Trusts Flashcards
Express trust: definition
(1) allows an owner of property to make transfers of property and to have those assets managed on behalf of someone else
(2) Settlor gives legal title to the trustee to manage the money and beneficiaries have equitable title to enjoy the distributions
Express trust: two types of express trusts
(1) Lifetime/inter vivos: set up during lifetime of the settlor
(2) Testamentary: set up in settlor’s will
Express trust: eight requirements
(1) Settlor makes a
(2) delivery of legal title to
(3) property (res or principal) to a
(4) trustee: holds legal title for the benefit of a (court can always appoint a trustee)
(5) beneficiary with
(6) intent to create a trust for
(7) a lawful purpose
(8) validly executed document
Express trust: settlor
(1) settlor can be anyone 18 or older with the capacity to enter into contracts
Express trust: delivery
(1) titled assets must be formally transferred to trustee for delivery to be valid
Express trust: property (res)
(1) can be almost anything but must be property that the settlor owns not just a mere expectancy
(2) must be identified property
Express trust: trustee
(1) for a lifetime trust, almost anyone can be a trustee since no court involvement is needed for such trusts
(2) for a testamentary trust created by the court, almost anyone except: (i) under 18; (ii) judicially declared incompetents; (iii) convicted felons; (iv) those incapable because of drunkenness, dishonesty, want of understanding, or improvidence
(3) A non-resident alien can serve as trustee only if: (i) related to decedent; (ii) NY resident serves as a co-fiduciary
(4) failure to name a trustee doesn’t matter, the court can appoint one
Express trust: beneficiaries
(1) for private trust must be definite and ascertainable
(2) if ambiguous, the trustee holds in a resulting trust for the residuary beneficiary of a will
(3) exception: a beneficiary listed as someone’s “family” or “next of kin” is considered definite and ascertainable
Express trust: Intent
(1) Settlor must intend to create an enforceable obligation; precatory language is not enough
(2) trustee must be given duties to perform (if no duties, passive trust which isn’t a trust)
(3) look at all of the language and all of the facts to determine intent
Express trust: lawful purpose
(1) cannot call for commission of crime
(2) cannot call for destruction of property
(3) cannot have condition against public policy (restricting marriage or promoting divorce)
Express trust: execution
(1) in writing
(2) signed by settlor
(3) Either: (i) acknowledged by notary; (ii) signed by two witnesses
Revocable lifetime (intervivos) trusts: requirements
(1) at least one beneficiary who is not the settlor
(2) settlor cannot be sole beneficiary when also named sole trustee
Revocable lifetime (intervivos) trusts: settlor roles
(1) trustee
(2) income beneficiary for life
(3) estate can be one beneficiaries of the principle so long as there is at least one other beneficiary
(4) settlor can retain the power to terminate or amend the trust
Revocable lifetime (intervivos) trusts: reasons to have it
(1) manage assets efficiently with professional trustee
(2) avoids future potential guardianship proceeding
(3) avoids probate
Revocable lifetime (intervivos) trusts: reasons not to have it
(1) does not avoid taxes
(2) if a settlor keeps an income interest, or keeps a power to revoke, the full trust assets will be included in the settlor’s gross estate for federal estate tax purposes
Pour-over gifts: requirements
(1) trust must be in existence or
(2) executed concurrently with a will
Pour-over gifts: special points
(1) trust need not be created by settlor
(2) valid even if trust was unfunded or only partially funded during settlor’s lifetime
Pour-over gifts: life insurance proceeds
How to make payable to trust: (1) insured can create an unfunded revocable insurance trust and name the trustee of the trust as policy beneficiary; (2) have the trust be a testamentary trust and have the life insurance policy contract name “the trustee named in my will” as the life insurance policy beneficiary
Totten trust: key things to remember
(1) depositor makes deposits and withdrawals as she wishes during the depositor’s lifetime
(2) beneficiary has no beneficial interest during the depositor’s lifetime, but gets whatever is in the account when depositor dies
Totten trust: ways to revoke
(1) Withdraw all of the money
(2) expressly revoke during lifetime: writing (i) naming beneficiary and financial institution; (ii) notorized; (iii) delivered to bank
(3) revocation in a will; must comply with requirements above
(4) death of beneficiary results in revocation and money goes free and clear to depositor
Totten trust: change of beneficiary
can be done by depositor, but must comply with revocation requirements
Totten trust: creditors
can always reach totten trust account balance before or after depositor’s death
Joint bank accounts: blocking money from passing to other party on one party’s death
If clear and convincing evidences shows that a survivorship was not intended when the account was established and that the account was opened only as a matter of convenience to the depositor
Joint bank accounts: ownership
Each joint holder owns one half of account no matter who deposits the money
Uniform transfers to minors act: why do it
(1) avoids guardianship proceeding
(2) avoids a trust and court supervision
(3) qualifies for 14,000 per donee annual exclusion from state and federal gift tax
Uniform transfers to minors act: requirements
(1) gifts must be made to custodian not trustee and it must specifically state that it is under the act
(2) gifts can be made under a will so long as same statutory language is used
Uniform transfers to minors act: duties of UTMA custodian
(1) hold, manage and invest the property (prudent person standard)
(2) pay over to the minor or the minor’s needs what part of the property that the custodian deems advisiable
Uniform transfers to minors act: tax consequences
