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Wills and Trusts > Trusts Basics > Flashcards

Trusts Basics Flashcards

1
Q

Summary of Testable Issues

A
  1. Parties to Trust
  2. Express Trusts
  3. Challenging the Validity of Trusts
  4. Charitable Trusts
  5. Rights of Beneficiaries and Creditors to Distribution
  6. Trust Termination
  7. Trustee’s Duties
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2
Q

Parties to Trust

A

Grantor/Settlor: Creator of the trust
Trustee: Holds legal interest/title to trust property
Grantee/Settlor: Beneficiary of the trust

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3
Q

Express trusts - Inter vivos trust

A

An inter vivos trust is created while the trustor is living that transfers some or all of trustor’s property to a trust.
Trustor can designate themself as trustee if so desired

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4
Q

Express trusts - Testamentary trust

A

A testamentary trust is created in writing a will or document incorporated by reference into a will. Wills containing trusts must meet the attested or holographic will requirements

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5
Q

Express trusts - Intent

A

Settlors may manifest intent to make gifts orally, in writing, or by conduct. Intent must come before or simultaneously to transfer of property.

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6
Q

Express trusts - Trustee

A

Courts appoint a trustee if a settlor fails to designate one.

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7
Q

Express trusts - Trust property

A

Trusts must be funded with identifiable trust property (or res) - must be described with reasonable certainty

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8
Q

Express trusts - Valid trust purpose

A

A trust can be created for any purpose as long as it is not illegal or contrary to public policy. Crossing terms will be subject to alternatives or stricken.

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9
Q

Express trusts - Ascertainable beneficiaries

A

Beneficiaries must be identifiable so that the equitable interest can be transferred automatically by operation of law and directly benefit the person
- Settlor may refer to outside writings or acts to ID beneficiaries
- Exceptions
(i) trusts for a reasonably definite class will be upheld, and
(ii) Charitable trusts don’t need individual ascertainable beneficiaries

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10
Q

Express Trusts - Omitted Children

A

A child omitted from the trust can force intestate share if:
(i) The child is born or adopted after the trust is created OR the settlor mistakenly believed they were dead/didn’t exist, and
(ii) The child is unintentionally omitted from the trust

Except: intestate share will not be forced if the omitted child is otherwise provided for either by instrument outside the trust or substantially all the estate is left to the omitted child’s parent

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11
Q

Challenging the Validity of the Trust - Approaches

A
  1. Undue Influence
  2. Fraud
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12
Q

Challenging the Validity of the Trust - General Undue Influence

A

Undue influence occurs when
(i) mental or physical coercion is exerted by a third party on a testator
(ii) with the intent to influence the testator
(iii) such that he loses control of his own judgment.

*Following the general rule, both traditional approach and confidential relationship analyses should follow

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13
Q

Challenging the Validity of the Trust - Traditional Approach

A

A trust’s contestant must show four elements (SMOC):
- Susceptibility - the testator was susceptible to influence
- Motive - influencer has reason to benefit
- Opportunity - influencer had opportunity to influence
- Causation - influencer followed ‘unnatural’ result

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14
Q

Challenging the Validity of the Trust - Confidential Relationship

A

Presumption of undue influence arises when
(i) The principal beneficiary of the will has a confidential relationship with the testator,
(ii) The principal beneficiary participated in executing the will, and
(iii) The gift to the beneficiary is ‘unnatural’
Following a presumption, the beneficiary must show through clear and convincing evidence that there was no exercise of undue influence.
If there is undue influence, the influencer will only receive what would be their theoretical intestate share
*Add’l CA presumption: gift to the drafter is invalid

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15
Q

Challenging the Validity of the Trust - Fraud

A

Fraud can invalidate trusts. Fraud requires
(i) a misrepresentation by a beneficiary
(ii) with intent to deceive the settlor, and
(iii) with the purpose of influencing the testamentary disposition

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16
Q

Challenging the Validity of the Trust - Fraud in the Inducement

A

A misrepresentation that causes the trustor to make a different trust that they otherwise would have made.
Must be shown that the trustor would not have made the gift if they knew the truth.

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17
Q

Challenging the Validity of the Trust - Fraud in the Execution

A

A misrepresentation as to the trust itself or its contents
Common where a trustor does not know they are making a trust instrument

18
Q

Charitable Trusts - Generally

A

Charitable Purpose - to benefit the community at large
Indefinite beneficiaries (community at large)
Failure to follow terms allows trustee to sue for return of funds
Subject to cy pres if law so requires

19
Q

Charitable Trusts - Cy pres doctrine

A

When a charitable trust’s purpose becomes illegal, impracticable, or impossible to perform, courts can modify to seek an alternative charitable purpose.
HOWEVER - a court must first determine whether there was specific intent to donate to the particular charity or a general charitable intent. Specific intent charitable trusts must be terminated upon illegality/impossibility and must become a resulting trust.

