Trusts Flashcards
What to examine in a Trust essay
Valid Trust Don’t Ruin Marriages
Validity (was a valid trust created) Type, Duties of Trustee, Removal of Trustee, Modification/Termination
What is a trust?
A trust is a fiduciary relationship in which a trustee holds legal title in property and manages the assets and the income for the benefit of the beneficiaries, who hold equitable title.
What are the types of trusts
Express Trusts
Resulting Trusts
Constructive Trusts
Does a trust need to be in writing?
Generally, no.
Unless (1) trust is for real property and the trust must satisfy the SOF (2) and if it is a testamentary trust it must satisfy the statute of wills (2 witnesses, written and signed)
RAP for trusts
Life in being plus 20 years
actually vesting within 360 years
N/a to charitable trusts when transfer is between charities
settlor
Person who creates trust
- must be 18
- must be of sound mind
Look to who furnishes the consideration for the trust.
Express Trust
Arise from the express intention of settlor. Arises when the gift in a will or trust fails and there is no alternative beneficiary. Falls back in settlor’s estate.
Clear and convincing evidence
Resulting Trust
Arise from the presumed intention of the settlor.
Constructive Trust
Arise in cases involving wrongful conduct and unjust enrichment
Res
Property of Trust
-MUST BE in existence at the time the trust was created.
No res + no trust
What governs express trusts in Florida?
Florida Trust Code and common law.
How do you create and express trust?
- Settlor with capacity to convey (he must own property at time of creating trust)
- Present intent to create a trust relationship and for trust to take effect immediately (not to create in future) - look at words or conduct (delivery)
- A competent trustee with duties
- A definite beneficiary (ascertainable by the time their interests come into enjoyment)
- The same person is not the sole trustee and sole beneficiary
- Present disposition in trust of specific property
- Valid trust purpose.
Is consideration required for the creation of a trust?
No
How do you know if settlor has capacity
Same as will - Trust void for lack of capacity if undue influence (but for test), fraud, duress.
Settlor must also have legal power to convey property.
Is an oral trust of personal property valid?
Yes
Is it necessary to communicate intent to create trust to beneficiaries?
No (in case of property, delivery of deed to trustee is sufficient)
What is precatory language?
a settler’s expression of hope, wish or mere suggestion that property be used in a certain way.
Does precatory language create a trust?
Theere is a general inference that precatory language does not create a trust
How to overcome the inference that precatory language does not create a trust
May be overcome if
- Definite and precise directions;
- Addressed to a fiduciary
- Resulting in an unnatural disposition of property if no trust imposed or
- Extrinsic evidence showing that settlor previously supported the intended beneficiary.
Trustee
Manages trust
What happens if trustee dies/resigns/removed?
Court appoints successor trustee, or if none, will choose one.
How does a trustee accept appointment?
A trustee can accept by substantially complying, taking trust property, or exercising powers.
To whom does trustee owe a duty?
Settlor
Is trustee entitled to fee?
Yes, trustee entitled to fee and reasonable expenses.
Merger of title
Where the sole trustee, who holds legal title, and the sole beneficiary, who hold equitable title are one and the same person, there is a merger of legal and equitable title. This defeats and terminates the trustee, creating a fee simple absolute in the trustee-beneficiary.
Can a trustee reject appointment?
Yes, by serving notice of rejection to qualified beneficiary. OR by doing nothing - if trustee does not accept within a reasonable time, it is presumed rejected. Even if it is rejected, trustee may still act to preserve the trust property.
Where does trustee get his duties?
Settlor imposes duties in trust instrument, or court can impose duties.
Qualifications of trustee
must be competent (i.e., have legal capacity to enter into contract) and at least 18 years old.
-must have capacity to acquire property for his own benefit and to administer the trust. (minors and insane persons can hold property but cannot administer)
Who can remove trustee
A court can remove a trustee on its own motion or upon request of settlor, a beneficiary, or a co-trustee
Grounds for removal of trustee
- serious breach of trust
- lack of cooperation among co-trustees
- unfitness, unwillingess or persistent failure to administer
- substantial change in circumstances
Consider whether continuation would be detrimental to trust
Can a trustee accept duties in part and disclaim in part?
No
Relation back of acceptance
A testamentary trust is created as of the settlor’s death, and the trustee’s acceptance “relates back” to that date.
Thus, trustee could become liable (in official capacity) for torts arising prior to acceptance.
Resignation of Trustee
Once an appointment has been accepted, trustee can either: (i) give 30 days notice of resignation to trust beneficiaries, settlor and co-trustees or (ii) obtain court approval.
Successor Trustee
Succeeds to all of the rights, powers and privileges of the original trustee and is subject to all of the original trustee’s duties, liabilities and responsibilities
Who can be a beneficiary?
