Trusts - Creation and Characteristics

Question 1

Main Components of a Trust

Answer 1

1. Bifurcation of Legal and Equitable Title – the hallmark characteristic of a common law trust is bifurcation of legal and equitable title.
   
   1. Legal Title in Fiduciary - The trustee takes legal title to the trust property, which allows the trustee to deal with third parties as owner of the property.
   2. Equitable Title in Beneficiary - The beneficiaries have equitable title to the trust property, which allows them to hold the trustee accountable for breach of the trustee’s fiduciary duties.

Question 2

Trustee’s Fiduciary Duties

Answer 2

1. Duty of Loyalty – trustee must administer trust solely for the benefit of the beneficiaries.
   
   1. No self-dealing
2. Duty of Prudence – trustee is held to objective standard of care in administering trust property for the trust’s purposes and beneficiaries.
3. Subsidiary Rules –
   
   1. Duty of impartiality – trustee must not play favorites between beneficiaries.
   2. Duty not to Comingle – trustee needs to keep trust property separate from trustee’s personal property.
   3. Duty to Inform and Account – trustee must keep beneficiaries apprised of info related to the trust.

Question 3

Remedies for Breach of Trust

Answer 3

1. Compensatory Damages - make whole
2. Disgorgement - of any profit to trustee
3. removal of trustee
4. Repayment and Restoration - of property sold by trustee to trust and vice versa
5. Appreciation damages - for unauthorized sale of property for less than its worth.

Question 4

General Requirements of a Trust

Answer 4

1. Intent to Create a Trust - bifurcation of legal and equitable title.
   
   1. no particular words required
2. Fund Trust With Property
   
   1. nominal funding sufficient
3. Ascertainable Beneficiaries
   
   1. any type of interest sufficient.
4. A Written Instrument (if real property or testamentary trust)

Question 5

precatory language

Answer 5

1. Precatory Language – when the settlor recommends or hopes something will occur with the identified property, rather than clearly making a trust.
   
   1. Examples: “wish, hope, recommend”
2. Effect: precatory language makes will invalid

Question 6

Merger Doctrine

Answer 6

to be valid the trustee must owe fiduciary duties to someone other than themselves. If the trustee were the sole beneficiary, the equitable and legal titles would merge, creating absolute legal title.

Question 7

Must Beneficiaries Be Ascertainable?

Any Exceptions?

Answer 7

1. must be ascertainable or trust fails
2. Exceptions -
   
   1. charitable trusts
   2. honorary (pet) trusts
      
      1. Texas allows

Question 8

Secret and Semi-Secret Trusts

Answer 8

1. Secret Trust – settlor orally decrees trust only to trustee but no reference to trust in will.
   
   1. court allows evidence of secret trust to prevent unjust enrichment.
   2. will create constructive trust in favor of beneficiary under trust.
2. Semi-Secret Trust - setllor orally decrees trust to trustee and will references trust but doesn’t identify beneficiaries.
   
   1. trust fails for want of beneficiaries.

Question 9

Trustee’s Powers - Default Rule, UTC

Answer 9

1. Default Rule - trust instrument controls
2. UTC - powers conferred under trust instrument plus powers of outright owner (subject to fiduciary limtations in favor of beneficiaries)

Question 10

Liability of 3d Parties Dealing with Trustee

Answer 10

most states don’t make third parties dealing with a trustee liable for trustee violations if they had no knowledge and acted in good faith.

Question 11

Rules/Requirements That Can’t Be Eliminated by Trust Instrument

Answer 11

1. Duty of good faith and to act in accordance with terms and purposes of trust and in the interests of the beneficiares
2. trust must have lawful purpose
3. notifying beneficiaries over 25 of existence of irrevocable trust
4. responding to request for info by qualified beneficiary of irrevocable trust
5. power of court to take action re trust.

Question 12

Duty of Loyalty -

1. General Rule
2. Good Faith and Fairness?
3. Exceptions

Answer 12

1. General Rule - A trustee must administer the trust solely in the interests of the beneficiary.
2. No Further Inquiry Rule - If a trustee undertakes a transaction that involves self-dealing or a conflict between the trustee’s fiduciary capacity and personal interests, good faith, fairness, or reasonableness are not enough to save the trustee from liability.
3. Exceptions -
   
   1. authorized by settlor in trust instrument
   2. beneficiaries consented after disclosure
   3. prior judicial approval
   4. reasonable compensation for trustee
   5. structural conflicts (but must still act in good faith and fairly)
   6. corporate trustees can deposit trust assets within banking department

Question 13

Co-Trustees -

1. taking action
2. liability

Answer 13

1. Majority Rule – most states allow trustees to act with three or more
2. Joint Liability – co-trustees are jointly liable for the negligent acts of other co-trustees that they failed to take reasonable steps to prevent or which they consented to.

