Trusts Flashcards
What is a trust?
A trust is an arrangement under which the trustee holds legal title to property for the benefit of the beneficiaries. Trustee has burdens and beneficiaries have benefits of property ownership. Trustee is subject to fiduciary standards; he is not privileged to use trust property as his own
Requisites: Creator (settlor) delivers legal title of trust assets (the res) to trustee for the benefit of beneficiaries with intent to create trust for valid purpose
When does the delivery element not apply to the creation of a trust?
When it is a self-declaration of trust or testamentary trust
When is “wish” and “desire” language sufficient to evidence of intent to create a trust?
If the language purports to create a duty based on its fairest construction. BUT, merely precatory language of suggested use is insufficient.
The “res” requirement
The corpus, the principal, the subject matter of the trust. In order to have a trust, there must be a specific interest in property to which the trustee’s duties relate. IF THERE IS NO CERTAIN AND IDENTIFIABLE TRUST PROPERTY, THERE IS NO TRUST
Expectancies insufficient
The property in the trust must be a recognized property interest, not a mere expectancy. Watch out for situations of heir expectant, who have no property interest in their prospective inheritance.
Legatee has more than mere expectancy; she has interest which may be subject matter of a trust or gift. Right to receive is certain and identifiable, even if amount is not.
Trust property can be life insurance policy beneficiary proceeds or pension plan death benefit or settlor’s will.
Reaffirmation of gratuitous trust
Where a promise to create a trust is gratuitous, a trust arises when all elements of a valid trust have been met if, but only if, at that subsequent time the settlor manifests an intention THEN to create the trust.
What if a trustee is lacking?
Rule: No trust fails for want of a trustee. If the intention to create a trust is clearly manifested but no trustee is named, or the named trustee dies or resigns with no provision for a successor trustee, the court will appoint a suitable trustee to execute the trust.
EXCEPTION: Powers personal to the named trustee (rarely invoked)
Private trust must have ascertainable beneficiaries
Unlike charitable trusts, private trusts must have ascertainable beneficiaries
Beneficiaries must be human
Charitable trust beneficiaries
Must be for a charitable purpose, and must be for a reasonably large and unidentifiable segment of the public at large
Power of appointment
Majority rule: a trust, invalid for want of definite beneficiaries cannot be given effect as a power of appointment. The property is returned to the settlor’s estate by resulting trust (implied reversion)
Minority view: power of appointment is allowed. If trustee declines to exercise it, the trust property will be returned to the settlor’s estate
Honorary trusts
E.g. money in trust for the care of my 3 dogs. Problem with these is they violate the rule against perpetuities. However, under the UTC, they are validated by statute for the lifetime of the animals. If the trust is valid, court will appoint someone to enforce the trust.
Pour-over clause
Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust – even an amendable and revocable trust – established during his lifetime. The trust may remain unfunded during the settlor’s lifetime. The trust must be clearly identified from language in the will.
Does not matter that T is both trustee and beneficiary. While the sole beneficiary of a trust cannot be the sole trustee, this rule does not apply (i) if there are two trustees, even though one of the trustees is the sole beneficiary; (ii) if there are two or more beneficiaries, even though the sole trustee is one of the beneficiaries.
Totten trust
A bank account depositor declares himself trustee of the account for a person who is to receive the money in the account at the time of the depositor’s death. The depositor retains full control of the money in the account during his lifetime. A Totten trust is revocable by: (i) the withdrawal of funds; (ii) any lifetime act manifesting the intent to revoke; and (iii) unlike joint accounts, a specific contradictory provision in a will (Majority rule). It does not protect funds int eh account from creditors’ claims, and it terminates of the beneficiary predeceases the depositor.
When is an oral inter vivos trust valid?
Oral trusts of personalty are enforceable provided its terms can be established by clear and convincing evidence.
When is an oral inter vivos trust invalid?
Trusts containing land must be evidenced by a writing that satisfies the Statute of Frauds.
When might constructive trusts be imposed?
General rule is that a mere breach of a promise will not raise a constructive trust. Thus, where A transfers real property to B on B’s oral promise to hold it for C, some jurisdictions consider the SOF a bar. But the trend is to impose a constructive trust for C.
Exceptions to general “no constructive trust” rule
Fraud in the inducement (promisor a liar from the start)
Breach of promise by one in a confidential relationship
Breach of promise by the decedent’s devisee or heir to hold property for the benefit of a third person
Breach of promise by the decedent to devise property to one rendering services in reliance thereon (but no CT if damages adequate); or
Breach of promise to the debtor by the buyer at the foreclosure sale to hold the property for the debtor, causing the debtor to forgo bidding at the sale (in many jurisdictions, no CT if damages adequate)
Four Rules for Charitable Trusts
Not subject to either Rule Against Perpetuities or Rule Against Accumulations (can last or accumulate income perpetually)
Must be for charitable purpose (how does trust operate in FACT? Is there a mechanism for policing the charitable objective?)
Must be in favor of a reasonably large number of unidentifiable beneficiaries (broad group – fact intensive – insertion of a preference clause is not fatal)
When specific charitable purpose can no longer be accomplished, may be reformed under the doctrine of cy pres
Cy pres doctrine
Primary intent vs. Specific direction – court must put itself in settlor’s mind. Court might find a primary intent that was broader in scope than the specific direction in the instrument. Court can reform the trust, dedicating trust to a purpose as near as possible to the original. Specific directions are those IN THE INSTRUMENT itself.
