Trusts

Question 1

• Private Express Truat Defined

Answer 1

• A fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

Question 2

Property of the Trust

Answer 2

Any presently existing interest in property that can be transferred can be the corpus of a trust.

Examples:

Fee simple, Future interest, Life insurance policy, Bonds, Stocks.

Illusory interest cannot be the subject matter of a trust.

Examples:

• Future profits to a business.
• A debt that settlor owes beneficiary is not property and cannot be the corpus of a trust.
• What settlor expects to inherit or receive as a gift.

Question 3

• Who Can Be the Beneficiary of a Private Express

Trust?)

Answer 3

• Any ascertainable person or group of people can be the beneficiary of a private express trust. Person includes a legal person.
• Corporations can be the beneficiary of a private express trust.
• Unincorporated associations

(a) Common law: could not be the beneficiary of a private express trust,
(b) Modern law: can be the beneficiary of a private express trust.

• Class gifts, but watch out for a class that is too big.
• A child conceived when the interest was created and later born is deemed an ascertainable person.

Question 4

Trustee

Answer 4

A trust must have a trustee, but the court will not allow the trust to fail solely because there is no trustee or a trustee refuses to serve.

The court, in such case, will appoint a trustee.

Until a trustee is appointed, the settlor or the settlor’s estate will hold legal title.

Question 5

Manifestation of Trust Intent

Answer 5

There must be present manifestation of trust intent by the settlor.

No magic words, however, are needed to create a trust. Settlor does not have to use the words “Trust,” ‘trustee,” or “beneficiary.”

Although no magic words are needed to create a trust, precatory words (words of wish, hope, or desire), by themselves are not sufficient to create a trust.

But precatory words plus parol evidence can create trust.

If you conclude that the precatory words and parol evidence is not sufficient to cause a trust to be created, then the transferee owns the property in fee simple.

Trusts of personal property do not have to be in writing. The Statute of Frauds applies only to real property.

Question 6

How to Create a Private Express Trust

Answer 6

• If settlor wants to create a trust to take effect at settlor’s death, the only way settlor can do that is by complying with the Statute of Wills, i.e. the local probate code. Thus, our settlor is really a testator. Thus, a part of testator’s will has a provision for a testamentary trust, a trust which will take effect at testator’s death.
• If settlor wants to create a trust to take effect during his lifetime, there are two ways to accomplish this: Transfer in Trust and Declaration in Trust.

Question 7

Transfer in Trust:

Answer 7

In a transfer in trust, a third person is the trustee.

[i] For a trust of real property, the settlor must execute and deliver a deed transferring title to the trustee. The writing requirement is due to the Statute of Frauds.

[ii] For a trust of personal property, there must be delivery to the trustee of the trust property at the time settlor manifests the intent to create the trust. The delivery can be actual, symbolic or constructive.

Note: If there is no delivery to trustee, there is no trust. Moreover, a promise to deliver the corpus in the future is not delivery.

Question 8

Declaration in Trust:

Answer 8

Settlor herself is the trustee.

(i) In a declaration of trust for real property, there must be some writing satisfying the Statute of Frauds indicating that settlor also is the trustee.
(ii) In a declaration in trust of personal property, because the settlor is the trustee, there is no issue of delivery: One cannot deliver property to oneself. So if the settlor is going to be the trustee in a declaration in trust of personal property, the only thing to is the present manifestation of trust intent.

Question 9

Legal Purpose

Answer 9

• A trust may be established for any legal purpose.
• Illegality at creation: try to excise the illicit condition and sever good from bad; if it’s not possible, the court has two options and can do whatever achieves the best result

1. Invalidate the trust at its inception. Thus, the trust is not recognized. Settlor remains the owner of the property.
2. Allow the trustee to keep the property for himself or herself.

• Illegality after creation: resulting trust is decreed.

Question 10

Definition of a Charitable Trust

Answer 10

Statute of Elizabeth: Trusts for education, alleviation of poverty, alleviation of sickness, to help orphans.

Restatement: Any trust which confers a substantial benefit upon society.

