Trusts

Question 1

What are the requirements for a valid trust?

Answer 1

To have a valid trust the settlor must deliver res to trustee for the benefit of beneficiaries w/the intent to create a trust. The trust must be for a lawful purpose & must usually be in writing. The settlor must have legal capacity to transfer the property. No consideration is req’d.

Question 2

When is an oral trust valid?

Answer 2

When the trust is solely of personal property, all other requirements are met & the trustee is a third party.

Question 3

What property is sufficient for a trust?

Answer 3

To have a trust there must be property in the trust. The trustee must have legal title to the property. An expectation interest is not property, but a future interest is presently owned property. A promise to contribute property to the trust supported by consideration gives rise to a property interest in the trust.

Question 4

What are the requirements for a trustee?

Answer 4

A trustee must have legal capacity to deal w/the property & capacity to contract & execute deeds. An unincorporated association cannot be a trustee. Only banks & trust companies can serve as corporate trustees. No trust fails for lack of trustee, the court will appoint one if necessary.

Question 5

Trustee’s acceptance of the trust?

Answer 5

Can be by either Trustee’s signature, signifying acceptance of trust, OR by conduct (e.g., exercises trust powers or performs trust duties)

Question 6

How can a trustee resign?

Answer 6

A trustee needs court approval upon a showing that he can no longer appropriately serve as trustee. He must provide an accounting.

Question 7

What trust purposes are illegal?

Answer 7

Any illegal purpose is invalid. Trusts that call for the destruction of property are not valid. Trust that have unlawful conditions against public policy are invalid – conditioned on divorce or total restraint on marriage. Partial restraints on marriage are valid.

Question 8

When is a trust revocable?

Answer 8

All trusts are revocable & amendable by the settlor unless expressly made irrevocable & unamendable. Any amendment or revocation must be in writing. Guardian of a settlor does not have the ability to revoke a trust; only a court could revoke upon finding that revocation is in the ward’s best interest.

Question 9

What does a durable power of attorney accomplish?

Answer 9

A durable POA is a signed, notarized document that authorizes another person to act on behalf of the principal. The agent’s authority will not be affected by the person’s incapacity if it expressly states. The principal can grant a springing power of attorney that only becomes effective upon incapacity. Appointment of a guardian of the estate terminates a POA.

Question 10

What are the requirements of a charitable trust?

Answer 10

Must satisfy the other formalities of a trust & be established for a charitable purpose. A charitable trust is not subject to the RAP, it may be perpetual. “to be used for charitable purposes” or “to support the performing arts” is valid. To be a charitable purpose, the trust must confer a substantial amount of social benefit – religion, science, art, medical research, etc… It cannot benefit an individual or small group of individuals. If the charitable purpose can no longer be carried out, a court can reform it to carry out the settlor’s general intent as near as possible.

Question 11

Who can enforce a charitable trust?

Answer 11

Any specifically named charitable beneficiary & the attorney general. The AG is a proper party to any proceeding regarding the trust. If the named beneficiary ceases to exist, trustee can pick a new beneficiary w/out going to court, but must notify the attorney general.

Question 12

What is an honorary trust?

Answer 12

An honorary trust is really a gift where the beneficiaries are not people. The gift will be upheld if the trustee decides to perform. If the gift fails, there is a resulting trust in favor of the residuary beneficiary. RAP is an additional problem, & the trust should be limited to 21 years.

Question 13

What is a resulting trust?

Answer 13

A term that courts apply to a trust that has failed for some reason. A purchase money resulting trust occurs where A pays the purchase price of property & has title taken in B’s name, not intending a gift. If A & B are related, presumption is gift; if they aren’t, presumption is PMRT.

Question 14

What is a constructive trust?

Answer 14

A constructive trust is not a trust. It is an equitable remedy whose object is to disgorge unjust enrichment. The two elements are wrongful conduct & unjust enrichment.

Question 15

What is a spendthrift trust?

Answer 15

A spendthrift trust protects a trust’s beneficiaries from creditors by prohibiting voluntary assignment or involuntary transfer of the beneficiary’s interest. They are given full effect in Texas w/the exception of contracts for necessities, *child support obligations, *interest retained by settlor, & federal tax liens. To be a spendthrift trust, the instrument must expressly provide.

Question 16

Can creditors reach a grantor’s trust interest?

Answer 16

Creditors can reach any interest in a revocable trust. In an irrevocable trust, only the grantor’s income interest can be reached. Creditor cannot reach the principal unless it was a fraudulent transfer.

Question 17

Who can compel a trustee w/sole discretion to make distributions?

Answer 17

The settlor cannot compel a distribution. Creditors can compel trustee to distribute the maximum amount that trustee has the discretion to distribute. Beneficiaries can challenge trustee’s discretion.

