Trusts: Creation and Characteristics

Question 1

Trust Analysis

Answer 1

1) Identify Type of Trust
2) Valid Trust?
3) Trust Administration
4) Transferability of Trust Beneficiary’s Interest
5) Modification and/or Termination of the Trust

Question 2

Types of Trusts

Answer 2

Express:
- Private Trust (for individual beneficiaries)
- Charitable Trust (charitable purpose in mind)

Arising out of Operation of law
i. Resulting trust- failed trust
ii. Constructive trust- remedy for unjust enrichment

Secret & semi-secret trusts

Question 3

Trust Administration

Answer 3

Trustee Powers, Duties, and Liabilities

Provisions within the trust documents affecting the trust purpose (what kind of provisions are in trust to guide trustee as to what their instructions are)
i. Discretionary
ii. Support
iii. Spendthrift

Question 4

Private Trusts

Answer 4

Purpose: Any lawful Purpose
Beneficiary: Any ascertainable beneficiary
Inter-Vivos Trust: Can be revocable or irrevocable (unlike charitable trusts)

Testamentary Trust: Always revocable during the settlor’s life, irrevocable upon the settlor’s death

Question 5

Charitable Trusts

Answer 5

Inter-Vivos Trust: Law requires to be irrevocable (due to tax benefits associated with charitable trusts).

Testamentary Trust: Established through the settlor’s will, after the settlor’s death.
- Always revocable during the settlor’s life.
- Irrevocable upon the settlor’s death

Question 6

Requirements for Creation of a Valid Trust

Answer 6

1. Present Intent (to create a trust)
   
   • PRESENT intent, not at some time in future
   • Must be manifested while trustor owns the property
   • Language must be definitive (NOT “desire, hope, wish”)
   • Words “Trust”/“Trustee” NOT required
2. Identifiable Corpus
   
   • Specific or identifiable property named?
   • Must be in settlor’s possession when trust is created
   • If no more trust property, then no more trust
3. Ascertainable Beneficiaries
   
   • Applies to Private trusts
   • Anyone can be a beneficiary (individuals, charities).
   • S must designate a specific beneficiary when the trust is created OR provide adequate standards for their identification in the future.
   • Bs must be ascertainable within the period of RAP\
   • If no more beneficiaries, then trust ends
   • LOOK OUT FOR:
     
     • Description of beneficiary is too vague.
     • Description is from a group that is too large.
     • Indefinite standard in selecting beneficiaries
4. Proper Purpose
   
   • Private Trust: Any purpose is proper unless illegal
   • Charitable Trust: Some charitable purpose that benefits community
5. Mechanics of Creation – How has the trustor created the trust?
   
   • Was there a sufficient split of legal & equitable title?
   • Done verbally, in writing, or both

Question 7

Methods of Creating a Trust

Answer 7

1. A declaration by the owner of property that the owner holds the property as trustee
2. A transfer of property by the owner during the owner’s lifetime to another person as Trustee
3. A transfer of property by the owner, by will or by other instrument taking effect upon the death of the owner, to another person as Trustee.
4. An exercise of a power of appointment to another person as trustee
5. An enforceable promise to create a trust

Question 8

Trust for the Care of a Pet

Answer 8

A trust for the care of an animal is a trust for a lawful non-charitable purpose

Question 9

Difference Between Private and Charitable Trusts

Answer 9

Unlike private trusts, charitable trusts require a sufficiently large or indefinite class of beneficiaries so that the actual beneficiary of the trust is the
public.

Question 10

3 ways to show that the trustor intended to create a trust

Answer 10

1) Oral declaration

2) Written instrument, and/or

3) Delivery of assets.

Question 11

Oral Declaration of a Trust Elements (Created with Words)

Answer 11

1) Purported trust is not in writing;
2) No delivery of assets to a 3rd party Trustee, and
3) No change in title to the property.

NOTE: ONLY VALID FOR PERSONAL PROPERTY

Problem with this is proving the existence of the trust later.

Question 12

Written Declaration of Trust (Created with a written
instrument)

Answer 12

Can be used for personal property, but REQUIRED FOR REAL PROPERTY – Must satisfy the Statute of Frauds.

Writing can be less formal than what is required for a valid will:
- Must be on paper and satisfy the requirements of a valid trust, on paper.

Title to real property should be changed to reflect the trust’s ownership.

Benefits: Easier to prove intent to create a trust

Question 13

Semi-Secret Trusts Rule

Answer 13

Majority Rule:
Semi-secret trusts will generally fail for lack of ascertainable beneficiaries.
- Extrinsic evidence is inadmissible to prove the existence of an oral trust agreement between the decedent and proposed trustee.

Minority Rule (CA):
The court will allow extrinsic evidence to determine who the intended beneficiaries are, and the court has discretion to “complete the document” based on that evidence, and decide to enforce the trust as a constructive trust

Question 14

What is a Semi-Secret Trust?

Answer 14

A bequest in will attempting to create a testamentary trust that is incomplete.

The trust is “semi-secret” because we know there was an attempt to create a trust, however at least one key component of the trust is not disclosed on the face of the document

Question 15

What is a Secret Trust

Answer 15

A will that makes a gift to a beneficiary, without reference to an oral agreement to keep the gift in trust.

Ex: Will simply states: “I give the residue of my estate to A.” However, behind the scenes there was an oral agreement between the testator and A to hold the residue in trust for an intended beneficiary.

