Trusts Flashcards
Private Express Trusts—Elements
- Intent,
- Trust Property,
- Valid Purpose,
- Ascertainable Beneficiaries
Revocable versus Irrevocable Trusts
Revocable: can be terminated by the settlor at any time. Irrevocable trust usually CANNOT be terminated.
Majority rule—presumed irrevocable unless it expressly states otherwise.
UTC (and minority jx) presumed revocable unless it expressly states that it is irrevocable.
Mandatory versus Discretionary Trusts
Mandatory requires trustee to distribute all trust income.
Discretionary, trustee given the power to distribute income at his discretion. Trustee does not abuse his discretion UNLESS acts dishonestly or in a way not contemplated by the trust creator.
Parties to a Trust
o Grantor/Settlor—creator of trust.
o Trustee—holds legal interest or title to trust property.
o Beneficiaries—receives benefit of trust.
Income Beneficiaries—receive income (i.e. profits from a business held by trust).
Remainder Beneficiaries—entitled to the trust principal upon termination of the trust
Private Express- Intent
Settlor must intend to make a gift in trust. The settlor’s intent may be manifested orally, in writing, or by conduct.
Private Express- Valid trust purpose
ANY purpose that’s not illegal, restricted by rule of law or statute, or contrary to public policy.
If terms improper – terms will be STRICKEN but trust will not fail overall unless removal of terms is fatal
Restrain a 1st marriage generally VIOLATE public policy. But might be upheld if trustee’s motive was supporting beneficiary while single
Private Express- Ascertainable beneficiaries
Required so that equitable interest can be transferred automatically by operation of law and directly benefit the person.
Settlor MAY refer to outside writings or acts to identify beneficiaries
EXCEPTIONS to requirement:
• Indefinite Class (“my friends”) UNLESS trustee must distribute equally to all members of indefinite class
• Unborn children
• Class Gifts: reasonably definite class (“my grandkids”)
• Charitable trusts (must NOT have individual ascertainable beneficiaries)
Types of Private Express Trusts
- Inter vivos trust–Created while trustor is living; trustor can designate himself or 3rd party as trustee; inter vivos includes Pour-Over trust provisions in will
- Testamentary trust -created in will or in doc incorporated by reference into a will. The will containing the trust MUST meet the attested or holographic will requirements.
Pour-Over Provision
Provision in a will that directs the distribution of
property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire
trust.
A will may “pour over” estate assets into a trust, EVEN IF the trust instrument was NOT executed in accordance with the Statute of Wills, as long as the trust is identified in the will, and its terms are set forth in a written instrument.
- Trust amendment does NOT have to be executed with formalities required for a will. NO witness or signature requirements!
- A later amendment to the trust WILL apply to the assets passed to the trust by the previously executed pour-over will.
Charitable Trusts
- Charitable purpose and
- Exists for benefit of community at large OR for a class of particular segment of the community
Exs: relief of poverty, advancement of edu or religion
Cy Pres Doctrine applies
RAP does NOT apply
Cy Pres Doctrine
If original charitable purpose becomes illegal, impracticable, or impossible to perform, a court may modify a GENERAL INTENT charitable trust to seek a similar charitable purpose
Modern approach presumes a general intent
specific intent to help ONE charity vs general to help
• If SPECIFIC, court may NOT modify and trust will be TERMINATED and become a RESULTING TRUST (an implied trust held for the settlor or his/her heirs).
Exam Tip must carefully analyze whether the trustor intended for trust to only benefit ONE specific charity
(such as one specific retirement home), or to GENERALLY benefit charity (all retirement homes).
Remedial Trusts
Resulting Trust – Court may create a resulting trust requiring the holder of the property to RETURN IT to settlor or to settlor’s estate when:
(1) trust FAILS in some way OR
(2) there is incomplete disposition of trust property
Note: When a testamentary trust fails, the residuary legatee succeeds to the property interest. The purpose of a resulting trust is to achieve the settlor’s likely intent in
attempting to create the trust.
Creditors
Beneficiary’s creditors may reach trust principal or income ONLY WHEN such amounts:
(1) become payable to beneficiary or
(2) are subject to her demand.
Alienation
Beneficiary’s equitable interest in trust property is freely alienable
Can be sold or used as collateral for a loan unless a statute or trust instrument limits this right
Support Trusts
Directs the trustee to pay income or principal as necessary to support trust beneficiary.
Creditors CANNOT reach assets of support trust, EXCEPT to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.
Discretionary Trust
Trustee given complete discretion re: whether to apply payments of income/principal to beneficiary
If trustee exercises his discretion to pay, the beneficiary’s creditors have same rights as the beneficiary, UNLESS spendthrift restriction. If discretion to pay is NOT exercised, then the beneficiary’s interest CANNOT be reached by his creditors.
Beneficiary of fully discretionary trust lacks standing to challenge the actions or inactions of the trustee unless there is a clear abuse of discretion.
Spendthrift Trust
Expressly restricts beneficiary’s power to voluntarily or involuntarily transfer his equitable interest
Creditors usually CANNOT reach the trust interest UNLESS money is owed for:
(1) child/spousal support
(2) to basic necessities providers OR
(3) tax lien holders.
