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Wills & Thrills > Trusts > Flashcards

Trusts Flashcards

1
Q

5 purposes

TRUSTS

A
  1. Avoid Probate
  2. Tax Planning
  3. Manage Property for Others
  4. Avoid Creditors
  5. Settlor’s Creditors
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2
Q

definition

TRUSTS

A

= fiduciary relationship in which

  1. a trustee holds legal title to specific property
  2. under a fiduciary duty to manage, invest, safeguard, and administer
  3. the trust assets and income
  4. for the benefit of designated beneficiaries
  5. who hold equitable title
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3
Q

3 types

TRUSTS

A

Classified according to the method of their creation

  1. express trusts
  2. resulting trusts
  3. constructive trusts
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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

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5
Q

resulting trusts

TYPES OF TRUSTS

A

= arise from the presumed intention of the owner of property

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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

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7
Q

2 categories

EXPRESS TRUSTS

A
  1. private trusts

2. charitable trusts

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8
Q

distinction between categories

EXPRESS TRUSTS

A

distinguished primarily by the identity of their beneficiaries

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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

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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

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11
Q

3 ways to create a trust

CREATION OF TRUSTS

A
  1. transfer of property
  2. declaration by the owner of the property that owner holds identifiable property as trustee
  3. exercise of a power of appointment in favor of a trustee
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12
Q

3 transfers of property

CREATION OF TRUSTS

A

Transfer of property

  1. to another person during settlor’s lifetime
  2. by will
  3. deed of trust
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13
Q

deed of trust

CREATION OF TRUSTS

A

= other disposition taking effect upon settlor’s death

transfer of property

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14
Q

declaration of trust

CREATION OF TRUSTS

A

= declaration by the owner of the property that owner holds identifiable property as trustee

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15
Q

definition

PRIVATE EXRESS TRUSTS

A

= a legally enforceable device by which a fiduciary (trustee) manages property for one or more beneficiaries

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16
Q

bifurcated title to trust property

PRIVATE EXRESS TRUSTS

A
  1. Legal title = trustee

2. Equitable title = beneficiaries

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17
Q

types of trusts

PRIVATE EXRESS TRUSTS

A
  1. Inter vivos (deed of trust OR declaration of trust)

2. Testamentary (deed of trust

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18
Q

8 elements

CREATION OF TRUSTS

A
  1. Settlor with Capacity
  2. Indicated intent to Create a Trust
  3. Property (Res, Corpus)
  4. Writing (Sometimes)
  5. Delivery of Assets
  6. Competent Trustee with Duties
  7. Ascertainable Beneficiaries
  8. Valid purpose
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19
Q

irrevocable inter vivos trusts

SETTLOR’S CAPACITY

A

= capacity during life time to transfer property free of trust

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20
Q

testamentary trusts

SETTLOR’S CAPACITY

A

= capacity to execute a will

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21
Q

invalid purposes

VALID PURPOSES

A

Intended trust or trust provision is invalid if

  1. Purpose is unlawful
  2. Performance calls for commission of a criminal or tortious act
  3. Contrary to public policy
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22
Q

requirement

VALID PURPOSES

A

Trust and its terms must be for benefit of its beneficiaries

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23
Q

requirement

ASCERTAINABLE BENEFICIARIES

A

= trust must have definite beneficiary

  1. can be ascertained now or in the future
  2. subject to any applicable Rule Against Perpetuities
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24
Q

3 exceptions

ASCERTAINABLE BENEFICIARIES

A
  1. Charitable trust
  2. Trust for care of animal
  3. Trust for noncharitable purpose
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25
Q

indicated trust intent

CREATION OF TRUST

A

use of words “trust” or “trustee” not required

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26
Q

key inquiry

INDICATED TRUST INTENT

A

did the grantor manifest an intent to create a trust relationship?