Any person capable of taking title to property. Beneficiaries do not need to be identified by name but must be susceptible of identification by the time their interests come into enjoyment. Beneficiaries do not need to be alive at the time the trust is created.
What happens if trust fails for lack of beneficiaries?
A resulting trust in favor of settlor is created.
Acceptance by beneficiary
May be express or implied and is generally presumed/.
Disclaimer by beneficiary
He must file a written disclaimer (w/in 9 months to avoid gift taxes)
Does Fla anti-lapse statute apply to future interests created in trust?
Yes
What does divorce do to a trust
Revokes all beneficial gifts and fiduciary appointments in favor of spouse, include revocable trusts, Trust is read as though former spouse is deceased.
Can a future interest be held in trust?
Yes, but not an interest not yet in legal existence (e.g., an expectancy).
Future profits from existing contract can be trust res
When is a trust purpose invalid?
If it is: illegal contrary to public policy impossible to achieve or intended to defraud the settlors creditors or based on illegal consideration.
What happens if a condition attached to an interest is against public policy?
- Settlors alternative desire controls
- If it is an illegal condition subsequent, condition is invalidated and trust is valid
- If it is an illegal condition precedent, preferred view is to hold the interest valid unless settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable.
How can an express trust be created
can be created inter vivos (during the settlor’s lifetime) by transfer or declaration or by will (testamentary trust).
What would failure to name trustee, or promise to name trustee in the future be evidence of?
Lack of present intent. It may also prevent delivery of the res.
Standard for proving existence of oral trust
Clear and convincing evidence.
Invalid oral trust may be enforced by imposing constructive trust
Do revocable inter vivos trusts containing testamentary aspects need to comply with the statute of wills?
Yes, otherwise they are ineffective.
Irrevocable inter vivos trusts do not.
Is parol evidence allowed where there is ambiguity on the face of the writing?
Yes
How to create a testamentary trust
Trust intent and the terms of the trust must be ascertained from the will itself or from a writing incorporated by reference to a will, or from the exercise of a POA created by the will.
Must a testamentary trust satisfy the SOF?
yes (2 witnesses, signed, writing)
Secret Trust
Where a will makes a gift that is absolute on its face, but T orally instructs beneficiary to hold it in trust for another, and he relies on the beneficiary’s agreement to do so. The intended beneficiary can establish by C & C evidence that a constructive trust should be imposed. Extrinsic evidence is permitted.
Semi-secret trust
Will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds the property in a resulting trust for the testator’s heirs
Extrinsic evidence NOT ALLOWED.
Trust contest over a revocable testamentary trust
cannot be brought until trust becomes irrevocable or upon T’s death.
Charitable trust - what is different about it?
-it must have indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies.
Cy pres
“As near as possible” - when a charitable purpose is impractible, impossible, wasteful or illegal, the settlor, trustee or any qualified beneficiary may petition court to distribute property in some other manner consistent with the settlor’s charitable purpose.
What are charitable purposes
-must have a purpose considered to benefit the public - e.g.e relief of poverty, religion, education, medicine, science, research, gov’t purpose (e.g. parks, museums)
Court can select a charitable purpose s/l/a it is consistent with settlor’s ascertainable intention
Who can bring a suit to enforce a charitable trust?
Settlor, qualified beneficiary, attorney general
Trust for the care of anumals
Type of honorary trust for the care of an animal, terminates when animal dies and remainder goes to settlor or his successors
Trust for the care of a cemetery plot
Deemed to be a plot for charitable purposes and therefore not subject to RAP
What happens if beneficiary does not survive to the distribution date
If beneficiary leaves surviving descendants, they take the interest per stirpes.
What happens if a beneficiary has creditors?
Creditors may levy his beneficial interest, and trustee may be ordered to pay distributions to creditors until debt is satisfied, or the property may be subject to a judicial sale
What if settlor has creditors
In a revocable trust, settlors creditors may levy on trust res to the extent such property would not be exempt from creditor’s claims of owned directly.
In an irrevocable trust, creditors may reach distributions for settlor’s benefit only
Spendthrift trust
Precludes the beneficiary from voluntarily or involuntarily transferring his interest in the trust, and creditors are precluded from reaching it to satisfy their claims. Most courts uphold spendthrift provisions.
What spendthrift provisions are INVALID
A provision that allows voluntary alienation by beneficiary, but not involuntary alienation by creditors
What happens if there is a spendthrift clause but beneficiary tries to assign his interest?
