Trusts Flashcards
Private Express Trusts: Definition
A fiduciary relationship w/ respect to prop whereby one person (the trustee) holds legal title for the benefit of another (the ben) and which arises out of a manifestation of intent to create it for a legal purpose.
Property of the trust
Any presently existing interest in prop that can be transferred can be the corpus of a trust – fee simple absolute, future interest, life insurance policy
No illusory interests allowed
i.e. future profits to a bus, except: a debt that settlor owes a beneficiary (ben) (liability, not prop interest), a mere expectancy, community property if one spouse creates the trust unilaterally or gratuitously.
Beneficiary
Any ascertainable person or group of people can be the beneficiary (“B”), including a corporation, or unincorporated ass’n (modern law only).
But, watch out for the rule against perpetuities!
Trustee
Must have a trustee, but court can appoint trustee
Intent to create a trust
Must be present manifestation of intent to trust, and no magic words necessary.
Must use mandatory words, not precatory words (hope and desire).
But, precatory words + parol evidence may be sufficient.
Otherwise, “trustee” owns in fee simple.
Trusts of personal property need not be in writing, SOF only for real property
Creation of a trust (2 time frames)
Death and settlor’s lifetime
Death: Probate code compliance needed (be in the will)
Life:
(1) Transfer in trust - 3rd party trustee, or
(2) Declaration in trust - Settlor is trustee. For real property, there must be a writing satisfying SOF indicating Settlor is trustee. For personal property, must be present manifestation of intent.
Legal purpose of a trust & illegalities
Rule: Trust must have a valid purpose not contrary to public policy or illegal.
Illegality AT creation – try to excise the illicit condition. If you can, the trust will stand, if not, the court will either
(1) invalidate the trust at its inception or
(2) All the trustees keep the property for himself.
Illegality AFTER creation – a resulting trust is decreed (trustee must transfer the property back to the S if alive, if not to the S’s estate).
Types of trusts
Charitable Honorary Resulting Constructive Totten
Charitable trust: Defined
Defined: Trust created for public benefit. Charitable purpose required – look to the effect of the gift to determine charitable purpose, not the motive of the Settlor.
Beneficiary: there is no ascertainable person or group. Society.
Rule Against Perpetuities does not apply to charitable trusts.
Charitable trust: Creation
Need a manifestation of trust intent, which can be done at death by will or during settlor’s lifetime by declaration or transfer in trust, a corpus of presently existing interest in prop that can be transferred.
Charitable trust: Cy pres
If settlor manifests a general charitable intent, but the mechanism for effecting that intent is not possible or practicable, the court, acting in equity, may modify the mechanism cy pres, as nearly as possible, to effectuate S’s general charitable intent
Honorary trusts
A trust that has no ascertainable beneficiary and confers no substantial benefit to society.
Not private express trust nor is it a charitable trust.
Merely a goal of the settlor. Trustee can carry this goal out if he wants to but he doesn’t have to if he doesn’t want to.
Resulting trusts
An implied-in-fact trust based on presumed intent of parties.
If decreed by the court, trustee will transfer property to settlor or estate. Arises when…
(1) Private Express Trust ends by its own terms, and no provision for aftermath,
(2) Private Express Trust fails for lack of beneficiary or illegality;
(3) there is excess corpus in Private Express Trust,
(4) Charitable Trust ends because of impossibility/impracticability, and cy pres unavailable,
(5) purchase money resulting trust, or
(6) semi-secret trust
Constructive trusts
An equitable remedy to prevent fraud or unjust enrichment. Wrongdoer is deemed trustee and must transfer property to intended beneficiary.
Arises when:
(1) trustee of a Private Express Trust or Charitable Trust profits by self-dealing;
(2) fraud in inducement or undue influence re a will;
(3) oral real estate trust; or
(4) there is a Secret Trust.
Totten trust
Really just a bank account where the ben takes whatever is left at settlor’s death.
Can turn into a private trust based on the facts!!! LOOK FOR:
- Intent
- Settlor doing anything to elevate this trust
Restrictive Trust Provisions: List
Spendthrift provision
Support provision
Discretionary provision
Spendthrift provision
Provision that prevents beneficiary from transferring, and creditors from attaching, his right to future payments.
Spendthrift provision: Voluntary alienation
Absent restrictions by statute or by the trust, a ben may freely transfer his interest in the trust.
Spendthrift provision: Involuntary alienation
Absent restrictions by statute or by the trust, an insolvent trust ben’s creditors may levy on his beneficial interest.
Spendthrift provision: Settlor creating for himself
As to involuntary alienation – no jdx recognizes self-settled spendthrift trust so settlor can’t insulate himself from his own creditors.
As to voluntary alienation – split of authority.
Support Provision
Provision that allows trustee to pay to beneficiary only as necessary for his health, support, maintenance, or education. Same rules as Spendthrift Provision.
