Trusts Flashcards
Describe a trust and its parties.
A fiduciary relationship in which one person (trustee) holds legal title to certain property (the trust res) for the benefit of another person (beneficiary)
Beneficiary (one or more) holds Equitable Title.
Trustee (one or more) holds Legal Title and owes fiduciary duties.
Settlor declares what property is to be held in trust.
What are the elements of a trust?
1) INTENT to create a trust by a settlor with the CAPACITY to do so;
2) Trust PROPERTY;
3) Trust BENEFICIARIES who are ASCERTAINABLE;
4) A WRITTEN instrument in most, but not all, cases; AND
5) A DELIVERY of PROPERTY to someone, except in the case of a declaration trust.
What if a trustee is not named by the settlor?
The trust does NOT fail.
THE COURT WILL APPOINT ONE.
What methods of creating a trust are recognized in Texas under the Texas Trust Code?
1) The property owner’s DECLARATION that the owner holds the property as trustee for another person. No transfer of property to a third person occurs here. It is GOOD PRACTICE TO CHANGE LEGAL TITLE to those assets to reflect that the settlor now holds the property as trustee. THIS IS A TRUST MADE DURING THE SETTLOR’S LIFETIME.
2) A property owner’s INTER VIVOS TRANSFER of the property to another person as trustee for the transferor or a third person.
3) A property owner’s TESTAMENTARY transfer to another person as trustee for a third person. ESTABLISHED BY THE SETTLOR’S WILL. These trusts are subject to the law of wills. Cannot become effective UNTIL THE DEATH OF THE SETTLOR.
4) An appointment under a POWER OF APPOINTMENT to another person as trustee for the donee of the power or for a third person.
5) A PROMISE to another person whose rights under the promise are to be held in trust for a third person.
What is a resulting trust?
NOT A TRUST SUBJECT TO THE TRUST CODE.
TWO SITUATIONS:
1) Failure of Express Trust - If the settlor attempts by fails to create an express trust OR if an express trust is created but later fails. Person in possession of the intended trust property holds it for, and must re-transfer it to, the grantor, his estate, his devisees, or his heirs.
2) Purchase Money Resulting Trust - If buyer purchases property but has it titled in the name of another, that other person is presumed to hold it in a purchase money resulting trust. EXCEPTION applies if the grantee is a natural object of the buyer’s bounty (these situations lead to the purchase being a GIFT).
The presumption of a PMRT is REBUTTABLE - can be rebutted by evidence showing Buyer’s true intent. Must be shown by CLEAR AND CONVINCING EVIDENCE.
What is a Constructive Trust?
NOT A TRUST SUBJECT TO THE TRUST CODE.
This is an EQUITABLE REMEDY that precludes someone who receives legal title to an asset from keeping it. Used to AVOID UNJUST ENRICHMENT.
Law requires the “constructive trustee” to relinquish the property to another.
What are two other types of “trusts” that don’t fall under the trust code.
Business Trust
Deed of Trust
Explain the revocability of trusts. What is the Texas presumption?
REVOCABLE TRUST - A trust over which the settlor has the power to revest outright title to trust property in himself by terminating the trust.
IRREVOCABLE TRUST - Not subject to this power by the settlor.
TEXAS TRUSTS ARE PRESUMED REVOCABLE . . .
UNLESS expressly made irrevocable by trust terms.
How must revocation of a trust be done?
If the trust is created by a written instrument, revocation MUST BE IN WRITING. The instrument must MANIFEST INTENT TO REVOKE but need not use the word “revocation.”
What do the terms of the trust generally determine?
1) Duties and powers of the trustee;
2) Relations among trustees; and
3) Rights and interests of a beneficiary.
T/F - Most rules in the Texas Trust Code are default rules and can be modified.
True
Are any rules in the Texas Trust Code mandatory?
Yes, the terms of a trust MAY NOT LIMIT:
1) Requirement that a trust not have an ILLEGAL PURPOSE, or require a trustee to commit a criminal or tortious act.
2) Provisions that restrict the ability of a settlor to exculpate a trustee from liability for certain egregious breaches of trust.
3) Periods of limitation for bringing a judicial proceeding regarding the trust.
4) A trustee’s duty (in an irrevocable trust) to respond to a demand for accounting by a beneficiary who is entitled or permitted to receive distributions or would receive a distribution if the trust terminated at the time of the demand.