Trustee may choose to honor a purported assignment by the beneficiary, but trustee may recommence payments to beneficiary at any time, and beneficiary may w/draw his direction to pay assignee
When spendthrift provisions cannot be used a as a shield
(i) to shield settlor from his own creditors when he is the beneficiary
(ii) to shield settlor from claims for support (including alimony)
(iii) to shield settlor from claims by government
When is a creditor unable to compel a distribution from a trust
When the trustee has discretion to pay income and/or principal, creditor cannot compel trustee to make payment (whether or not there is a spendthrift provisions
When does a trust terminate?
A trust will AUTOMATICALLY terminate at a term specified in the instrument or when the purposes have been accomplished or unlawful, contrary to public policy, or impossible to achieve.
When can a settlor revoke or amend a trust?
At any time, unless the terms expressly state it is irrevocable.
What is a qualified beneficiary
This class of beneficiaries is limited to current beneficiaries, intermediate beneficiaries, and first line remainder beneficiaries, whether vested or contingent
How are qualified beneficiaries prioritized ?
First, qualified beneficiaries are going to have standing in just about any judicial proceeding involving their trusts. Second, qualified beneficiaries are at the center of all trustee disclosure obligations.
When can a trustee modify or terminate a trust?
- Uneconomic trust (less than $50,000 and too expensive to administer, even spendthrift trusts)
- Combination and Division of trusts - s/l/a trust doesn’t prohibit, one or more trusts can be combined or divided, as long as trust purpose isn’t frustrated
- Pour over of trust assets into new trust
How can a trustee pour over trust assets into new trust
A trustee who has absolute discretion to invade the trust principal, can pour over assets into a new trust - allowed even if trust is revocable or contains spendthrift provisions
When can a trustee or QB (qualified beneficary) Petition the Court to Modify an IRREVOCABLE trust?
(1) If trust purposes have been fulfilled or have become illegal, impossible, wasteful or impracticable
(2) because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair a material purpose; OR
(3) material purpose no longer exists
Other times when a court can modify or terminate IRREVOCABLE trust?
(1) modification and termination is not inconsistent with settlor’s purpose; (2) it is in the best interest of the beneficiaries; (3) continuation would be uneconomical (under $50k); (4) modification would achieve settlor’s tax objectives; (5) reformation is necessary to correct a mistake.
Court must make sure spendthrift provisions do not prevent modification or termination, or that judicial modification is not otherwise prohibited.
When can a Trustee and QB agree, by unanimous decision, to modify the terms of an IRREVOCABLE trust
At any time after settlors’ death, modification is permitted even if the trust contains a spendthrift provision or provision prohibiting amendments. Agreement is binding on unborn or unascertained beneficiaries, s/l/a there is no conflict of interest.
What if settlor and all beneficiaries want to terminate IRREVOCABLE trust
It is permitted, and they do not need trustee’s consent. Not allowed if beneficiary is a minor or incompetent., even if guardian agrees.
When can beneficiaries terminate trust
Once settlor is dead, only if termination would not interfere with material purpose of the settlor. N/a to spendthrift trusts
How do co-trustees make decisions
If they are unable to reach unanimous decision, it is majority.
Trustee Powers Given By FTC
-collect and hold trust assets; operate a business; invest, buy sell or encumber trust assets; -make distributions; prosecute and defend actions
Trustee Powers Given By FTC
- collect and hold trust assets;
- operate a business;
- invest, buy sell or encumber trust assets;
- make distributions;
- prosecute and defend actions
Trustee powers are subject to what standard of judicial review
Abuse of discretion
Who does trustee owe duties to in an irrevocable trust?
Irrevocable trust - duties owed to all of the beneficiaries
Who does trustee owe duties to in a revocable trust?
Revocable trust - duties owed exclusively to settlor - this trumps other duties, so watch for fact pattern containing a revocable trust and settlor directing trustee to do something like may nondiverse investments
Duty to Perform Personally
Trustee must perform functions that a reasonably prudent person would NOT delegate.
Exceptions: trustee can delegate investment and management decisions if trustee uses reasonable care, skill, and caution in (1) selecting agent, (2) establishing scope and terms of delegation, and (3) monitors agents performance/compliance
Duty to Perform Personally
Trustee must perform functions that a reasonably prudent person would NOT delegate.
What are beneficiaries rights in case of prohibited transaction by trustee
Transaction is VOIDABLE by affected beneficiary unless: the court or terms of trust approved it; the beneficiary failed to bring suit in time; settlor gave written consent while trust was revocable
Duty of Impartiality
Trustee must act for benefit of all beneficiaries, taking into account the beneficiaries different interests (i.e. fair and impartial to all beneficiaries)
Duty to Invest Prudently
make decision that are likely to produce income and preserve principle like a prudent investor
Prudent Investor Rule
Fl Applies this rule in determining the propriety of investments made by the trustee AT THE TIME OF THE DECISION. Trustee must exercise reasonable care, skill, and caution.