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27
Q

trust relationship

INDICATED TRUST INTENT

A

= relationship in which one person holds and manages property for another

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28
Q

deed of trusts

DELIVERY OF ASSETS

A

to be in the trust, assets must be

  1. delivered to the trust and
  2. placed in the trustee’s name

COMMON LAW/MAJORITY

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29
Q

declaration of trust

DELIVERY OF ASSETS

A

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

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30
Q

assets capable of registration

DELIVERY OF ASSETS

A
  • 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

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31
Q

assets not capable of registration

DELIVERY OF ASSETS

A

transferred to the trust through a recital of assignment describing the asset with particularity in the trust instrument

TN LAW

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32
Q

receipt of corpus at later time

CREATION OF TRUSTS

A

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

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33
Q

corpus

RECEIPT OF CORPUS

A

= principal or property of a trust

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34
Q

majority

WRITING

A
  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
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35
Q

utc

WRITING

A

trusts need not be evidenced by trust instrument

BUT oral trusts require clear and convincing evidence

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36
Q

tn

WRITING

A

TN SOF doesn’t require writing for trust of land

BUT oral trusts require clear, cogent, convincing evidence

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37
Q

definition

CONSTRUCTIVE TRUST

A

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
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38
Q

proof required

CONSTRUCTIVE TRUST

A

justification of construction trust = usually must be made by clear and convincing evidence

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39
Q

definition

POUR OVER WILLS

A

= integrated disposition of testamentary assets with a trust created during the settlor’s lifetime

valid under the UTATA

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40
Q

2 rules

POUR OVER WILLS

A
  1. May be amendable and revocable

2. Gift is valid even though trust unfunded during settlor’s lifetime

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41
Q

timing

POUR OVER WILLS

A

UPC = May be established before, after, or concurrently with will

TN = may be executed before or concurrently

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42
Q

res

CREATION OF TRUSTS

A

= trust property

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43
Q

3 principles

TRUST PROPERTY

A
  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
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44
Q

3 requirements

BENEFICIARIES

A
  1. Must be capable of taking and holding title to property
  2. Must be definite
  3. Beneficiary must accept
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45
Q

definite

BENEFICIARIES

A

= susceptible of identification when their interests come into enjoyment

Example of NOT definite = “friends”

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46
Q

acceptance

BENEFICIARIES

A
  1. Acceptance is presumed

2. Notice is not required

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47
Q

requirements

VALID TRUST PURPOSE

A

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
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48
Q

contrary to public policy examples

VALID TRUST PURPOSE

A
  1. Induce crimes
  2. Torts
  3. Divorce
  4. Child neglect
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49
Q

effect of invalid conditions

VALID TRUST PURPOSE

A

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

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50
Q

2 possible sets of requirements

FORMALITIES

A
  1. For inter vivos trust

2. For testamentary trust

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51
Q

inter vivos trust

FORMALITIES

A

= created during settlor’s life

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52
Q

2 inter vivos trust requirements

FORMALITIES

A

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)

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53
Q

testamentary trust

FORMALITIES

A

= created by settlor’s will

54
Q

testamentary trust terms

FORMALITIES

A

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
Q

2 testamentary trust types

FORMALITIES

A
  1. secret trust

2. semi-secret trust

56
Q

secret trust

FORMALITIES

A

absolute gift but trust intended = SECRET TRUST, constructive trust imposed

57
Q

semi-secret trust

FORMALITIES

A

gift in trust w/o beneficiary = SEMI-SECRET TRUST, resulting trust for testator’s heirs

58
Q

3 powers of trustee

TRUST ADMINISTRATION

A
  1. Power of appointment
  2. Power to incur expenses
  3. Power to borrow money MUST be granted in trust instrument
59
Q

power of appointment

POWERS OF TRUSTEE

A

= 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
Q

2 types

POWER OF APPOINTMENT

A
  1. General POA

2. Limited or special POA

61
Q

general poa

POWER OF APPOINTMENT

A

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
Q

limited/special poa

POWER OF APPOINTMENT

A

All other powers

63
Q

common law rule

POWER OF APPOINTMENT

A

RAP or USRAP applies

64
Q

minority view

POWER OF APPOINTMENT

A

adopted by TN

= testamentary general power of appointment upon which no restrictions are imposed is exercised by a general residuary clause

