Trusts Flashcards
Legal Interest
Held by the trustee
Does not include legal title
Trustee: Definition and Duties
Holds the legal interest
Fiduciary duties:
(1) Must deal with the property with reasonable care
(2) Must maintain the utmost degree of loyalty
(3) Is personally responsible if conduct falls beneath required standards
(4) Must exercise powers in accordance with the terms of the trust (failure to do so constitutes breach)
Equitable or Beneficial Interest
Held by the beneficiary, who receives the benefits of ownership in the trust
Usually has little or no control over trust or trust property
Settlor
Person who causes the trust to come into existence by supplying the initial trust property
Also known as the trustor, grantor, donor
Trust property
Required for a trust
Also known as the principle, trust corpus, trust res
Basic Functions of a Trust
Settlor creates a trust by transferring legal title to the trustee and equitable title to the beneficiary
Trustee manages and invests in accordance with legal duties and settlor’s instructions as contained in the trust instrument
Purposes and Uses of a Trust
(1) Providing for and protecting trust beneficiaries
(2) Flexibility of asset distribution
(3) Protection against settlor’s incompetence
(4) Professional management of property
(5) Probate avoidance
(6) Tax benefits
Express Trusts
Created by express intention of the settlor
(1) Private: private beneficiaries/individual people
(2) Charitable: charitable beneficiaries
Trusts Created by Operation of Law
(1) Resulting trusts: attempt to carry out implied intent
(2) Constructive trusts: equitable remedy to prevent unjust enrichment
Elements of a Valid Trust
(1) Intent
(2) Identifiable Corpus
(3) Ascertainable Beneficiaries
(4) Proper Purpose
(5) Mechanics and Formalities
Elements of a Valid Trust: Intent - Elements
(1) Intend to split legal and equitable title,
(a) communication to beneficiary not required
(b) present intent required
and
(2) Impose enforceable (fiduciary) duties on holder of legal title
(a) precatory language is no good – “I hope”, “I wish” is insufficient
Elements of a Valid Trust: Intent - Split of Title
Sole trustee cannot be the sole beneficiary. If they are, merger occurs and the trust terminates, leaving the person with all legal and equitable title
Elements of a Valid Trust: Identifiable Corpus
The property must be ascertainable with certainty, which means cannot include property you cannot transfer or do not yet own
Elements of a Valid Trust: Ascertainable Beneficiaries - Private Trusts - Capacity
Any person or entity that can take and hold title may be a beneficiary – need not be competent
Elements of a Valid Trust: Ascertainable Beneficiaries - Private Trusts - Class Gifts
Beneficiaries may be designated by generic designations such as “children”
(a) Unascertained class members at time of trust creation: okay as long as ascertainable when they are to benefit
(b) Third party or trustee may select which class members are to receive benefits (e.g., discretionary trust for children)
(c) Membership of class must be ascertainable
If there are no ascertainable beneficiaries, property reverts to the settlor
Elements of a Valid Trust: Ascertainable Beneficiaries - Charitable Trusts
Trusts set up to provide benefits for non-human, non-charitable purposes (e.g. a pet)
Trustee can carry it out, but is not bound to do so. If trustee chooses not to, property returns to settlor or settlor’s successors in interest (resulting trust)
Elements of a Valid Trust: Purpose of a Trust
Settlor may create trust for any purpose, EXCEPT
(1) Illegal purpose (e.g. encourage commission of a crime)
(2) Require trustee to commit a crime or tort
(3) Purpose contrary to public policy (often case by case)
Elements of a Valid Trust: Mechanics & Formalities - Creation Methods
(1) Inter vivos or living trust (created while settlor is alive)
(a) Settlor can declare himself to be trustee of specific property for beneficiary, and he keeps legal title
(b) Settlor can transfer legal title to trustee, and may choose
(2) Testamentary Trusts: created in settlor’s valid will
Elements of a Valid Trust: Mechanics & Formalities - Trustee Designation
Must have trustee with real powers or duties, otherwise all title will vest in the beneficiary
(a) Capacity of trustee: take, hold, and manage
(b) Court will fill vacancy if trust is silent
Elements of a Valid Trust: Mechanics & Formalities - Delivery to Trustee
Personal property: does not need to be physically conveyed, as long as it is identified and segregated
Real property: should be conveyed from settlor as person to settlor as trustee, then transferred via deed
Elements of a Valid Trust: Mechanics & Formalities - Oral
Trust may be oral unless it involves (a) real property or (b) is contained in a will
(statute of frauds)
Elements of a Valid Trust: Mechanics & Formalities - Pour over wills
Definition: will that leaves property to a previously existing inter vivos trust
Property goes into trust as trust exists at the date of the testator’s death, so amendments made to the trust after the will execution are effective to pour over
The property can be the initial trust funding if:
(1) Identified in the will and
