Trusts

Question 1

What is a trust?

Answer 1

An arrangement for making gifts of property and management of assets under which the trustee holds legal title of the trust assets for the benefit of the beneficiary having equitable title.

Question 2

What are the requirements of a trust?

Answer 2

The settlor delivers title to trust property to a trustee for the benefit of beneficiaries with the intent to create a trust for a lawful purpose.

Question 3

What are the requirements to be a settlor?

Answer 3

He must have capacity to convey title and be 18, and have legal capacity.

Question 4

When is delivery required for a trust?

Answer 4

For any inter vivos trust, not testamentary or for self-declaration (where the settlor is trustee)

Question 5

What is required for delivery of a trust?

Answer 5

There must be delivery of the subject matter of the trust and intent to convey legal title to the trustee

Question 6

What are the requirements for trust property?

Answer 6

The subject matter of the trust must be certain and identifiable as specific property, unless you promise to create a trust for unidentified property in trust supported by consideration.

Question 7

What is required for a trustee?

Answer 7

Must have capacity to contract and execute a deed and be 18.
An unincorporated association can’t be a trustee.
A bank or trust company with trust powers in their charters can be trustees
Charities can be trustees for charitable trusts only.
But a trust never fails for lack of having a trustee.

Question 8

What happens if a trust doesn’t name a trustee?

Answer 8

The court will appoint a suitable one. No one can be compelled to be a trustee

Question 9

What is are the financial duties and obligations of trustees?

Answer 9

An individual trustee must post a fudiciary bond unless the settlor waived that requirement. A corporate trustee doesn’t have to.
A trustee is entitled to reasonable compensation for serving as trustee and rasonable reimbursement for expenses.

Question 10

How does a trustee accept trustee status?

Answer 10

He can sign or accept by conduct by executing trust powers or performing trust duties.

Question 11

When can a trustee resign?

Answer 11

1) . with court approval upon showing he can no longer appropriately serve as trustee (perhaps because of conflict) and he
2) . gives an accounting of property initially received, receipts and dispersements, and property now an hand and liabilities.

Question 12

What happens when a trust leaves out the beneficiary?

Answer 12

No trust is formed, and the property lapses. No gift is intended to the trustee

Question 13

What happens if no powers are granted to a trustee?

Answer 13

Then no trust is created. The trustee must have powers or duties to perform, otherwise, the property merely passes to the beneficiary.

Question 14

What is a spendthrift clause?

Answer 14

a clause in the trust that the property within it is not transferable by the beneficiary and not reachable by creditors by attachement or other legal processes.

Question 15

What is trustee by estoppel?

Answer 15

NOT RECOGNIZED IN TEXAS! When a person acts as a trustee without formal appointment, in other places this creates a trust by estoppel

Question 16

What is required to be a trust benficiary?

Answer 16

A noncharitable trust must hvae definite ascertainable beneficiaries and their interests must vest, if at all, no later than lives in being plus 21 years.
Charitable tursts cannot have identifiable beneficiaries and they are not subject to the RAP.

Question 17

What is a resulting trust?

Answer 17

If a trust fails for some reason, courts may employ this principal where the residuary beneficary receives equitable title subject to the proposed trustee’s management.

Question 18

What is the intent required for a trust?

Answer 18

the intent to create a trust. The settlor must use enforceable obligation language (though “trust/trustee is not required) and not precatory words, like wish, desire, request, hope, or I would like.

Question 19

What trust objectives/purposes are not allowed by law?

Answer 19

Trusts that call for commission of crime
destruction of property
Unlawful condition against public policy.
partial marriage restraints on marriage are ok. Full marriage restraints and encouraging divorce aren’t ok

Question 20

What writings are required for trust creation?

Answer 20

A trust transfering personal property to a trustee other than the settlor or beneficiary coupled with an intent to create a trust with or prior to the transfer does not have to be in writing unless it’s for land.
All land trusts and all other trusts must be in writing.

Question 21

What is a revocable trust?

Answer 21

A trust that the settlor can change later. The default in Texas is revocable and amendable unless expressly irrevocable.

Question 22

How can a trust be changed?

Answer 22

It must be in writing and done by the settlor. If the settlor can’t change it, then the trustee must get court approval.

Question 23

Divorce and trusts?

Answer 23

Upon divorce, all revocable trust provisions in favor of a former spouse or the spouse’s relatives are revoked.

Question 24

trust formalities compared to will formalities?

Answer 24

Trusts don’t have to be witnessed, and you can do a testamentary trust just by creating it. pg. 7.

Question 25

What is a pourover will?

Answer 25

When a will makes a testamentary gift to a trust. This allows you to put future assets into a trust, even if the trust is subject to revocation/amendment or if the trust is unfunded. The trust doesn’t even have to be in existence at the time of the will’s execution–exception to incorporation by reference.

Question 26

What happens when a trust and a will conflict?

Answer 26

The will controls

Question 27

Trusts and life insurnace?

Answer 27

You can create a life insurance trust and name the trustee as the beneficiary Or a better option is to name the “trustee names in my will” as a policy beneficiary. This can also be done on employee death benefits for trustee name in will or trustee of inter vivos trust.