Question 11

Creation of a Charitable Trust

Answer 11

It is created in the same way that a private express trust is created: you need a [i] manifestation of trust intent, which can be done [ii] at testator’s death by will or [iii] during settlor’s lifetime by declaration of trust or by transfer in trust [iv] of a presently existing interest in property that can be transferred [v] for a legal charitable purpose.

Question 12

Beneficiary of a Charitable Trust

Answer 12

In a charitable trust, there is no ascertainable person or group of people who are the beneficiaries.

While an individual may receive an incidental benefit, the focus is on society.

Where the beneficiary is of a small group of people - split authority.

Question 13

RAP

Answer 13

Doesn’t apply to charitable trusts.

Question 14

• Cy Pres

Answer 14

In cy pres, if the court finds that settlor had a general charitable intent (to help the poor who are sick) and only the mechanism for effectuating that intent is not possible or practicable, the court can modify the mechanism, cy pres, as nearly as possible, to effectuate settlor’s general intent.

To determine whether settlor’s charitable intent was general or specific, introduce extrinsic and intrinsic evidence.

Question 15

Pour-over wills

Answer 15

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

The pour-over provisions are validated in three ways:

1. Incorporation by reference;
2. Facts of independent significance; and
3. UTATTA (Uniform Testamentary Additions to Trusts Act).

Question 16

Honorary Trusts

Answer 16

No ascertainable beneficiary and no substantial benefit to society.

It is simply a goal of the settlor. The trustee is not required to carry out settlor’s goal, but has the power to carry it out. Thus, the trustee is on his honor only to carry out settlor’s intent. Trustee may refuse to carry out settlor’s wishes and the trust them fails.

Example: trust to care for settlor’s pet.

• Because there is no measuring life for these trusts, they virtually always violate the Rule Against Perpetuities.
• Thus, some courts strike the trust at its inception, and as a consequence, we have a resulting trust.
• In other states, courts allow the honorary trust to endure for 21 years and then a resulting trust follows to end the trust. This is the approach of the Restatement of Trusts and the Uniform Probate Code.

Question 17

• Totten Trust

Answer 17

• A Totten trust is also referred to as tentative bank account trust, whereby the named beneficiary takes whatever is left in the account at death of the owner of the account.
• The depositor/trustee owns the account during the depositor’s lifetime and owes the named beneficiary no fiduciary duties whatsoever.
• It really, therefore, is just a will substitute.
• A Totten trust or Totten account is always a type of savings account with a bank or other financial institution.

Question 18

Voluntary alienation

vs.

Involuntary alienation

Answer 18

Voluntary alienation - beneficiary of a private trust can sell his right to future payments; his right to receive this year’s payment, or even his right to receive every interest payment for the rest of his life.

Involuntary alienation - property can be attached by creditors after proper legal proceedings.

Question 19

• Spendthrift Trust

Answer 19

Beneficiary can’t transfer his right to future payments and creditors can’t attach the beneficiary’s right to future payments.

Question 20

Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the spendthrift provisions?

Answer 20

• No, as a general rule.
• This would defeat the terms of the trust.
• But sometimes a court will recognize the assignment on the ground that the beneficiary merely has given the trustee a direction or order to pay the beneficiary’s agent or representative, i.e. the assignee. In such a case, prior to the time of payment, the beneficiary would have the right to revoke the order or direction.

Question 21

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions?

Answer 21

• No, as a general rule.
• Common law exceptions: Preferred creditors can attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions.
  
  • Preferred creditors: government (IRS); child support; spousal support; alimony; a tort judgment creditor.
• In addition to common law exceptions for preferred creditors, in many jurisdictions any creditor (even if not a preferred creditor) has the right to attach “surplus,” as measured by the beneficiary’s “station in life.”
  
  • Suppose beneficiary (“B”) needs $25,000 a year to live, to maintain her station in life, that is, her standard of living. Suppose also that the trust generates $75,000 of income for the B. The difference, $50,000, is surplus and in many jurisdictions that can be attached by any creditor, not just a common law preferred creditor.

Question 22

Can the settlor ever create a spendthrift trust for himself or herself?

