Trusts Flashcards
Mandatory vs. discretionary
(1) Mandatory: The trustee must distribute all trust income.
(2) Discretionary: The trustee may distribute income at her discretion.
She does not abuse her discretion unless she acts dishonestly or in a way not contemplated by the trust creator.
Rule against perpetuities
A trust may fail if all interests thereunder may not vest within the applicable perpetuities period—usually a life-in-being plus 21 years.
By contrast, some jurisdictions take a “wait and see” approach, refraining from invalidating future interests until it is clear they will not vest within the perpetuities period.
Parties to a trust
(1) Grantor/settlor: the creator of the trust;
(2) Trustee: holding the legal interest or title to trust property;
(3) Beneficiaries: receiving the benefit of the trust.
(a) Income beneficiaries receive income, e.g., profits from a business held by the trust;
(b) Remainder beneficiaries are entitled to the trust principal upon termination of the trust.
Private express trusts: intent requirement
The settlor must intend to make a gift in trust, whether manifested orally, in writing, or by conduct;
Private express trusts: trust property requirement
A valid trust must contain some property—including property interests—owned by the settlor at the time the trust was created.
The property must have been transferred to the trust or trustee at the time of the trust’s creation.
Valid trust purpose
A trust can be created for any purpose that is not illegal, restricted by rule of law or statute, or contrary to public policy.
Terms that violate public policy will be stricken from the trust without invalidating the trust as a whole—unless the removal of the terms is fatal.
Trusts provisions that restrain a first marriage generally have been held to violate public policy. A restraint might be upheld, however, if the trustee’s motive was only to provide support for a beneficiary while the beneficiary is single.
Private express trusts: ascertainable beneficiaries requirement
The beneficiaries must be identifiable so that the equitable interest can be transferred automatically by operation of law.
The settlor may refer to outside writings or acts to identify beneficiaries.
There are four exceptions to the identifiable beneficiaries requirement:
(1) Indefinite classes: A trustee can select a beneficiary from an indefinite class (e.g., “my friends”) unless the trustee must distribute equally to all members of the indefinite class;
(2) Unborn children;
(3) Class gifts: Trusts for a reasonably definite class—e.g., “my brothers”—will be upheld;
(4) Charitable trusts, which cannot have individual ascertainable beneficiaries.
Private express trusts: inter vivos
An inter vivos trust is one created while the trustor is living, and the trustor can designate herself or a third party as the trustee.
Pour-over provision:
A pour-over is a provision in a will that directs the distribution of property to a trust upon the happening of an event.
In this way, the property passes according to the terms of the trust without requiring the will to recite the entire trust—and even if the trust was not executed in accordance with the statute of wills, so long as the trust is set forth in a written instrument.
Even amendments to a trust need not follow the formalities prescribed for the execution of a will.
Testamentary trust
A testamentary trust is one created in writing in a will or in a document incorporated by reference in a will.
The will containing the trust must meet the attested or holographic will requirements.
Charitable trusts: requirements
For a trust to be considered charitable, it must have:
(1) Charitable purpose:
E.g., relief of poverty, the advancement of education or religion, or other purposes benefiting the community at large or a particular segment of the community; and
(2) Indefinite beneficiaries:
The beneficiary of a charitable trust either be:
(a) The community at large; or
(b) A class comprising unidentifiable members, i.e., not a named individual or narrow group of individuals.
Charitable trusts: rule against perpetuities
Charitable trusts are not subject to the rule and thus may continue indefinitely.
Charitable trusts: cy pres doctrine
A court may modify a charitable trust to seek an alternative charitable purpose if the original one becomes illegal, impracticable, or impossible to perform.
To determine whether it should modify a trust, a court will analyze whether the trust has a specific intent to help one charity or a general intent to help charity:
(1) If there is specific intent, the court may not modify the trust, and the trust then will be terminated and become a resulting trust;
(2) If there is general intent, the court will substitute a similar charity.
The modern approach (Uniform Trust Code and Third Restatement) is to presume a general intent and apply the cy pres doctrine.
Remedial trusts: resulting trusts
They are used when a trust fails as to avoid unjust enrichment.
The trustee must return the trust property to the settlor or settlor’s estate.
Special topics:
(1) Gift-over clause: A resulting trust can be avoided through a gift-over clause;
(2) Purchase-money resulting trust: If A buys the property but title is taken in B’s name, and B is not the natural object of A’s bounty (i.e., not a close friend or relative), a court will create a purchase-money resulting trust.
Remedial trusts: constructive trusts
A remedy used to prevent unjust enrichment if a third party takes advantage of the settlor.
There must be wrongful conduct—e.g., fraud or undue influence—directed toward the settlor that cause the settlor to create the trust.
Valid trust purpose: restraints on marriage
Trusts provisions that restrain a first marriage generally have been held to violate public policy. A restraint might be upheld, however, if the trustee’s motive was only to provide support for a beneficiary while the beneficiary is single.
A marriage restriction on a surviving spouse is not void on public policy grounds.