5) A trustee’s duty to act in GOOD FAITH and IN ACCORDANCE WITH PURPOSES OF THE TRUST.
6) The power of a court to take action or exercise jurisdiction with respect to a trust matter.
7) The applicability of TTC 112.038 which renders unenforceable a trust forfeiture clause (analogous to a no-contest clause in a will) where a beneficiary brings an action in good faith AND just cause existed for the action.
8) Common law duty of a trustee to keep a beneficiary of an irrevocable trust who is at least 25 YEARS OF AGE or older informed at any time during which the beneficiary is entitled or permitted to receive distributions or would receive distributions upon the trust’s termination.
When is writing required in a trust?
1) DECLARATION OF TRUST - Trust of PERSONAL PROPERTY requires a declaration IN WRITING by the settlor that she holds the property as trustee for another person or for herself and another person as a beneficiary. WRITING NEED NOT BE SIGNED BY THE SETTLOR.
IF REAL PROPERTY, must be WRITTEN evidence of the trust’s terms bearing the SIGNATURE of the settlor or the settlor’s authorized agent.
2) TRANSFER OF TRUST TO ANOTHER - Transfer of personal property to a trustee who is neither settlor nor beneficiary is effective to create a trust IF: settlor expresses SIMULTANEOUSLY WITH OR PRIOR TO the transfer the intention to create a trust. WRITING IS NOT REQUIRED.
IF REAL PROPERTY, WRITTEN EVIDENCE of the trust’s terms bearing the SIGNATURE OF THE SETTLOR or the settlor’s authorized agent IS REQUIRED.
What must be true about the purpose of a trust?
Can be created for any purpose that is NOT ILLEGAL.
What “intent” is required for a trust?
Settlor must MANIFEST intent to create a trust. No magic words, like “trust” or “trustee,” are necessary.
Has to be clear.
Words like “I wish that,” “My desire is that,” or “I ask that” a named transferee hold property in a certain manner does NOT necessarily create a trust. This is PRECATORY LANGUAGE (not binding).
What capacity must a settlor have?
CREATING A TRUST BY WILL - Must have TESTAMENTARY CAPACITY.
CREATING AN INTER VIVOS TRUST - Must have the capacity required to MAKE A GIFT.
What is required of beneficiaries to have a valid trust?
Requires the existence of ASCERTAINABLE beneficiaries. DO NOT NEED A NAME OR EVEN HAVE TO BE BORN (guardian will carry out an unborn beneficiary’s rights). Class designation is sufficient if the members of the class can be PRECISELY DETERMINED.
Beneficiaries have the RIGHT TO ENFORCE the trust and SUE THE TRUSTEE for breach of fiduciary duties.
What interest does a beneficiary have?
EQUITABLE INTEREST IN:
1) Trust Income; AND/OR
2) Trust Principle
Who can beneficiaries be?
Generally, they must be humans. However, Texas allows for ANIMAL TRUSTS.
What are the requirements for an Animal Trust?
1) Animals must be ALIVE during the settlor’s life time, AND
2) Trust must terminate on the death of the animals,
The terms of the trust may appoint a human to enforce the trust.
RAP APPLIES
What qualifies as trust property?
Basically any property from any source. Does NOT need to be very much. The trust property is called the “res.”
AN UNENFORCEABLE PROMISE TO MAKE A GIFT IN THE FUTURE IS NOT PROPERTY.
Explain the trustee of a trust.
Holder of LEGAL title to the trust property. Charged with FIDUCIARY DUTIES in the management and distribution of the trust property. CAN HAVE MORE THAN ONE TRUSTEE.
A beneficiary CAN be a trustee, as long as the beneficiary is NOT the sole trustee and the sole beneficiary.
Settlor CAN be a trustee, or even the sole trustee, as long as the settlor is NOT the sole beneficiary of the trust too.
Trustee CAN BE A CORPORATION.
What if the beneficiary of the trust is the sole beneficiary and the sole trustee?
Equitable and Legal Title MERGE and the TRUST TERMINATES.
Does a trustee have to accept being a trustee?
YES, the trustee must accept the office of trustee in order to assume liabilities and duties.
A SIGNATURE OF THE TRUSTEE ON THE WRITING OR ON A SEPARATE WRITTEN ACCEPTANCE IS CONCLUSIVE EVIDENCE THAT THE PERSON ACCEPTED THE TRUSTEE POSITION.
