Trusts Flashcards
Trustee Powers
Trustee has all powers enumerated in Trust
AND
Implied powers to carry out trust purpose
E.g. sell res, incur expenses, lease, encumber
Spendthrift OR Support OR Discretionary Trust for Settlor
- Majority view on involuntary alienation: Trust is valid but provisions are not recognized
- Minority view on involuntary alienation: recognized and may insulate from creditors
Support Trusts
Trustee MUST use res but ONLY so much of the income or principal as is NECESSARY for Ben’s Health, Education, Maintenance, Support (HEMS) as opposed to just reasonable comfort.
- MUST expressly state in Trust e.g. “Trustee must use only so much of income/principal as necessary for Ben’s HEMS”
- Ben cannot transfer interest AND creditors cannot attach even if Ben has present right to mandatory distribution
- Exceptions: certain creditors can attach
CL creditors: Gov creditor (e.g. IRS), creditor provides necessities of life to Ben, Child support, Spousal support, Alimony, Tort judgment
Modern: ANY creditor may attach BUT only surplus as measured by Ben’s station in life (subjective std)
Private Express Trust
A fiduciary relationship w/respect to property whereby the Trustee holds legal title for the benefit of the Ben and which arises out of a manifestation of intent to create it for legal purpose
Who hold title in a trust?
- Settlor transfers legal title of Real Prop to Trustee (MUST satisfy SoF)
- Settlor must deliver personal prop to Trustee
- Settlor may be trustee:
For Real Prop must have SOME writing to satisfy SoF but no transfer or legal title is executed
For Personal Prop: no delivery required
Cy Pres doctrine
If Charitable Trust of general intent + not enough money (trust prop) to achieve trust purpose, Ct may
1) deem a resulting trust: res is returned to settlor or settlor’s estate (residuary, if any, or intestate)
OR
2) apply Cy Pres: Ct modifies mechanism to effecutates Settlor’s general charitable intent (intrinsic and extrinsic evidence allowed to determine intent)
- DO NOT apply Cy pres if Settlor has specific charitable intent
- RAP does not apply to charitable trusts
Alienation of Trust property
- Voluntary: Ben may alienate interest
- Involuntary: creditors may involuntarily alienate Ben’s interest by attachment or seizure
Charitable Trusts
Same elements as a private express trust:
1) Writing
2) Present manifestation of intent
3) Trust prop
4) BUT no ascertainable Ben (for benefit of Society as a group)
5) Charitable purpose: Confers a substantial benefit upon society
E.g. help the poor, advance edu, help sick, promote religion
- Cy pres (as nearly as possible): if not enough res + Settlor has General charitable intent: Ct applies resulting trust OR Cy Pres (mods mechanism to effectuate Settlor’s general charitable intent
- DO NOT apply Cy pres if Settlor has specific charitable intent
- RAP does not apply to charitable trusts
Termination of Trusts
Revocable Trusts
- Majority: Settlor MUST expressly reserve the power in the trust
- Minority (CA): Settlor HAS the power to revoke UNLESS expressly made irrevocable
Irrevocable Trusts
- Settlor and ALL Bens (including contingent remainders through guardian ad litem) agree to terminate
- ALL Bens (including contingent remainders w/guardian) agree to terminate AND all material purposes have been accomplished
- By Operation of Law: Trustee has not active duties (Trust is passive)
Discretionary Trust
Trustee is given SOLE and ABSOLUTE discretion in determining how much to pay Ben, if anything, AND when to pay Ben, if ever
- MUST expressly state in Trust e.g. “Trustee shall have full, sole, absolute discretion in determining to pay Ben”
- Ben cannot transfer interest because res may never be paid BUT if Ben assigns interest, assignee steps in Ben’s shoes
- Creditors cannot attach because res may never get paid BUT if Trustee is has notice of debt, when Trustee decides to pay, it MUST pay creditor or held personally liable
- Exceptions: certain creditors can attach
CL creditors: Gov creditor (e.g. IRS), creditor provides necessities of life to Ben, Child support, Spousal support, Alimony, Tort judgment
Modern: ANY creditor may attach BUT only surplus as measured by Ben’s station in life (subjective std)
Spendthrift Trust
Because Ben can voluntarily alienate interest in trust prop and creditors can involuntarily alienate Ben’s interest (attach or seize), Settlor can set up a ST
- MUST expressly state in Trust e.g. “Ben’s interest in income and/or principal is not subject to voluntary or involuntary transfer,”
- Ben cannot transfer interest AND creditors cannot attach even if Ben has present right to mandatory distribution
- Exceptions: certain creditors can attach
CL creditors: Gov creditor (e.g. IRS), creditor provides necessities of life to Ben, Child support, Spousal support, Alimony, Tort judgment
Modern: ANY creditor may attach BUT only surplus as measured by Ben’s station in life (subjective std)