Devision from trust administrative terms because of changed circumstances
Elements:
- Primary intent
- Specific direction
- Unforeseen change in circumstances that creates conflict between them
Beneficiary’s rights
Force trustee to distribute income;
If problem persists, have trustee removed (can do it one first go if trustee acted dishonestly)
Alienability of trust income interest
Income interest in a trust is the same as any other interest in property. But remember, it is only as good as the beneficiary himself – if the beneficiary dies after he sold it, the buyer is out of luck.
Spendthrift Clause
“No interest of any beneficiary herein shall be assignable by such beneficiary nor shall it be subject to the claims of the beneficiary’s creditors.”
Effect of spendthrift clause
Prevents creditor from garnishing trust income, enforcing assignment of income, etc.
Exceptions: Claims for necessities, alimony/child support obligations, claims by US or a state.
Spendthrift clause makes trust indestructible (beneficiaries cannot terminate). Further trust purpose of the settlor to be served (Claflin Doctrine). Exception: a spendthrift trust can be terminated by the consent of all of its beneficiaries if the settlor also consents.
When trust distribution is at sole discretion of trustee:
It is a question of interpretation of the instrument as a whole. But, presumptively trustee may take into account other resources available to beneficiary in determining whether to make a support payment. Courts are reluctant to question a trustee’s decisions when words like “sole,” “uncontrolled,” or “absolute” are associated with the trustee’s discretionary power.
UCT exception: claims by child or spouse for support takes precedence over trustee’s discretion
Trusts for benefit of settlor
Spendthrift clauses unenforceable so the creditor can reach any right to distributions settlor has in the trust
In addition, settlor’s creditors may reach the actual trust property if settlor has the power to revoke the trust OR if the trustee has discretionary authority to make distributions to settlor
Irrevocable trusts for third persons
Settlor’s creditors have NO rights
Exception: Fraudulent transfers doctrine – if trust was created initially for the purpose of defeating known creditors, the trust can be set aside.
Trustee Duty of Loyalty
No self-dealing by fiduciary
Trustee cannot buy or sell trust assets to itself
Trustee cannot borrow trust funds, even for adequate interest.
Trustee cannot sell assets from one trust to another.
Corporate trustee cannot purchase its own stock as a trust investment (BUT it can retain its own stock if a part of the original trust property – provided it is a permissible investment [prudent investor standard])
Trustee cannot engage in any transaction which it seeks to secure a personal gain
Duty to invest prudently – Prudent Investor Rule
Except as otherwise provided by the terms of the trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill, and caution in making investment decisions.
Elements of Prudent Investor Rule
- Duty to keep trust PRODUCTIVE
- Duty to BALANCE return with POTENTIAL RISK
- Duty to DIVERSIFY investments
- Duty NOT to COMMINGLE
Portfolio View re: Prudent Investor Rule
A trustee’s compliance with the PIR is measured using a portfolio view. THat is, the fact that one or more assets held by the trust are underperforming is not a problem as long as the total return (income and capital appreciation) of the overall portfolio is reasonable.
Other Duties of Trustee
Duty to preserve and protect trust property (i.e. insure the property)
Duty of impartiality – trustee must be fair and impartial to all beneficiaries
Duty to account and inform – trustee has duty to account periodically (annually) to the beneficiaries and to keep them reasonably informed about admin of the trust
May co-trustee enter into lease alone on property held by the co-trustees in trust?
Traditional view: Except in emergencies, trustees must act unanimously
Majority view: Trust can act by majority rule
What options does beneficiary have when trustee breaches fiduciary duty?
- Ratify – waives breach
- Sue for resulting loss – SURCHARGE
- In self-dealing cases, can trace and recover property for the trust
Exculpation Clause
Clause relieving a trustee of liability for breach of trust is unenforceable to the extent it relieves the trustee of liability for reckless or bad faith actions OR the clause was drafted by or at the direction of the trustee and the settlor was not represented by independent counsel.
Uniform Prudent Investor Act
Trustee may delegate the investment decision provided the trustee exercises reasonable care, skill and caution in (i) selecting the agent, (ii) defining the scope and terms of the delegation, and (iii) periodically reviewing the actions and decisions of the agent.
SELECTING, DEFINING, REVIEWING
Trust Accounting
The income beneficiaries get the net income while the remaindermen are entitled to trust corpus at the termination of the trust. Thus, items of receipts and expenditures must be allocated to the correct amount.
Receipts
Interest, rents, dividends on stock paid in cash are all income. So too is 10% of any amounts received as an annuity or mineral royalty. Proceeds from the sale of trust assets, stock splits, and dividends paid in stock are principal.
Expenditures
Ordinary expenses incurred in the production of income are charged to the income account. Extraordinary items, capital improvements and income taxes incurred ont he sale of trust property are charged to principal. Trustee’s fee is charged half to income and half to principal.
Power to adjust
A trustee may adjust the normal classification rules if an adjustment is necessary to comply with the trustee’s duty of impartiality.
Claflin Doctrine (early termination of trusts)
Beneficiaries, all of whom are sui juris, can terminate the trust IF (i) all beneficiaries consent, and (ii) there is no further trust purpose to be served. By all beneficiaries we mean ALL beneficiaries. Interest in minors or unborn beneficiaries precludes termination.
Resulting Trust
May arise upon failure of express trust OR when express trust purposes accomplished and corpus not exhausted: Semi-secret trust case under Maj. Rule; cy pres situations
Purchase money resulting trust
Presumed to arise when consideration for purchase of property is paid by person other than the person taking title. Defenses (1) gift or (2) loan.
Transfer to BFP
A BFP cuts off the beneficiaries equitable interests. A third party is a BFP if he acquires the property for value and without notice of the trust. A person who knows of facts requiring an inquiry, which if pursued would have revealed the existence of a trust, is not a BFP. An innocent donee of trust property is not liable for damages but must restore the property, its value, or its substitute to the trust.
