Trusts Flashcards
1
Q
5 purposes
TRUSTS
A
- Avoid Probate
- Tax Planning
- Manage Property for Others
- Avoid Creditors
- Settlor’s Creditors
2
Q
definition
TRUSTS
A
= fiduciary relationship in which
- a trustee holds legal title to specific property
- under a fiduciary duty to manage, invest, safeguard, and administer
- the trust assets and income
- for the benefit of designated beneficiaries
- who hold equitable title
3
Q
3 types
TRUSTS
A
Classified according to the method of their creation
- express trusts
- resulting trusts
- constructive trusts
4
Q
express trusts
TYPES OF TRUSTS
A
= arise from the expressed intention of the owner of property to create the relationship with respect to the property
5
Q
resulting trusts
TYPES OF TRUSTS
A
= arise from the presumed intention of the owner of property
6
Q
constructive trusts
TYPES OF TRUSTS
A
= do not depend on intention but rather constitute a useful equitable remedy in cases involving wrongful conduct and unjust enrichment
7
Q
2 categories
EXPRESS TRUSTS
A
- private trusts
2. charitable trusts
8
Q
distinction between categories
EXPRESS TRUSTS
A
distinguished primarily by the identity of their beneficiaries
9
Q
private trust
EXPRESS TRUSTS
A
created for the benefit of certain ascertainable persons
example = a trust “to T in trust for my husband, and at his death to my children,” is a private trust
10
Q
charitable trust
EXPRESS TRUSTS
A
created for the benefit of an indefinite class of persons or the public in general
example = trust providing scholarship funds for needy students at a named university
11
Q
3 ways to create a trust
CREATION OF TRUSTS
A
- transfer of property
- declaration by the owner of the property that owner holds identifiable property as trustee
- exercise of a power of appointment in favor of a trustee
12
Q
3 transfers of property
CREATION OF TRUSTS
A
Transfer of property
- to another person during settlor’s lifetime
- by will
- deed of trust
13
Q
deed of trust
CREATION OF TRUSTS
A
= other disposition taking effect upon settlor’s death
transfer of property
14
Q
declaration of trust
CREATION OF TRUSTS
A
= declaration by the owner of the property that owner holds identifiable property as trustee
15
Q
definition
PRIVATE EXRESS TRUSTS
A
= a legally enforceable device by which a fiduciary (trustee) manages property for one or more beneficiaries
16
Q
bifurcated title to trust property
PRIVATE EXRESS TRUSTS
A
- Legal title = trustee
2. Equitable title = beneficiaries
17
Q
types of trusts
PRIVATE EXRESS TRUSTS
A
- Inter vivos (deed of trust OR declaration of trust)
2. Testamentary (deed of trust
18
Q
8 elements
CREATION OF TRUSTS
A
- Settlor with Capacity
- Indicated intent to Create a Trust
- Property (Res, Corpus)
- Writing (Sometimes)
- Delivery of Assets
- Competent Trustee with Duties
- Ascertainable Beneficiaries
- Valid purpose
19
Q
irrevocable inter vivos trusts
SETTLOR’S CAPACITY
A
= capacity during life time to transfer property free of trust
20
Q
testamentary trusts
SETTLOR’S CAPACITY
A
= capacity to execute a will
21
Q
invalid purposes
VALID PURPOSES
A
Intended trust or trust provision is invalid if
- Purpose is unlawful
- Performance calls for commission of a criminal or tortious act
- Contrary to public policy
22
Q
requirement
VALID PURPOSES
A
Trust and its terms must be for benefit of its beneficiaries
23
Q
requirement
ASCERTAINABLE BENEFICIARIES
A
= trust must have definite beneficiary
- can be ascertained now or in the future
- subject to any applicable Rule Against Perpetuities
24
Q
3 exceptions
ASCERTAINABLE BENEFICIARIES
A
- Charitable trust
- Trust for care of animal
- Trust for noncharitable purpose
25
indicated trust intent
| CREATION OF TRUST
use of words “trust” or “trustee” not required
26
key inquiry
| INDICATED TRUST INTENT
did the grantor manifest an intent to create a trust relationship?
