Trusts bestrusts - stuff i should know Flashcards
Types of trusts
Express - Private, charitable
Resulting trust
Constructive trust
Trust basics
A trust is a fiduciary relationship in which one party (trustee) holds legal title to property for the benefit of designated beneficiaries
Settlor = person who created the trust, giving trustee legal title to hold, manage, and administer trust property for beneficiaries
Revocability — trusts are generally revocable under modern statutes, unless the terms expressly state the trust is irrevocable
Express trusts
Express trusts — created with property owner’s express intent
Private trust — created for the benefit of certain defined and/or ascertainable persons (note — most common trust tested on essays)
May be created inter vivos (during settlor’s life) or as a testamentary trust (created by will)
Charitable trust — created for the benefit of an indefinite class of people or the public generally
Resulting trust
Resulting trust — trust implied or imposed by law, most often when an express trust fails for some reason (e.g., beneficiary is dead, trust is unenforceable or void, etc.)
Settlor usually becomes beneficiary and trustee conveys title back to settlor or, if settlor has died, settlor’s estate
Constructive trust
Constructive trust — not a trust, but rather an equitable remedy used in cases to rectify unjust enrichment or wrongful conduct
Court imposes constructive trust on property in wrongdoer’s possession
Express trust requires:
A valid express trust requires the following elements:
- Settlor with capacity to convey
Same capacity as required to create a will - Settlor has a clear present intent to create a trust relationship
Intent must be absolutely clear and settlor must understand the nature of their act (i.e., what a trust is)
Writing not required unless as required by the Statute of Wills or Statute of Frauds (e.g., real property) - Competent trustee with duties — must name a trustee, but once established, a trust will not fail solely b/c trustee does not exist
In such cases, a trustee will be appointed - Trustee capacity — in most states anyone who can hold title to property can act as a trustee
- Definite beneficiary — at time of trust creation, settlor must either:
Specifically identify the beneficiaries by name, or
Sufficiently describe how beneficiaries will be ascertained
Does not apply to charitable trusts (see card 33)
Sole trustee cannot be a sole beneficiary of a trust
- Present and clear disposition of settlor’s specific property in trust
I.e., owner has specific property they want to place in trust - Trust property (“res”) must be specifically described or ascertainable with certainty from its description.
- Valid trust purpose — can be for any purpose that is not illegal, impossible, or contrary to public policy
Capacity
Settlor with capacity to convey
Same capacity as required to create a will (see card 7)
Settlor intent
Settlor has a clear present intent to create a trust relationship
Intent must be absolutely clear and settlor must understand the nature of their act (i.e., what a trust is)
Writing not required unless as required by the Statute of Wills or Statute of Frauds (e.g., real property)
Competent trustee with duties
Competent trustee with duties — must name a trustee, but once established, a trust will not fail solely b/c trustee does not exist
In such cases, a trustee will be appointed
Trustee capacity — in most states anyone who can hold title to property can act as a trustee
Definite benificiary
Definite beneficiary — at time of trust creation, settlor must either:
* Specifically identify the beneficiaries by name, or
* Sufficiently describe how beneficiaries will be ascertained.
EXCEPT: Does not apply to charitable trusts
Sole trustee cannot be a sole beneficiary of a trust
Trust Property
Present and clear disposition of settlor’s specific property in trust
I.e., owner has specific property they want to place in trust
Trust property (“res”) must be specifically described or ascertainable with certainty from its description
Valid Trust purpose
Valid trust purpose — can be for any purpose that is not illegal, impossible, or contrary to public policy
Trust creation: inter-vivos vs testamentary
Trusts are generally created inter vivos (during settlor’s life) or via testamentary trusts (trust created by will)
Inter vivos (a.k.a. “living trust”) creation:
Inter vivos (a.k.a. “living trust”) — creation requires either:
**1. Transfer of property **— property owner transfers property to another as trustee, or
**2. Declaration of trust **— property owner declares himself trustee for another
Delivery — if property owner declares another as trustee (i.e., settlor is not trustee), property must be delivered to trustee
Formalities — writing not required, but an oral trust and its terms can only be established by clear and convincing evidence
Land as property — writing required under Statute of Frauds
Testamentary trust
Testamentary trusts — trust created by will
Trust intent, essential terms, and identification of beneficiaries must be ascertainable by either:
* Terms of the will itself,
* Incorporation by reference — an existing writing properly incorporated by reference into the will, or
* Power of appointment
Pour-over provision
Pour-over provisions — provision in a will that devises property to a previously existing trust
Does not create a trust; transfers property to an existing trust.
