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Trusts Flashcards

1
Q

What is a trust?

A
  • Legal device whereby one individual or entity, a trustee, holds legal title to certain property and manages it for the benefit of named beneficiaries.
  • A trustee as such has no equitable interest in the trust property (though someone can be both the trustee and a beneficiary of a trust).
  • The trustee is under duties that include managing the property prudently, making distributions to beneficiaries in accordance with the settlor’s instructions, and periodically reporting to the beneficiaries.
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2
Q

What are the (6) requirements for a valid trust?

A
  1. Settlor
  2. Property
  3. Trustee
  4. Beneficiary
  5. Intent
  6. Lawful purpose
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3
Q

What are the requirements for the settlor?

A
  1. Legal capacity or emanicpated minor- i.e., age 18 or older
  2. Proper capacity - i.e., competency
  3. Ability to convey title
  4. Exception:
    1. If an individual gives someone else a durable power of attorney that expressly authorizes the agent to create a trust with the individual’s property, the agent can do so even if the individual has become mentally incompetent.
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4
Q

What are the requirements for trust property?

A

Traditionally:

  1. Property must be certain and ascertainable
  2. Legal title must be fully conveyed to trustee

Modern Rule:

  1. Unfunded trusts to which the settlor directs future transfer of property rights are allowed
    1. e.g. making the trust the POD beneficiary of an insurance policy or investment account, or making the trust a beneficiary of the settlor’s will.
  2. Here, trust exists in a sense from the time of creation, even though trustee’s only duty might be to transfer property into the trust when pour-over provisions become effective.
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5
Q

What are the requirements for the trustee?

A
  1. Trustee may be an individual, a group of individuals, or a corporation
  2. Legal capacity to exercise fiduciary duties:
    • Age 18 or older
    • Capacity to take and hold legal title
    • Capacity to contract and execute deeds
  3. ​Acceptance
    • ​​Done by either:
      • ​Written signature
      • Conduct (i.e., performing duties of trust)
        • But not merely inspecting property for potential environmental law liability
      • Method stated in the trust
    • Trustee assumes his role as soon as he accepts.
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6
Q

What is a testementary trust?

What is a testamentary trustee?

What are the limits on serving as one?

A

Definition

  • Trust created by the settlor’s last will and testament
  • Trustee appointed under a will

Limits

  • Non-resident bank cannot serve as one
  • Non-resident individual can serve as one, but must appoint Virginia resident as agent for service of process
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7
Q

What happens if a will establishes a trust, but does not name a trustee?

A

No trust fails for lack of a trustee, unless the settlor clearly stated that only one person could be trustee and that person is not available

Otherwise, the court will appoint a suitable trustee

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8
Q

Does a trustee have to post bond?

A

Not unless the court finds it is necessary to protect the interests of beneficiaries

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9
Q

What is required for intent to create a trust?

A

Settlor must attach enforceable duties that can be supervised as to the transfer of the property

Otherwise, it was just a gift to the purported trustee

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10
Q

What are the requirements for beneficiaries?

A

Depends on type of trust:

  1. Private trust
    • Must have definite and ascertainable beneficiaries
    • Interests must vest within the period of RAP
  2. Charitable trust
    • Must have indefinite group of beneficiaries
    • Must have a charitable purpose
    • Not subject to RAP
  3. Honorary trust
    • Must have beneficiaries that cannot complain
    • May be pets and cemeteries
    • Not subject to RAP
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11
Q

What is the effect of RAP in Virginia?

A

Common law rule:

  • If at the creation of any interest, there is a possibility that it will not vest within a life in being plus 21 years

Virginia’s adoption of USRAP

  • The court may wait and see what actually occurs after 90 years from creation of the interest
  • If at that point the interest still violates RAP, the court fixes it so it is vested
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12
Q

What is the process for applying RAP in Virginia?