27
trust relationship
| INDICATED TRUST INTENT
= relationship in which one person holds and manages property for another
28
deed of trusts
| DELIVERY OF ASSETS
to be in the trust, assets must be
1. delivered to the trust and
2. placed in the trustee’s name
COMMON LAW/MAJORITY
29
declaration of trust
| DELIVERY OF ASSETS
manifestation of intent by the settlor to hold
1. certain items of his or her property
2. over which he or she already has legal title
3. in trust for one or more beneficiaries
= sufficient for the property to be in the trust
(no further document transferring title required)
COMMON LAW/MAJORITY
30
assets capable of registration
| DELIVERY OF ASSETS
- transferred to the trust through the recording of the deed or the completion of registration of the asset in the name of the trust or trustee
- NOT transferred to the trust through only a recital of assignment, holding, or receipt in the trust instrument
EXAMPLES = real estate, stocks, bonds, bank and brokerage accounts
TN LAW
31
assets not capable of registration
| DELIVERY OF ASSETS
transferred to the trust through a recital of assignment describing the asset with particularity in the trust instrument
TN LAW
32
receipt of corpus at later time
| CREATION OF TRUSTS
any trust agreement or declaration of a trust may be valid even if no corpus is delivered to trustee at time of execution of the instrument AS LONG AS trustee has right to receive corpus at later time or times
TN
33
corpus
| RECEIPT OF CORPUS
= principal or property of a trust
34
majority
| WRITING
1. Inter vivos trust in which part or all of the property is real estate
2. Testamentary trusts
= must be evidenced by writing signed by settlor
35
utc
| WRITING
trusts need not be evidenced by trust instrument
| BUT oral trusts require clear and convincing evidence
36
tn
| WRITING
TN SOF doesn’t require writing for trust of land
| BUT oral trusts require clear, cogent, convincing evidence
37
definition
| CONSTRUCTIVE TRUST
A equitable remedy
- to prevent the unjust enrichment
- of the holder of title to/of property/property interest
- which such holder acquired through
a. fraud,
b. breach of duty
c. or some other circumstance making it inequitable for him to retain it against the claim of the beneficiary of the constructive trust
38
proof required
| CONSTRUCTIVE TRUST
justification of construction trust = usually must be made by clear and convincing evidence
39
definition
| POUR OVER WILLS
= integrated disposition of testamentary assets with a trust created during the settlor’s lifetime
valid under the UTATA
40
2 rules
| POUR OVER WILLS
1. May be amendable and revocable
| 2. Gift is valid even though trust unfunded during settlor’s lifetime
41
timing
| POUR OVER WILLS
UPC = May be established before, after, or concurrently with will
TN = may be executed before or concurrently
42
res
| CREATION OF TRUSTS
= trust property
43
3 principles
| TRUST PROPERTY
1. Property may be of any type (including future interests)
2. Must be property that settlor has the power to convey
3. Must be described with certainty
44
3 requirements
| BENEFICIARIES
1. Must be capable of taking and holding title to property
2. Must be definite
3. Beneficiary must accept
45
definite
| BENEFICIARIES
= susceptible of identification when their interests come into enjoyment
Example of NOT definite = “friends”
46
acceptance
| BENEFICIARIES
1. Acceptance is presumed
| 2. Notice is not required
47
requirements
| VALID TRUST PURPOSE
Trust or provision must NOT be
1. Illegal
2. Impossible to achieve
3. Contrary to public policy
4. Intended to defraud settlor’s creditors based on illegal consideration
48
contrary to public policy examples
| VALID TRUST PURPOSE
1. Induce crimes
2. Torts
3. Divorce
4. Child neglect
49
effect of invalid conditions
| VALID TRUST PURPOSE
effect on invalid condition SUBSEQUENT = condition stricken, but trust is valid
effect on invalid condition PRECEDENT = condition stricken, but court decides whether interest is valid or fails
50
2 possible sets of requirements
| FORMALITIES
1. For inter vivos trust
| 2. For testamentary trust
51
inter vivos trust
| FORMALITIES
= created during settlor’s life
52
2 inter vivos trust requirements
| FORMALITIES
Must have either
1. Declaration of trust by property owner that he holds in trust OR
2. Transfer of property by the settlor to the trustee
(No writing required UNLESS trust of land)
53
testamentary trust
| FORMALITIES
= created by settlor’s will
54
testamentary trust terms
| FORMALITIES
essential terms must be ascertained from
a. Will OR
b. incorporated document OR
c. facts of independent significance OR
d. exercise of power of appointment
55
2 testamentary trust types
| FORMALITIES
1. secret trust
| 2. semi-secret trust
56
secret trust
| FORMALITIES
