Trusts Flashcards
Requirements for Trust
Five statutory requirements (Can’t I Be Done Studying?):
1) Capacity: the settlor has capacity to create a trust
2) Intention: the settlor indicates an intention to create a trust
3) Beneficiary: the trust either has a definite beneficiary, is a charitable trust, is a trust for a non charitable purpose, or is pet care trust.
4) Duties: the trustee has duties to perform.
5) Same person is not the sole trustee and the sole beneficiary.
Other elements not listed by sometimes elements:
- -Delivery (two exceptions: a declaration of trust, where the settlor serves as trustee, no delivery requirement and testamentary trust
- -Property: must be specific assets that are identified as the trust corpus
Spendthrift Clauses
‘restrains either the voluntary or involuntary transfer of a trust beneficiary’s interest’ and generally preclude the beneficiary’s creditor’s from satisfying the beneficiary’s debt with the beneficiary’s trust
- Valid and enforceable in Michigan
- Exceptions to rule:
- -child or spousal support,
- -claim by MI or US (taxes),
- -judgment creator who has provided services to protect a beneficiaries interest in trust (ie lawyers),
- -contract for necessaries,
- -any interest retained by the settlor if the claim is against the settlor
- –during lifetime of settlor, property of a revocable trust is subject to claims of the settlor’s creditors regardless of whether the trust contains a spendthrift provision, but does not apply to irrevocable trusts.
- —know if revocable if terms do not expressly state irrevocable and trust was created on or after April 1, 2010 (before then it’s irrevocable unless otherwise stated)
Discretionary Trust Provision
- Exists when the trustee is given the discretion to determine whether, or in what amount, to distribute trust assets to beneficiaries
- If trust contains a discretionary trust provision, trust beneficiary’s creditor does not have right to any amount of the trust income or principal until it is distributed to the trust beneficary
Cy Pres Doctrine
‘As near as possible’
- Generally, if no purpose of a charitable trust remains to be achieved, the trust fails. However, if court finds that the settlor had a general, rather than specific charitable intent, then the trust will not fail, and the court may distribute the trust in a manner consistent with the settlor’s general charitable intent
- -look at specific vs general intent of the settlor when creating the trust!! if general, apply cy press; if specific, don’t
- -if there is a reversion clause in trust to non charitable person leans towards cy pres failing
Actual language:
-if a particular charitable purpose has become unlawful, impracticable, or impossible to achieve, no alternative charity is named in the trust and the court finds the settlor has a general, rather than specific I, charitable intent then (1) trust does not fail; (2) the trust property does not revert to the settlor or the settlor’s successors in interest; and (3) court may apply cy press to modify or terminate the trust by direction the trust property be applied or distribute, in whole or in part, in a manner consistent with the settlor’s ge general charitable intent.
Validity of Oral Trust
- Valid for personal property
- Terms must be proved by clear and convincing evidence
Pet Care Trusts
-Valid for life of pet, but amount of money can be reduced if it substantially exceeds the amount required for the indented use
Challenging Validity of Trust
General rule: beneficiary who accepts the benefits cannot challenge validity under doctrine of election (estoppel by acceptance)
-Exception: new statutory provision allows a beneficiary to challenge the trust based on undue influence ‘a trust is void to the extent its creation was induced by fraud, duress, or undue influence’ and does not contain an exception or exclusion for those who have accepted trust benefits
No-contest clauses (i.e. terrorem clauses)
- Generally these are valid and enforceable
- Strictly construed
- A clause that expressly forbids any challenge to the trust will apply to a very broad class of challenges unless there is probable cause for instituting the proceeding
- -i.e. exploiting position as trustee would be probable cause to remove trustee for ‘a serious breach of trust’
Reformation of Trust
Court may reform a trust (even if its unambiguous) to conform to the settlor’s intention if the settlor’s intent can be shown by clear and convincing evidence
Methods of Creating Trust
‘Start answer with these’
Total of 5 but most important:
1) transfer of property to another person as trustee during the settlor’s lifetime or by will or other disposition taking effect upon the settlor’s death
2) declaration by the owner of property that the owner holds identifiable property as trustee
3) a promise by one person to another person, whose rights under the promise are to be held in trust for a third person
4) exercise of a power of appointment in favor of a trustee
Reformation to Correct Mistake in Trust
- Court can reform the terms of trust to reflect the settlor’s intent by showing clear and convincing evidence that both the settlor’s intent and the terms of the trust were affected by a mistake of fact or law whether in expression or inducement
- -generally party seeking reformation bears burden of proving it (clear and convincing evidence)
–mistake of fact: misunderstanding, misapprehension, error, fault, or ignorance of a material fact or a belief that a certain fact exists when in fact it does not
Trust Termination
Generally, trust automatically terminates:
- at the expiration of the term specified in the instrument
- when all of the purposes of the trust have been accomplished or
- when they have become unlawful, contrary to public policy, or impossible to achieve
Irrevocable vs Revocable Trusts
Unless the terms of a trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust
-this applies only to trusts created on or after April 1, 2010 (any trust before then is deemed irrevocable no matter what)
