Trusts Flashcards
Execution (and Requirements)
Settlor (grantor; 18+ with capacity to convey title) delivers (not mere intent or gratuitous promise) title to trust property to a trustee for the benefit of the beneficiaries with intent to create a trust (property must be identifiable and certain).
Must be for lawful purpose: (1) commission of crime; (2) destruction of property; (3) against public policy
No consideration required but Trust duties auto attach if supported by consideration
Purpose and Beneficiaries must be stated; otherwise pass through will or intestate(trustee can’t be beneficiary)—except if minor children with someone over 18 (minors treated as beneficiaries and over 18 as trustee)
• PER—oral testimony inadmissible to ID beneficiaries
Associations as Trustees
An unincorporated association cannot be a trustee—only banks and trust companies given trust powers in their charters and charities for charitable trusts only (must have definite and ascertainable beneficiaries and interests must vest no later than lives in being plus 21 years)
Trustee / Bond Requirement
Must post a fiduciary surety bond to secure faithful performance of her duties unless settlor waived bond requirement; corporate trustee does not have to give a bond.
No trust ever fails for lack of trustee; court will appoint
No one can be compelled to accept fiduciary responsibilities and duties
Acceptance when (1) trustee’s signature, signifying acceptance of the trust or via conduct
Trustee Compensation
Entitled to reasonable compensation (5% in/out)
Precatory Words
Do NOT create a trust. Words must be binding/create an enforceable obligation.
Revocable Trusts
Default in TX (must clearly be irrevocable)
All inter vivos trusts revocable and amendable by the settlor
Revocation
Any revocation must be in writing.
Only a court can revoke a trust if beneficiary becomes incapacitated (not a guardian)
Pourover Will
Provides a means for adding testamentary assets to a trust created by the testator during life. Valid (i) even if trust is subject to revocation and amendment and is later amended; (ii) even if trust is unfunded—trust need not be in existence before or executed concurrently with will
Trustee Named in my Will
“Trustee named in my Will” is sufficient for designating for life insurance trust
Joint Tenancy with Right of Survivorship
Must be clearly stated
Durable Power of Attorney (when does it terminate)
must be signed and acknowledged before a notary public, authorizes another to act on behalf of P. A’s power unaffected by P’s incapacity if states “POA unaffected by subsequent disability or incapacity”
• Given to spouse terminates on divorce NOT on P’s bankruptcy
• Appointment of guardian of estate terminates durable power
• Standing to Challenge A’s acts: Action to review an A’s conduct may be brought by a person named as beneficiary to receive property on P’s death or any other person who persuades the court they have sufficient interest in P’s welfare or to justify the action
• Person or Institution presented w/durable PoA: MUST either (i) accept the power; (ii) request cert of facts showing the power is valid or (iii) request an attorney’s opinion that the power is valid
Can revoke if knowledge PoA revoked; illegal; or judicial proceeding pending involving PoA
Charitable Trusts (AG)
No RAP / Must be charitable purpose / must be in favor of larger public / may be reformed in judicial proceedings under cy press
AG is a proper party (but not necessary) to any suit concerning a charitable trust. AG can join
• BUT if named charitable beneficiary named under trusts ceases to exist or qualify as charity for fed inc purposes—trustee may, without court approval name new beneficiary
Resulting and Constructive Trusts
Gift: Evidence is admissible to rebut gift presumption and show by C&C evidence
Constructive Trust: NOT a trust, an equitable remedy whose subject is to disgorge unjust enrichment. (1) wrongful conduct that (2) woud lead to unjust enrichment
Spendthrift Trust and Creditors
MUST CLEARLY BE IRREVOCABLE
given full effect in TX. Protects a trust beneficiary’s interest from creditors by prohibiting voluntary assignment or involuntary transfer of the beneficiary’s interest. Beneficiary’s creditor cannot reach beneficiary’s interest in spendthrift by garnishment or attachment or compel a distribution if trustee is given discretion to make distributions to beneficiary.—valid if expressly says “this shall be a spendthrift trust”
• Exceptions: Ks for necessities/child support/any interest retained by settlor (revocable trust–default in TX)/Fed Tax Liens
Once income distributed it is no longer subject to the trust or spendthrift clause—creditors may have at it BUT will have to file suit each time beneficiary received a distribution (takes away creditor’s efficient rights to garnishment and attachment)
Cannot fraudulently transfer—if made with intent to defeat, delay, or defraud creditors (3Ds)
Discretionary Trusts
Trustee has sole discretion for distributions. Creditor may obtain to the max extent beneficiary debtor could make a distribution
Support Trusts
Beneficiary can get to the funds despite the trustee—provided for their support. Any distribution far in excess of beneficiary’s needs is a breach of trust
Creditor who furnishes necessaries CAN reach a support trust. If beneficiary can compel distribution then so can a creditor furnishing necessities
Venue for Trust Disputes
Venue: (i) county of trustee’s residence or (ii) county in which situs (principal office) of trust is maintained / 2+ invididuals: (ii) / corporate trustee: (ii) / if settlor now deceased and admin pending, action involving inter vivos or testamentary trust created by will may be brought by above rules or in county in which estate admin is pending.
