Trusts Flashcards
What is a trust?
A fiduciary relationship where one party holds legal title to property for the benefit of another who holds equitable title.
Express trusts
Created intentionally.
+ Private trusts - created to benefit private, non-charitable beneficiaries.
+ Charitable trusts - created for some charitable purpose or to benefit charitable beneficiaries.
Implied trusts
Created by operation of law.
+ Constructive trust - imposed to deprive a wrongdoer from retaining improperly obtained property.
+ Resulting trust - imposed irrespective of wrongdoing when the circumstances require it.
Can a sole trustee be the sole beneficiary?
NO - interests merge and trust collapses.
Requirements for a Valid Trust
SETTLOR with requisite capacity who express a PRESENT intent to create a trust.
DELIVERY of specific trust property
ASCERTAINABLE BENEFICIARY - at least one.
PURPOSE - Must have a proper trust purpose
TRUSTEE
ACTIVE DUTIES imposed on trustee
Satisfying delivery requirement of a valid trust.
+ delivered to trustee with intent to do it right now (not in the future)
+ must be some certainty over what is the trust property (can’t be expectation or unearned profits)
Satisfying ascertainable beneficiary requirement of a valid trust.
+ determinable when trust is to be distributed
+ need some objective standard (reasonable basis) to identify beneficiaries.
What is a proper trust purpose?
A trust can be created for any purpose except those that are illegal, fraudulent or against public policy.
Inter Vivos Trust
Created during Settlor’s lifetime.
Trust property must be placed into the trust
Testamentary Trust
Created by Settlor’s will.
Can include “pour over” provision. Directs the transfer of Decedent’s property into a trust established by either Decedent during his lifetime or another person.
Totten Trust
Arrangement with a bank that allows the depositor to open a bank account in his own name, as trustee for other parties.
Beneficiary’s only right is to take whatever is left in the account when depositor dies (if beneficiary is still alive)
Is the Rule Against Perpetuities applicable to trusts?
All private, non-charitable trusts must comply with RAP.
Common law RAP has been modified in MAJORITY of jxs – WAIT AND SEE approach: Whether a trust violates the RAP depends upon what actually happens rather than what might happen.
What are the sources of a Trustee’s powers?
+ Trust instrument (expressly or by implication), AND
+ Statute or implied in law as necessary or appropriate to accomplish the trust’s purposes.
What are a Trustee’s implied powers?
Unless expressly precluded by the trust, the trustee can settle/abandon claims against the trust, borrow money, sell/lease trust assets, and incur reasonable expenses necessary to maintain trust property.
Trustee’s Duty of Loyalty
Trustee owes beneficiary a duty of LOYALTY and GOOD FAITH.
Prohibited from:
+ self-dealing with trust (even if done in good faith
+ obtaining a personal benefit other than the agreed-upon compensation
+ obtaining a personal benefit for a third party with respect to dealings involving the trust estate
Even if the trust has an exculpatory clause, the trustee still can’t breach the fair-dealing standard – any profits earned from self-dealing with the trust belong to the trust.
Trustee’s duty to preserve and enhance trust property
Trustee has an AFFIRMATIVE DUTY to preserve and enhance trust property.
“Prudent Business Person” Rule:
Trustee must use the degree of skill, care, and prudence exercised by a reasonable business person to use trust property in a productive manner.
+ if trustee possess superior business expertise or is a professional fiduciary – higher standard. Held to the care, skill, and prudence of an individual or entity possessing those capabilities.
Uniform Principal and Income Act
Specifies the distribution of receipts between trust principal and income.
+ Rents and cash dividends received are allocated to trust income, and then are distributed to trust’s income beneficiary.
+ Sales proceeds and stock dividends are allocated to principal of trust.
What is the liability of a Trustee?
Trustee is liable for damages caused by his breach of duty.
+ If the trustee uses trust assets to buy property that increases in value – must return both trust property and increased value.
+ If the trustee breaches duty of care in investing – must personally repay the trust for its losses.
May a beneficiary assign his rights?
A beneficiary may assign his right to receive income or principal from a trust (unless the trust provides otherwise).
Spendthrift Trust
Beneficiary’s interest is inalienable, beneficiary cannot voluntarily transfer property and a creditor cannot attack it.
EXCEPTION - Cannot be used to defeat a claim of:
+ Alimony or child support
+ Creditors who furnish necessities to beneficiary
+ Government claims against beneficiary.
Discretionary Trust
Trustee pays as much income as he believes desirable.
Beneficiary’s creditors can get a lien on the trust but cannot get trust property until a distribution is made.
Support Trust
Distributions are based on the beneficiary’s needs.
Termination of a Trust by the Settlor
COMMON LAW - Presume trusts are irrevocable unless stated otherwise.
UTC - Presume trusts are revocable unless stated otherwise.
Settlor may terminate an irrevocable trust only with consent of all the beneficiaries who must be living at that time.
Termination of Trusts
By Settlor
By merger
By operation of law
By Beneficiaries after Settlor’s death.
