Trusts Flashcards
Express Trust Definition
Legal device that allows an owner of property to make transfers of property and to have those assets managed by someone else
Two kinds of express trusts
Lifetime- set up during the lifetime of the settlor
Testamentary- created by the settlor’s will
Requirements for valid trust (8)
1) Settlor
2) Delivery of legal title
3) Property
4) Trustee
5) Beneficiary
6) Intent to create trust
7) Lawful purpose
8) Validly executed
Requirements for settlor
1) Must be 18 or older
2) Must have capacity to enter into contracts
Requirements for property that can be transferred in trust
1) Owned by settlor (not merely an expectancy)
2) Must be identified property, not subject to future determination
Who can be a trustee?
For a lifetime trust- pretty much everyone
For a testamentary trust- anyone other than
a) Those under 18
b) Judicially declared incompetents
c) Convicted felons
d) Those incapable because of drunkenness, dishonesty, want of understanding, or improvidence
Non-resident alien can serve as trustee only if
1) Related to settlor AND
2) A New York resident serves as co-fiduciary
Intent requirement for trusts
Settlor must intend to create enforceable trust; precatory language insufficient
Three implications of lawful purpose requirement
1) Trust cannot call for commission of a crime
2) Trust cannot call for destruction of property
3) Trust cannot have a condition against public policy
Requirements for trust execution
Must be in writing signed by both settlor and trustee AND EITHER
1) Notorized
2) Signed by two witnesses
All trusts are presumed ______
Irrevocable unless provided otherwise
Pour-Over Gifts
Testamentary gifts to an existing revocable trust
Requirements for pour-over gifts
1) Trust must be in existence or
2) Executed concurrently with the will
Ways to make life-insurance proceeds payable to trust
1) Create unfunded revocable insurance trust and name the trustee as the policy beneficiary
2) Have the trust be testamentary and have the life insurance policy contract name “the trustee named in my will” as beneficiary
Totten trust
Bank account in depositor’s name “as trustee for” a beneficiary (no particular words needed)
Two things to remember about Totten trusts
1) Depositor makes deposits and withdrawals as he wishes during his lifetime
2) Beneficiary has no beneficial interest in the trust until depositor dies
Ways to revoke Totten trust (4)
1) Withdraw all money in account
2) Express revocation during lifetime by making a writing (i) naming beneficiary (ii) and financial institution (iii) and having the revocation notarized (iv) and delivered to the bank
3) Revocation in a will (complying with express revocation requirements)
4) Death of beneficiary
Change of beneficiary of Totten trust
Must comply with same requirements for revocation (making a writing (i) naming beneficiary (ii) and financial institution (iii) and having the revocation notarized (iv) and delivered to the bank)
UTMA
Uniform Transfers to Minors Act
Duties of UTMA custodian
1) Hold, manage, and invest the property under a “prudent person” standard
2) Pay over to the minor or for the minor’s needs what part of the property the custodian deems advisable
3) Pay what is left of the property to the minor when he turns 21 (18 for a pre-1997 gift)
UTMA Tax Consequences
1) If donor names himself as custodian- amount of gift includible in estate for tax purposes
2) If donor names someone else, amount of gift is not includable
Charitable Trust Key Points (5)
1) Must have indefinite beneficiaries in a reasonably large group (no specific, named beneficiaries)
2) Must be held for a charitable purpose
3) May be perpetual
4) Cy pres can be used to change the trust if stated purpose of charitable trust can no longer be accomplished
5) AG has duty of representing beneficiaries and is therefore an indispensable party (with standing to sue)
Honorary Trusts
Trust where no human being is beneficiary
Exceptions where honorary trust valid
1) Pet trusts for duration of pet’s life
2) Cemetery trusts (treated as charitable, so no RAP problem)
Constructive trusts
Disgorges unjust enrichment. Trustee has a duty to convey the property to the rightful owner in equity
Purchase Money Resulting Trust (rule and exceptions)
Purchaser buys property and has title put in someone else’s name. Generally not recognized.
Exceptions:
1) Creditors of purchaser will not be defeated by the transfer
2) If clear and convincing evidence that transferee originally planned to reconvey, constructive trust is created
Spendthrift Rule
Prohibits voluntary and involuntary transfers of the beneficiary’s interest
NY’s Spendthrift Rule automatically protects
Income interests in irrevocable trusts, not in principal
Exceptions to spendthrift clause (5)
1) Supplier of necessaries
2) Federal tax liens
3) Child support and alimony
4) Excess income beyond that needed for support and education (LAST RESORT)
5) 10% levy for judgment creditors provided by CPLR
Spendthrift protection does not apply to (3)
1) Principal interests
2) Interest retained by settlor
3) Revocable trusts
Modification of trust only permitted where
The objectives of the trust would be defeated or substantially impaired if the trust is not modified
Claflin doctrine
Purpose of the trust overrides specific directions
Invasion of Principal
Court can authorize where income is not enough to carry out the settlor’s purpose
Terminability of Irrevocable Trust
Trustee can terminate with consent of all beneficiaries in being (requires them to be born)
Termination of trust by beneficiaries- Requires that all the beneficiaries consent and there is no further trust purpose to be served (based on Claflin)
Spendthrift trusts may not be terminated
Trustee’s powers are controlled by ______
New York Fiduciary Powers Act (FPA)
Trustee may not (3)
1) Engage in self-dealing
2) Borrow money
3) Continue a business
Prohibitions of self-dealing (5)
1) Borrow trust funds
2) Lend money to the trust (any interest earned must be returned and security given is invalid)
3) Cannot buy or sell trust assets to himself
4) Cannot profit from serving as trustee (including taking advantage of confidential information)
5) Corporate trustee cannot buy its own stock as a trust investment
Affirmative duties on self-dealing (2)
1) Segregate assets from personal assets
2) Earmark trust assets by titling them in trustee’s name
Remedies for breach of fiduciary responsibility
1) Beneficiary can sue to remove the trustee
2) Beneficiary can ratify the transaction and waive the breech
3) Beneficiary can sue for any loss
Actions against a 3rd party for trustee self-dealing
Cannot recover if 3rd party was BFP (will be BFP unless he knows that he was dealing with a trustee and that there is self-dealing)
Exculpatory clauses for trustee misconduct
Can be used for lifetime trust, not for testamentary trust
Personal Liability of Trustee in Contract
If signed only on behalf of trust, no personal liability
If signed personally and merely mentioned trust, personal liability imposed
Where there is personal liability for trustee in contract, he can recover if
1) Contract was within the powers of the trustee AND
2) Was acting in the course of proper administration of the trust
Personal Liability for Trustee in Tort
Personally liable for all torts by him or his employees
Trustee can seek reimbursemet from trust in tort if
1) Trustee was acting within his powers AND
2) Trustee was not personally at fault
Trustee’s investment powers governed by
Uniform Prudent Investor Act
Under UPIA, trustee can pursue the
modern portfolio where he creates a “custom-tailored investment strategy
Two Key factors under UPIA
1) Trustee must consider the role each investment plays within the overall trust portfolio
2) Trustee must consider the expected total return from income and capital gain
NY Rule Against Suspension
Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years, that is there are no persons who together could transfer a fee simple absolute
Suspension of alienation is a concern where
1) Spendthrift income interests are in the trust
2) Life estate is create in an unborn, or an open class may possibly included unborn persons
