Trusts Flashcards
Differences b/w private trusts & charitable trusts
A) private trusts must have ascertainable beneficiaries B) Charitable trusts enforced by a gov’t actor C) Charitable trusts must be formed for a charitable purpose D) Cy pres doctrine only applies to charitable trusts
What is required for validity of a trust?
1) Capacity (same as for wills) 2) Intent (no precatory language) 3) Identifiable trust corpus 4) Ascertainable beneficiaries 5) Proper purpose (not against public policy)
Mechanics of trust creation
1) via declaration 2) via testamentary transfer (irrevocable)
secret v. semi-secret trust. Is extrinsic evidence admissible to prove existence?
1) secret trust – not shown on will, extrinsic evidence may NOT be admitted to prove existence 2) semi-secret trust – on face of will, doesn’t lay out necessary terms. Extrinsic evidence may NOT be admitted.
Trustee’s powers can be…
express or implied
Trustee’s duty to beneficiaries
ICE LAAD - Impartiality - Care - Earmark assets (keep trust property separate, no commingling) - Loyalty – no self dealing - Administer - Accounting - Diversification
Defenses to claim of breach of trustee’s duties
1) exculpatory clause – can relieve trustee of liability falling short of negligence. Not valid for recklessness 2) Consent – beneficiaries may consent to an action resulting in a loss to the trust. If multiple Bs, all must consent 3) equitable remedies – laches/statute of limitations 4) trustee vote – if majority trustees vote and dissenting trustee documents dissent, he is protected
What is NOT a good defense to breach of trustee’s duties?
offset profits. Can’t argue that a bad investment was offset by a gain elsewhere
Remedies for breach of trustee’s duty
1) surcharge the trustee – i.e., sue him for damages. Can sue for actual damages and potential lost profits 2) rescind transactions that breach duty of trustee (e.g. sale of land) 3) compel trustee to stop – injunction 4) remove trustee
Trustee’s liability to third persons
1) if sued for breach and a third party prevails, trustee may have to pay
Liability of third parties to the trust
Trustee can sue others on behalf of the trust.
In what situations can beneficiaries sue a third party?
1) if trustee fails to sue/refuses to sue, beneficiaries can sue 2) if trustee is at fault/knowingly participates w/ a third party and causes a loss, beneficiaries need not wait to sue 3) if trustee abandons the trust, beneficiaries can sue
General rule for transfer of trust interest
CA rule
General rule: beneficiary may freely assign interest in income/principal from a trust.
CA DEFAULT = NOT freely transferrable
Discretionary trust
trustee has sole discretion to control income distributions. Obliged NOT to make a distribution when it’s not in the B’s interest
Spendthrift clause
DEFAULT IN CA provides trustee w/ sole authority to make decisions as to how the trust fund may be spent for the beneficiary’s benefit
What is the main requirement for a valid spendthrift clause?
The effect of that requirement?
Must restrict both voluntary and involuntary transfers. can’t do it simply to avoid creditors
effect = beneficiary can’t transfer an interest in the trust, and a creditor can’t attach that interest. BUT once a beneficiary receives a distribution, creditors can reach that
When can creditors break through a spendthrift clause?
1) fed’l gov’t for taxes 2) orders for child support 3) creditors who supply necessities of life (food/lodging)
General rule for revocability fo trusts
Trusts are presumed revocable UNLESS expressly made otherwise. XC: any trust created by a will is irrevocable
Rules for trust modification
1) settlor can modify a revocable trust (but not too much) 2) beneficiary usually can’t modify - XC: if B can show special circumstances and doesn’t harm a material purpose of the trust, doesn’t go against settlor’s intent, or harm other Bs, then court might agree to a modification
Termination of a trust
1) settlor can terminate a revocable trust
2) Beneficiaries can only terminate early if
- unanimous consent of ALL Bs (sometimes impossible if unborn); AND
- doesn’t defeat purpose of trust
Cy pres doctrine =
A court can change the benficiary of a charitable trust if it is no longer possible to benefit the intended beneficiary and the settlor had a general charitable purpose
Resulting trust = ?
Implied in law from the presumed intent of the settlor. If settlor intends to create a trust but it fails for some reason, court may find that the trustee holds the property on resulting trsut for the settlor or his heir.
Also applies when value of trust property exceeds that needed for trust purposes.
Typical situations for a resulting trust
- trust names no beneficiaries
- no provision made for a portion of trust property
- trust purpose is invalid, insufficient, or excessive
- trust purpose never described or unclear
- carrying out material purposes of the trust has become impractical or illegal
What is a purchase money resulting trust?
Where one party has provided all or party consideration for a propert purhase, but property title is in another’s name, purchase money resulting trust imposed in favor of party providing consideration
What is the general rule for trust expenses?
for ordinary expenses, the funds come out of income from the trust’s assets. Extraordinary expenses are paid from the trust’s principal
When is a constructive trust created?
When one party is unjustly enriched due to fraud, mistake, undue influence, or breach of fiduciary duty; party seeks to retake property title from wrongdoer; remedy where invalid oral agreement induced by fraud, or where defendant insolvent and damages not available; plaintiff must show all legal remedies inadequate; requires: (1) defendant holds legal title to specific property belonging to claimant; (2) confidential or fiduciary duty breached by defendant; and (3) retention of property by defendant would result in unjust enrichment
When is a trustee entitled to indemnity when sued by a third party?
Trustee entitled to indemnity IF: a) K was properly formed and b) breach was not a result of breach of trustee’s duties
When will a trust reminate automatically?
- if the term expires,
- if it is revoked,
- or if the trust purpose is fulfilled
When can a trustee terminate a trust in CA?
- if the trust corpus is less than $20,000; AND
- trustee is the only beneficiary