Mix Discretionary and Support Trust
If Trust creates a mix between discretionary + support (e.g. Trustee has sole discretion to pay for Ben’s HEMS) then analyze under BOTH theories
Testamentary Trust
Trust created to take effect at Settlor’s death
MUST comply w/CA Probate Code
Powers of Co-Trustees
Must act by majority decision because powers are NOT personal to the trustee named
Resulting Trust
Resulting Trust: returns res to Settlor or Settlor’s Estate
Apply to
- Private express trust ends on its own terms
- Private express trust fails because no Ben
- Private express trust fails because illegality
- Charitable trust ends because impossibility or impracticability
- Semi-secret trust (gift to an unnamed Ben)
- For secret trusts: Will gift to A w/oral promise to be Trustee for Ben, apply parol evidence to establish Ben’s ID
Trustee Duty
Trustee owes to Trust and Bens
– Duty of Loyalty: admin trust for benefit of Bens AND no self-dealing
Breach: Trustee is surcharged for loss + disgorge if profited
– Duty to invest: MUST diversify to prevent loss under ANY std below
1) State law listed investments
Invest: Fed Gov Bonds, FDIC Certs, First Deeds of Trust in RE
NOT new buss, second deeds of trust in RE
2) CL: invest as a RPP investing his own prop trying to maximize income while preserving res
Invest: same list
NOT new buss, second deeds of trust in RE
3) Prudent Investor Rule:
- Trustee is NOT a market guarantor
- Look at overall performance
- Trustee may delegate investment and management (MUST exercise prudence when selecting an agent) BUT CANNOT delegate decision-making
Breach: Trustee is surcharged for loss + disgorge if profited
– Duty to Earmark: label trust prop
Breach: trustee held personally liab ONLY if loss is caused by breach
– Duty to Segregate: cannot commingle personal prop w/trust prop OR between Trusts
– Duty not to Delegate: may rely on professional advice BUT cannot delegate decsion-making autho
– Duty to Account: Give accounting of income and expenses to Ben
Breach: Ben can file action to force accounting
– Duty of Care: act as a RPP dealing w/own affairs
– Duty of Impartiability: cannot favor between Bens
-*- APPLY at least three or four duties and ALWAYS discuss Due Care
Trustee liab to TP
Liability in K
- CL: Trustee can be sued personal capacity BUT if trustee acted w/in power may be indemnified from trust assets
- Modern: If TP knows trustee’s role ONLY sue in representative capacity
Liability in Tort
- CL: sued in personal capacity BUT indemnified if w/o fault
- Modern: sued individual capacity ONLY if personally at fault
Modification of Trust
- Settlor may modify trust ONLY if Settlor reserves the POWER to modify the trust OR the POWER to revoke
- Ct has two powers to mod trust
1) Cy Pres: Ct modifies mechanism to effecutates Settlor’s general charitable intent
2) Deviation: Ct changes admin or management provisions (NOT change the Bens)
Elements for deviation: unforeseen circumstances by Settlor AND necessity to preserve the trust
Honorary Trusts
Trust which has NO ascertainable Ben and confers NO substantial benefit upon society
- Trustee is NOT required to carry out Settlor’s goal but may (Trustee’s discretion)
- Apply RAP to strike the Trust at inception and Ct deems it a resulting trust and returns res to Settlor or Settlor’s estate (residuary, if any, then heirs)
Trust Elements
1) Writing
2) Present manifestation of Settlor’s intent to create trust (effective at death by will, or during lifetime)
NOT: outright gift, precatory language (wish, hope, desire)
- If precatory words = transferee owns in fee simple
3) Trust is funded with trust res/corpus/prop
Fee simple, future interest (e.g. contingent remainder), life ins, bonds, stocks
NOT: illusory interests (e.g. future profits, expectancy, etc)
4) Ascertainable Bens (reasonable certainty)
Natural person OR Corp
Secret Trust: Will gift to A w/oral promise that A is trustee for Ben (apply parol evidence to determine Ben’s ID)
Semi-secret trust: Trust for unnamed Ben = resulting trust
Defined class gift
NOT: ECO subject to RAP unless Charitable trust
5) Valid purpose
- Illegality at creation (e.g. trust w/condition not to marry): separate good from bad, if not possible Trust is invalid OR trustee keeps Prop
- Illegality after creation: Ct decrees it a “resulting trust” w/only purpose of transferring prop back to Settlor, or Settlor’s estate (residuary, if any, or heirs)
Trustee Duties owed TO under revocable vs irrevocable
- Revocable Trust
Trustee’s duties are owed EXCLUSIVELY to Settlor - Irrevocable Trust
Trustee’s duties are owed EXCLUSIVELY to trust Bens
Remedies for Breach of Trustee Duties
- Damages: Compensatory (FACUE)
- Constructive trust + disgorge profits
- Tracing equitable lien on prop
- Ratify transaction if it benefits Ben
- Remove trustee
- Restitution
APPLY at least three or four duties and ALWAYS discuss Due Care