The trust is a “secret” because it looks like a normal gift in a will, and the existence of the trust is entirely missing from the face of the document.

Question 16

Secret Trusts Rule

Answer 16

Majority Rule (CA):
Extrinsic evidence is admissible to determine if an oral trust agreement existed between the testator and the beneficiary. If the court does find this, it will enforce the terms of the oral trust using a constructive trust remedy.

Question 17

Mechanic of Creating a Trust: Splitting Title

Answer 17

Legal title (held by the trustee) and equitable title (held by the beneficiary) must be split in order to create a valid trust

6 WAYS TO SPLIT TITLE
1. Three-Party Trust: Settlor transfers legal title to a trustee, and equitable title to one or more beneficiaries.
- If the trustee dies, the trust remains in effect.

2. Two-Party Trust: Settlor retains legal title (as trustee), and transfers equitable title to one or more beneficiaries.
3. Settlor transfers legal title to trustee, and retains equitable title (as beneficiary).
4. Settlor transfers legal title to trustee and equitable title to trustee (as beneficiary) and another beneficiary.
5. Settlor transfers legal title to two trustees (one of whom is also the sole beneficiary, thereby holding equitable title)
   
   • If the trustee who is not a beneficiary dies, both titles merge and the transfer becomes a gift, not a trust.
6. Revocable living trust: Settlor retains legal title (as Trustee) and equitable title (as beneficiary) and designated contingent beneficiaries in the event of the Settlor’s death

Question 18

Benefits of a Revocable Living Trust

Answer 18

The settlor’s estate avoids probate upon the settlor’s death, thus minimizing attorney fees, court costs, and the length of time of administration.

Likely avoidance of conservatorship proceedings – If the settlor loses his/her capacity, the trustee can step in immediately and begin managing the trust assets for the settlor’s benefit.

Pour over will: A valid will stating: “upon my death, if there are any assets that were not in my trust during my life, they go into my trust upon my death

Question 19

What happens if Trustor transfers both equitable title and legal title to the same person.

Answer 19

This creates a gift, not a trust

Question 20

Mechanics of Creation: Two-Party Trust Creation

Answer 20

Here, Trustor & Trustee are the same person

A trust for PERSONAL PROPERTY does not have to be in
writing (but Trustor should change the certificates of stocks/bonds to reflect they are in the trust)

A trust for REAL PROPERTY must be in writing (statute of frauds.) Also requires a new deed to reflect change of title to trust.

No “delivery” required (trustor keeps legal title as trustee)

Question 21

Mechanics of Creation: Three-Party Trusts

Answer 21

Here, Trustor, Trustee, and Beneficiary are different people.

Writing Requirements:
- Trust for PERSONAL PROPERTY: oral trust OK.
- Trust for REAL PROPERTY: must be in writing (SOF).

Delivery: Trustor must deliver trust assets to the trustee
- Actual: hand over the asset to the trustee
- Constructive: Deliver item that gives means to access the trust (ex: keys to home)
- Symbolic: Put the trustee’s name on the legal document (the trustee does not have to actually receive the document)

Trustee need not accept position as trustee to create valid trust (BUT the trustee must accept position for fiduciary duties to arise.)

Beneficiaries need not be notified of trust’s existence or accept trust at creation (BUT can turn down trust benefits when notified)

Question 22

Common Trust Structures

Answer 22

Singleton Trust
“A” Trust
“A” Trust (with Disclaimer)
AB Trust
ABC Trust
ABC Trust w/GST

See Class 21

Question 23

Mandatory v. Discretionary Trust Provisions

Answer 23

MANDATORY: The trustee does not have control over the distribution to the beneficiary:
- E.g.,: S transfers property to T, in trust, “to distribute all income to B, on at least an annual basis” This is mandatory because T has no discretion to stop or delay the distributions to B.

DISCRETIONARY: The trustee has discretion to decide when the beneficiary receives payment, usually based on some ascertainable standard (i.e. need).
- E.g.,: S transfers property to T, in trust, “to use for B’s health, education, maintenance, and support, as T shall determine appropriate in T’s sole discretion.
NOTE: Provisions giving the Trustee discretion imposes on the trustee the fiduciary duty to investigate whether the beneficiary needs the distribution.
NOTE: to limit the trustee’s discretion, provide specific, defined purposes. If trustee distributes for a purpose other than those specified in the trust: liable for breach of trust

Question 24

What is the Trust does not say whether it is Mandatory or Discretionary?

Answer 24

If the trust does not mention a discretionary power of the trustee, the trustee does not have the right or discretion to distribute the assets.

EXAMPLE: “Income to B on a quarterly basis, until B turns 30 years of age; then B receives the principal outright.”

Mandatory quarterly income distributions, but no right/discretion to give B any principal until B turns 30 years old

Question 25

Spendthrift Provisions

Answer 25

Spendthrift provisions prohibit beneficiaries from assigning any trust interest to a creditor

Question 26

Creditors and Mandatory/Discretionary Provisions

Answer 26

Spendthrift provisions prohibit creditors from attaching a beneficiaries trust interest. However, a creditor may still “intercept” a payment of trust income or principal made by the trustee.

• If the trustee is obligated to make a mandatory distribution, the creditor of the intended beneficiary may attach and seize that payment before it goes to the beneficiary.
• If the trustee has discretion over whether or not to pay a payment to a beneficiary, the trustee can protect that beneficiary’s money from creditors by electing not to make a distribution to the beneficiary