Trusts

Question 1

Trusts defined

Answer 1

A trust is a fiduciary relationship in which a trustee hold legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated benficiaries, who hold equitable title. The testator or grantor who creates the trust is called the trustor or settlor.

Question 2

Types of trusts:

Answer 2

Trusts are classified according to the method of their creation: (i) EXPRESS TRUSTS, which arise from the expressed intention of the owner of property to create the relationship with respect to the property; (ii) RESULTING TRUSTS, which arise from the presumed intention of the owner of property; and (iii) CONSTRUCTIVE TRUSTS, which do not depend on intention but rather constitute a useful equitable remedy in cases involving wrongful conduct and unjust enrichment.

Question 3

Categories of express trusts:

Answer 3

Express trusts fall into two categories: private trusts and charitable trusts. These two categories of trusts are distinguished primarily by the identity of their beneficiaries. A PRIVATE TRUST is created for the benefit of certain ascertainable persons; thus, a trust “to T in trust for my husband, and at his death to my children,” is a private trust. A CHARITABLE TRUST, on the other hand, is created for the benefit of an indefinite class of persons or the public in general; thus, a trust providing scholarship funds for needy students at a named university is considered a charitable trust.

Question 4

Uniform Trust Act

Answer 4

In PA, express trusts are governed by the UTA, which has been adapted from the Uniform Trust Code, and which provides rules relating to the creation, modification, and termination of trusts; duties and powers of a trustee; relations among co-trustees; and the rights and interests of beneficiaries.

Question 5

UTA Mandatory Rules

Answer 5

In general, the terms of the trust govern the obligations of the trustee and the rights of the beneficiaries. But there are some mandatory rules of UTA that cannot be overridden in the terms of the trust:

1. The requirements for creating a trust;
2. The trustee’s duty to act in good faith and in accordance with the terms and purposes of the trust and the beneficiaries’ interest;
3. The requirement that the trust purposed be lawful and not contrary to public policy;
4. The power of a court to modify or terminate a trust;
5. The effect of a spendthrift provision;
6. The trustee’s duty to keep the beneficiaries informed of trust administration; and
7. The rights of third parties, such as bona fide purchasers, engaged in commerical transactions with the trustee.

Question 6

EXPRESS PRIVATE TRUSTS: elements

Answer 6

1. SETTLOR with capacity to convey;
2. a signed writing that indicates clear and unequivocal PRESENT INTENT to create a present trust relationship and states the terms of the trust;
3. a competent TRUSTEE with duties;
4. a definite BENEFICIARY; and
5. the same person is not the SOLE trustee and the SOLE beneficiary.

Additionally, there must be a present and unequivocal disposition in trust of SPECIFIC PROPERTY then owned by the settlor, and the trust must have a valid TRUST PURPOSE. Consideration is not required for the creation of a trust; in fact, trusts are usually created gratuitously.

Question 7

EXPRESS PRIVATE TRUSTS ELEMENTS: settlor must have capacity

Answer 7

The capacity required to create a revocable or testamentary trust is the same as that required to make a will. The settlor’s lack of legal capacity to convey prevents a trust from arising, and undue influence, fraud, or duress renders the trust unenforceable. Similarly, to create an irrevocable trust, the settlor must have legal power to convey the trust property.

Question 8

EXPRESS PRIVATE TRUSTS ELEMENTS: present intent to create a trust: MANIFESTED BY WRITING

Answer 8

MANIFESTED BY WRITING
The settlor’s WRITTEN manifestation of intention to create a trust is essential to the existence of an express trust. A trust may be created by the transfer of property under a written instrument to another person as trustee, written declaration signed by the property owner stating that the owner holds indentifiable property as trustee, or written exercise of a power of appointment in favor of a trustee. ORAL TRUSTS ARE UNENFORCEABLE.

DELIVERY OF DEED MAY MANIFEST INTENT
Although some external expression of trust intent is required, the failure of the settlor to communicate his intention to the beneficiaries or other persons does not prevent the creation of a trust. Delivery TO THE TRUSTEE of the deed creating the trust is sufficient.

Question 9

EXPRESS PRIVATE TRUSTS ELEMENTS: present intent to create a trust: MUST BE MANIFESTED WHILE SETTLOR OWNS PROPERTY AND PRIOR TO CONVEYANCE

Answer 9

MUST BE MANIFESTED WHILE SETTLOR OWNS PROPERTY AND PRIOR TO CONVEYANCE
The intention to create a trust must have been manifested by the settlor at a time when he owned the trust property and prior to its conveyance to another. One cannot convey property outright and later execute a trust instrument declaring that the transfer was actually one in trust.

