal interest in a trust?
Held by trustee.
Holds responsibility for ownership.
Receives no benefit from the legal title.
Trustee is a fiduciary, which means must: (1) use reasonable care in dealing with trust, (2) utmost degree of loyalty, (3) personally responsible if conduct falls beneath that responsibility.
Who holds the equitable interest in a trust?
Beneficiary.
Receives benefits of ownership, but with little control.
This is the person the trustee owes a duty to, who enforces the trust (has standing if trustee does something wrong)
Who is the grantor of a trust?
Settlor, trustor, donor.
Person who causes trust to come into existence by supplying the initial property.
What are some terms for the trust property?
Principal
Trust corpus
Trust res
A trust is not a legal entity. You can’t sue it. The trustee provides the trust property.
What is the basic timeline of a trust?
- Settlor creates by transferring legal title to trustee, equitable title to the beneficiary
- Trustee manages and invests pursuant to law & trust instruments. In most states, trust instrument can trump normal state law.
- Trustee follows trust instrument, which clarifies payment play
- Trustee duty is over, trust ends. Additional property, if applicable, is conveyed to beneficiary (giving beneficiary legal title)
- Ultimate beneficiary has full title, both sides of the stick, trust is over.
What are some purposes and uses for trusts?
Providing for and protecting beneficiaries.
- Minors
- Incompetents
- People without management skills
- Spendthrifts (spenders)
Flexibility of asset distribution, manipulation of dead hand.
Protection against settlor’s incompetence (they don’t have to pay attention to the details)
Professional management of property.
Probate avoidance.
Tax benefits.
What are the possible types of trusts?
Express trusts (private and charitable) Trusts created by operation of law (resulting trusts, constructive trusts)
What are the five main elements in a valid trust?
To create a valid trust, there must be a settlor, who intending to create a trust for a valid trust-purpose, delivers the trust property to the trustee to hold for the benefit of one or more beneficiaries.
- Intent
- Identifiable corpus
- Ascertainable beneficiaries
- Proper purpose
- Mechanics and formalities
If there are no trust assets when the trust instrument is executed (settlor promises to create in the future), a trust arises in the future only if, when the asset comes into existence, the settlor manifests anew an intention to create the trust OR is supported by consideration.
What are the elements required within intent to form a valid trust?
- Intent to split legal and equitable title
- Intent to impose enforceable duties on the holder of legal title
- Present intent required (no promises) - although a future interest can be trust property; the settlor’s intent must be that the trust take effect immediately
- Precatory language (must impose legal obligation (legal, not moral, obligation))
No formal words are required; you don’t need to even call it a trust. If you use trust words, sufficient.
Also do not need to communicate the creation to beneficiary (though if you tell them, stronger evidence of intent).
You can’t change a completed gift into a trust.
What are the requirements for split title?
The sole settlor cannot also be the sole beneficiary.
Any split of title such that the sole trustee is not the sole beneficiary is sufficient.
Ex. S settlor, T and B trustee, T and B beneficiary - fine because each can sue the other
Ex. S creates trust retaining life interest for self, power to change beneficiaries, power to revoke. Ellen benefits upon S death. That’s fine.
If title does not correctly split, merger occurs and the trust terminates (legal and equitable title)
What types of property will meet the “identifiable corpus” requirement, for purposes of valid trust creation?
Property must be ascertainable with certainty.
Sufficient: any property settlor can transfer. Real/personal, tangible/intangible, vested/contingent, contract rights (e.g. life insurance, 401k). A future interest may be held in trust, so long as it is in legal existence.
Insufficient: property settlor cannot transfer, property settlor does not yet own, property of another person, expected future income not supported by valid contract, expectancy to inherit or take under a will from living person, unenforceable gratuitous promise
The trust res must be existing property that the settlor has the power to convey, including intangibles in which the settlor has an assignable interest
- the res must be identifiable, segregated (though it can be a fractional interest in a specified property)
- debtor cannot hold his own debt in trust, but debtor can declare himself trustee of particular property from which debt is to be paid and debt can be held in trust by another.
How is the “ascertainable beneficiaries” requirement met within a private trust?
Capacity requirement: Any person or entity that can take and hold title may be beneficiary. Need not be competent, just alive.
How is the “ascertainable beneficiaries” requirement met within a class gift?
