Trusts (DONE) Flashcards
Are spendthrift trusts valid in Texas?
yes
Can a trustee be the beneficiary of a trust?
Yes, as long as the individual is not the sole trustee and sole beneficiary.
If a person is the sole trustee and sole beneficiary, there is not trust. The legal and equitable titles merge, and the person holds title free of any trust.
What is required when the beneficiaries of a trust are a class?
The individuals of the class must be readily ascertainable.
By default, are trusts revocable or irrevocable?
Trusts are revocable unless expressly made irrevocable.
The purpose of this provision is to prevent ill-considered irrevocable dispositions. If a trust is revocable, the settlor can modify or amend the trust even though the trust instrument is silent as to the power to alter or amend. Thus, a settlor can revoke, modify, or amend a trust unless the instrument provides that the trust is irrevocable and not subject to amendment.
If one party provides the consideration and title is taken in the name of another party, a presumption of a resulting trust may arise. How can the purchase money resulting trust presumption be rebutted?
By evidence showing that the person providing consideration intended to make a gift to the title holder.
What is a constructive trust?
Not really a trust, but an equitable remedy created by a court to disgorge unjust enrichment and prevent someone from profiting by her wrongful conduct. In imposing the constructive trust, the court can compel delivery of the property involved to the person who would have owned it but for the wrongful conduct.
A is in breach of his fiduciary duty to B. As a remedy, the court may impose a constructive trust, as long as:
A wrongfully acquires or retains property in violation of his fiduciary duty.
Imposition of a constructive trust enables the party to recover the very property involved.
What is the purpose of a spendthrift clause?
To prohibit a beneficiary from voluntarily or involuntarily transferring his interest in the trust.
These are a common drafting practice to expressly provide that a beneficiary’s interest is not transferable and is not reachable by others.
The settlor of a trust transfers his assets into a spendthrift trust. Is the principal protected?
So long as the settlor does not retain an interest in it.
Under the “cake and eat it” principle, a settlor cannot transfer assets into a spendthrift trust for his benefit, hoping to immunize them from his creditor’s reach. A spendthrift provision is invalid with respect to any interest retained by the settlor.
To the extent that the settlor has retained an interest in the trust’s income or principal, his creditors can reach that interest.
What is the UPIA, and can it be expanded or restricted in a trust?
The Uniform Prudent Investor Act.
It MAY be expanded, restricted, or eliminated by the provisions of a trust. However, to deviate or modify the UPIA, the trust language must be SPECIFIC.
When will the UPIA apply to the provisions of a trust?
Always, unless the trust manifests contrary intent by:
Proceeds from a life insurance policy or any other contract in which the trust or trustee is named beneficiary are allocated to:
The Principal.
Under the Uniform Principal and Income Act (“UPIA”), proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to the principal. If, however, a contract insures the trustee against loss of profits from a business, the proceeds are allocated to income.
Explain the fiduciary duty of the trustee via her personal interest in dealings.
Absent a contrary trust provision or court approval, a trustee cannot “wear two hats” and enter into any transaction in which she is dealing with the trust in her individual capacity. A trustee owes a duty of undivided loyalty to the trust and its beneficiaries, and that loyalty might be tainted by her personal interest.
May a trustee loan his personal funds to the trust?
No.
May a trustee use trust assets to secure a personal loan?
No. And if the lender know or had reason to know that the assets belonged to a trust, then the lender does not obtain a valid security interest.
What relief is available for a trustee’s breach of trust?
The court may order any appropriate relief necessary to remedy the breach.
To remedy a breach of trust that has occurred or might occur, the court may:
(i) compel the trustee to perform the trustee’s duties;
(ii) enjoin the trustee from committing a breach of trust;
(iii) compel the trustee to redress a breach of trust, including compelling the trustee to pay money or restore property;
(iv) order a trustee to account;
(v) appoint a receiver to take possession of the trust property and administer the trust;
(vi) remove or suspend the trustee;
(vii) reduce or deny compensation to the trustee;
(viii) void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property of which the trustee wrongfully disposed and recover the property or the proceeds from the property; or
(ix) order any other appropriate relief.
Because the court may enjoin a trustee from committing a breach, it need not wait until a breach has occurred. Beneficiaries are under no obligation to attempt to remedy the trustee’s actions.
When a prohibited transaction occurs, a trust’s beneficiaries may:
Either ratify the transaction or hold the trustee personally liable.
What is required to have a valid trust?