Settlor’s Power to Revoke or Amend
If settlor retains power to revoke, also has power to modify or amend the trust.
If NO reservation, modification or termination can occur ONLY IF:
(1) consent of ALL beneficiaries AND
(2) proposed change will NOT interfere with a primary purpose of trust.
Majority rule—presumed to be irrevocable
UTC and minority—presumed revocable
An amendment to a trust does NOT have be executed with the formalities req’d for a will. No witness or signature requirements!
Trustees Power to Terminate
NONE, unless trust contains express termination provisions
A court can remove a trustee if (1) trust purpose would be frustrated by trustee’s continuance or (2) if trustee violated a duty.
Terminate Trust
(1) trust purpose fulfilled (auto-terminates)
(2) settlor is deceased/has no remaining interest
(3) all beneficiaries consent (income beneficiaries and remainder beneficiaries)
Trustee can BLOCK a premature trust termination by beneficiaries if shows trust has unfulfilled material purpose
Disclaimer
Majority states have statutes permitting beneficiaries to disclaim their interest in trust property IF:
(1) in writing
(2) within 9 months after the future interest would become “indefeasibly vested”
Otherwise, disclaimer is INVALID.
When holder of a future interest disclaims, deemed to have predecease life tenant
If the remainder is VESTED and income beneficiary disclaims — trust principal becomes immediately distributable (accelerates) to the remainder beneficiaries
If remainder is CONTINGENT upon a condition and income beneficiary disclaims, the remainder will NOT accelerate.
Lapse
Majority– lapses b/c anti-lapse statutes do NOT apply to NON-probate gifts (ie a trust!)
EXCEPTION: some states adopted UPC § 2-707 where a SUBSTITUTE GIFT is created in descendants of the deceased issue when there are words of survivorship (ie “to those of my issue who are living”)
Trustee Powers
Powers granted expressly in the trust Implied powers necessary to act as a reasonably prudent person in managing trust: 1. contract 2. sell 3. lease or 4. transfer the trust property
Trustee: Duty of Loyalty
Duty to administer trust in good faith (subjective)
Duty to act reasonably (objective) when investing property and managing trust solely in the best interests of the beneficiaries.
No self-dealing
No conflicts of interest
Trustee: Self-Dealing
IRREBUTTABLE presumption trustee breached duty of loyalty; no further inquiry into trustee’s reasonableness or good faith; per se breach.
Exs:
Buying/selling trust assets
Selling property between trusts that trustee manages
Borrowing from/making loans to trust
Using trust assets to secure personal loan
Engaging in prohibited transactions with friends/relatives,
Otherwise acting for personal gain through trustee position
EXCEPTION: if self-dealing is authorized (by settlor, court order, or all beneficiaries), transaction MUST still be (1) reasonable and (2) fair to avoid liability for breach.
Remedy for Self-Dealing
Beneficiaries can
(1) set aside the transaction or
(2) ratify the transaction and recover the profits from the transaction
Trustee: Conflict of Interest
Ex: Trustee invests trust assets in corp in which trustee owns stock; transaction might affect the trustee’s judgment
Presumption of breach of loyalty REBUTTABLE if shows:
(1) terms of transaction were fair OR
(2) transaction would have been made by an independent party
Trustee: Duty of Care (Prudence)
Duty to act as a reasonably prudent person and treat the trust property as if it was his/her own.
Duty to follow the trust directions and carry them out in accordance with the trust.
Prudent Investor Rule
Duty to Diversify
Duty to Make Property Productive
Duty to be Impartial
Prudent Investor Rule
Requires trustee act as a prudent investor when investing his own property (putting less emphasis on risk level); use reasonable care, caution, and skill when investing and managing trust assets
Duty to Diversify
Adequately diversify trust investments to spread risk of loss under a total performance portfolio approach
EXCEPTION: not req’d if administrative costs would outweigh benefits
Duty to Make Property Productive
Pursue all possible claims
Derive max amount of income from investments
Sell assets when appropriate
Secure insurance
Pay expenses, and
Act within a reasonable period of time in all matters
Duty to be Impartial
Balance interests of present and future beneficiaries
Duty to be Impartial: balance the interests by investing property to produce reasonable income for income beneficiaries while preserving the principal for the remainder beneficiaries.
Duty to Disclose
Disclose complete and accurate information about :
(1) nature of trust property
(2) extent of trust property and
(3) allowing access to trust records and accounts
Duty to Account
Periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed against the terms of the trust.
Remedies for Violation of Trustee’s Duties
Lost profits
Interests, and
Other losses resulting from a breach
Beneficiaries may sue the trustee and seek:
(1) damages or
(2) removal of trustee for breach of duties
doctrine of equitable deviation
Court may modify a trust if:
- events unanticipated by trustee have occurred AND
- changes would further purposes of trust
Modification should be made in accordance with settlor’s probable intention
Note: Court need NOT seek beneficiary consent to make modification
Court CANNOT modify
CANNOT alter rights of beneficiaries due to changed circumstances…but MAY interpret certain changes as frustrating trust purposes to make such modifications