Question 18

What court has jurisdiction over a trust dispute & where is venue proper?

Answer 18

District courts & statutory probate courts have concurrent jurisdiction over all proceedings regarding inter vivos trusts, but probate courts have exclusive jurisdictions over testamentary trusts. Venue is the residence of the trustee, or if more than one trustee, the situs of the trust.

Question 19

When are beneficiaries entitled to an accounting?

Answer 19

Trust beneficiaries are entitled to an accounting not sooner than 12 months after the trust is created & then every 12 months.

Question 20

What are the trustee’s powers?

Answer 20

The Texas trust code, except as provided by settlor, gives broad fiduciary powers to the trustee. Specifically, the trust code expressly authorizes a trustee to [do what ever question involves]. A trustee can do almost anything a fee simple owner can do

Question 21

What are the limitations on a trustee?

Answer 21

A trustee cannot *borrow trust funds or use trust funds as *collateral for a personal loan, buy or sell trust assets to itself, loan funds to the trust, profit from serving as trustee (except compensation), or breach fiduciary duties. Trustee can loan funds to beneficiary, so long as it is reasonable.

Question 22

Trustee duty to insure property?

Answer 22

A trustee’s duty to protect & preserve the trust’s assets includes the duty to insure them against loss, if a prudent person would insure.

Question 23

What happens when a trustee breaches a fiduciary duty?

Answer 23

In addition to bringing an action to remove the trustee, beneficiary has the option to ratify the transaction or sue for the resulting loss in a surcharge suit. If the case involves self dealing, the “no further inquiry” rule provides that the only issue will be a determination of damages.

Question 24

When does a COA accrue against the trustee & what is the limitations period?

Answer 24

A suit must be brought w/in 4 years of the trustee repudiating the trust, of the trustee dying, or resigning, or giving an accounting that makes a full disclosure of the facts on which the action is based.

Question 25

When there are multiple trustees, how can one protect himself?

Answer 25

Majority rules w/multiple trustees, but a co-trustee has a duty to prevent a breach by the co-trustees. The trustee should not participate in the transaction & express dissent in writing.

Question 26

How is a trustee’s investment performance measured?

Answer 26

Under the Uniform Prudent Investor Act, a trustee’s prudence is measured at the time the investment was made. UPIA is based on modern portfolio theory & looks to the total return. Under UIPA, a trustee must establish & maintain a custom investment strategy that will effectuate settlor’s intent. Under UIPA a trustee can exercise adjustment power & allocate capital gains to income.

Question 27

How does a trustee allocate b/t principal & income in Oil & Gas interests?

Answer 27

Delay rental is all allocated to income; royalty & bonus are allocated equitably (presumed equitable: 15% to principal & 85% to income; & if trust is pre-2004, 27.5% to principal & 72.5% to income).

Question 28

How does a trustee allocate b/t principal & income in other unusual assets?

Answer 28

Pensions & IRAs are treated as income until they exceed 4% of the plan’s value at the beginning of the period. Other liquidating assets allocate either 5 or 10% to income & the rest to principal. Commissions & expenses are allocated ½ against income, ½ against principal.

Question 29

When can a B bring an action against a 3P who injured the trust?

Answer 29

When either the trustee is unable or unwilling to bring an action or when the trustee participated w/the party in committing a breach of trust.

Question 30

Trustee exculpatory clauses.

Answer 30

Settlor can include a valid exculpatory clause relieving trustee of beneficiary liability except for gross negligence, fraud, or bad faith, but such clauses are strictly construed. If it purports to relieve trustee from liability for any of these three things, it is unenforceable. While self dealing rules can be waived, an exculpatory clause, by itself, does not authorize self dealing.

Question 31

When can a court terminate a trust prior to the time fixed for its termination?

Answer 31

Upon petition from the trustee or a beneficiary, a court may terminate the trust or may modify if the court finds that the provisions of the trust have been fulfilled, or have become illegal or impossible to fulfill, or b/c of changed circumstances, compliance w/trust terms would *defeat or substantially impair accomplishment of trust purposes.
Termination of an uneconomic trust: after giving notice to the Bs, the trustee of a trust having a value of less than $50k may terminate the trust if he determines that the cost of administration doesn’t justify continuation of the trust (no ct. order nec.) (2007 §)

Question 32

What powers does a trustee have after a trust has been terminated?

Answer 32

A trustee can wind up trust affairs & distribute the proceeds to the beneficiaries.

Question 33

What is a QTIP trust & what is it for?

Answer 33

A QTIP trust defers federal estate tax. To qualify income must be payable to spouse for life. During the spouse’s lifetime, no other beneficiaries are allowed. The trust corpus is taxed at the spouse’s death.

Question 34

For federal tax purposes how much is the credit shelter?

Answer 34

$1m lifetime gifts & $2m for the estate (including lifetime gifts).