Ex. “children”
- Class members can be unascertainable at time of creation, so long as they are ascertainable at the time they are to benefit (“to my children, upon their death to my surviving grandchildren” is OK). (Common law: The class must be reasonably definite; UTC - may empower trustee to select from an indefinite class).
- Trustee or third party can select within the class as to who will receive benefit
- Membership of class must be ascertainable (yes grandkids, no to friends). Remedy if no ascertainable beneficiary: reverts to settlor if inter vivos, or if dead goes to successors in interest.
Ex of unascertainable class: to my friends, to the people nicest to me during my illness, to people the trustee selects.
Who are the “ascertainable beneficiaries” within a charitable trust?
Set up for the benefit of a community in general rather than particular individuals.
The purpose of a charitable trust must be one considered to benefit the public, including relief of poverty, the advancement of religion or education, the promotion of health, and the accomplishment of a governmental purpose. A trust for the dissemination of views of a political movement qualifies as educational and thus is charitable, but a trust for the benefit of a political PARTY is not charitable.
Ex. Second Amendment rights, but NOT the Republican Party.
Who are the “ascertainable beneficiaries” within an honorary trust?
Non-human, non-charitable (your cat, maintain a grandfather clock).
Majority: Trustee MAY carry out the honorary trust, but is not bound to. If does not, returns to successor in interest or settlor.
Growing minority are making honorary trust trustees requisite.
Absent specific statutes, many jdns void under RAP if its duration may be more than a human life plus 21 years. UPC expressly provides that it may not be enforced for more than 21 years.
What purposes will NOT meet the “proper purpose” requirement of a valid trust?
Generally, you can trust for any purpose.
Exceptions:
- Illegal purpose
- Requires trustee to commit a crime or tort
- Purpose contrary to public policy (case by case)
- Impossible to achieve
- Intended to defraud the settlor’s creditors
Acts contrary to public policy:
- encourage others to engage in criminal or tortious acts
- encourage immorality
- induce a person to neglect parental, familial, civic duties
If against public policy:
- settlor’s alternative desire controls
- illegal condition is a condition subsequent, condition is just invalidated and the trust is valid
- if illegal condition is CP, preferred view is to hold the interest valid unless evidence that the settlor’s wish would be to void altogether
What are the requirements to fulfilling the “mechanics and formalities” requirement of a valid trust?
- If inter vivos trust, then created while settlor alive. If testamentary trust, created within settler’s VALID will.
- Designate trustee (with powers, duties)
- Transfer (deliver) property to trustee (if declaration of trust, no conveyance needed so long as property is identified and declared; if conveyance in trust, must convey to a trustee through deed or title, appropriate written assignment)
- Meet SoF (oral OK so long as proven by clear and convincing evidence; real property or will must be in writing)
Note: otherwise invalid oral trust of land may be enforced by imposing a constructive trust.
What are the features and requirements of a pour-over trust?
A will containing a gift to a previously existing inter vivos trust (“I leave all my $ to my trust.”)
Property goes into trust as trust exists at date of death. Amendments made after will execution are effective to govern the poured-over property.
Modern rule: pour-over can actually be the first thing that goes into a trust, so long as the trust is identified in the will and is executed before testator death.
A pour-over gift from a will to an inter vivos trust is valid if the trust is established during the testator’s lifetime. At common law, a pour-over gift was invalid if the trust was not in existence at the will’s execution. However, under the Uniform Testamentary Additions to Trusts Act, adopted by most states, a will may devise property to a trustee of a trust to be established during the testator’s lifetime. The Act also authorizes pour-over gifts to a trust that is unfunded during the testator’s lifetime and whose sole purpose is to receive such a testamentary gift. A pour-over gift is valid even though the inter vivos trust is amendable and revocable. The gift is to the trust as it exists at the testator’s death, including amendments to the trust made after the will’s execution.
What is a testamentary secret trust?
A will gift that is silent about the trust nature of transfer. Where a will makes a gift that is absolute on its face, but was in fact made in reliance on the beneficiary’s promise to hold the property in trust for another, the intended trust beneficiary may present extrinsic evidence of the promise. If the promise can be proven by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.
A constructive trust will be imposed even iff the will beneficiary did not make the promise until AFTER the will was executed. Furthermore, it doesn’t matter whether the beneficiary actually intended to perform the promise; all that matters is that the TESTATOR RELIED.
