Trusts

Question 1

Private Express Trusts: Definition

Answer 1

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.

Question 2

Property of the trust

Answer 2

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

Question 3

No illusory interests allowed

Answer 3

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.

Question 4

Beneficiary

Answer 4

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!

Question 5

Trustee

Answer 5

Must have a trustee, but court can appoint trustee

Question 6

Intent to create a trust

Answer 6

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

Question 7

Creation of a trust (2 time frames)

Answer 7

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.

Question 8

Legal purpose of a trust & illegalities

Answer 8

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).

Question 9

Types of trusts

Answer 9

Charitable
Honorary
Resulting
Constructive
Totten

Question 10

Charitable trust: Defined

Answer 10

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.

Question 11

Charitable trust: Creation

Answer 11

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.

Question 12

Charitable trust: Cy pres

Answer 12

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

Question 13

Honorary trusts

Answer 13

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.

Question 14

Resulting trusts

Answer 14

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

Question 15

Constructive trusts

Answer 15

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.

Question 16

Totten trust

Answer 16

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

Question 17

Restrictive Trust Provisions: List

Answer 17

Spendthrift provision
Support provision
Discretionary provision

Question 18

Spendthrift provision

Answer 18

Provision that prevents beneficiary from transferring, and creditors from attaching, his right to future payments.

Question 19

Spendthrift provision: Voluntary alienation

Answer 19

Absent restrictions by statute or by the trust, a ben may freely transfer his interest in the trust.

Question 20

Spendthrift provision: Involuntary alienation

Answer 20

Absent restrictions by statute or by the trust, an insolvent trust ben’s creditors may levy on his beneficial interest.

Question 21

Spendthrift provision: Settlor creating for himself

Answer 21

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.

Question 22

Support Provision

Answer 22

Provision that allows trustee to pay to beneficiary only as necessary for his health, support, maintenance, or education. Same rules as Spendthrift Provision.

Question 23

Discretionary Provision

Answer 23

Provision that gives trustee sole and absolute discretion to determine when and what, if ever and anything, to give to beneficiary

Question 24

Spendthrift provision: Voluntary alienation

Answer 24

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.

Question 25

Spendthrift provision: Involuntary alienation

Answer 25

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.

Question 26

Trustee powers

Answer 26

Trustee has all enumerated powers.

Trustee has all implied powers – anything helpful and appropriate to carry out the trust

Question 27

List the 7 trustee duties owed to beneficiaries

Answer 27

Duty of loyalty
Duty of due care
Duty to account
Duty to invest 
Duty to earmark
Duty to segregate
Duty not to delegate

Question 28

Trusts: List remedies available to the beneficiary

Answer 28

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.

Question 29

Trusts: Duty of loyalty

Answer 29

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.

Question 30

Trusts: Duty of due care

Answer 30

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.

Question 31

Duty to account

Answer 31

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.

Question 32

Duty to invest (4 rules)

Answer 32

(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.

Question 33

Duty to earmark

Answer 33

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.

Question 34

Duty to segregate

Answer 34

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.

Question 35

Duty not to delegate

Answer 35

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.

Question 36

Trustee duties owned to 3rd persons: List

Answer 36

Liability in contract

Liability in tort

Question 37

Trustee duties owned to 3rd persons: Liability in contract

Answer 37

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.

Question 38

Trustee duties owned to 3rd persons: Liability in Tort

Answer 38

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.

Question 39

Trust: Modification by settlor

Answer 39

S can modify trust if S expressly reserves the power.

S also has power to modify if S has power to revoke.

Question 40

Trust: Modification by the court

Answer 40

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.

Question 41

Termination of revocable trusts

Answer 41

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.

Question 42

Termination of irrevocable trusts ( 3 ways)

Answer 42

(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.