Investment performance is measured by overall return; diversification of investments
Factors to consider: general economic conditions, effect of inflation/deflation, expected tax conseq., role of individual investments in overall portfolio, expected total return from income/appreciation, reasonable costs
Prudent Investor Rule
Uniform Prudent Investor Act - Fl applies this rule in determining the propriety of investments made by the trustee at the time of the decision. Trustee must exercise reasonable care, skill, and caution.
Investment performance is measured by overall return; diversification of investments
Factors to consider: general economic conditions, effect of inflation/deflation, expected tax conseq., role of individual investments in overall portfolio, expected total return from income/appreciation, reasonable costs
-MUST diversify unless she reasonably determines that the purposes of trust are served better w/o diversification
Duty to Account and Inform
Give yearly update to beneficiaries and keep informed about administration; must also respond to beneficiary requests for information and provide a copy of trust instrument if requested.
Duty to Preserve and Protect Trust Property:
Trustee must ensure trust property against casualty losses; collect all claims due on the trust; lease land and manage it; record recordable documents, and invest trust funds
Duty to Separate and Earmark Property
no commingling. Trust assets must be kept physically separate from trustee’s
personal assets and assets other trusts
Remedy for breach of duty to administer trust
Trustee may be ordered to comply with is duties, enjoined from committing a breach, compelled to pay money, restore property, or can be suspended.
Breach of duty of loyalty and remedy
Engaging in self-dealing is a per se breach of the duty of loyalty. E.g. selling trust asset to yourself
-paying or receiving less than FMV for a trust asset
Beneficiary may be able to void the transaction
Remedy for breach of duty to report
Trustee may be ordered to comply with his duties
Remedy for breach of duty to separate and earmark property
Trustee is liable for any resulting losses or profits
Remedy for breach of duty to preserve and make trust property productive
Trustee is liability for losses resulting from breach and for any profit that would have accrued to the trust but for the breach, plus interest
Exception to Duty to Perform Personally
Trustee can delegate investment & management decisions if trustee uses reasonable care, skill, and caution in (1) selecting agent, (2) establishing scope and terms of delegation, and (3) monitors agents performance/compliance
Questions to ask yourself on a trust essay regarding a trustee
- Was the act one that the trustee was authorized to perform by the instrument, state law, or by implication?
- If the act was proper to perform, did the trustee do so with the appropriate care, skill or caution?
General remedies for breach of trustee’s duties:
Court may”
- enforce specific performance
- enjoin trustee from committing a breach of trust
- compel the trustee to pay money or restore property or
- suspend the trustee
Damages to beneficiary for breach of trustee’s duties
Trustee will be liable to the beneficiaries for the greater of (i) the amount necessary to restore trust property and distributions to what they would have been absent the breach, or (ii) trustees profit from the breach
SOL for claim of breach of trust
Four years
-Benef must bring her action within 6 months of receiving any report disclosing the breach.
In absence of report, SOL does not begin to run until beneficiary has actual knowledge of facts(established by c&c evid or the trustee’s repudiation of trust. Fraud - based on discovery like usual
When trustee is not liable for breach
- If he acted in reasonable reliance on terms of trust
- if beneficiary consented, released trustee from liability or consented
Effect of exculpatory clauses in Trust
Are VOID if they
(i) relieve trustee of liability for breach of trust committed in bad faith or with reckless indifference; or (ii) appear in the trust instrument b/c of trustee’s abuse of fiduciary or confidential relationship with the settlor unless he can show it was fair
Liability for Co-Trustee
Not liable for acts of co-trustee if he (1) did not join in the action AND exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach; or (2) joined in the action of a majority of the co-trustees but notified them of his dissent.
Trustees liability to Third Parties
Can be sued for tort and trust in official capacity. Can be sued personally on contract only if he failed to reveal his representative capacity. Cannot be sued personally for tort unless he was at fault (no respondeat superior)
Does adding property to a resvocable trust protect it from a spouse’s elective share?
No
Three types of resulting trust
(1) Purchase Money: beneficiary furnishes consideration for purchase of property in the trustee’s name at or before trustee takes title
(2) Failure of Express Trust: because (i) void or unenforceable OR (ii) trustee dead or unable to locate, OR (iii) failure of a charitable trust where cy pres is inapplicable, then express trust is terminated and settlor becomes beneficiary
(3) Excess Corpus: trust purpose is satisfied, but property remains
Proof necessary to establish constructive trust
Clear and convincing evidence
Hiring relatives to perform trust duties
Creates a rebuttable presumption of the breach of the duty of loyalty.
Once settlor has died, can a trust be terminated?
Yes, by unanimous consent of the beneficiaries s/l/a doing so would not conflict with “material purpose” of the trust - e.g. spendthrift clauses