To have a valid trust:
1) Settlor…
2) Delivers
3) Title to trust property
4) For the benefit of beneficiaries
5) With intent to create a trust
6) With a lawful purpose.
NO consideration is required for a trust.
What is required of the legal capacity of the Settlor?
Must have legal capacity:
1) Age 18 or over
2) Must have capacity to convert title to the trustee
(Higher test for capacity than for wills)
What is the delivery requirement for a trust?
Does not apply to a self-declaration of trust (“I hereby declare myself trustee”) or testamentary trust.
But for inter vivid trust that names third party as trustee, the mere intent to create a trust or a gratuitous promise to create a trust, is not sufficient.
As with the law of gifts, there must be delivery of the subject matter of the trust, with the intent to convey LEGAL TITLE to the trustee.
What is required of “trust property”?
To have a trust, legal title to a specific interest in property must be conveyed to the trustee.
The subject matter of the trust must be certain, segregated, and identifiable.
If there is no trust property, there is no trust.
What is required of a trustee?
1) Must have legal capacity to deal with the property (18 or older)
2) Must have capacity to contract and to execute a deed
3) An unincorporated association cannot be a trustee
4) Only banks and trust companies given trust powers in their charter, and charities as to charitable trusts only, can serve as trustee.
What is required of an INDIVIDUAL named as trustee?
An individual names as trustee must post a fiduciary surety bond to secure the faithful performance of her duties unless the settlor WAIVED the requirement of a bond.
A corporate trustee does not have to give bond.
If a trustee fails to qualify, what is the effect on the trust?
“No trust ever fails for lack of a trustee”
If the intent to create a trust is clearly manifested, but no trustee is named or if the trustee dies/resigns/incapacitated, with no provision for a successor trustee, the court will appoint a suitable successor to execute the trust.
If a named trustee does not want to serve, can he be compelled to serve as trustee?
NO. No one can be compelled to accept fiduciary responsibilities and duties.
The court will appoint a trustee, since no trust ever fails for lack of a trustee.
What constitutes acceptance of the trust of the trust office by the trustee named in the trust instrument?
1) Trustee’s signature, signifying acceptance of the trust.
2) If no signature, then acceptance by conduct.
If irreconcilable conflicts arise between the trustee and the beneficiaries, can the trustee resign?
Yes, if:
1) Court approval, upon showing it can no longer appropriately serve as trustee.
2) Must given an accounting
HYPO: Mother conveys land to her son “John Smith, trustee.” No trust powers or terms are set out in the deed or any other document. Then mother dies.
Valid trust created?
NO.
No beneficiaries were name, and no trust purpose was indicated.
Therefore, the land passes through mother’s estate by will or intestacy.
HYPO: Alan transfers title to Blackacre to Betty, as trustee for the benefit of Alan’s son Clyde. Under the parties’ agreement, Clyde has the power to manage and control the use of Blackacre, and Betty as trustee has no powers or active duties over the property
Valid trust with respect to Blackacre?
NO.
Under the “Statute of Uses”, if named trustee has no powers or active duties to perform, no trust arises.
To have a trust, the trustee must owe duties to someone.
Clyde holds full title, not equitable trust interest.
What is required to have a spendthrift clause?
In order to have a valid spendthrift clause, you MUST have a trust.
Spendthrift clauses allow beneficiaries to take free of creditor’s interests.
What is the effect on a trust if the trustee is the sole beneficiary?
There is no trust.
What is required of beneficiaries?
A non charitable trust must have definite and ascertainable beneficiaries, AND their interest must vest, if at all, no later than lives in being plus 21 years.
If there are no ascertainable beneficiaries, but there’s a residual beneficiary for the residuary estate, what happens to the trust?
A “resulting trust” is created.
A resulting trust is not a trust. It is the term courts employ when a trust fails for some reason.
The court will order that the estate be distributed to the residual beneficiary.
What is the “lawful purpose” requirement for a trust?
In order to be valid, trusts must be given a lawful purpose.
UNLAWFUL purposes include:
1) Trust calls for commission of a crime
2) Trust calls for destruction of property
3) Unlawful conditions that are against public policy
Can a trust condition receipt of income to beneficiaries on divorce?
No, this is against public policy. Cannot encourage divorce or implement a total restraint on marriage.
Beneficiary will take free of trust and free of condition.
Are partial restraints on marriage valid in a trust?
Yes, as long as it’s not a total restraint.
What is the writing requirement for a valid trust?