Discretionary Provision
Provision that gives trustee sole and absolute discretion to determine when and what, if ever and anything, to give to beneficiary
Spendthrift provision: Voluntary alienation
Beneficiary cannot transfer right because he may not get anything. However, if he does, transferee steps into beneficiary’s shoes, and if trustee decides to pay, he must pay transferee.
Spendthrift provision: Involuntary alienation
Creditors cannot attach beneficiary’s right, because there might not be any. However, if trustee has notice of debt and creditor’s judgment against beneficiary, and decides to pay, he must pay the creditors.
Trustee powers
Trustee has all enumerated powers.
Trustee has all implied powers – anything helpful and appropriate to carry out the trust
List the 7 trustee duties owed to beneficiaries
Duty of loyalty Duty of due care Duty to account Duty to invest Duty to earmark Duty to segregate Duty not to delegate
Trusts: List remedies available to the beneficiary
Damages
Constructive trust
Tracing and equitable lien on prop (except if buyer is BFP w/ out notice of breach)
Ratify the transaction if good for ben
Remove the trustee.
Trusts: Duty of loyalty
Def: Requires trustee to exclusively administer the trust for the benefit of the bens.
Self-dealing and no further inquiry rule: If trustee buys or sells assets for trustee or spouse or borrows trust funds, good faith and reasonableness of transaction are irrelevant.
Consequences: If loss trustee is surcharged. If profit then will be constructive trustee for profits.
Trusts: Duty of due care
Common Law std: Trustee must act s as reasonably prudent person dealing w/ his own affairs.
Modern std: Trustee must act as a reasonably prudent person dealing w/ another person’s prop.
Duty to account
Def: Requires the trustee on a regular basis to give the bens a stmt of income and expenses.
Consequences: Bens file an action for accounting.
Duty to invest (4 rules)
(1) State restrictions: Some states mandate certain investments that trustee must follow in absence of directions in the trust.
* **Allowed: Fed gov bonds, federally insured certificates of deposit, first deeds of trust in real estate, sometimes stocks of publicly traded corps.
(2) CL reasonably prudent investor: Duty to invest requires trustee to act as a reasonably prudent person investing in his own affairs, trying to maximize the income while preserving the corpus.
(3) More modern CL reasonably prudent investor: Trustee must act as a reasonably prudent person investing in another person’s prop, trying to maximize income while preserving corpus.
(4) Uniform Prudent Investor Act (adopted by most states): Trustee must invest as a reasonably prudent investor. Each ind investment is not scrutinized. Performance based upon entire portfolio.
Duty to earmark
Def: Requires trustee to label trust prop as trust prop.
Consequences:
***CL approach: If there is a loss then trustee held personally liable. No causal relationship required. Failure to earmark didn’t have to cause the loss.
***Modern approach: Trustee is liable only if the failure to earmark caused the loss.
Duty to segregate
Def: Trustee can’t mingle his own funds w/ trust funds and can’t co-mingle diff trusts together.
Consequences: If breach, then trustee held liable for the loss.
Duty not to delegate
Trustee can rely on professional advisors in reaching a decision but can’t delegate decision making authority to these advisors.
Trustee can’t delegate to any 3rd person or to another co-trustee.
Trustees must act unanimously.
Trustee duties owned to 3rd persons: List
Liability in contract
Liability in tort
Trustee duties owned to 3rd persons: Liability in contract
CL: Trustee is sued in his personal capacity (personal assets at stake). However, can get indem from trust assets if trustee wasn’t personally at fault.
Modern: If other person to the k knows trustee is entering into k in his representative capacity, then trustee must be sued in his representative capacity.
Trustee duties owned to 3rd persons: Liability in Tort
CL: Trustee is sued in his personal capacity but if w/out personal fault then gets indem from trust assets.
Modern: Trustee is personally liable for torts only if trustee is personally at fault.
Trust: Modification by settlor
S can modify trust if S expressly reserves the power.
S also has power to modify if S has power to revoke.
Trust: Modification by the court
Ct can modify for charitable trusts using cy pres.
Ct can modify for charitable or private express trusts using ct’s deviation power.
*Deviation power: Ct changes admin or managerial provisions. Ct cannot change bens.
- When ct can exercise its deviation power:
- *Unforeseen circs on the part of S or T.
- **Deviation is nec to preserve the trust. Typically means keep the trust going.
Termination of revocable trusts
Maj view: To retain the power to revoke, settlor must expressly reserve the power.
Min view: Settlor has power to revoke unless trust is expressly made irrevocable.
Termination of irrevocable trusts ( 3 ways)
(1) Settlor and all bens agree to terminate. Must account for unborn contingent remaindermen.
(2) All bens agree to terminate and all material purposes of the trust have been accomplished.
(3) Operation of law – Statute of Uses:
* Not all jurs recognize. If you have a private trust w/ a corpus of real prop and trustee has no active duties, this is called a passive trust. Where there is a passive trust, bens will get legal title automatically by operation of law.
**Could analogize even for passive trust of stock (personal prop) by arguing equity will not see a trust continue to carry out a minor or insig purpose.