Question 28

How does rights of survivorship arise?

Answer 28

The language of a bank account controls. It must say “with rights of survivorship”, not JT JTWROS or Joint Tenants.
It works even if the survivor didn’t sign unless the joint tenants are married and it is funded with community property funds b/c then they must jointly agree to rights of survivorship.

Question 29

What is a durable power of attorney?

Answer 29

The creation of an agnecy relationship that survives the principal’s incapacitation.

Question 30

How is a durable power of attorney created?

Answer 30

IT must be signed before a notary and says that this POA is not affected by my subsequent disability.

Question 31

What is a springing power of attorney?

Answer 31

It takes effect only upon the principal’s incapacitation.

Question 32

How is a durable power of attorney terminated?

Answer 32

by the principal, by his death, by divorce, by appointment of a guardian of the estate. A third party who relies on it without knowledge of termination is protected.

Question 33

What are the requirements for a charitable trust?

Answer 33

It must have a charitable purpose confering a substantial amount of social benefit, though specific is not necessary.
It must be for a reasonably large segment of the public, not identifiable individuals.

Question 34

What is cy pres?

Answer 34

the doctrine when the charitable purpose of a trust can no longer be accomplished, then funds are diverted to another charitable purpose “as near as possible” (translation) to the original purpose.

Question 35

RAP and trusts?

Answer 35

The RAP applies to non charitable trusts, but not charitable trusts. If a no charitable trust violates the RAP, then the instrument is reformed or construed to carry out the intent as far as possible within the period of the rule.

Question 36

Who can enforce a trustee to properly operate a charitable trust?

Answer 36

The Texas Attorney General is a proper party to any suit concerning a charitable trust.

Question 37

What happens if a named charitable beneficiary ceases to exist or qualify as a charity?

Answer 37

Then the trustee can name a new charity as beneficiary without judicial approval

Question 38

What is an honorable trust?

Answer 38

A gift in which an object is a beneficiary, like a car. Then the trustee is on his honor to prform it. If he chooses to perform, then the trust will be upheld. If he doesn’t, then the trust fails and there is a resulting trust in favor of the residuary beneficiary. Even if he did choose to honor the trust, watch for the RAP, where reforming it might make the trust valid for only 21 years.

Question 39

Animals and trusts?

Answer 39

Trusts can be for the benefit of an animal, if the animal is aloive during settlor’s lifetime, it terminates on the animal’s death, and individuals named in the trust can be the life in being.
Trust property not used for the animal’s care is distributed to hte settlor or his estate/will.
You can’t make a bequest to animals.

Question 40

What is a purchase money resulting trust?

Answer 40

When Buyer purshases land and puts it into third party’s name, and they are not relatives, then Buyer brings suit to put resulting trust in Buyer’s name, saying it wasn’t a gift and can require conveyance at any time.
Evidence can be admitted to say it was a gift or a loan of the purchase price.
If they are relatives, then there is a presumption it was a gift.

Question 41

What is a constructive trust?

Answer 41

An equitable remedy created to disgorge unjust enrichment. There must be wrongful conduct and unjust enrichment, like being named a life insurance beneficiary, then killing the policy holder. Then you don’t benefit from your wrongful acts.

Question 42

What are exceptions to spendthrift clauses?

Answer 42

Contracts for necessaries, including income when income is benficiary’s only income
Child support obligations.
Any interest retained by settlor, including revocable trusts
federal tax liens.

Question 43

What happens when a trustee transfers trust assets untransferable by a spendthrift clause?

Answer 43

Then his is liable unless he acted under the beneficiary’s instructions.

Question 44

What can creditors reach in a trust bound by a spendthrift clause?

Answer 44

The income distributed to the beneficiary from a trust, but they must refile for every distribution, even with “turnover statute” under Creditor’s rights law.
They can also reach interests irrevocably transferred to others or transfers made with intent to defeat, defraud or delay.

Question 45

How are spendthrift clauses created?

Answer 45

saying spendthrift clause or using the descriptive language of non transfer/ no creditors.

Question 46

What is a discretionary trust?

Answer 46

A valid trust where the trustee can distribute as much of the trust income/principal at in his sole discretion.

Question 47

What is a support trust?

Answer 47

A trust created to support the beneficiary, where the benficary can sue to get more income or principal distributed. But distribution in excess of actual support needs are also a breach of trust, and remainder men can sue for that.
A creditor that gives necessaries can reach the assets in a support trust if benficiary could compel distribution.

Question 48

What court has jurisdiction over trusts?

Answer 48

District courts and statutory probate courts have concurrent jursidction over all proceedings for inter vivos t rusts and tetamentary trusts.

Question 49

Where is venue proper for trusts?

Answer 49

For individual truste’s the trustee’s county of residence or the country where the trust’s principal office/situs is maintained (here if multiple trustees).
For a corporate trustee, the county of the trust’s situs/principal office.
If testator is deceased and there is a trust created by will, then it can be in the county where estate administration is pending.

Question 50

What is an accounting and its requirements?