absolute gift but trust intended = SECRET TRUST, constructive trust imposed
57
semi-secret trust
| FORMALITIES
gift in trust w/o beneficiary = SEMI-SECRET TRUST, resulting trust for testator’s heirs
58
3 powers of trustee
| TRUST ADMINISTRATION
1. Power of appointment
2. Power to incur expenses
3. Power to borrow money MUST be granted in trust instrument
59
power of appointment
| POWERS OF TRUSTEE
= power to designate manner of distribution of donor’s property
1. May be created by deed or by will
2. May be exercisable by deed and/or will
3. Usually donor specifies in the instrument creating the power the methods by which it must or may be used
60
2 types
| POWER OF APPOINTMENT
1. General POA
| 2. Limited or special POA
61
general poa
| POWER OF APPOINTMENT
Power by which the donee can appoint the donor's property to anyone he/she pleases, including the donee or the donee’s estate
62
limited/special poa
| POWER OF APPOINTMENT
All other powers
63
common law rule
| POWER OF APPOINTMENT
RAP or USRAP applies
64
minority view
| POWER OF APPOINTMENT
adopted by TN
= testamentary general power of appointment upon which no restrictions are imposed is exercised by a general residuary clause
65
majority view
| POWER OF APPOINTMENT
NOT adopted by TN
= intent must clearly appear in will
66
power to incur expenses
| POWERS OF TRUSTEE
- necessary and ordinary management expenses allowed
| - power to improve property usually not inferred
67
6 duties of trustee
| TRUST ADMINISTRATION
1. (fiduciary) duty of care
2. duty to administer trust
3. duty of loyalty
4. duty of prudence
5. duty of impartiality
6. duty to inform and account
68
duty of care
| DUTIES OF TRUSTEE
AKA fiduciary duty
Standard = that of reasonably prudent person managing own property
69
duty to administer trust
| DUTIES OF TRUSTEE
Shall administer trust in good faith in accordance with its terms and purposes and interests of beneficiaries and in accordance with UTC
70
self-dealing restriction
| DUTY OF LOYALTY
no self-dealing =
1. Cannot buy assets from or sell assets to the trust
2. Cannot borrow from trust or loan to trust
3. Cannot personally gain through position
4. Corporate trustee cannot buy own stock
71
self-dealing restriction waiver
| DUTY OF LOYALTY
settlor can waive self-dealing restriction
72
corporate trustee
| DUTY OF LOYALTY
- Cannot buy own stock
| - BUT may retain own stock
73
no further inquiry rule
| DUTY OF LOYALTY
= trustee’s self-dealing transactions can be set aside regardless of whether the trustee acted reasonably or in good faith
74
no further inquiry exceptions
| DUTY OF LOYALTY
1. the transaction was authorized by the terms of the trust;
2. the transaction was approved by the court;
3. the beneficiary did not commence a judicial proceeding within the time allowed by Section 1005
4. the beneficiary consented to the trustee’s conduct, ratified the transaction, or released the trustee
75
remedy for breach
| DUTY OF LOYALTY
If duty breached, beneficiary may elect among following remedies
1. Compensatory damages
2. Equitable relief
3. Restitution
76
4 presumptively void interactions
| DUTY OF LOYALTY
A sale, encumbrance, or other transaction involving the investment or management of trust property is presumed to be affected by a conflict between personal and fiduciary interests if it is entered into by the trustee with
1. the trustee’s spouse;
2. the trustee’s descendants, siblings, parents, or their spouses;
3. an agent or attorney of the trustee; or
4. a corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee’s best judgment
77
equitable relief
| DUTY OF LOYALTY
= order requiring trustee to transfer property back to trust
78
restitution
| DUTY OF LOYALTY
= order requiring trustee to disgorge any profits she made to the trust
79
duty to perform personally
| DUTIES OF TRUSTEE
rule = cannot delegate administration of trust
80
duty to separate trust property
| DUTIES OF TRUSTEE
rule = no commingling
a. with own property OR
b. with other trusts’ property
81
3 presumptions for commingled property
| DUTY TO SEPARATE TRUST PROPERTY
1. Commingled property lost or destroyed = presumed to be trustee’s
2. If portion of commingled assets increases in value = presumed to be trust assets
3. If portion of commingled assets declines in value = presumed to be trustee’s
82
duty to inform and account
| DUTIES OF TRUSTEE
1. Affirmative disclosure
2. Responding to requests
3. Accounts
83
liability of trustee
| TRUST ADMINISTRATION
Trustee liable to
1. Beneficiaries for breach of trust = surcharge action
2. 3P for contracts and torts, but usually entitled to indemnification
84
2 defenses to liability
| LIABILITY OF TRUSTEE
1. Laches
| 2. Express or implied consent to the breach by beneficiaries
85
may losses from one breach be offset against gains from another?