Answer 22

• As to involuntary alienation:
• [i] In the overwhelming number of jurisdictions, the trust itself is valid, but the spendthrift provisions are not recognized. To recognize a self-settled spendthrift trust for the purpose of insulating oneself from one’s own creditors violates public policy.
• [ii] In a few jurisdictions, however, a settlor is allowed to create a spendthrift trust for himself, thus insulating himself from his own creditors.
• As to the voluntary alienation:
• [i] Most jurisdictions will ignore the provision restricting voluntary alienation and allow the settlor to voluntarily alienate her interest.
• [ii] But some jurisdictions will not allow settlor to transfer her right to future payments.

Question 23

Support Trusts

Answer 23

Trustee is required to use only so much of the income or principal as is necessary for the beneficiary’s health, support, maintenance, and education.

Question 24

Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the support trust provisions?

Answer 24

No. To allow any type of assignment would defeat the purpose of the trust and violate settlor’s intent.

Question 25

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the support trust provisions?

Answer 25

• See rules for spendthrift trusts: rules are the same. (Generally no attachment. But there are preferred creditors, who can attach the beneficiary’s right to future payments.)

Question 26

Can the settlor ever create a support trust for himself or herself (create a self-settled support trust)?

Answer 26

• See rules for spendthrift trusts.

Question 27

Discretionary Trust

Answer 27

Trustee shall have full, sole, and absolute discretion in determining when to pay the beneficiary and how much to pay the beneficiary.

Question 28

Can beneficiary ever transfer his interest, his right to future payments, notwithstanding the discretionary trust provisions?

Answer 28

• On the one hand, no: Beneficiary cannot voluntarily transfer his right to future payments because what exactly is the beneficiary assigning? The beneficiary may not get anything.
• But, on the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the beneficiary. Because the beneficiary could not force payment by the trustee, neither can the assignee. However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.

Question 29

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the discretionary trust provisions?

Answer 29

• On the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach. The trustee may never allocate anything to the beneficiary. The beneficiary could not force payment, and neither can the creditors. Thus, there is nothing to attach by the creditors.
• On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee does decide to pay, he must pay the creditors or be held personally liable.

Question 30

Can settlor ever create a discretionary trust for herself?

Answer 30

See rules for spendthrift trusts.

Question 31

• Definition of a Resulting Trust

Answer 31

• A resulting trust is an implied in fact trust and is based upon the presumed intent of the parties.
• If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the settlor if the settlor is alive, and if not, to the settlor’s estate, i.e. to the residuary devisees if any, and if none, to the intestate takers (the heirs).

Question 32

How a Resulting Trust Arises?

Answer 32

1. When a private express trust ends by its own terms, and there is no provision for what happens to the corpus thereafter.
2. When a private express trust fails, because there is no beneficiary.
3. When a charitable trust ends because of impossibility or impracticability and Cy Pres cannot be used.
4. When a private express trust fails because, after creation, the trust becomes illegal.
5. When there is excess corpus in a private express trust.
6. When we have a “purchase money resulting trust.” –> A pays consideration to B to have title to property transferred to C. If A and C are not closely related: there is a rebuttable presumption that C is holding as a purchase money resulting trustee for the benefit of A. If A and C are closely related: there is a rebuttable presumption that A simply made a gift to C.
7. Semi-secret trusts: arise when the will makes a gift to a person to hold as trustee, but does not name the beneficiary. –> Distinguish from “secret trusts” where the courts allow in parol evidence to establish the identity of the beneficiary
   8.

Question 33

Constructive Trust Defined

Answer 33

A constructive trust is really a misnomer because it is not a trust. It is a remedy to prevent fraud or unjust enrichment.

When a court decrees a constructive trust, the wrongdoer will have only one obligation: to transfer the property to the intended beneficiary as determined by the court.

Question 34

How a Constructive Trust arises?