65
Q

majority view

POWER OF APPOINTMENT

A

NOT adopted by TN

= intent must clearly appear in will

66
Q

power to incur expenses

POWERS OF TRUSTEE

A
  • necessary and ordinary management expenses allowed

- power to improve property usually not inferred

67
Q

6 duties of trustee

TRUST ADMINISTRATION

A
  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
Q

duty of care

DUTIES OF TRUSTEE

A

AKA fiduciary duty

Standard = that of reasonably prudent person managing own property

69
Q

duty to administer trust

DUTIES OF TRUSTEE

A

Shall administer trust in good faith in accordance with its terms and purposes and interests of beneficiaries and in accordance with UTC

70
Q

self-dealing restriction

DUTY OF LOYALTY

A

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
Q

self-dealing restriction waiver

DUTY OF LOYALTY

A

settlor can waive self-dealing restriction

72
Q

corporate trustee

DUTY OF LOYALTY

A
  • Cannot buy own stock

- BUT may retain own stock

73
Q

no further inquiry rule

DUTY OF LOYALTY

A

= trustee’s self-dealing transactions can be set aside regardless of whether the trustee acted reasonably or in good faith

74
Q

no further inquiry exceptions

DUTY OF LOYALTY

A
  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
Q

remedy for breach

DUTY OF LOYALTY

A

If duty breached, beneficiary may elect among following remedies

  1. Compensatory damages
  2. Equitable relief
  3. Restitution
76
Q

4 presumptively void interactions

DUTY OF LOYALTY

A

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
Q

equitable relief

DUTY OF LOYALTY

A

= order requiring trustee to transfer property back to trust

78
Q

restitution

DUTY OF LOYALTY

A

= order requiring trustee to disgorge any profits she made to the trust

79
Q

duty to perform personally

DUTIES OF TRUSTEE

A

rule = cannot delegate administration of trust

80
Q

duty to separate trust property

DUTIES OF TRUSTEE

A

rule = no commingling

a. with own property OR
b. with other trusts’ property

81
Q

3 presumptions for commingled property

DUTY TO SEPARATE TRUST PROPERTY

A
  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
Q

duty to inform and account

DUTIES OF TRUSTEE

A
  1. Affirmative disclosure
  2. Responding to requests
  3. Accounts
83
Q

liability of trustee

TRUST ADMINISTRATION

A

Trustee liable to

  1. Beneficiaries for breach of trust = surcharge action
  2. 3P for contracts and torts, but usually entitled to indemnification
84
Q

2 defenses to liability

LIABILITY OF TRUSTEE

A
  1. Laches

2. Express or implied consent to the breach by beneficiaries

85
Q

may losses from one breach be offset against gains from another?
LIABILITY OF TRUSTEE

A

NO

86
Q

3 functions

DUTY TO PRESERVE PROPERTY/MAKE IT PRODUCTIVE

A
  1. Distribution
  2. Investment
  3. Custodial and administrative
87
Q

distribution function

DUTY TO PRESERVE PROPERTY/MAKE IT PRODUCTIVE

A

the trustee shall make disbursement of income and principal to the beneficiaries in accordance with the terms of the trust

88
Q

mandatory trusts

DISTRIBUTION FUNCTION

A

For mandatory trusts, the trustee must make the distributions specified by the trust

89
Q

discretionary trusts

DISTRIBUTION FUNCTION

A

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
Q

investment function

DUTY TO PRESERVE PROPERTY/MAKE IT PRODUCTIVE

A

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
Q

legal-lists

INVESTMENT FUNCTION

A
  • 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
Q

prudent person rule

INVESTMENT FUNCTION

A

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
Q

prudent investor rule

INVESTMENT FUNCTION

A

Adopted in nearly all states

94
Q

diversification

INVESTMENT FUNCTION

A

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
Q

professional trustees

INVESTMENT FUNCTION

A

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
Q

delegation

INVESTMENT FUNCTION

A
  • 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
Q

custodial/administrative functions

INVESTMENT FUNCTION

A
  • 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
Q

5 functions

INVESTMENT FUNCTION

A
  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
Q

2 standards

INVESTMENT FUNCTION

A 
= investments must be prudent
= trustee must use reasonable 
1. care AND
2. skill AND
3. caution
100
Q