All trusts MUST be in writing, except:
1) A transfer of personal property to a trustee other than a settlor or beneficiary coupled with a declaration of intent to create a trust simultaneously with or prior to the transfer
Can inter vivos trusts be revoked or amended?
Yes. All inter vivos trusts are revocable and amendable by the Settlor unless expressly made otherwise.
Any revocation/amendment must be made in writing.
ORAL revocation is ineffective.
If a Settlor creates a revocable trust, but later becomes incapacitated, does Settlor’s guardian have authority to revoke the trust?
No, only a court can evoke the trust upon finding that revocation is in ward’s best interest.
What effect does divorce have on revocable trust provisions in favor of a former spouse?
Divorce revokes all revocable trust provisions in favor of a former spouse and relative of a former spouse who are not relatives of the settles, unless the trust is re-executed or a contract or court order provides otherwise.
If a will creating a trust is not valid because it doesn’t meet the formalities, is the trust still valid?
The trust is still valid.
As long as there are one or more trust beneficiaries besides the settlor, a trust is not void as an attempted testamentary disposition (i.e., does not have to be executed with will formalities)
What is a pourover will? Requirements?
A testamentary gift to a trust that provides a means for adding testamentary assets to a trust created by the testator during lifetime.
By statute, a pourover gift is valid:
1) Even if trust is subject to revocation and amendment and is later amended,
2) Even if trust is unfunded
The trust NEED NOT be in existence before or executed concurrently with will, if can be created after the will is signed.
If a written amendment to a trust indirectly changes a will, is it valid?
Yes, even though the change to the will was without attesting witnesses.
Trust law controls, not wills law.
In amending a trust, it must be in writing and signed, but witnesses are not required, even though this indirectly affected the pourover provision of a will.
HYPO: Sam is the insured under a $500,000 life insurance policy that names his 11-year-old daughter Diane as beneficiary. Concluding that it would be inappropriate to have the proceeds paid in a lump sum to Diane, Sam desires to have the proceeds paid to a trust for Diane’s benefit. What should Sam do?
Sam could create an unfunded revocable life insurance trust, and name the trustee as beneficiary.
But this would result in additional legal fees for preparation of a trust; and Sam’s present will already establishes a trust for Diane’s benefit. Instead, Sam could name “the trustee named in my will” as policy beneficiary.
Such a beneficiary designation is expressly validated by statute.
HYPO: Donna deposits funds in a joint bank account that names her sister Sarah as joint owner. The account signature card provides that “upon the death of either party, the bank is authorized to pay the funds on deposit to the survivor.” Donna dies leaving a will that devises “all my property” to her son John. There is $84,000 in the joint bank account at Donna’s death.
1) Does Sarah take the amount on deposit by right of survivorship?
2) Is extrinsic evidence admissible to show that Donna actually intended to create a right of survivorship account?
3) Would Sarah be entitled to the amount on deposit if the signature card said “on the death of one party, all sums in the account shall vest in and belong to the surviving party” or said “with right of survivorship” [or similar wording]?
4) Would a valid right of survivorship have been created if the account agreement stated (simply) JT, JTWROS, or “as Joint Tenants”?
1) No. Scotus held that this language merely protects the Bank if it pays out to Sarah, but not create a valid right of survivorship. John would get the money in the bank account.
2) NO. Language on the account agreement controls.
3) YES. This language creates a right of survivorship.
4) NO. “As joint tenants” does not create a valid right of survivorship.
HYPO: Hank opened a savings account at Credit Union with a deposit of $40,000. The account agreement named Hank and his daughter Jenny as owners of the account with right of survivorship, Hank signed the account agreement but Jenny did not. Hank died in 2016, leaving a will that devised “all my property” to his son Sam. On Hank’s death the amount on deposit in the Credit Union account was $42,000.
1) Did Hank make a gift to Jenny when he opened the account in 2015?
2) Did Jenny take the $42,000 by right of survivorship when she didn’t sign the account agreement?
3) Did spouse Jenny take the $42,000 by right of survivorship when she did not sign the account agreement?
1) NO. He could revoke the account at any time by changing beneficiary or withdrawing funds.
2) YES. Because it was signed by the party who died (by statute).
3) NO. Both spouses must sign. If it’s community property and a right of survivorship between spouses, BOTH PARTIES must sign. Since she did not sign, Jenny takes 1/2 CP and the son takes Hank’s 1/2.
What is a durable power of attorney? Requirements?
Authorizes another person (Agent) to act on behalf of the principal.
A DPA must be signed and acknowledged before a notary public.