A
  1. Determine if interet violates common law RAP
    • Kill off all lives in being
    • After 21 years, could the interest still vest?
  2. If no common law RAP violation, interest is valid
  3. If common law RAP violation, wait 90 years
  4. If interest could still vest, fix it so it vests then
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13
Q

What do you say if you think there is a RAP problem, but you are not confident?

A

There is no perpetuities problem. Virginia has enacted the Uniform Statutory Rule Against Perpetuities, which provides an alternate vesting period of 90 years.

All interests created by this will are almost certain to vest or terminate within 90 years after their creation, and therefore will likely be valid despite the common law RAP.

Even if the interests have neither vested nor terminated at the end of the 90 year period, USRAP requires the courts to fix the problem so that the interests do vest at that point.

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14
Q

What is required for a trust to have a lawful purpose?

A

Trust cannot:

  1. Further commission of a crime
  2. Call for destruction of property
  3. Impose unreasonable conditions
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15
Q

What constitutes an unreasonable condition of a trust?

What is not unreasonable?

A

Unreasonable

  • Trust encourages divorce
    • E.g., income to Betty, but also principal if she divorces

Reasonable

  • Trust provides money until person remarries
    • E.g., income to Betty until she remarries
  • Trust encourages beneficiary to marry Jewish boy
    • E.g., income to Betty if she marries a Jewish boy
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16
Q

What is an oral trust?

A

A trust of either personal or real property, the terms of which can be proven by clear and convincing evidence

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17
Q

What are examples of non-probate devices?

A
  1. Intervivos trust
  2. Joint tenancy
  3. Joint accounts
  4. Payable on death accounts
  5. NOT testementary trusts
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18
Q

What is the distinguishing characteristic of an intervivos trust?

A

It is created during the lifetime of the settlor

This is what makes it an effective non-probate transfer vehicle

It is m=not subject to the RAP

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19
Q

Are intervivos trusts revocable?

A

Yes. All inter vivos trusts are presumed revocable if:

  • Created on or after July 1, 2006
  • Not expressly made irrevocable by settlor

This is a reversal of the common law rule, and a result of Virginia’s adoption of the UTC

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20
Q

Who can revoke a trust?

A
  • Settlor
  • Conservator, guardian, or agent only if either:
    • Expressly authorized by trust
    • Authorized by court for good cause
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21
Q

What is a pour over arrangement?

A

Either:

  • Pour over will
    • Non-probate vehicle pours over assets into a will
  • Pour over trust
    • Will pours over assets in an intervivos trust
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22
Q

What is a self-declaration of trust?

A

Settlor makes himself both the trustee and beneficiary

But adds a remainder beneficiary

And a successor trustee, who takes over in the event of settlor’s incapacity or death

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23
Q

What is the statue of limitations for contesting a revocable trust?

A

The earlier of:

  1. Two years after settlor’s death
  2. Six months after trustee sent person commencing action:
    • Copy of trust instrument
    • Trustee’s name and address
    • Notice of time allowed for contesting trust
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24
Q

When a trust is contested, can the trustee be subject to liability for distributing assets in according with the trust?

A

Only if trustee distributes assets while either:

  1. Trustee knows of a pending judicial proceeding contesting the trust
  2. Trustee has received notice of a possible judicial proceeding that actually commences within 60 days after the notice was sent
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25
Q

What happens if a beneficiary of a trust is determined to have been invalid after receiving assets?

A

Person must return any distribution received, but they have no further liability

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26
Q

What is a power of attorney?

What makes one durable?

What is a springing power of attorney?

When does a power of attorney terminate?

A

Definition

  • Authorizes another person (i.e., agent) to act on behalf of the principal

Durable

  • States that the power of attorney is not affected by the principal’s incapacity or disability

Springing

  • States that the power of attorney becomes effective upon the principal’s incapacity or disability

Termination

  • Upon principal’s death
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27
Q

Who enforces the terms of a charitable trust?

