Trusts Flashcards
• Splitting of Ownership:
o Legal Interest – held by the trustee. Trustee is a fiduciary, so 1) must deal with property with reasonable care, 2)must maintain utmost degree of loyalty, and 3) is personally responsible if conduct falls below these standards
o Equitable or Beneficial interest – held by beneficiary. Little or not control, but enforces the trust.
• Basic Classifications
o Express Trust – created by express intention of settlor (private beneficiaries, charitable)
o Trusts Created by operation of law –
Resulting Trust – attempt to carry out implied trust
Constructive Trust – remedy to prevent unjust enrichment
• Validity of Trusts
- Intent
- Identifiable Corpus
- Ascertainable Benefiaries
- Purpose of Trust
- Mechanics and Formalities
Intent to create trust
o Intent
Element: splitting legal and equitable title; 2) impose enforceable fiduciary duty on holder of legal title (no formal words required – not even call it a trust) Mere use of words insufficient.
Communication to beneficiary not required
Present Intent Required - can’t be for future donation
Precatory language (hope, wish, desire) – not enough
Split of title (can’t have one entity as both trustee and beneficiary — merger)
o Identifiable Corpus
Property must be ascertainable with certainty (real or personal, tangible or not, vested or contingent). Can’t transfer property you don’t own yet (property of another, expected future income or profits).
Ascertainable beneficiaries
Private trust –
• Capacity – any person that can take and hold title may be beneficiary;
• class gift – beneficiaries may be designated by generic designations such as children
o can be unascertainable when trust created so long as ascertainable when they are to benefit; gotta be ascertainable (can’t say friends) – would revert to settlor
• Charitable Trusts – benefit of community, rather than specified individuals
• Honorary trusts – can provide for non-human, non-charitable purpose (care for pet) – trustee doesn’t have to do it – could just revert property to settlor.
o Mechanics and Formalities
Creation Method –
• Inter Vivos or Living Trusts – Created While Settlor Alive:
o 1)declaration of trust – settlor = trustee (declares himself to be trustee of specific property for beneficiary; settlor keeps legal title);
o 2)transfer or conveyance in trust (settlor transfers legal title to trustee (may retain or transfer equitable title: settlor conveys legal title;
• Testamentary Trusts – created in settlor’s will
Designate a trustee (ct will fill if silent)
Transfer and deliver property to trustee – declaration of trust; conveyance in trust (must convey property to trustee – real property by deed. Personal property by physical duty or appropriate written assignment.
Statute of Frauds – requires a writing: oral unless involves land or contained in will.
Pour Over Wills
• Definition – will containing gift to inter vivos trust (will that leaves property to a previously existing inter vivos trust).
• Governance of Property – property goes into trust exists on date of testator’s death – not how it was written at date when will executed.
• Pour over property can be initial trust funding – if identified in will, and executed before testator death
Testamentary Secret Trusts – settlor agrees with beneficiary to hold property in trust for s/o else but will doesn’t say that. Alleged beneficiary can seek a constructive trust remedy against beneficiary serving as trustee
Testamentary Semi-Secret Trust – gift is “in trust” but will does not indicate beneficiaries nor state terms. Effect – trust fails and property passes through testator’s estate to successors in interest.
Inter Vivos Secret Trust – Grant looks outright on its face, but oral evidence that grantee promised to use property for someone else’s benefit. Grantee is not bound unless alleged beneficiary can show abuse of confidential relationship, fraud, undue influence, or wrongdoing.
Transfer of Beneficiaries’ Interests
• Freely Transferable Interests Presumed –
o Voluntary Transfers – Gifts and Sales – beneficiaries can transfer equitable interest like any other property
o Involuntary Transfers – Creditors – Unless trust provides otherwise (usually the case), beneficiary’s creditors may reach interest
• Discretionary Trusts – Trustee determines how much, if anything, the beneficiary receives
o Beneficiary has nothing to transfer – nothing for creditor to reach.
• Spendthrift Trusts
o Characteristics –
Beneficiary may not transfer interests in trust – any attempt by the beneficiary to transfer is ineffective. Once paid, he can transfer property tho.
Creditors can’t attach beneficiary’s trust interest – but can reach when transferred
o Limitations on enforcement
Ineffective if settlor is beneficiary (protecting assets from creditors)
May be ineffective against certain creditors – support of spouse or child; creditors who supplied necessaries
• Support Provisions
o Use of Trust Property Limited to Beneficiary’s Support – may only be for health, education, maintenance and support.
