Trusts Flashcards
Revocable Trust
Can be terminated by the settlor at any time
Irrevocable Trust
Cannot be terminated by the settlor
If the trust is silent as to revocability, it is presumed
Revocable
Mandatory trust
Requires the trustee to distribute all trust income
Discretionary Trust
Gives the trustee power to distribute income at his discretion
Parties to a Trust
Settlor
Trustee
Ascertainable Beneficiary
Doctrine of Merger
Same individual cannot serve as the sole trustee and the sole beneficiary
What happens if the settlor fails to appoint a trustee?
The court will appoint one
Mandatory Rules that cannot be changed by trust
- Creation requirements
- Trustee’s fiduciary duties
- Trust purpose must be lawful
- Court’s power to modify/terminate a trust
- Effect of a spendthrift provision
- Rights of 3rd parties engaging in transaction with trustee
Private Express Trust
Clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries
Elements of Private Express Trust
- Intent to make a gift in writing, prior to or simultaneously with transfer of the property
- Trust Property, identifiable, segregated, and described with reasonable certainty
- Valid trust purpose (not illegal or contrary to public policy)
- Ascertainable Beneficiaries
Creation of Express Trust: Inter Vivos
Writing is only required for real property
Delivery must accompany the declaration if a third party trustee is named, whereby the settlor parts with dominion and control over the trust property
Creation of Express Trust: Testamentary
Occurs when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will
- Secret trust
- Semi-secret trust
Secret Trust
Looks like a testamentary gift, but is created in reliance on the named beneficiary’s promise to hold and administer the property for another
Extrinsic evidence permitted
Semi-Secret Trust
Occurs when gift is directed in a will to be held in trust, but testator fails to name a beneficiary or specify terms/purpose of trust
No extrinsic evidence permitted
Remedial Trusts
An equitable remedy not subject to trust requirements
Resulting Trust: what
When a trust fails, the court will create a resulting trust requiring the holder of the property to return it to the settlor or his estate to prevent unjust enrichment
Resulting Trust: when imposed
- A party other than the holder of trust property supplied consideration (rebuttable presumption of unjust enrichment)
- Failure of Express trust
- Incomplete disposition of trust assets due to excess corpus
Constructive Trust
Used to prevent unjust enrichment if the settlor causes fraud, duress, undue influence, breach of duty, or detrimental reliance by a third party on a false representation
Gift-over Clause
Provide for the disposition of trust property if the trust purpose fails
General Rule for Reach of Creditors
Creditors can only reach what the beneficiary can reach
Alienation of Beneficiary’s equitable interest
Freely alienable but may be subject to involuntary alienation (e.g., creditors)
Spendthrift Trust
expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest
Support Trust
Directs the trustee to pay income or principal necessary to support the beneficiary
Automatic Termination of Trust
A trust terminates automatically only when the trust purpose has been accomplished
How can a trustee block premature termination?
If the trust is shown to have an unfulfilled material purpose
Revocation by will
Permissible unless the trust expressly provides for another method
Court Modification and Termination
- Unanticipated events have caused trust purposes to be frustrated
- Trust’s purpose has been achieved
- Trust’s purpose has become illegal, impracticable, or impossible
Trustee’s power to terminate
None, unless the trust contains express termination provisions
Settlor’s ability to amend or revoke
TX trust is presumed to be amendable or revocable unless settlor explicitly states otherwise
Removal of Trustee
An interested party may petition the court for removal of the trustee if the trustee -
- has materially violated term of trust resulting in financial loss
- has become incapacitated/insolvent
- Fails to make required accounting
- Other just cause exists
Balanced Allocation Rule
Focuses on the total return of the portfolio, such that the trustee is empowered to re-characterize items and reallocate investment returns as he deems reasonably necessary to fulfill the trust purpose
Factors Considered under the Balanced Allocation Rule
- intent of settlor and language of trust document
- nature, size, likely duration, and purpose of trust
- Identities and circumstances of the beneficiaries
- Relative needs for income
- Net amount allocated to income and increase/decrease in value of principal assets
- Anticipated effect of economic conditions on income and principal
- Anticipated consequences of adjustment
Trustee’s Duty Upon Acceptance of Trusteeship
The trustee must safeguard property by purchasing insurance, earmarking assets, recording deeds, identifying and locating beneficiaries, and following settlor’s instructions
Powers of the Trustee
TX trustee’s powers include all powers that an individual would have over her own property, all powers reasonable necessary to administer the trust, and all other powers granted
Trustee’s Power to Sell
a trustee cannot sell certain property as specified by the settlor without a valid court order permitting the sale upon court finding sale is necessary to save trust
Liability of Third Parties
Can be liable for role in breach of trust
Must carefully inspect trust property before dealing with trustee
Trustee’s Duty of Loyalty and Good Faith
Duty to Administer the trust in good faith and to act reasonably when investing property and otherwise managing trust solely in best interests of beneficiaries
Self-dealing by the trustee =
A per se breach of the duty of loyalty
Prohibited Transactions
Buying/selling trust assets
Selling property between trusts that trustee manages
Using trust assets to secure a personal loan
Engaging in prohibited transactions with friends/relatives
Otherwise acting for personal gain through the trustee position
Standard for evaluating conflicts of interest
Assessed under “reasonable and in good faith” standard if not self dealing
Co-trustee liability
Jointly liable for:
- consenting to action constituting breach;
- negligently failing to act to prevent breach;
- concealing breach or failing to compel redress;
- improperly delegating authority to co-trustee
Trustee’s Liability to Third Parties
Personally liable (unless otherwise specified in trust instrument) on contracts entered into or tortious acts committed while acting as trustee if entered into or committed personally
Duty of Prudence
Trustee may delegate responsibilities if it would be unreasonable for the settlor to require the trustee to perform such tasks.
However, a critical function concerning the property is discretionary and not delegable
Trustee cannot delegate duties in their entirety; limited to delegation of ministerial duties
Duty to Oversee Decisions
Trustee can delegate the determination of management and investment strategies but must oversee the decision-making process
Prudent Investor Rule
TX requires a trustee to act as a prudent investor would act when investing his own property (putting less emphasis on individual risk levels).
Trustee must exercise reasonable care, caution, and skill when investing and managing trust assets.
Trustee with special skills has duty to utilize them.
Compliance judged as of time of the actions taken, not in hindsight
Duty to Diversify
A trustee must adequately diversify the trust investments in order to spread the risk of loss under a total performance portfolio approach, but not if administrative costs would outweigh the benefits or trust purpose better served without diversification
Duty to Make Property Productive
By pursuing all possible claims, deriving the maximum amount of income from investments, selling assets when appropriate, securing insurance, paying expenses, and acting within a reasonable period of time in all matters
Duty to be impartial
Balance interests of the present and future beneficiaries by investing property so that it produces a reasonable income while preserving the principal for the remaindermen; and, sell trust property within a reasonable time if a failure to diversify would be inconsistent with the total performance portfolio approach
Duty to Diclose
Complete and accurate information about the nature and extent of the trust property, including allowing access to trust records and accounts; must notify beneficiaries if the trustee intends to sell a significant portion of the trust assets
Duty to Account
Must periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed against the terms of the trust
Remedies for Breach of Trust
- compel the trustee to perform the trustee’s duties;
- enjoin the trustee from committing breach;
- compel the trustee to redress a breach of trust;
- order the trustee to account;
- appoint receiver;
- suspend the trustee;
- remove the trustee;
- reduce/deny compensation to the trustee;
9 void an act of the trustee; - order any other appropriate relief