A

Settlor, if alive, otherwise attorney general of the state

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28
Q

What happens when the stated charitable purpose of a charitable trust can no longer be accomplished?

A

May be reformed under doctrine of cy pres

29
Q

What are restrictions on honorary trusts for pets?

A

Only animals alive during the settlor’s life can be beneficiaries (i.e., trust terminates on death of animal)

30
Q

What is a constructive trust?

What is required to create one?

A

Definition

  • Not really a trust - equitable device meant to remedy a bad act

Elements

  1. Wrongful conduct
  2. Unjust enrichment
31
Q

What is a resulting trust?

A

Similar to a constructive trust in that it does not require the formalities of a normal trust

When the purpose of a trust cannot be achieved, the money “results back” to the settlor

Purchase money resulting trust (PMRT)

  • If A purchases land and title is put in B’s name (not a relative) for no reason, there is a presumption that B holds the property in a resulting trust for A
  • Presumption must be rebutted by clear and convincing evidence that the purchase was a gift for B
32
Q

What is a spendthrift trust?

Are they enforceable?

A

Trust that restricts the ability of creditors to reach the trust assets

Enforceable unless violates public policy:

  1. Child support obligations
  2. Fees to lawyer who protected beneficiary’s interest
  3. Claims by government
  4. Mandatory distributions not made by trustee
33
Q

What is it called when a settlor places his assets in a spendthrift trust but retains the right to receive future payments at the trustee’s discretion?

A

Qualified self-settled spendthrift trust, or asset protection trust

34
Q

What are the requirements for a qualified self-settled spendthrift trust in Virginia?

A
  1. Valid trust
  2. Irrevocable
  3. Spendthrift clause
  4. Qualified trustee
  5. Additional beneficiary other than settlor when distributions made to settlor
  6. Settlor cannot disapprove of distributions
35
Q

When can the settlor of a qualified self-settled spendthrift trust challenge a trustee’s refusal to distribute?

A

Only if clear terms that trigger distribution have been met (e.g., amount needed for financial support)

36
Q

What is the trustee’s obligation?

A

Act for benefit of beneficiaries, unless beneficiaries provide consent after complete and full disclosure

No self-dealing:

  • Buying or selling trust assets to himself
  • Borrowing trust funds
  • Loaning funds to the trust
  • Profit from serving as trustee via confidential info
  • Buy stock of corporation if corporate trustee
37
Q

Do trustee beneficiaries have an action against third parties involved in self-dealing with the trustee?

A

Not if they are bona fide purchasers, which does not include parties that are either:

  • Aware of the self-dealing
  • Related to the trustee
38
Q

What is the statute of limitations for an action against the trustee?

A

Under accounting

  • One year from when
    • Trustee gives beneficiary report (accounting) that:
      • Discloses facts that show existence of breach
      • Informs beneficiary of time to bring action

Under termination

  • Five years from the earlier of:
    • Trustee’s removal, resignation, or death
    • Termination of beneficiary’s interest
    • Termination of trust
39
Q

Can the settlor waive the trustee’s obligations?

A

Yes, after complete and full disclosure, except for:

  1. Waiver of legal purpose requirement
  2. Waiver of trustee’s obligation to act in good faith
  3. Waiver of trustee’s obligation to not intentionally or recklessly act contrary to beneficiary interests
  4. Waiver of statute of limitations to bring action
  5. Waiver of court’s power to modify trust, remove trustee, require fiduciary bond, or deny trustee compensation
40
Q

What are the specific duties of the trustee?

A
  1. Act prudently
  2. Be impartial in relationship to beneficiaries
  3. Control and protect trust property
  4. Collect trust property and defend claims
  5. Segregate trust property from own
  6. Keep adequate records
  7. Keep beneficiaries reasonably informed
  8. Furnish copy of trust instrument on request
  9. 60-day notice provision
  10. Annual reports
41
Q

What is the trustee’s obligation with respect to the 60-day notice provision?