(2) Trust executed before testator’s death
Elements of a Valid Trust: Mechanics & Formalities - Testamentary secret trusts
Definition: testamentary gift silent about trust nature of transfer, e.g. settlor agrees with beneficiary of will that beneficiary will hold property in trust for someone else but will does not state the trust nature of the gift
Effect: Alleged beneficiary (third party) can usually seek a constructive trust remedy against the will beneficiary (who should be the trustee)
Elements of a Valid Trust: Mechanics & Formalities - Testamentary semi-secret trusts
Testamentary gift is “in trust” but will does not indicate beneficiaries nor state terms
Effect: trust fails and property passes through testator’s estate to successors in interest (resulting trust)
Elements of a Valid Trust: Mechanics & Formalities - Inter vivos secret trusts
Grant of property looks outright on face but there is oral evidence that the grantee promised to use the property for another person’s benefit
Grantee is not bound, unless the alleged beneficiary can show an abuse of a confidential relationship, fraud, undue influence, or wrongdoing
Transfer of Beneficiaries’ Interests: Freely Transferable Interests Presumed
(1) Voluntary transfers (gifts and sales): unless trust provides otherwise, beneficiaries may transfer their equitable interests like other property
(2) Involuntary transfers (creditors): unless trust provides otherwise, beneficiary’s creditors may reach the beneficiary’s interest in the trust
Transfer of Beneficiaries’ Interests: Discretionary Trusts
Trustee (not settlor) determines how much, if anything, beneficiary receives.
Even if trustee has absolute discretion, a court will interfere if the trustee acts in bad faith or dishonestly
Beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses her power
Until trustee makes the transfer, (1) beneficiary has nothing to transfer and (2) nothing for creditor to reach
Spendthrift Trusts: Characteristics
(1) Beneficiary may not transfer interest in trust (while still in trust)
(2) Creditors cannot attach beneficiary’s trust interest
Spendthrift Trusts: Limitations on enforcement
(1) Ineffective if settlor is beneficiary (i.e. no self-settled spendthrift trust)
(2) May be ineffective against certain creditors, e.g., child support, spousal support, creditors who supplied necessaries to beneficiary
Trust Support Provisions
Definition: If use of trust property is limited to beneficiary’s support, trust may only be use for health, education, maintenance and support (HEMS)
Impliedly spendthrift
Standard: if instrument is silent, it is beneficiary’s accustomed standard of living before becoming a beneficiary
Trust Termination Terms
Most common way to terminate a trust is by its own terms
Settlor Termination or Modification of Trust
General rule: Settlor can modify or revoke, unless trust expressly restricts settlor’s ability by making the trust irrevocable
But, settlor may still revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests
Beneficiary Termination or Modification of Trust
Beneficiaries may agree to modify or terminate if all are true:
(1) All beneficiaries agree (unborn or unascertainable beneficiaries make this impossible)
(2) All beneficiaries are legally competent, and
(3) Settlor’s intent is not frustrated, either through (a) settlor’s consent or (b) modification or termination would not interfere with a material purpose of the trust (Claflin rule)
Termination or Modification of Trust by Operation of Law
(1) Property exhausted
(2) Merger of legal and equitable title
Termination or Modification of Trust by Court
(1) Trustee purposes accomplished
(2) Purposes of trust have become illegal
(3) Purposes of trust have become impossible
Duty of Trustee upon Termination
(1) Wind up trust business, within a reasonable period of time
(2) Distribute remaindermen beneificiaries
Trust Administration: Trustee’s Powers - Source
(1) Express powers:
(a) Granted by settlor in trust instrument
(b) Provided by state statute
(c) Decreed by court
(2) Implied powers: those which are necessary or appropriate to carrying out the terms of the trust if those powers are not expressly forbidden by the trust
Trust Administration: Trustee’s Powers - Exercise of Powers
(1) Multiple trustees: need a majority to act, but unanimity usually not required
(2) Mandatory powers (in trust)
(3) Discretionary powers: settlor may permit trustee to exercise some powers discretionarily:
(a) Liability for abuse of discretion or failure to exercise discretion
(b) Grant of absolute discretion is nonetheless subject to court review
Trust Administration: Trustee’s Duties
(1) Administer trust according to terms of trust
(2) Duty of loyalty to beneficiary
(3) Avoid self-dealing – trustee’s good faith or the fairness of transaction is irrelevant
(4) Keep accurate records and render accountings upon request
(5) General standard of care: care and skill of a prudent person; also, earmark/label trust property and segregate trust property (no comingling)
(6) Investments standard of care: prudent investor
(7) Duty to review trust property
(8) Duty of impartiality (among beneficiaries)
Trustee’s Duties - Investor’s Standard of Care