20
Q

Beneficiary and Creditor Rights - Income Beneficiary

A

Receives income from the trust like profits from a business

21
Q

Beneficiary and Creditor Rights - Remainder Beneficiary

A

Entitled to the trust principal upon termination

22
Q

Beneficiary and Creditor Rights - Lapse and Anti-Lapse Laws

A

Historically, a beneficiary dying before the settlor lapses the beneficiary’s gift (common law).
Under modern anti-lapse statutes (like in CA), a blood-related beneficiary can pass the gift on to their surviving issue.

Limitation - Only class members alive at the time of the execution of the trust can receive the trust’s benefit, not their issue.

23
Q

Beneficiary and Creditor Rights - Discretionary Trust

A

The trustee is given complete discretion to apply payments of income or principal to the beneficiary.
Creditors get equal rights to the beneficiary if the trustee exercises discretion to pay out funds.B

24
Q

Beneficiary and Creditor Rights - Mandatory Trust

A

The trustee is a figurehead with no discretion. The trust itself governs alone when and how the trust property is to be distributed.

25
Q

Beneficiary and Creditor Rights - Alienation

A

A beneficiary can assign their equitable interest in trust property to 3rd parties unless statute or spendthrift provision prevents

26
Q

Beneficiary and Creditor Rights - Support Trust

A

The trustee is directed to pay income or principal necessary to support the beneficiary.
Creditors cannot reach these assets without proving they provide a necessity to the beneficiary.

27
Q

Beneficiary and Creditor Rights - Spendthrift Trust

A

Type of trust that expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer equitable interest.
Creditors can only reach the trust interest if money is owed for child/spousal support, basic necessities, or lien holds

28
Q

Trust Termination and Amendments - Revocable v. Irrevocable Trusts

A

In revocable trusts, the settlor has the right to modify or terminate a trust.
In irrevocable trusts, modification or termination during the settlor’s lifetime requires consent of all beneficiaries and that the proposed change will not interfere with the trust’s primary purpose

*Trusts are presumed revocable in CA

29
Q

Trust Termination and Amendments - Outside grantor’s control

A
  • Trusts terminate automatically when their purpose is accomplished
  • A deceased settlor or trust lacking any remaining interest can be terminated on all beneficiaries’ consent
  • Court determines the purpose of the trust illegal, impracticable or impossible
30
Q

Trust Termination and Amendments - Trustee’s Power to Terminate

A

Haha sike there isn’t one unless expressly given in the trust’s termination provisions

31
Q

Trust Termination and Amendments - Removal of Trustee

A

Courts can remove a trustee if
- the trustee’s continued service would frustrate the trust’s purpose, or
- the trustee violated a fiduciary duty

32
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Trustee Powers

A

The trustee has the powers expressly granted in the trust, and those necessary to act as a reasonably prudent person managing the trust.
- This includes implied power to contract, sell, lease, or transfer the property

33
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - General Duty of Care

A

Generally - a trustee must act as a reasonably prudent person would and treat the trust property as their own. Further duty exists to follow trust directions and carry them out accordingly.

34
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Duty of Care for Investments

A

The trustee must act as a prudent investor as if they were investing their own property. The trustee must exercise reasonable care, caution, and skill when investing and managing.
Duty to Diversify - Trustee must adequately diversify trust investments to spread the risk of loss but not if the administrative costs would outweigh the benefits

35
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Duty to make property productive

A

A reasonably prudent trustee will pursue all possible claims, derive the maximum amount of income from investments, and sell assets when appropriate. Further duties exist to secure insurance, pay expenses, and act within a reasonable period of time in all matters

36
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Duty of Impartiality

A

The trustee must balance interests of all beneficiaries (unless provided in the trust). This includes present interests between present beneficiaries and all interests for present and future beneficiaries when considering investments,

37
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Duty of Loyalty generally

A

Trustees must act reasonably (objective standard) and administer the trust in good faith (subjective standard) when investing and otherwise manage the trust solely in the best interests of beneficiaries

38
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Duty of Loyalty Against Self Dealing

A

Trustees personally engaging in transactions involving trust property create conflicts of interest between their personal interest and duties as trustee. Self-dealing is a per se breach, an irrebuttable* presumption of trustee duty.
Examples: borrowing from trusts to secure personal loans, buying/selling trust assets, selling property between trusts

*Self-dealing can be authorized by settlor, court order, or all beneficiaries, but it still must be reasonable and fair

39
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Other Trustee Duties

A

Duty to disclose: trustee must disclose complete and accurate info about the nature and extent of trust property including allowing access to records
Duty to Account: trustee must periodically account for actions taken on behalf of the trust to allow for assessment of their own performance

40
Q

Trustee’s Powers, Duties, Remedies for Breach of Duties - Remedies for Trustee’s Violation

A

Beneficiaries may
- Sue for damages from lost profits, interest, and other losses resulting from a trustee’s breach of responsibility
- Sue for removal of the trustee

Wills and Trusts (2 decks)

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