T/F - A person named as trustee who does not accept the trust may still incur liability with respect to the trust.
No, did not accept.
Can a trustee’s acceptance be presumed?
A person named as trustee who exercises power or performs duties under the trust is PRESUMED to have accepted the trust.
The following conduct will NOT presume acceptance:
1) Preserving trust property if, within a reasonable time after acting, the person gives notice of the rejection of the trust to the settlor; OR
2) Inspecting or investigating trust property for any purpose.
What if the trustee rejects the trust or is dead?
Then the person named as an alternate trustee in the trust terms may accept the trust.
If no alternates, then the COURT WILL APPOINT A TRUSTEE.
Explain the delivery requirement in creating a trust.
Trust property must be delivered to the other person (trustee). Delivery can be actual, constructive or symbolic.
ACTUAL - The property is physically transferred to another person.
CONSTRUCTIVE - The access to the property to be held in trust (key to a safe) is transferred to another person.
SYMBOLIC - A writing (trust instrument) is transferred to another person.
NOTE: FOR TITLED PROPERTY, A CERTIFICATE OF OWNERSHIP (e.g., stock certificate) GENERALLY MUST BE PLACED IN THE CONTROL OR NAME OF THE INTENDED TRUSTEE.
What if trust property is delivered to the trustee and the trustee rejects office?
The legal title would revert BACK TO THE SETTLOR.
How is property delivered to the trustee in the case of a testamentary trust?
TWO METHODS:
1) TRADITIONAL - The terms are part of the settlor’s will.
2) “POUR-OVER WILL” - Transfers estate assets to a trustee of a trust governed by terms that are NOT in the will.
IN TEXAS, a pour-over gift by will to a trustee of a trust that is executed BEFORE, WITH, OR AFTER the execution of the settlor/testator’s will.
How are trusts classified? Why does it matter?
1) Their revocability;
2) The degree to which distributions are subject to the trustee’s exercise of judgment (mandatory or discretionary);
3) The degree to which distributions are tied to a standard (ex: health, education, maintenance or support);
4) The alienability of beneficial interests (spendthrift trusts); AND
5) Whether the trust is self-settled (i.e., the settlor is a beneficiary).
Rights of creditors and beneficiaries vary with the type of trust involved.
Revocable Trusts: What are the rights of contingent beneficiaries?
As long as the trust is REVOCABLE, the duties of the trustee are owed solely to the settlor.
TX Law - A contingent beneficiary lacks standing to complain of a transaction by a settlor/co-trustee of a revocable trust who was for his life the sole beneficiary with vested rights in the trust.
Revocable Trusts: Can a settlor adjust a trustee’s duties?
Settlor CANNOT ENLARGE the duties of a trustee WITHOUT THE TRUSTEE’S EXPRESS CONSENT.
Revocable Trusts: What are the rights of creditors?
UTC and Restatement allow creditors of a settlor of a revocable trust to reach trust assets.
Texas Statutory Law - does not expressly address this issue.
TTC does deny spend-thrift protection to a settlor’s interest in a trust of which the settlor is a beneficiary.
Mandatory and Discretionary Trusts: What’s the difference between mandatory and discretionary?
MANDATORY INCOME TRUST - requires that the trustee pay ALL trust income to designated beneficiaries.
DISCRETIONARY TRUST - Distributions of income and/or principal are made in the DISCRETION of the trustee, which may or may not be tied to a standard.
Exercise of discretion by the trustee is NOT ABSOLUTE. Settlor may NOT eliminate the duty of the trustee to act in good faith and in accordance with the purposes of the trust.
CASE LAW - supports the view that a court rarely interferes with a trustee’s exercise of discretion.
STANDARD - CLEAR ABUSE OF DISCRETION
Discretionary Trusts: What rights do creditors have as to beneficiaries?
TRADITIONAL RULE - creditors of a non-settlor beneficiary of a discretionary trust CANNOT reach any interest of the beneficiary in the trust.
TEXAS - generally consistent with the common law rule.
MODERN RESTATEMENT - creditor can require the trustee to make a distribution to the same extent that the beneficiary could do so (subject to an abuse of discretion).