Answer 34

1. When trustee of private express trust or charitable trust makes profit because of self-dealing.
2. With respect to the law of wills, when there is fraud in the inducement or undue influence.
3. Secret trusts in the law of wills: The will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B. Parol evidence is admissible to show that the beneficiary was B. –> But note: For semi-secret trusts (see above), courts will not impose a constructive trust. Rather they impose a resulting trust (back to testator’s estate). –>On the bar exam, whether you have a semi-secret trust (“I devise $100,000 to Abel as trustee” and no beneficiary is named), or secret trust (‘9 devise $100,000 to Abel”), discuss the rules for each (give the rule for semi-secret trusts and then give the rule for secret trusts), then apply the appropriate doctrine to the facts at hand.
4. Oral Real Estate Trusts (also known as Breach of Promise) –> Example: S goes to A and states, “If I transfer Blackacre to you by deed, will you hold Blackacre for the benefit of B?” A agrees. Thereafter S executes a deed in favor of A and delivers it to A.

Question 35

• Trustee Duties Owed to Beneficiaries
• Duty of Loyalty

Answer 35

Requires that the trustee administer the trust for the benefit of the beneficiaries (implicitly, trustee must be impartial), having no other consideration in mind.

No self-dealing. Examples of self-dealing:

• Trustee prefers one beneficiary, his child, over the other beneficiaries
• Trustee sells trust property to trustee’s spouse
• Trustee-lawyer hires himself

Consequences of finding breach:

• If there is a loss, the trustee is “surcharged,” meaning the trustee has to make good the loss.
• If the trustee makes a personal profit, then with respect to those ill-gotten profits, the trustee is a constructive trustee: must turn over those profits to the intended beneficiary.

Question 36

Duty to Invest:

Answer 36

Split of authority: There are three alternative rules of the duty to invest. Discuss all three on the bar exam.

1. State lists: Some states have lists which trustee must follow in the absence of directions in the trust.
2. Common law prudent person test: The duty to invest requires the trustee to act as a reasonably prudent person investing his own property, trying to maximize income while preserving corpus. If the trustee holds himself out as having greater skill, he is held to that higher standard.
3. Uniform Prudent Investor Act: Adopted by most states; provides that the trustee must invest as a “prudent investor.”

• Unlike the state lists approach and the common law prudent person test, each individual investment is not scrutinized, but, rather, performance is measured in the context of the entire trust portfolio. Thus, any investment is not per se invalid. Consequently, even derivatives or futures contracts (investments absolutely prohibited under state lists standard or the common law reasonably prudent person standard) may be appropriate in the context of an entire portfolio.

Consequences of Breach:

In any jurisdiction, trustee must make good the loss. If there is a profit, the beneficiaries affirm the transaction. If the trustee makes two investments that breach the duty to invest, one makes money and the other loses money, the trustee is surcharged for the loss while the beneficiaries affirm the transaction that made money. No netting allowed by the trustee.

Question 37

• Duty to Earmark

Answer 37

Duty to label the property as belonging to the trust.

Consequences of Breach:

• Common law approach: If trustee breaches the duty to earmark and there is a loss, the trustee is held personally liable. No causal relationship required between failure to earmark and a loss. Thus, if the stock market crashes and there is loss, trustee is held personally liable, even though the failure to earmark did not cause the loss.
• Modern approach: If there is a failure to earmark and there is a loss, the trustee is held personally liable only if the loss was caused by the failure to earmark.

Question 38

Duty to Segregate

Answer 38

No commingling of personal funds with trust funds.

No comingling of the funds of Trust A with the funds of Trust B.

Consequences of Breach:

The trustee can be removed and be held liable for any loss.

Question 39

Duty Not to Delegate

Answer 39

The trustee can rely on professional advisors in reaching a decision, but the trustee cannot delegate decision- making authority to these advisors.

• Under the common law, a trustee could not delegate the duty to invest to a professional money manager. Modernly, a trustee can delegate this duty (e.g. to a manager of a mutual fund).
• Trustee also cannot delegate to another trustee.
• Under the common law, in the absence of a contrary provision in the trust instrument, trustees must act unanimously. Modernly, trustees may act by majority decision.