MUST INTEND TRUST TO TAKE EFFECT IMMEDIATELY
The settlor must have intended the trust to take effect immediately and not at some future time (e.g., a promise by A to create a trust when he collects a debt from B does NOT create a trust now).

FUTURE INTEREST MAY BE TRUST RES
However, a presently declared trust can have as the trust res a future interest in property (e.g., A can convey “to B for life and then to C as trustee for D”; C has present duties to protect D’s equitable future interest).

EFFECT OF PROMISE TO CREATE A TRUST
If the settlor promises gratuitously to create a trust in the future, a trust arises in the future only if, at that time, the settlor manifests anew his intention to create the trust. Often this promise will be to hold property in trust when the property is acquired. On the other hand, if the pormise is SUPPORTED BY CONSIDERATION, the trust can arise in the future, when the property is acquired, without any further manifestation of intent.

Question 10

EXPRESS PRIVATE TRUSTS ELEMENTS: present intent to create a trust: PRECATORY EXPRESSIONS

Answer 10

PRECATORY EXPRESSIONS
Usually a settlor clearly directs the trustee to carry out the intended terms of the trust, but difficulties arise when the transferor merely expresses a hope, wish, or suggestion that the property be used for a certain purpose. A direction such as “to B with the hope that B will use the property to provide for the support of C” is precatory language. Most courts today infer from such language that NO TRUST was intended, but only that the trasferor wished his desires to be know so that the transferee could comply with t hem if willing to do so. This inference may be overcome if:

1. The directions are DEFINITE AND PRECISE, not vague;
2. The directions are address by a decedent to his EXECUTOR or ADMINISTRATOR, or to one who otherwise occupies the position of a fiduciary under the will;
3. Failure to impose a trust results in an “UNNATURAL” DISPOSITION by a testator (e.g., a close relative takes no interest under the will); or
4. Extrinsic evidence shows that the transferor had been supporting the alleged beneficiary PRIOR TO EXECUTING THE INSTRUMENT, and the “beneficiary” would not have sufficient means of support absent a finding that a trust was created (e.g., A gives property to B with what appears to be precatory directions to use the property for C’s benefit, but evidence shows that A had always supported C, suggesting that A intended to impose enforceable trust obligations on B).

Question 11

EXPRESS PRIVATE TRUSTS ELEMENTS: present intent to create a trust: INTENT TO CREATE TRUST RELATIONSHIP

Answer 11

INTENT TO CREATE TRUST RELATIONSHIP
Whether a trust is intended often depends on whether the consequences intended are those of a trust or some other relationship.

DISTINGUISH FROM AGENCY RELATIONSHIP
An agency relationship involves the continuing supervision of the agency by the principal, while the settlor of a trust has no power (unless specifically rserved) to supervise the trustee. The trustee is responsible only to the court of equity. In addition, the agent ordinarily has only the authority to deal with his principal’s property and does not have legal title, while the trustee has legal title to the trust property.

DISTINGUISHED FROM DEBTOR-CREDITOR RELATIONSHIP
A debtor-creditor relationship involves only a personal claim against the debtor while the beneficiary of a trust has equitable rights in specific property. Thus, no trust arises where a bequest is made upon condition that the legatee pay certain debts or legacies to a third party but the will’s language does not establish the testator’s intent to create a trust.

Question 12

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: general rule

Answer 12

Although a trustee is essential to the operation of a trust, once a trust is established it will not fail merely because of the trustee’s death, incapacity, resignation, or removal. Thus, where a will names X as trustee, the trust does not fail merely because X has predeceased the testator. A successor trustee will be appointed in order to carry out the testator’s intention, except in the unusual case where it clearly appears that the trust is to continue only as long as the originally designated trustee continues to serve.

Question 13

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: ACCEPTANCE OF TRUSTEESHIP

Answer 13

ACCEPTANCE OF TRUSTEESHIP
A person designated as trustee can accept the trusteeship by: (i) substantially complying with the method for acceptance stated in the trust instrument; or (ii) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance. If the trusteeship is not accepted within a reasonable time, iti s presumed to be rejected.

EXCEPTION–PRESERVING AND INSPECTING TRUST PROPERTY
The person designated as trustee can act to preserve the trust property and can inspect or investigate the trust property without accepting the trusteeship, provided he sends notice of the rejection to the settlor or a qualified beneficiary.