SPECIAL RULE FOR CLAIMS FOR CHILD SUPPORT - TFC provides that a court may order the trustees of a discretionary trust to make disbursements for the support of a child to the extent the trustees are required to make payments to a beneficiary who is required to make child support payments. LIMITED TO THE INCOME FROM THE TRUST PROPERTY AND NOT THE TRUST PRINCIPAL.
SPECIAL RULE FOR CLAIMS AGAINST SETTLOR/BENEFICIARY - Creditors of the settlor of a trust of which the settlor is ALSO A BENEFICIARY can reach the settlor’s interest in the trust to the MAXIMUM EXTENT that, in the exercise of the trustee’s discretion, the settlor would be entitled to trust assets.
What are spendthrift trusts? Are they enforceable?
A trust with a clause stating that the interest of a beneficiary in the income and/or principal of the trust may NOT be voluntarily or involuntarily transferred BEFORE PAYMENT OR DELIVERY of the interest to the beneficiary by the trustee.
These are GENERALLY ENFORCEABLE IN TEXAS.
How is a spendthrift trust created?
With a spendthrift PROVISION.
A statement in the trust instrument that it is a “spendthrift trust” suffices to create spendthrift protection.
Spendthrift Trusts: What is the nature of protection provided by a spendthrift provision? Are there exceptions?
Creditors can STILL reach assets DISTRIBUTED to the beneficiary.
The effect of the clause is that it EXEMPTS from creditors’ claims the assets of the trust IN THE HANDS OF THE TRUSTEE, as well as the equitable interest of the beneficiary in the trust.
EXCEPTIONS -
1) DOES NOT protect the beneficial interest of the SETTLOR IN A SELF-SETTLED TRUST.
RECENT CHANGES TO TEXAS STATUTE:
Settlor is NOT considered a beneficiary just because her interest in the trust was created by the exercise of a power of appointment by a third party.
Settlor is NOT deemed to have contributed property to an irrevocable trust that is an intervivos trust for the settlor’s spouse, IF settlor is a beneficiary of the trust AFTER the death of the settlor’s spouse.
Settlor is NOT deemed to have contributed property to an irrevocable trust for the benefit of a person to the extent that the property of the trust was subject to a GENERAL POWER OF APPOINTMENT in another person
EFFECT OF THESE RECENT CHANGES - SETTLOR’S CREDITORS CANNOT REACH HER INTEREST IN THE SPENDTHRIFT TRUST IF SHE IS NOT TREATED AS THE SETTLOR OR A BENEFICIARY;
2) DOES NOT defeat the interest of the federal government in enforcing a FEDERAL OR STATE TAX LIEN;
3) A creditor with a claim arising from the furnishing of NECESSARIES (food or medical care) to a beneficiary is NOT DEFEATED by a spendthrift clause; AND
4) TFC provides that a court may order the trustees of a spendthrift trust to make disbursements for the support of a child to the extent the trustees are required to make payments to a beneficiary who is required to make CHILD SUPPORT payments.
Spendthrift Trusts: What is the status of beneficiaries as “settlors” on account of powers of appointment?
A beneficiary is NOT considered to be a settlor, and is NOT considered to have the power to transfer beneficial interests in trust or to have made such a transfer, merely because the beneficiary holds or exercises one or more of the following:
1) Power to consume or invade trust principal, if that power is: (a) exercisable only with the consent of someone with an adverse interest; OR (b) limited to an ascertainable standard (health, education, maintenance, or support);
2) A limited power of appointment (e.g., the power to appoint trust property to someone other than the beneficiary, her estate, and the creditors of either);
3) A testamentary power of appointment;
4) A so-called “5 & 5” power described in the IRC;
5) A right to withdraw trust principal not exceeding the amount of the annual exclusion for federal gift taxes.
IN ADDITION, a beneficiary is NOT considered to be a settlor merely because of the LAPSE, WAIVER, or RELEASE of one of the powers described above.
WHAT IS THE EFFECT OF THESE RULES? These rules SHIELD trust assets from the claims of creditors of beneficiaries who hold any of these powers.
What are support trusts?
Trust that requires a trustee to make payments of income and/or principal to the beneficiary in an amount necessary for her support in accordance with an ASCERTAINABLE STANDARD (HEMS - health, education, maintenance, and support).
To provide for the beneficiary’s support is to provide funds to enable the beneficiary to live in his or her ACCUSTOMED MANNER OF LIVING.
DISTRIBUTIONS - can be phrased under the trust instrument as MANDATORY OR DISCRETIONARY.