Standard: prudent investor, conduct viewed at time of decision
(a) Settlor is free to limit or expand types of investments trustee may make, or change the standard
(b) Certain language invokes the prudent investor standard (e.g., prudent person rule, prudent man rule, legal investments)
(c) Factors trustee must consider: (i) trust purposes, trust terms, distribution requirements, other circumstances; (ii) view all investments together (portfolio approach); (iii) comprehensive factors (extensive list, includes tax, appreciation, economic conditions etc); (iv) diversification is required (unless special circumstances)
Trustee’s Duties - Investor’s Standard of Care - Trustee skills
(a) Trustee with special skills or expertise is held to a higher standard
(b) Trustee who represents having special skills or expertise is bound by the standard accompanying such special skills
(c) Trustee with lower skills cannot excuse himself from general standard of prudent investor
Trustee’s Duties - Delegation of Duties
Trustee may delegate investment and management functions, but only if a prudent trustee of comparable skills could properly delegate under such circumstances
Must use reasonable care in:
(a) Selecting the agent
(b) Establishing the scope and terms of the delegation, and
(c) Periodically reviewing the agent’s actions
Remedies of Beneficiaries: Money Damages (from trustee personally)
If trustee breaches, beneficiary may be entitled one or more:
(1) Lost profits
(2) Depreciation in value of trust property
(c) Profits earned by trustee (even if trust wasn’t harmed)
Remedies of Beneficiaries: Self-Dealing
B may have choice of following remedies:
(1) Affirm transaction (if trust profited)
(2) Set aside transaction (if trust lost)
(3) Trace profits (if trustee profited)
Remedies of Beneficiaries: Removal of Trust
Absent instructions in the trust instrument, beneficiaries need to go to court to remove a trustee
(1) Grounds: incapacity, unfit, serious breach of duty, serious conflict of interest, insolvency, extreme hostility between trustee and beneficiaries, refusal to post required bond, refusal to account
(2) Courts consider settlor’s intent
Trustee’s Liabilities to Third Parties
(1) Contract liability: generally, trustee is liable; exception if there is a provision in the contract excluding trustee’s personal liability (including signing “as trustee”)
(2) Tort liability: generally, trustee is liable for own acts and acts of agents/employees via respondeat superior; but trustee can get indemnified or reimbursed if (a) trustee not personally at fault or (b) tort is normal incident of activity
Charitable Trusts: Purposes
Relief of poverty
Advancement of education, science, or art
Advancement of religion
Promotion of health
Governmental or municipal purposes (parks, museums)
Goals beneficial to the community
Charitable Trusts: Requirements
(1) Charitable purpose
(2) No special language needed
(3) Must be significantly altruistic in supplying benefits (i.e. big enough group of beneficiaries)
Charitable Trusts: Cy Pres Doctrine
When a change in circumstances has caused it to be impossible or impractical to carry out original trust purpose and the trust instrument is silent court can alter dispositive provisions to follow settlor’s intent:
(1) If settlor had general charitable intent broader than the impossible/impractical purpose, court can perform equitable approximation
(2) If settlor’s intent was specific, cy pres not available
Charitable Trusts: Rule Against Perpetuities
RAP n/a to charitable trusts
Charitable Trusts: Enforcement
By the attorney general
Resulting Trusts: General
Purpose: do what settlor would have done had he thought about it
Arises by implication from settlor’s conduct
Benefits the settlor or, if he is deceased, successors in interest (heirs or beneficiaries under will)
Resulting Trusts: Failed Express Trusts
There is an implied reversionary interest when (a) a trust fails and (b) the trust res is larger than necessary and does not provide for disposition of excess (i.e. no provision for remainder)
Purchase-Money Resulting Trust: Definition
Issue arises when one person pays the consideration for a transfer of property (real or personal) but has the title taken in the name of another
Seller –> Supplier of Purchase $ + Recipient of Legal Title
Possible scenarios:
(a) –> Settlor/Beneficiary of PMRT + Trustee of PMRT
(b) –> Donor + Donee
(c) –> Creditor + Debtor
Purchase-Money Resulting Trust: Presumptions
(a) If payor is a close relative (i.e., spouse, parent, grandparent) of grantee, presumption is GIFT not PMRT
(b) If payor is not a close relative of grantee, presumption is PMRT.
(c) If payor expects to be repaid, relationship is a LOAN not PMRT.
Constructive Trusts: Basic Principles
(1) It’s not a trust
(2) Not based on party’s interest
(3) Equitable remedy: it is an equitable remedy to prevent unjust enrichment
(4) Must be requested (in court action)
(5) Requires particular property
(6) Plaintiff must do equity to receive a constructive trust remedy
(7) Duty of Trustee is merely to convey
Constructive Trusts: Grounds to Impose
Non-exclusive list:
- Fraud
- Abuse of confidential relationships
- Promises made in contemplation of death