Question 14

Duty of Care -

1. General Rule
2. Discretionary Trusts

Answer 14

1. General Rule - prudent person standard
2. Discretionary Trust Duties - must exercise discretion in (1) good faith and (2) in accordance with terms of trust (3) in light of needs and circumstances of beneficiries
   
   1. duty to incquire as to needs of beneficiaries when given discretion.

Question 15

Exculpatory Clauses

Answer 15

Trust terms cannot exculpate trustee for Bad Faith, Recklessness, or Intentional or Willful Breach.

Question 16

Duty of Care in Investments -

1. Majority Rule
2. Diversification
   
   1. Exceptions
   2. Directed Retention

Answer 16

1. Majority Rule - Prudent Investor Rule
   
   1. A trustee shall invest and manage trust assets as a prudent investor would
2. Diversification - A trustee shall diversify the investments of the trust.
   
   1. Exception - special circumstances exist such that the purposes of the trust are better served without diversifying
   2. Directed Retention - Trustee not liable for retaining assets settlor required to be retained.
      3.

Question 17

Delegation of Trustee Duties -

1. By Trustee
2. By Settlor

Answer 17

1. By Trustee - Delegation Allowed but trustee must exercise reasonable care in selecting agent and periodically reviewing actions.
2. By Settlor - a settlor can name two or more co-trustees, sometimes an individual and corporate trustee, with complementary strengths and weaknesses.

Question 18

Duty of Impartiality -

1. General Rule
2. Adjusting between Principal and Income

Answer 18

1. General Rule - if a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard for the beneficiaries’ respective interests
2. Trustee’s Power to Adjust - most states has legislation giving the trustee the power to adjust between principal and income or select Unitrust

Question 19

Traditional Law on Principal vs. Income

Answer 19

1. Income – under traditional law, rents, cash dividends on common stock, and interest on bonds are classified as income.
2. Principal – increases in asset value, such as stock or land appreciation are classified as principal.

Question 20

Types of Discretionary Trusts and Effect on Creditors

Answer 20

1. Discretionary Trust -
   
   1. B can’t alienate interest
   2. creditor can’t get at trust directly but can get court order compeling payment to creditor first.
2. Support Trust
   
   1. B can’t alienate interest
   2. ordinary creditors can’t get at trust except for child support, spousal support, necessities.

Question 21

Spendthrift Trust -

1. Requirements
2. Effect
3. Exceptions

Answer 21

1. Requirements - trust instrumetn must have spendthrift clause
   
   1. trust instrument must say spendthrift or something similar
2. Effect
   
   1. B can’t alienate interest
   2. Creditors can’t get at trust or get order directing distributions
3. Exceptions
   
   1. Support
   2. Necessities
   3. ERISA

Question 22

Self-Settled Trusts -

1. Majority Rule
2. Minority Rule

Answer 22

1. Majority Rule - a person cannot shield assets from creditors by placing them in a trust of which they are a beneficiary.
2. Minority Rule - a person can protect assets from creditors by placing them in a trust of which they are a beneficiary.

Question 23

Modification and Termination -

1. General Rule
2. Material Purpose Precluding Termination/Modification?

Answer 23

1. General Rule - a trust can be modified/terminated:
   
   1. With the settlor’s intent; or
   2. Without the settlors’ intent:
      
      1. consent of all beneficairies and not against trust purposes; or
      2. changed circumstances not anticipated by settlor that substantially impair trust purposes.
2. Material Purpose Precluding Mod/Termination?
   
   1. spendthrift
   2. limit on distribution till B reaches certain age
   3. discretionary trust
   4. support trust

Question 24

Trust Decanting -

1. Definition
2. Limitations

Answer 24

1. a trustee who under the terms of the original trust has a discretionary power over distribution uses that power to distribute the trust property to a new trust with updated provisions, leaving behind the limiting provisions of the first trust.
   
   1. Texas allows
2. Limitations -
   
   1. advance notice to beneficiaries
   2. can’t alter material provisions

Question 25

Grounds for Removal of Trustee

Answer 25

1. Breach of Fiduciary Duty
2. Lack of Cooperation Among Trustees
3. Bad Administration
4. Alternative -
   
   1. Substantial Change of Circumstances;
   2. Removal Requested by All Beneficiaries;
   3. Not inconsistent with trust purposes;
   4. suitable successor available.