Trusts

Question 1

Private express trust

Answer 1

Definition:

• fiduciary relationship with respect to property
• the trustee holds legal title to benefit of beneficiary
• intent to create
• only legal purpose

Question 2

Manifestation of intent to create trust

Answer 2

No magic words, but precatory (wishful words) are not enough.

But precatory words + parol evidence might establish intent to create a trust.

Question 3

How to create private express trust

Answer 3

Intent, trustee, res, beneficiary, valid trust purpose.

Trust created to take effect at settlor’s death: part of will provides for creation of trust.

Trust created during lifetime:

(1) transfer in trust: writing or property delivered to trustee.
(2) declaration in trust: settlor himself is trustee

Question 4

Illegal trusts

Answer 4

Illegal at creation: try to excise bad from good. If impossible, try to invalidate trust or allow trustee to keep everything.

Subsequently illegal: becomes a resulting trust and everything goes back to settlor or settlor’s residuary devisees

Question 5

Charitable trusts

Answer 5

Focus is on benefit to society.

Small number of beneficiaries: two views, it’s actually a private trust or it still is a charitable trust because society still benefits.

Rule against perpetuities does not matter.

Question 6

Cy pres

Answer 6

“As nearly as possible”

Question 7

Pour over wills

Answer 7

Settlor creates inter-vivos trust with provision in will devising all or part of estate to trustee of the trust.

Question 8

Honorary trust

Answer 8

A trust with no ascertainable benefit to society or any beneficiaries.

Typically, RAP problems and almost always violate because no measuring life.

Courts then treat them as resulting trusts.

Question 9

Totten trust

Answer 9

A tentative bank account trust, whereby named beneficiary takes whatever is in the bank account.

Question 10

Spendthrift trust

Answer 10

Definition: beneficiary cannot transfer his interest and creditors cannot attach

• Except preferred creditors: the government, necessities of life to beneficiary, child support, alimony, tort judgment.
• “Surplus” attachment for amount in excess of beneficiary’s “station in life”

Question 11

Support trust

Answer 11

Definition: trustee is required to use only so much for beneficiary’s health, maintenance, support, education

• Beneficiary cannot alienate
• Creditors generally cannot attach
• Except preferred creditors: the government, necessities of life to beneficiary, child support, alimony, tort judgment.
• “Surplus” attachment for amount in excess of beneficiary’s “station in life”

Question 12

Discretionary trusts

Answer 12

Definition: trustee is given sole and absolute discretion in determining how much to pay beneficiary if anything or ever

• Beneficiary generally cannot alienate because there might be nothing to assign, but if there was an assignment, then assignee steps into shows and trustee must pay.
• Creditors generally cannot attach because there might be nothing to attach, but if there is an attachment then he must pay.

Question 13

Resulting trust

Answer 13

Definition: an implied in fact trust based on presumed intent of the parties. If a resulting trust is decreed by the court, the assets will be transferred back to settlor or to his residuary devisees, or whomever by intestate succession.

Question 14

7 situations when resulting trusts arise

Answer 14

(1) a private trust ends by its own terms
(2) private express trust fails because no beneficiary
(3) when a charitable trust ends because of impossibility and cy pres cannot be used
(4) when private express trust fails because of illegality
(5) there’s excess corpus from very successful private trust
(6) purchase money resulting trust: someone helping facilitate a transaction
(7) Semi-secret trust: a trustee is named but no beneficiary

Question 15

Constructive trusts

Answer 15

Definition: A remedy to prevent unjust enrichment

Where court decrees, wrongdoers have one obligation: to transfer property to intended beneficiary

Arises in 4 situations

(1) trustee of private express/charitable trust creates profit from self-dealing
(2) a will situation based on fraud in the inducement or undue influence
(3) secret trusts: the amount given to trustee had oral promise to have a beneficiary. (Similar but different to semi-secret trusts)
(4) oral real estate trusts: promise to hold a deed to later give to another.

Question 16

Trustee powers

Answer 16

Trustee has all enumerated powers and all implied powers

Question 17

Trustee duties

Answer 17

Revocable trust = duty to settlor
Irrevocable trust = duty to beneficiaries

Duty of loyalty: Act in the best interest of beneficiary at all times. No self-dealing (if there is, “surcharge,” trustee makes up the loss).

Duty to invest (only express trusts)

(1) some states have lists which trustee must follow (often fed gov bonds, fed insured CD’s, sometimes publicly traded corporations)
(2) common law prudent person tests: each individual investment scrutinized, add blue chip stocks and maybe mutual funds, but never new businesses.
(3) Uniform Prudent Investor Act: look at portfolio as a whole.

Duty to diversify

Duty to earmark: to label ownership of a stock as “John Smith, as trustee of ABC trust.”

• common law: if trustee breaches and stock loses value, trustee personally liable for the loss.
• modern law: if trustee breaches and stock loses value, trustee personally liable only if the failure to earmark was a cause in fact of the loss

Duty to segregate: not commingle personal and trust funds.

Duty to account

Duty of due care (reasonably prudent person)

Question 18

Remedies for breaches of duty

Answer 18

Damages, constructive trust, tracing and equitable lien

Question 19

Liability of trustee to third parties: contracts

Answer 19

Common law rule: If acting on behalf of trust and sued in contract, and if not personally at fault, then trust funds are liable.

Modern rule: if the other party to the contract knew the trustee was acting on behalf of trust, then trustee not personally liable.

Question 20

Liability of trustee to third parties: tort

Answer 20

Common law rule: trustee sued in personal capacity, if not at fault can seek indemnification from trust.

Modern rule: trustee is sued in personal capacity and is personally liable for torts only if the trustee is personally at at fault.

Question 21

Modification by settlor

Answer 21

Settlor can modify trust and to revoke entirely.

Express power to revoke will include implied power to modify. Must be expressly provided to preserve.

Question 22

Modification by court

Answer 22

-under cy pres

• deviation power: court changes administrative powers but not the beneficiaries if
  (1) unforeseen circumstances on part of settlor and
  (2) necessity (needed to preserve the trust)

Question 23

Termination of irrevocable trusts

Answer 23

Three ways

(1) Settlor and all beneficiaries agree to terminate
(2) All beneficiaries agree to terminate and all material purposes accomplished
(3) by operation of law

Question 24

Writing requirement

Answer 24

A trust of private property requires no writing.

But trust for land must be in writing per SOF.

Question 25

“Secret” and “semi-secret” trusts

Answer 25

Secret = A will makes a gift that’s absolute on its face but was in face made in reliance on beneficiary’s promise to hold the property in trust for another. Requires proof by clear and convincing evidence. Remedy: constructive trust imposed.

Semi-Secret = The will makes a gift in trust but fails to name beneficiary. Gift fails, and named trustee holds property on resulting trust for testator’s heirs.

Question 26

Can a trust be set up to benefit a political movement?

Answer 26

Yes, counts as an educational charitable trust.

Question 27

Does a trustee-lawyer violate any duties if he compensates himself for services?

Answer 27

No, reasonable compensation allowed.

Question 28

Revocable trusts: who does the trustee owe a duty to?

Answer 28

The settlor only

Question 29

Duty to invest applies to what kind of trusts?

Answer 29

Express trusts