Question 14

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: ABSENCE OF TRUSTEE–TESTAMENTARY VS. INTER VIVOS TRUSTS

Answer 14

The refusal of a named trustee to accept an appointment or his failure to qualify, or even the complete failure to name a trustee in a will, does not defeat a TESTAMENTARY TRUST (a trust created by a will). On the other hand, because of the necessity of a present and effective transfer in order to create a TRUST BY DEED, the present and effective transfer in order to create a TRUST BY DEED, the absence of a trustee may result in an attempted INTER VIVOS trst (a trust created during settlor’s lifetime) failing for want of delivery. Such a trust fails because there has been no transfer–not because there was no trustee, for equity would supply the trustee had there been a valid delivery of the deed creating the trust.

Question 15

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: TRUSTEE MUST HAVE DUTIES

Answer 15

The settlor must intend to impose enforceable duties on the trustee. If the duties are not spelled out in the trust instrument, the court will usually imply duties if there is an intention to create a trust, a res, and an identified beneficiary.

Question 16

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: QUALIFICATIONS OF TRUSTEE

Answer 16

1. CAPACITY TO ACQUIRE OR HOLD TITLE FOR ONE’S OWN BENEFIT
   In the absence of a statute, anyone who has capacity to acquire or hold title to property for his own benefit has capacity to take property as a trustee. Unincorporated associates can be trustees only where they can hold title to property for their own benefit. If a partnership cannot hold title to property, a purported transfer to the partnership in trust may be deemed to be a transfer to the partners individually as trustees.
2. ADMINSTRATIVE CAPACITY
   Although a party may have capacity to take and hold property as a trustee, he may not have the capacity to administer it. For example, minors or insane persons may take title to property, but because their contracts or acts are usually voidable, they are generally held to lack capacity to adminnister the trust. Such a trustee will be removed by the court and replaced with a qualified trustee.
3. STATUTORY LIMITATIONS ON RIGHT TO SERVE AS TRUSTEE
   Statutes sometimes limit the right of some persons or corporations to serve as trustees. This is particularly common in the case of testamentary trusts. Foreign corporations are often denied the right to conduct trust business in states other than their state of incorporation.

Question 17

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: COMPENSATION AND REIMBURSEMENT

Answer 17

A trustee is entitled to reasonable compensation for to compensation as specified in the trust instrument (as adjusted by the court when necessary). A trustee is entitled to reimbursement for expenses incurred in the trust’s administration and any other expenses that resulted in a benefit to the trust.

Question 18

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: REMOVAL OF TRUSTEE

Answer 18

The court may remove a trustee on its own motion or upon request by the settlor, a beneficiary (unless the trust is revocable and the settlor has capacity), or a co-trustee.

GROUNDS FOR REMOVAL
Basically, a court may remove a trustee if his continuation in office would be detrimental to the trust (taking into consideration both the settlor’s intent and the interests of the beneficiaries). There are numerous grounds upon which a trustee may be removed, including the following:

1. Commission of a serious BREACH OF TRUST;
2. LACK OF COOPERATION among co-trustees that substantially impairs trust administration;
3. UNFITNESS, UNWILLINGNESS, OR PERSISTENT FAILURE to administer the trust; or
4. SUBSTANTIAL CHANGE OF CIRCUMSTNACES.

Question 19

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: DISCLAIMER OR RESIGNATION BY TRUSTEE

Answer 19

A trustee who has not accepted the trust–either expressly, by implication, or by contracting in advance to do so–can disclaim and refuse appointment arbitrarily. However, he cannot accept a trust in part and disclaim it in part. Also, after having accepted the trust, the trustee cannot thereafter disclaim; the problem then becomes on of resignation.

RELATION BACK OF ACCEPTANCE
The trustee’s acceptance of a testamentary trust “relates back” to the settlor’s death, becaue the trsut is treated as having been in existence from that date. Thus, it is possible for the trustee, by accepting, to become liable (in his fiduciairy capacity) on tort claims arising prior to the time he accepted.

RESIGNATION
Once a trustee has accepted appointment, he can resign by either; (1) getting the consent of all qualified beneficiaries and co-trustees in writing (there must be at least one co-trustee); or (ii) obtaining court approval unless the trust instruments names a successor trustee or provides a method for appointing a successor trustee; furthermore, the resignation is not effective until the successor trustee ACCEPTS THE APPOINTMENT IN WRITING.

Question 20

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: SUCCESSOR TRUSTEE

Answer 20

A successor trustee succeeds to all of the rights, powers, and privileges of the original trustee and is subject to all of the original trustee’s duties, liabilities, and responsibilities. A vacancy in the trusteeship is filled in the following order of priority: (i) person designated in the trust instrument as successor trustee, (ii) person selected by unanimous written agreement of the qualified beneficiaries (for charitable trusts, the attorney general must concur in the selection), and (iii) person appointed by the court.