Must prove:
- Settlor agrees with B that B will hold property in trust
- Testator relied on the promise
Remedy: constructive trust against will beneficiary who should be serving as trustee.
What is a testamentary semi-secret trust?
A gift that is in trust, but the will does not indicate the beneficiaries or stated terms.
In this case, the trust fails and the property passes through testator’s estate to successors in interest.
Extrinsic evidence is NOT allowed.
What is an inter vivos secret trust?
This is a grant of property that looks outright on its face but there is ORAL evidence that the grantee promised to use the property for another person’s benefit.
Grantee usually cannot enforce because it’s just precatory, unless alleged beneficiary can show an abuse of confidential relationship, fraud, undue influence, wrongdoing.
What degree of transferability are trust beneficiaries presumed to have?
There is a presumption that interests are freely transferable.
For voluntary transfers (gifts and sales), beneficiaries may transfer their equitable interests as any other property, unless trust provides otherwise.
Can creditors access beneficiaries’ interests?
Unless the trust explicitly provides otherwise, as is usually the case, beneficiary creditors may reach interests that are kept in trust.
In both of these, there is usually a spendthrift provision (see other slide) and they are limited to life.
What is a discretionary trust, and when is it transferable?
In a discretionary trust, the trustee determines how much (if anything) a beneficiary will receive.
Before the trustee exercises his discretion to make payments, beneficiary’s interest is not assignable and can’t be reached by creditors. Creditors may attach the beneficiary’s interest but may not compel trustee to make a distribution. If trustee has notice of an attachment by creditors and decides to make payments to beneficiary, he must make those payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision.
Exception for maintenance of spouse/child.
B is merely expecting to be beneficiary of power of appointment placed into trust.
Beneficiary has no right to payment that he can enforce against the trustee; can’t interfere with exercise of discretion unless abuse of power is present.
What is a spendthrift trust (characteristics, enforcement?)
A spendthrift trust is one in which the beneficiary is unable to transfer her interest—either voluntarily or involuntarily. She cannot sell or give away her right to income or corpus, and her creditors cannot attach these rights.
- Creditors cannot attack the beneficiary’s trust interest until income has been paid to beneficiary (but when the trustee pays beneficiary, creditors may reach).
- Restraint on alienation must accompany (if there is alienability but no-creditor provision, will be held invalid; alienable when interest reaches beneficiary)
- Effect: assignments are unenforceable (though the trustee may choose to honor a purported assignment by beneficiary, but trust may recommence payments to beneficiary at any time, and beneficiary may withdraw his direction to pay assignee)
Exceptions:
Spendthrift clause cannot be used to shield beneficiary from:
- Own creditors where beneficiary is settlor (self-settled spendthrift trust);
- Judgments/orders for support/maintenance of child, spouse, ex
- Claims by the government
- Can reach a mandatory distribution of income/principal if the trust did not make it within a reasonable time.
What is a self-settled spendthrift trust?
Basically if you are a settlor and beneficiary, and you put your own funds in a trust with a spendthrift provision with the hope that creditors will not be able to reach.
It used to be that we would not allow self-settled spendthrift trusts to avoid creditors, but a growing minority of states are allowing this (since people were just taking their business out of the country)
Who are certain creditors that a spendthrift provision may not work to protect from?
- Support of beneficiary’s spouse/child (alimony, CS)
- Creditors who supplied necessaries
- In some states, tort creditors.
- Federal and state income taxes
What are support provisions within a trust?
- Use of trust property limited to beneficiary’s support (which means the trustee can only use property for health, education, maintenance, support (HEMS) standard).
- May or may not be discretionary.
- Impliedly spendthrift, courts will usually block creditors from touching even if no explicit provision.
- If instrument is silent, standard of support is the beneficiary’s accustomed standard of living they were in before becoming beneficiary (trust should spell out if it was meant to enhance)
- Case-by-case determination as to whether beneficiary’s other resources are considered in setting balance for HEMS allowance (is it meant to pick up difference or fully sustain you?) Look for provision like “may/must/cannot consider other resources”
What are the most common way in which a trust will be modified or terminated?
By the terms of the trust, either through express terms or upon the achievement of a condition (i.e. person’s death, stated age, graduation from college, stated date)