A

After the trustee accepts, he must notify beneficiaries of:

  1. Trust’s existence
  2. Trust’s settlor(s)
  3. Beneficiaries’ rights to request copy of trust
  4. Beneficiaries’ rights to annual report
  5. Trustee’s name, address, phone, and e-mail
42
Q

What is a trust protector?

A

Someone other than the corporate trustee who makes sensitive personal decisions regarding the trust

43
Q

How can a corporate trustee avoid a fiduciary duty breach from following the trust protector’s directions?

A
  1. Have settlor incorporate Virginia trust protector provisions in the trust instrument
  2. Avoid instances of willful misconduct or gross negligence in following trust protector’s instructions
44
Q

What are a trustee’s powers?

A

Virginia’s trust code expressly a uthorizes a trustee to do whatever the fee simple owner of the property could do, so long as:

  • No self dealing
  • Settlor doesn’t say otherwise
45
Q

What is a trustee’s responsibility with regard to prudent investing?

A

Virginia has adopted the Uniform Prudent Investor Act (UPIA) which utilizes a portfolio theory of investing (i.e., so long as the investment fits the portfolio, it is prudent - do not look at the investment individually)

46
Q

What is a trustee’s responsibility with regard to prudent investments when the trustee was selected based on his skills?

A

Trustee will be held to that level of expertise in evaluating his prudence

47
Q

Under UPIA, how are investment returns measured?

A

Total return, including income, but also:

  • Growth
  • Capital gains
48
Q

What is the trustee’s responsibility with regard to allocating income between income and remaindermen beneficiaries?

A

Trustee must act impartially between the two by either:

  1. Adjustment powers
  2. Unitrusts
49
Q

How does a trustee exercise his adjustment power?

A
  • Trustee distributes income to the income beneficiary, but also some of the capital gains to promote fairness
  • Rule of thumb - 10% of capital gains can be allocated
  • Trustee must take into account:
    1. The purpose and expected duration of the trust
    2. The settlor’s intent as to the beneficiaries’ respective interests
    3. Direction in the trust instrument regarding invasion of principle or accumulation of income
    4. Current circumstances of the beneficiaries
    5. Current economic conditions and their likely effect on the value of assets or income
    6. The need for liquidity, regularity of income, and preservation and appreciation of capital
    7. Any recent increase or decrease in value of the trust assets
    8. Anticipated tax consequences of an adjustment
    9. The total amount of ordinary income or principle available for allocation
50
Q

How should the trustee distribute the followingexpenses between income and principal beneficiaries:

  • Trustee’s fees
  • Ordinary expenses
  • Capital expenses
A

Trustee’s fees

  • Half and half

Ordinary expenses

  • Income beneficiary

Capital expenses

  • Principal beneficiary
51
Q

What is a unitrust?

A

Allows trustee to avoid having to allocate between income and remainder beneficiaries

Instead, income beneficiary gets between 3% and 4% of FMV of trust, remainder beneficiary gets everything else, regardless of amount of income generated

52
Q

Who can the trustee delegate powers to?

Is the trustee liable for delgatee’s actions?

A

Can delegate powers, including investment power, to agent

No liable for delegatee’s actions so long as trustee exercised reasonable care in:

  1. Selecting agent
  2. Establishing terms of delegation
  3. Reviewing agent’s decisions
53
Q

Is a trustee liable on contracts entered into as trustee?

A

No, so long as trustee:

  1. Acted in fiduciary capacity
  2. Disclosed fiduciary capacity
  3. Contract does not say otherwise
54
Q

Is a trustee liable for torts committed as trustee?

A

Yes, so long as trustee is personally at fault

55
Q

Does a co-trustee have liability for actions taken by other trustees?

A

No, so long as the co-trustee:

  • Dissented
  • Did not join in the action
  • Notified other trustees
56
Q

How many co-trustees have to agree on a decision for it to be ratified?