Question 21

EXPRESS PRIVATE TRUSTS ELEMENTS: trustee: MERGER OF TITLE WHERE SOLE TRUSTEE IS ALSO SOLE BENEFICIARY

Answer 21

Where the sole trustee, who holds legal title, and the sole beneficiary, who holds equitable title, are one and the same person, there is a merger of the legal and equitable titles. This defeats and terminates the trust, creating a fee simple absolute in the trustee–beneficiary. If the trustee does not hold precisely the same interests, both legal and equitable, there is no merger and the trust continues. The existence of either multiple trustees or multiple beneficiaries will normally preclude merger.

Question 22

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Answer 22

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Question 23

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: general rule

Answer 23

Generally, a trust cannot exist without someone to enforce it. Thus a beneficiary is NECESSARY TO THE VALIDITY of every trust except charitable trusts (which can be enforced by the state attorney general although the beneficiaries are indefinite) and so called honorary trusts (e.g., trusts for animals or to maintain graves). A private trust requires that there be DEFINITE BENEFICIARIES (beneficiaries who can be ascertained now or in the future, subject to any applicable Rule Against Perpetuities).

Question 24

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: QUALIFIED BENEFICIARY

Answer 24

A qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is:

1. a CURRENT BENEFICIARY; or
2. a FIRST-LINE REMAINDERMAN (i.e., one who would become eligible to receive distributions were the event triggering the termination of a beneficiaries interest or of the trust itself to occur on the qualification date).

Status as a qualified beneficiary is important in determining which beneficiaries must be given notice of or must give consent to certain actions.

Question 25

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: CAPACITY

Answer 25

Any person, natural or artificial, capable of taking and holding title to property can be a beneficiary of a private trust. An unincorporated association, which has no capacity to take title, cannot be a trustee, and it is doubtful that it can be a beneficiary of a trust because it is not a legally recognized person.

Question 26

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: INCIDENTAL AND INDIRECT BENEFICIARIES

Answer 26

Not every person who stands to benefit from the operation of a trust is to be regarded as a “beneficiary.” If the trust operates only incidentally to benefit a person, that person is not a beneficiary and cannot enforce rights thereunder.

NAME ATTORNEY NOT DEEMED BENEFICIARY
Where a trust requires the trustee to employe a named attorney for the trust, the attorney is not deemed a beneficiary and has no right to enforce a provision for his appointment. The trustee can refuse to employ the attorney, and in fact should do so, when he feels that the best interests of the trust will not be served by the appointment. However, the right to have the named person appointed as the attorney is a term of trust presumably intended for the benefit of the beneficiaries, and the failure to make the appointment would be actionable by the beneficiaries (rather than by the attorney) if it resulted in a loss to the trust.

Question 27

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: NOTICE TO AND ACCEPTANCE BY BENEFICIARY

Answer 27

Notice to the beneficiary that the trust is being created for his benefit is not essential to the validity of the trust. (The failure to give such notice may, however, serve as evidence contesting an alleged present intention to create a trust.) However, the beneficiary must accept his rights under the trust. A TRUST CANNOT BE FORCED on the beneficiary without his acceptance.

ACCEPTANCE MAY BE EXPRESS OR IMPLIED: even by silence or inaction, and the acceptance of a beneficial interest is NORMALLY PRESUMED. The acceptance, whether express or implied, relates back to the date the trust was created.

BENEFICIARY MAY RENOUNCE BEFORE ACCEPTANCE: before acceptance, and within a reasonable time after learning of the creation of the trust, the beneficiary may renounce or disclaim his rights thereunder.

Question 28

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: DEFINITENESS OF BENEFICIARIES UNDER PRIVATE TRUST

Answer 28

To have a private trust, there must be definite beneficiaries. Otherwise, there would be no one to enforce the trust, and the trustee could appropriate the trust property for himself, which is not what the settlor intended.

UNASCERTAINED BENEFICIARIES: Beneficiaries need not be identified at the time a trust is created, but they must be ABLE TO BE ASCERTAINED in the future, subject to any applicable Rule Against Perpetuities.

UNBORN BENEFICIARIES
An unborn beneficiary may be described in the instrument, and the trust will be valid even as to his interest. Sufficient that they would be susceptible of identification at the time their interests were to come into enjoyment.