o Impliedly spendthrift
o Standard of Support – if silent, current standard of living
Modifications and Termination of Trusts
• Termination – most common by express terms
• By Settlor
o General Rule – Settlor can modify or revoke unless irrevocable
o Revocation of Irrevocable Trust – settlor may revoke and irrevocable trust upon written consent of vested or contingent interests
• By Beneficiaries
o Beneficiaries can agree to modify or terminate if:
All beneficiaries agree – existence of unborn or unascertainable beneficiaries may make this impossible
All beneficiaries are legally competent
Settlors intent not frustrated
• Settlor intent;
• Modification would not interfere with material purpose
• By Operation of Law
o Property Exhausted
o Merger – legal and equitable title comes together
• By Court
o Trust Purposes Accomplished
o Purposes of Trust Have Become Illegal
o Purposes of Trust Have Become Impossible
• Duty of Trustee Upon Termination
o Wind up trust business – use powers for reasonable period of time to wind up
o Distribute to remaindermen
Trustees Powers
o Sources – 1)granted by settlor in trust instrument, 2)provided by state statute, 3) decreed by court
o Implied powers – power which is necessary or appropriate carrying out terms of trust
Exercise of Trustee POwers
o With multiple trustees – majority can act
o Mandatory powers
o Discretionary powers –
Liability for failure to exercise – abuse of discretion
Grant of absolute discretion is subject to court review
Trustee’s Duties
o Administer Trust according to terms of trust – accepts
o Duty of loyalty – duty of loyalty and utmost good faith
o Avoid Self-Dealing – cannot personally benefit
o Keep Accurate Records and render accountings upon demand
o General standard of care
Duty to use care and skill of a prudent person
Insulate trust property –
• Earmark trust property – label all property as belonging to the trust
• Segregate trust property – no commingling
o Investments Standard of Care – Prudent Investor
Settlors Instructions – settlor is free to limit or expand the types of investments which the trustee may make or change the default std.
Language Invoking Std – language triggers prudent investor std (prudent person, prudent man)
o Factors Trustee Must Consider
Basic Rule – must invest in the same manner as a prudent investor
Basic factors –
• Trust purposes
• Trust terms
• Distribution requirements
• Other circumstances
Portfolio approach – view all investments together. Some speculation may be appropriate.
Comprehensive factors:
• General economic conditions
• Possible effect of inflation or deflation,
• Tax consequences
• Role of each investment within the portfolio
• Income expected
• Appreciation expected
• Other resources of the beneficiaries
• Need for liquidity
• Need for regular income
• Importance of preserving trust property
• Importance of appreciation
• Special relationship or value of an asset to the purpose of the trust or beneficiary
Diversification
• General rule – diversification required unless purposes of trust are better served without diversifying (farm example)
Trustee’s Conduct Viewed at Time Investment Made – in light of facts
Trustee with special skills or expertise – must use those skills
Trustee who represents having special skills or expertise – bound by represented skills
Trustee with lower skills – cannot excuse himself
o Duty to review trust property – when assuming to bring into prudent investor rule
o Duty of Loyalty – social investing may be problematic
o Duty of Impartiality – not favor one beneficiary over another
o Delegation of Trustee’s Duties – trustee may delegate investment and mgt functions but only if prudent trustee of comparable skills would delegate under circumstances.
Trustee must use reasonable care in selecting the agent, establishing scope and terms of delegation, and periodically review the agent’s action
• Removal of Trustee
o Absent instructions in the trust instrument, the beneficiaries need to go to court to remove a trustee
o Grounds: incapacity, unfit (convicted of crime, chemically dependent), serious breach of duty, serious conflict of interest, insolvency, extreme hostility b/w trustee and beneficiaries but only if would interfere with trust administration, refusal to post bond, refusal to account
o Court consider settlers intent
o Trustee liability to 3rd parties
Contract - general rule = trustee liable; exception – provision in K excluding trustee’s personal liability (signing trustee is prima facie evidence of intent to exclude personal liability)
Indemnification or Reimbursement from Trust Property – K was properly entered into – trustee entitled to indemnification
o Tort Liability
General Rule – Trustee liable – and for acts of agents (respondeat superior)
Indemnification or Reimbursement From Trust Property
• Trustee can get indemnified or reimbursed if: trustee not personally at fault, or tort is normal incident of activity
Charitable Trusts
• Rule basically the same for private and charitable trusts
• Charitable Purposes
• No Special Language Necessary as Long as Intent Clear
• Must be significantly altruistic in supplying benefits – must be to a large enough group.
• Cy Pres
o When can’t carry out trust as written – change in circumstances – trust instrument is silent.
o Ability to alter dispositive provisions upon finding of general charitable intent – settlors equitable intent = equitable approximation.
• RAP – doesn’t apply to charitable trusts
• Enforced by AG
Resulting Trusts
• Arises by Implication from Settlor’s Conduct – arises by implication of law. Look to conduct.
• Who benefits from resulting trust
o Settlor, or if settlor is deceased
o Settlor’s successors in interest
• Purpose – would have done
• Failed Express Trusts – Implied Reversionary Interest
o Creation Ineffective – settlor attempts to create an express trust but intent fails
o No provision for remainder
• Purchase money resulting trust – arise when one pays the consideration for a transfer of property (real or personal) but has the title taken in the name of another.
o Presumption –
Payor is close relative of grantee = gift
Payor not close relative of grantee – PMRT – other than spouse, parent or grandparent, a PMRT is presumed.
Payor expects to be repaid = debt. IF payor expects to be reimbursed, relationship is a loan, not PMRT.