Trustee powers
Powers — trustee can only exercise powers expressly or impliedly conferred (most often conferred by trust terms)
Trustee has powers necessary and appropriate to properly invest, manage, and distribute trust property if not contrary to trust terms
Trustee duties
Duties — trustee has a number of duties designed to ensure trust property is secure and fairly administered, most notably:
Duty to administer — trustee must administer trust in good faith and in a prudent manner in accordance with trust terms and beneficiary’s interest
Duty of loyalty — no self-dealing
Trustee cannot enter into a transaction in which he is dealing with the trust in his individual capacity, absent court approval or a contrary trust provision
Duty to report — trustee must keep beneficiaries reasonably informed of the trust and its administration
Duty to separate trust property and keep records — trustee must not commingle trust property with his own or another trust’s
Duty to enforce claims and defend trust — trustee must enforce claims the trust has and defend the trust against claims
Duty to preserve property and make it productive — trustee must preserve trust property, including the duty to make property productive (e.g., invest funds, lease or manage land, collect claims)
Discretionary and support trusts
Discretionary and support trusts (sometimes called “protective trusts”) restrict beneficiary’s access to trust property by terms of the trust
Creditor issues — b/c beneficiaries have limited access to trust property, their creditors are limited in accessing beneficiary’s trust interest
Discretionary trust
Discretionary trust — trustee has absolute power and discretion to make decisions regarding distribution of trust property to beneficiaries
Beneficiaries have no right to income until trustee exercises discretion to distribute property or income
Beneficiary’s creditors — cannot reach the trust b/c beneficiary cannot compel payment from the trust
But if creditors serve trustee with process, trustee must first satisfy creditor’s claims before distributing funds to beneficiary
Support Trust
Support trust — directs trustee to pay beneficiaries from trust as much as is necessary for beneficiary’s support
Beneficiary’s creditors — have same rights as for discretionary trust
Spendthrift trust
Spendthrift trust — prohibits beneficiaries from transferring their interests in the trust, either voluntarily or involuntarily
Usually included to protect beneficiary from his own carelessness
Beneficiary’s creditors — cannot reach beneficiary’s interest in the trust, but distributions to beneficiary are reachable
Charitable trust
Trust that has the purpose of benefitting an unascertained group of people or the public at large.
Distinguishing characteristics:
* Indefinite beneficiaries required — must be created in favor of a reasonably large class of indefinite beneficiaries
* Cannot be for the benefit of identifiable individuals, although a trust benefitting a single charitable organization whose activities meet these requirements is acceptable
Test — beneficiaries are indefinite and unascertainable if they are unnamed and changing over time.
Charitable purpose — must be considered to benefit the public.
* Effect of gift, not motive of settlor, controls — e.g., trust to build a public swimming pool on land next to settlor’s house is acceptable even if settlor’s motive was to use the pool
* Trust for supporting political initiatives can be charitable, including a present change in law (although cannot be a trust in favor of a political party)
Can be perpetual — the Rule Against Perpetuities (“RAP”) does not apply to charitable trusts, as compared to private trusts, where all interests must vest within the RAP period
Modificiaiton of charitable trust: Cy Pres
Modification — trust’s property can be applied to different charitable purposes through the Cy Pres doctrine.
Cy Pres Doctrine for charitable trusts — allows courts to modify terms of a charitable trust to as near as possible as settlor’s original intention
Can arise where the trust’s original purpose is accomplished or becomes impractical, unlawful, or wasteful
Termination of trust
Trusts terminate automatically at the expiration of a specified trust term or when its purposes have become accomplished, unlawful, impossible, or contrary to public policy.
Termination, revokation, or modification of a PRIVATE TRUST.
By settlor?
By Beneficiaries?
Private trusts — can be revoked (and thus terminated) or modified by settlor and/or beneficiaries in most states.
* By settlor — settlor can modify or revoke unless the terms expressly prohibit modification or revocation
By beneficiaries —
* beneficiaries can modify or revoke upon consent of settlor and all beneficiaries.
* Without settlor consent — all beneficiaries can consent to modify or revoke if doing so would not frustrate a material purpose of the trust.
* “All beneficiaries” includes unborn or unascertained beneficiaries, which can preclude obtaining required unanimous consent.
* Some states allow appointment of a representative for minor, unborn, or unascertained beneficiaries