LIABILITY OF TRUSTEE
NO
86
3 functions
| DUTY TO PRESERVE PROPERTY/MAKE IT PRODUCTIVE
1. Distribution
2. Investment
3. Custodial and administrative
87
distribution function
| DUTY TO PRESERVE PROPERTY/MAKE IT PRODUCTIVE
the trustee shall make disbursement of income and principal to the beneficiaries in accordance with the terms of the trust
88
mandatory trusts
| DISTRIBUTION FUNCTION
For mandatory trusts, the trustee must make the distributions specified by the trust
89
discretionary trusts
| DISTRIBUTION FUNCTION
For discretionary trusts, the trustee must exercise his or her discretion prudently, in good faith, and in accordance with the terms of the trust and in light of the needs and circumstances of the beneficiary
90
investment function
| DUTY TO PRESERVE PROPERTY/MAKE IT PRODUCTIVE
the trustee must review the trust assets and then make and implement an ongoing program of investments in light of the purpose of the trust and the circumstances of the beneficiaries
91
legal-lists
| INVESTMENT FUNCTION
- TN still has a “permissible list” of trust assets
- Includes government bonds, utility bonds, certificates of deposit, etc.
= If a trustee invests in an item on the legal list, the trustee is not liable for any resulting losses
92
prudent person rule
| INVESTMENT FUNCTION
a trustee in administering a trust shall exercise such skill and care as a person of ordinary prudence would exercise in dealing with his or her own property. Each investment is judged in isolation; risky or speculative investments are not allowed
93
prudent investor rule
| INVESTMENT FUNCTION
Adopted in nearly all states
94
diversification
| INVESTMENT FUNCTION
a trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying
95
professional trustees
| INVESTMENT FUNCTION
A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.
(BUT a trustee with subnormal skills will not be held to a lower standard)
96
delegation
| INVESTMENT FUNCTION
- A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances
- The trustee shall exercise reasonable care, skill, and caution in:
1. selecting an agent;
2. establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and
3. periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation
97
custodial/administrative functions
| INVESTMENT FUNCTION
- A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust.
- In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution
98
5 functions
| INVESTMENT FUNCTION
1. Duty to collect and protect trust property
2. Duty to earmark trust property
3. Duty to not to commingle trust assets
4. Duty to keep adequate records of administration
5. Duty to bring and defend claims
99
2 standards
| INVESTMENT FUNCTION
```
= investments must be prudent
= trustee must use reasonable
1. care AND
2. skill AND
3. caution
```
100
4 key principles
| INVESTMENT FUNCTION
1. Trustees with special skills held to higher standard
2. Trustee must diversify investments
3. Investment decisions may be delegated if a prudent trustee would do so
4. Prudence evaluated in terms of overall strategy
101
income v. remainder beneficiaries
| DUTY OF IMPARTIALITY
If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests
102
2 specific duties
| DUTY OF IMPARTIALITY
1. Must administer trust impartially
| 2. Must be fair to all beneficiaries
103
distribution of interest and dividend income
| DUTY OF IMPARTIALITY
Rule = interest and dividend income to income beneficiary
| If such distribution does not effectuate trust purpose and is unfair = trustee may adjust between principal and income
104
income receipts
| DUTY OF IMPARTIALITY
= 10% rule
- Rental income
- Interest on bond or CD
- Money received from entity
- Liquidating assets and mineral rights
105
principal receipts
| DUTY OF IMPARTIALITY
= 90%
- Proceeds of sale of asset
- Capital gains
- Property other than money received from entity
- Insurance proceeds where trust is beneficiary
- Liquidating assets and mineral rights
106
income expenses
| DUTY OF IMPARTIALITY
- ½ trustee and consultant compensation
- ½ accounting and legal expenses
- Ordinary expenses, including interest payments on debt,
ordinary repairs,
taxes,
insurance premiums
107
principal expenses
| DUTY OF IMPARTIALITY
- ½ trustee and consultant compensation
- ½ accounting and legal expenses
- Principal payments on debt
- Environmental costs
108
UPAIA allocation of receipts and expenses
UPAIA = uniform principal and income act
enacted in majority of states
109
3 methods
| TERMINATION/MODIFICATION OF TRUSTS
1. by settlor
2. by beneficiaries
3. by court
(applies to irrevocable inter vivos AND testamentary trusts)
110
2 rules
| TERMINATION/MODIFICATION BY SETTLOR
1. Must reserve right to revoke or modify
(UTC = Trusts presumed revocable)
2. Power to revoke includes power to modify
111
utc presumption
| TERMINATION/MODIFICATION BY SETTLOR