Question 40

Duty to Account

Answer 40

Give beneficiaries a statement of income and expenses of the trust on a regular basis

If the trustee fails to render an accounting to the beneficiaries, the beneficiaries would file an action for an accounting.

Question 41

• Duty of Due Care

Answer 41

Must act as a reasonably prudent person dealing with his own affairs.

Question 42

Remedies of beneficiary for breach of duty or duties:

Answer 42

1. Damages.
2. Constructive trust remedy.
3. Tracing and equitable lien on property.
4. Ratify the transaction if good for beneficiary.
5. Remove trustee.

Question 43

• Liability of Trustee to Third Persons (Liability in Contract)

Answer 43

Common law rule:

Trustee is sued in his personal capacity. Consequently, the trustee’s personal assets are at stake. But the trustee can get indemnification from trust assets if the trustee acted within his or her powers and was not personally at fault.

The only time the trustee would be sued in his representative capacity (i.e., trustee’s personal assets are not at risk) is if the contract itself provided that in the event of a breach by the trustee, the trustee is to be sued in his representative capacity. It was not enough under the common law that the trustee signed the contract, “John Smith, as trustee of the ABC Trust.”

Modern law rule:

If the other person to the contract, the promisee, knows that the trustee is entering into the contract in his representative capacity, then the trustee must be sued in his representative capacity. Thus, the trustee’s personal assets are not at stake.

Thus, if the trustee signs the contract, “John Smith, as trustee of the ABC Trust,” under the modem rule, the trustee must be sued in his representative capacity.

Question 44

Liability of Trustee to Third Persons (Liability in Tort)

Answer 44

Common law rule:

• The trustee is sued in his personal capacity.
• If the trustee was without personal fault, however, the trustee can get indemnification from trust assets. Thus, if an agent committed the negligent act, or if this is a case of strict liability, then the trustee can obtain indemnification.

Modem law rule:

• The trustee is sued in his individual capacity and is personally liable for torts only if the trustee is personally at fault (i.e. acted negligently or otherwise committed a tort). Thus, if an agent committed the negligent act or if this is a case of strict liability, the trustee is sued in his representative capacity.

Question 45

Modification by Settlor

Answer 45

Settlor can modify trust if he expressly reserves the power to modify.

Settlor also has the power to modify if the settlor has the power to revoke.

Question 46

Modification by the Court

Answer 46

[A] There can be modification by the court regarding charitable trusts and the cy pres power: changing the mechanism to further settlor’s general charitable intent.

[B] There also can be modification of charitable trusts or private express trusts regarding the court’s deviation power (also known as Doctrine of Changed Circumstances): the court changes administrative and management provisions of the trust. It’s not changing beneficiaries.

2 elements must be established for the court to use its deviation power:

(a] Unforeseen circumstances on the part of the settlor, and

[b] Necessity (deviation needed to preserve the trust).

Question 47

Termination of Revocable Trusts

Answer 47

Majority Rule:

Settlor must reserve power to revoke expressly in a trust instrument.

Minority Rule:

Settlor has the power to revoke unless the trust is expressly made irrevocable.

Question 48

• Termination of Irrevocable Trusts

Answer 48

1. Settlor and all the beneficiaries agree to terminate.
   
   • “All the beneficiaries” means you must account for contingent remaindermen: guardian ad item must be appointed to represent them
2. All beneficiaries agree to terminate and all the material purposes have been accomplished.
3. By operation of law:

• When you have private express trusts with corpus of real property, and the trust is passive (trustee has no active duties and is just holding bare legal title), under Statute of Uses, the beneficiaries get legal title by operation of law, and thus the trust terminates.

Question 49

Income Expenses Allocated to the Life Tenant

Answer 49

LT gets:

1. cash dividends
2. interest income
3. net business income

LT’s interest pays expenses:

1. interest on loan indebtness
2. taxes
3. minor repairs

Question 50

Income Expenses Allocated to the Remainderman

Answer 50

Remainderman gets income:

1. stock dividends
2. stock splits
3. net proceeds on sale of trust assets

Remainderman’s interest pays expenses:

1. Principal part of loan indebtedness
2. Major repairs or improvements