Trustee Powers
May: (1) sell the prop at publc or private sale; (2) lease the prop for any term trustee deems appropriate; (3) give a mortgage; (4) make improvements; (5) make repairs; (6) give mineral leases; (7) partition and subdivide the property
Accounting
Beneficiaries entitled to an accounting on demand no sooner than 12 months after trust created and to successive accounting on demand at the same intervals
• Compare Ind Will Executors—accounting on demand no sooner than 15 months after appointment and successive on demand at 12 month intervals
Trustee’s Decanting Powers
Limited power to transfer trust assets to a new trust with different provisions. CANNOT be exercised so as to impair beneficiaries’ interests or name new beneficiaries.
• Only trustee’s admin powers can be changed. Court approval not required.
Trustee Prohibited From:
Cannot self-deal (cannot borrow trust funds; buy or sell trust assets to itself; loaned funds to the trust; profit from serving as trustee except for 5% compensation; corp trustee cannot buyt its own stock as trust asset but can retain if a prudent invesment) or be an imprudent investor
Self-dealing also applies to loans or sales to relatives and to a business entity of which trustee is an officer, director, partner, employee, or principal SH [indirect self-dealing]
SoL
4 year SoL: does not begin to un on an action aganst a fiduciary unless and until he (i) repudiates the trust by denyng existence of the trust wrt the property; (ii) dies or resigns; or (iii) gives an accounting that makes full disclosure of the facts upon which the action is based
UPIA
Prudence measured by conduct when investment decision is made (NOT outcome or performance)
Trustee must establish a custom-tailored investment strategy that will effectuate settlor’s intent as to purposes of the particular trust—prudence not measured by hindsight; look at conduct in making the investment decision.
Trustee can exercise Adjustment Power and allocate capital gain and principal to income
Expenses
Trustee’s commissions, accounting, judicial proceedings charged ½ against income and ½ against principal
Ordinary: expenses recurring every year (taxes, premiums, ordinary repairs, interest)
CAPEX: Charged against principal (cap improvements, environ expenses, estate taxes, principal payments)
Texas Trusts Code gives Default Rules
and apply absent contrary provision by settlor; like personal liability on Ks; torts (personally liable but trust can elect to reimburse); exculpatory clause (but strictly construed and NOT for bad faith, gross negligence, or fraud)—but cannot waive:
• No illegal purpose/breach of trust committed in bad faith/limit SoL/duty to respond to demand for accounting/cannot limit court’s power to exercise its jurisdiction
Trustee decides to sue (has legal title)
unless (1) trustee unwilling to bring the action; (2) 3rd party participated w/trustee in committing breach
Modification and Early Termination of Trust (Uneconomic Trust)
Upon petition of trustee or beneficiary, court may order trustee be changed, terms be modified if: (a) trust purposes fulfilled or become impossible/illegal; (b) changed circumstances mod or termination thus further the purposes of the trust or; (c) achievement of tax purposes
Termination of uneconomic trust: value less than $50K may terminate without court approval except division or merger of trusts can be accomplished without judicial proceeding. Can be done for any reason but usually for tax purpose
Federal Estate & Gift Taxes
o For estates of decedents dying in 2018, if decedent’s “gross estate” is less than $11M, decedent executor doesn’t have to file estate tax return
o Unlimited marital deduction under both gift and estate tax
o Also an $11M exemption under the federal gift tax—thus, no gift tax must be paid by a donor unless cumulative lifetime taxable gists exceed $11M
o $15K/done annual exclusion under the gift tax
o Unlimited exclusion for tuition and med payments if (but only if) payment is made directly to the service provider
o Revocable trusts = “incomplete” gifts because of revocable power