= trusts presumed revocable
112
3 rules
| TERMINATION/MODIFICATION BY BENEFICIARIES
- May terminate or modify if
1. All beneficiaries consent** AND
2. It will not interfere with a material purpose
- Joinder of settlor waives material purpose
- Spendthrift trust cannot be terminated without settlor’s consent
**TIP = watch for remote unborn beneficiaries
113
3 examples of material purposes precluding termination
| TERMINATION/MODIFICATION BY BENEFICIARIES
1. distribution at specific age
2. preserving property for remainderman
3. protecting beneficiary from own poor judgment
114
method
| TERMINATION BY COURT
may terminate if trust purposes accomplished or become illegal or impossible
115
method
| TERMINATION BY COURT
may modify if changed circumstances make compliance incompatible with trust purpose
116
charitable purpose
| CHARITABLE TRUSTS
= equitable remedy to prevent unjust enrichment
117
use of remedy
| CHARITABLE PURPOSE
Potential remedy for
1. Theft or conversion
2. Fraud, duress, undue influence, mistake, or interference with contract relations
3. Breach of fiduciary duty
4. Breach of fraudulent promise, promise by one in confidential relationship, promise concerning will or inheritance, promise to forgo foreclosure bid
118
types
| CHARITABLE PURPOSE
1. Relief of Poverty
2. Advancement of Education
3. Advancement of Religion
4. Promotion of Health
5. Governmental or Municipal Purposes
6. Other Purposes Beneficial to the Community
119
difference btwn private and charitable trusts
| CHARITABLE PURPOSE
Private Trust = Must have ascertainable beneficiaries
Charitable Trust = Must have a charitable purpose and the class of potential beneficiaries may not be so narrowly defined that it designates only a few individuals upon whom the settlor wishes to confer private benefits
120
does the Rule against Perpetuities apply to charitable gifts?
CHARITABLE TRUSTS
NO, need not select definite or definitely ascertainable beneficiary
121
what is the standard for modifying a charitable trust?
| CHARITABLE TRUSTS
DOCTRINE OF CY PRES
= if the settlor’s exact charitable purpose cannot be carried out, the court may direct the application of the trust property to another charitable purpose that reasonably approximates the settlor’s intent
122
cy pres elements
| MODIFICATION OF CHARITABLE TRUST
1. the settlor’s exact purpose has become impossible or, at the very least, impracticable
3. the settlor had a general (and not specific) charitable intent
= upon proof of these two elements, the court will direct the application of the trust property to another charitable purpose that reasonably approximates the settlor’s intent
123
cy pres triggers
| MODIFICATION OF CHARITABLE TRUST
If a particular charitable purpose becomes
UPC = unlawful, impracticable, impossible to achieve, or wasteful
TN = unlawful, impracticable, impossible to achieve, obsolete or ineffective
124
cy pres application
| MODIFICATION OF CHARITABLE TRUST
If a particular charitable purpose becomes _____,
1. the trust does not fail, in whole or in part
2. the trust property does not revert to the settlor or the settlor’s successors in interest
3. the court may apply cy pres to modify or terminate the trust by directing that the trust property be applied or distributed, in whole or in part, in a manner consistent with the settlor’s charitable purposes
125
private express trusts
| TRUST SUPERVISION
1. Settlor
| 2. Beneficiaries (only for irrevocable)
126
honorary trusts
| TRUST SUPERVISION
May be enforced by
1. any of the following who are appointed under the terms of a trust
a. trustee
b. trust advisor
c. trust protector or other person OR
2. if no person is so appointed, by a person appointed by the court
(Also person having an interest in the welfare of animal may request court appoint/remove person)
127
charitable trusts
| TRUST SUPERVISION
1. Settlor (in TN, not @ common law)
2. Attorney General
3. Beneficiaries (if identified)
128
required for revocable trusts and testamentary trusts
| EXECUTORY MENTAL CAPACITY
Capacity required to create, amend, revoke, or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will
(in TN)
129
required for deeds and irrevocable trusts
| EXECUTORY MENTAL CAPACITY
The mental capacity required to execute a deed or an irrevocable trust is essentially the same as the mental capacity required to enter into a contract
(in TN)
130
required for contracts
| EXECUTORY MENTAL CAPACITY
The parties to a contract must have the mental capacity to know the nature and terms of the contract
(in TN)
131
applicable law
| EXAM INSTRUCTIONS
1. wills = tn (compare to UTC)
intestacy = tn (compare to UTC)
2. trusts = UTC (or majority if UTC silent)
3. non-probate transfers = majority
4. powers of appointment = majority
5. uniform prudent investment act = adopted by tn
6. uniform principle and income act = adopted by tn