4 key principles

INVESTMENT FUNCTION

A
  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
Q

income v. remainder beneficiaries

DUTY OF IMPARTIALITY

A

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
Q

2 specific duties

DUTY OF IMPARTIALITY

A
  1. Must administer trust impartially

2. Must be fair to all beneficiaries

103
Q

distribution of interest and dividend income

DUTY OF IMPARTIALITY

A

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
Q

income receipts

DUTY OF IMPARTIALITY

A

= 10% rule

  • Rental income
  • Interest on bond or CD
  • Money received from entity
  • Liquidating assets and mineral rights
105
Q

principal receipts

DUTY OF IMPARTIALITY

A

= 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
Q

income expenses

DUTY OF IMPARTIALITY

A
  • ½ trustee and consultant compensation
  • ½ accounting and legal expenses
  • Ordinary expenses, including interest payments on debt,
    ordinary repairs,
    taxes,
    insurance premiums
107
Q

principal expenses

DUTY OF IMPARTIALITY

A
  • ½ trustee and consultant compensation
  • ½ accounting and legal expenses
  • Principal payments on debt
  • Environmental costs
108
Q

UPAIA allocation of receipts and expenses

A

UPAIA = uniform principal and income act

enacted in majority of states

109
Q

3 methods

TERMINATION/MODIFICATION OF TRUSTS

A
  1. by settlor
  2. by beneficiaries
  3. by court

(applies to irrevocable inter vivos AND testamentary trusts)

110
Q

2 rules

TERMINATION/MODIFICATION BY SETTLOR

A
  1. Must reserve right to revoke or modify
    (UTC = Trusts presumed revocable)
  2. Power to revoke includes power to modify
111
Q

utc presumption

TERMINATION/MODIFICATION BY SETTLOR

A

= trusts presumed revocable

112
Q

3 rules

TERMINATION/MODIFICATION BY BENEFICIARIES

A
  • 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
Q

3 examples of material purposes precluding termination

TERMINATION/MODIFICATION BY BENEFICIARIES

A
  1. distribution at specific age
  2. preserving property for remainderman
  3. protecting beneficiary from own poor judgment
114
Q

method

TERMINATION BY COURT

A

may terminate if trust purposes accomplished or become illegal or impossible

115
Q

method

TERMINATION BY COURT

A

may modify if changed circumstances make compliance incompatible with trust purpose

116
Q

charitable purpose

CHARITABLE TRUSTS

A

= equitable remedy to prevent unjust enrichment

117
Q

use of remedy

CHARITABLE PURPOSE

A

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
Q

types

CHARITABLE PURPOSE

A
  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
Q

difference btwn private and charitable trusts

CHARITABLE PURPOSE

A

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
Q

does the Rule against Perpetuities apply to charitable gifts?
CHARITABLE TRUSTS

A

NO, need not select definite or definitely ascertainable beneficiary

121
Q

what is the standard for modifying a charitable trust?

CHARITABLE TRUSTS

A

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
Q

cy pres elements

MODIFICATION OF CHARITABLE TRUST

A
  1. the settlor’s exact purpose has become impossible or, at the very least, impracticable
  2. 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
Q

cy pres triggers

MODIFICATION OF CHARITABLE TRUST

A

If a particular charitable purpose becomes
UPC = unlawful, impracticable, impossible to achieve, or wasteful
TN = unlawful, impracticable, impossible to achieve, obsolete or ineffective

124
Q

cy pres application

MODIFICATION OF CHARITABLE TRUST

A

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
Q

private express trusts

TRUST SUPERVISION

A
  1. Settlor

2. Beneficiaries (only for irrevocable)

126
Q

honorary trusts

TRUST SUPERVISION

A

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
Q

charitable trusts

TRUST SUPERVISION

A
  1. Settlor (in TN, not @ common law)
  2. Attorney General
  3. Beneficiaries (if identified)
128
Q

required for revocable trusts and testamentary trusts

EXECUTORY MENTAL CAPACITY

A

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
Q

required for deeds and irrevocable trusts

EXECUTORY MENTAL CAPACITY

A

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
Q

required for contracts

EXECUTORY MENTAL CAPACITY

A

The parties to a contract must have the mental capacity to know the nature and terms of the contract

(in TN)

131
Q

applicable law

EXAM INSTRUCTIONS

A
  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

Wills & Thrills (12 decks)

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