DETERMINING IDENTITIES OF UNASCERTAINED BENEFICIARIES: The means by which the unascertained beneficiaries are to be determined must satisfy the formal requirements necessary for the creation of a trust. They must be described in a manner that satisfies the Statute of Wills or the Statute of Frauds, although methods such as INCORPORATION BY REFERENCE and ACTS OF INDEPENDENT SIGNIFICANCE may be relied upon in the same fashion that they may be relied upon to complete the terms of a will.

CLASS GIFTS
A private trust may exist for the benefit of members of a class.  At common law, the select beneficiary from an INDEFINITE class is valid.  If the power, with respect to a noncharitable trust, is not exercised within a reasonable time, the power fails and the property subject to the power passes to the persons who would have taken the property had the power not been conferred.

Question 29

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: RESULTING TRUST REMEDY WHEN EXPRESS TRUST INVALID

Answer 29

If a trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or his successors is presumed.

Question 30

EXPRESS PRIVATE TRUSTS ELEMENTS: beneficiaries: CHARITABLE TRUSTS NEED NOT HAVE DEFINITE BENEFICIARIES

Answer 30

The requirement of definite beneficiaries does not apply to charitable trusts, when the charitable purpose may be quite broad and the beneficiaries left for the determination fo the trustee.

Question 31

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: NO RES

Answer 31

NO RES–NO TRUST

Where there is no trust property, the trust fails because the trustee has no property to manage.

Question 32

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: PROPERTY TYPE

Answer 32

PROPERTY MAY BE OF ANY TYPE
The property may be real or personal, tangible or intangible, legal or equitable, and it may be either a present interest or a future interest, whether vested or contingent.

Question 33

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: INTEREST TYPE

Answer 33

TRUST PROPERTY MUST BE AN EXISTING INTEREST IN EXISTING PROPERTY
An interest that has not yet come into LEGAL EXISTENCE cannot be held in trust (e.g., a son’s hope of inheriting his father’s property). If there is no trust res when the trust instrument is executed, the trust will not come into effect when the res comes into existence unless the settlor at that time manifests anew an intention to create a trust.

FUTURE EARNINGS CAN BE TRUST RES: Future earnings from an EXISTING CONTRACT or employment can be the res of a trust, but it is doubtful whether earnings from a contract or employment not yet in existence could be the res.

DOCTRINE OF POTENTIAL POSSESSION–FUTURE CROPS, UNBORN ANIMALS
Under the mortgage doctrine of potential possession (which may not be applied to trusts), a person has a present interest in a thing to be produced if he has the means of producing the things. Thus future crops or unborn animals might constitute a res if the settlor owns the land or the mother animal.

Question 34

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: PROPERTY THAT SETTLOR HAS POWER TO CONVEY CAN BE SUBJECT OF TRUST

Answer 34

The trust res must be existing property that the settlor has the power to convey. The res NEED NOT BE TANGIBLE property, but the settlor must have an assignable interest. Thus, a promissory note, a contract, a patent or royalty interest, and a future interest can be the subject of a trust.

Question 35

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: TRUST RES MUST BE SEGREGATED FROM OTHER PROPERTY

Answer 35

The requirement that the trust property be identifiable and segregated means that the property is described with such certainty that it can be ascertained from existing facts. A person cannot declare himself trustee of “the bulk of my estate,” because the description is too indefinite. But a conveyance of “all of my real property except Blackacre” is effective because by inventorying all of the settlor’s real property on the date of the conveyance and excluding Blackacre, the identity of the trust estate can be identified.

RES MAY INCLUDE FRACTIONAL OR UNDIVIDED INTERESTS
A trust res may be, or may include, fractional or undivided interests in specific property, and it may include patents, copyrights, choses in action, and an almost limitless variety of other types of property. Because of the possibility of holding undivided interests in trust, it is proable (although the law is not settled and courts are divided) that the requirement of identification and segregation is satisfied where on declares himself trustee or otherwise purports to create a trust of a particular quantum or portion of fungible goods, such as “half the gain in my storehouse” or $10,000 of the cash in my safe deposit box” (which contains more than that amount at the time.)

Question 36

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: DEBTOR CANNO HOLD OWN DEBTS IN TRUST

Answer 36

A person cannot be a trustee of his own debt to another.

Question 37

EXPRESS PRIVATE TRUSTS ELEMENTS: trust property: GRATUITOUS PROMISE

Answer 37

An unenforceable gratuitous promise cannot be the subject of a trust.

Question 38

GENERAL RULE

Answer 38

Trusts may be created for any purpose that is not deemed illegal or contrary to public policy. A trust will fail if it was created to defraud the settlor’s creditor’s or was based on an illegal consideration.