(1) if donor names himself or herself as custodian then the amount of the gift is includible in the custodian’s gross estate for federal and state estate taxes
(2) If donor names someone else as custodian then the amount of the gift is not includible
Charitable trusts: key things
(1) indefinite beneficiaries and reasonably large group (cannot have specific named person
(2) charitable purpose
(3) can last forever
(4) Cy pres can be used to change the trust (make the trust be as near as possible as settlor intended)
(5) Attorney general has the duty of representing the beneficiaries of charitable trusts in the state
Non-trusts: Honorary trust
(1) no human being is the beneficiary (use trust to take care of my gardens)
(2) cemetery trust: ok as charitable trusts even though no human beneficiary
Non-trusts: constructive trusts
(1) designed to disgorge unjust enrichment that results from wrongful conduct
(2) trustee’s only duty is to convey the property to the person who, in equity, should have the property
Non-trusts: resulting trust
(1) equitable remedy)
(2) purchase money resulting trust recognized in most states, but not NY (arises when purchaser buys property and has title put in someone elses name)
(3) NY exception to no-PMRT rule: clear and convincing evidence that the grantee had expressly or impliedly promised to reconvey the land to the purchaser, then a constructive trust can be imposed to benefit the purchaser
Statutory spendthrift rule
(1) prohibits voluntary or involuntary transfer of beneficiary interest (beneficiary cannot sell/transfer and creditors cannot demand)
(2) NY allows spendthrift clauses in trusts, has special statutory rule that protects all income interests in trusts (not principle)
(3) to provide protection to remainder beneficiary, must expressly be stated in clause
Exceptions to spendthrift
(1) creditors who furnish necessity
(2) child support and alimony
(3) federal tax liens
(4) excess income beyond that needed for support and education: (i) must show all other possible remedies have been exhausted; (ii) what is needed is based on life style of beneficiary
(5) 10% levy provided by CPLR (shared by all creditors
Modification by trustee or beneficiaries
(1) appropriate only when the objectives of the trust would be defeated or substantially impaired if the trust is not modified
(2) the purpose of the trust comes first, overriding any specific directs of the trust
Two level modification test
(1) what is the primary intent of the settlor regarding trust purposes
(2) look to see if specific directs would frustrate the primary intent of the trust (if they do, the court can change them)
Trust termination by settlor
(1) trusts are hard to terminate; irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust instrument
(2) exception: (i) all beneficiaries consent (minors and incompetents can never consent (not by themselves or by proxy); If trust is to heirs or next of kin no consent is needed because not considered a beneficial interest
Trustee’s powers (FPA, fiduciary powers act)
(1) sell any real or personal property
(2) mortgage property
(3) lease property
(4) make ordinary repairs
(5) contest, compromise or settle claims
(6) do almost anything to manage the corpus of the trust
Trustee is restricted from doing
(1) engaging in self dealing
(2) borrowing money
(3) continue a business (liable for losses unless got court approval)
Trustee self-dealing (five prohibitions)
(1) cannot buy or sell trust assets to himself
(2) cannot borrow trust funds
(3) cannot lend money to the trust
(4) cannot profit from serving as trustee (except trustee fees)
(5) corporate trustee cannot buy its own stock as a trust investment
Trustee self-dealing (affirmative duties)
(1) must segregate trust assets from personal assets (trustee takes any decrease in value from this and trust gains any increase)
(2) earmark trust assets by titling them in trustee’s name as trustee
Remedies for breach of fiduciary duties
(1) beneficiary can sue to remove trustee
(2) beneficiary can ratify the transaction and waive the breach
(3) beneficiary can sue for any loss (surcharge action)
No further inquiry rule
(1) breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made.
(2) neither good faith nor reasonableness are defenses
Actions against 3rd parties after self dealing
(1) beneficiary cannot sure bona fide purchaser
(2) to not be bona fide purchaser must know of trustee status and self dealing
Indirect self dealing
Applies to loans or sales to a relative; business of which trustee is an officer; employee; partner; principal shareholder
Exculpatory clauses
(1) cannot be used to shield trustee from liability for breach of a fiduciary duty in a testamentary trust
(2) exculpatory clauses can be used in life time (inter vivos) trust
Personal liability of trustee in contract
(1) how trustee signed is key to determining liability (on behalf of trust v. personally)
(2) trustee will be reimbursed for personal liability if: (i) contract was within the powers of the trustee; (ii) trustee was acting in the course of proper administration of the trust
Personal liability for trustee in tort
(1) trustee is personally liable for all torts by trustee or trustee’s employees (absolute rule)
(2) Trustee can get reimbursement if: (i) was acting within trustee’s powers; (ii) trustee was not personally at fault
Trustee’s investment power
(1) in NY uniform prudent investor act (UPIA)
(2) Can pursue modern portfolio with custom tailored investment strategy
(3) Key factors: (i) trustee must consider the role each investment plays within the overall trust portfolio; (ii) trustee must consider the expected total return from income and capital gain
(4) Look at investments in total not riskiness or prudence of individual investments
NY rule against suspension of power of alienation: definition
Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years (no persons who could together transfer fee simple title)
NY rule against suspension of power of alienation: when is it a concern
(1) spendthrift income interests are in the trust
(2) life estate is created in an unborn person or in an open class that could include unborn persons