A

Majority

57
Q

Can an irrevocable trust ever be modified or terminated while settlor is alive?

A

Yes, if the settlor and all the beneficiaries consent and the court does the modification or termination

Even if the living settlor does not agree, the court may allow modification or termination

58
Q

Can an irrevocable trust ever be modified or terminated after the settlor dies?

A

Yes, provided that:

  1. All beneficiaries consent
    • Modification or termination is not inconsistent with purpose of trust
  2. Not all beneficiaries consent
    • Court is satisfied that:
      • Trust could be modified if all consented
      • Interests of beneficiaries not consenting (e.g., unborn child) will be protected
59
Q

When can a court modify or terminate a trust without all beneficiaries’ consent?

A
  1. Unanticipated circumstances
    • Modification or termination will further purpose of trust based on unanticipated circumstances
  2. Tax advantages
    • Modification or termination will achieve settlor’s tax objectives
  3. Purposes
    • Either:
      • No trust purpose remains to be achieved
      • Purposes of trust are now unlawful, contrary to public policy, or impossible to achieve
  4. Uneconomic
    • If value of trust is < $10,000, trustee may petition for termination if administrative costs are too much to justify continuance
60
Q

Can a trustee ever combine or divide trusts?

A

Yes, without court approval, so long as it does not frustrate the purposes of the trusts (e.g., to gain more investment ability)

61
Q

Can a court reform the terms of a trust even if the terms are unambiguous?

A

Yes, if proved by clear and convincing evidence that the settlor’s intent and the trust terms were affected by a mistake of fact or law

E.g., allow sale of house despite trust restriction so that wife can get a new house in a more suitable zoning district

62
Q

What are the standards for contesting an inter vivos trust on the grounds of undue influence or fraud?

A

Same as in wills.

63
Q

What is the SoL for actions contesting the validity of a revocable inter vivos trust?

A

must be brought within the earlier of:

  1. two years after the settlor’s death, or
  2. six months after the trustee sent the person commencing the judicial proceeding a copy of the trust instrument, the trustee’s name and address, and a notice of the time allowed for contesting the trust.
64
Q

Can creditors get to a trust?

A
  • when a debtor dies after transferring funds into a trust, creditors must first seek payment from the probate estate.
  • If that is insufficient, creditors can reach any assets that are subjects of non-probate transfers to the extent the settlor had enough control over them before dying that she could have used them for her own benefit
65
Q
A
66
Q

What can the beneficiaries sue the trustee for?

What are the remedies?

A

Beneficiaries can file suit against a trustee for breach of fiduciary duty and ask the court to:

  • issue an injunction against the trustee
  • void an action of the trustee
  • order an accounting
  • remove the trustee
  • or order the trustee to divulge any profits from self-dealing
  • compensate the beneficiaries for any financial loss occasioned by a breach of any trustee duty.
67
Q

What is an accounting?

A

Trust accounting is a detailed record that includes information about all income and expenses of a trust.

68
Q

When can a revocable trust be modified or terminated?

A

At any time by the settlor.

69
Q

How can a trust be modified by operation of law?

A
  • Divorce
    • Filing of any kind of dissolution (incl. separation) automatically revokes trustee, if trustee is settlor’s spouse
  • Death
    • Predeceased beneficiary’s share presumptively lapses just like a will
      • If the property was specifically to the beneficiary, it would become part of the trust corpus.
      • If the property was to a class of people, it would be distributed to other class members.
    • Anti-lape statute also applies
      • If the beneficiaty was a grandparent or descendant of a grandparent of the settlor, beneficiary’s descendand take in her shoes, per stirpes
  • Disappearance of Property
    • Any provision naming specific disappeared property is nullified
    • Exceptions:
      • number of stocks
      • lost property was condemned, lost, or stolen and it was insured
      • trustee alienated the property after the settlor became incapacitated

Trusts (1 decks)

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