Answer 50

Upon demand, the trustee must give an accounting annually, but no sooner than 12 months after the trust is created. The Settlor canont limit the right to demand accounting by primary beneficiaries

Question 51

What is a primary beneficiary?

Answer 51

One entitled or permitted to get distributions from the trust or would get a distribution if the trust terminated.

Question 52

What powers does a trustee have over property?

Answer 52

Anything a fee simple owner can do, including selling leasing, mortgaging, partitioning, make improvements, give mineral leases, and make repairs

Question 53

What can a trustee not do with trust property?

Answer 53

Self deal and imprudent investments.

Question 54

What is a trustee prohibited from doing under his duty of loyalty (self-dealing)?

Answer 54

borrow trust funds, loan funds, buy or sell trust assets with him on the other side, profit from serving as trustee other than compensation, a corporation trustee to buy its own stock–but can retain it if prudent.

Question 55

What happens if the trustee commits a breach of trust?

Answer 55

The beneficiary can sue to deny compensation and remove the trustee, and
ratify it and wiave the trust
surcharge action for loss (no further inquiry rule) makes good faith no defense
impose a constructive trust if trustee still has possession of the property.

Question 56

BFP’s in trusts?

Answer 56

When a trustee breaches the duty of loyalty by selling the trust property, the beneficiary can’t recover it from a BFP unless the purchaser is a relative of the trustee or an entity where trustee is an officer, employee, or principal shareholder, then it is self-dealing.

Question 57

What is the SOL for a breach of duty of loyalty?

Answer 57

4 years from trustee’s repudiation of the trust (denial it exists), trustee dies/ resigns, or trustee gives accounting with full disclosure of the bad acts

Question 58

loan trust assets to the beneficiary/

Answer 58

Ok if prudent, considering interest rate, secured, reasonable repayment.

Question 59

How do multiple trustees control the trust?

Answer 59

by majority rule. A trustee not wanting to be liable must not participate in the action and express his dissent in writing.

Question 60

Trustee’s investment powers?

Answer 60

Duty of prudent investments to maintain a custom-tailored investment strategy, measured by the conduct when the investment decision is made, considering:
the role each investment plays within toe overall portfolio
the expected total return from income and capital gain,
needs for liquidity,
general economic conditions,
possible inflation or deflation… (pg. 19)

Question 61

Duty to balance income and capital gains in investments?

Answer 61

The trustee has adjustment poewr to allocate capital gain and principal to income where appripriate considering the
ordinary income and capital gain available for allocation,
the intent of the settlor for benficiary’s interests,
increase or decreas in the trust assets,
whether he has a the power to distribute the principal

Question 62

Which payments are income and which are principal?

Answer 62

Mineral Delay rental: all income and no principal

Question 63

Income or principal: mineral royalty?

Answer 63

allocate equitably between income and principal. presumed equitable if 85% income.15% principal But it used to be 27.5% principal

Question 64

Income/principal: mineral bonus?

Answer 64

Allocate equitably. presumed equitable if 85% income and 15% principal. But it used to be 27.5% principal

Question 65

Income/principal: pension, annuity, IRA

Answer 65

4% income, 96% principal

Question 66

Income/principal: liquidating assets, like IP that will decline over time?

Answer 66

10% income and 90% principal.

Question 67

Income/Principal: money from an entity?

Answer 67

All income unless classfied as a capital gain or not “money” like stock dividends

Question 68

Income/principle: expenses?

Answer 68

trustee expenses: 50% income charge
annual expenses: charge against income
capital expenses: charged against principal

Question 69

Diversity of investments?

Answer 69

trustee has a duty to diversify, even if investments wer all one stock when received, unless trust document says otherwise

Question 70

What can’t a settlor change in a trust?

Answer 70

can’t limit illegal purpose prohibition
can’t prevent bad faith/ intentional, reckless liability (can limit negligence)
can’t limit SOL
can’t limit duty to respond ot accounting
can’t limit court’s ability to modify trust, remove trustees, require fudiciary bond, or deny trustee compensation.

Question 71

When is a trustee liable on contracts

Answer 71

liable by default unless there is intent to exclude personal liability, like by putting “trust” or “trustee,” unlike a personal estate administrator.

Question 72

When is a trustee liable for torts in relation to the trust?

Answer 72

Always. And the trust is never suable.

Question 73

Who has standing to sue a third party who injurs the trust?

Answer 73

Only hte trustee, who has legal title. But if he is unwilling or unable, or he helped defraud the trust, then the beneficiary can sue.

Question 74

When do trusts terminate?

Answer 74

1) . termination conditions in the trust
2) . petition of trustee or beneficiary that the trust be changed, trustee change because
a. the purposes of the trust have been fulfilled or become illegal/impossible to fulfill
b. changed circumstances unknown to settlor that will better fulfill the purpose of the trust, or
c. better tax objectives of settlor
3) . termination of uneconomic trust without court approval if less than 50,000$ and administration doesn’t justify continuation

Question 75

Merging/splitting trusts?

Answer 75

can be done without judicial order for any reason, but usually done for tax purposes

Question 76

How long do trustee duties last?

Answer 76

enough time to wind up trust affairs and make distributions to beneficiaries.