Trusts (Essay Only) Flashcards
terms
trust
management device
bifurcated transfer - legal and equitable ownership split up
trustee owns legal title, manages the property for benefit of beneficiary
beneficiaries have equitable interest
terms
principal
original trust property and any increase in value
terms
income
money invested by the trust
terms
revocable vs. irrevocable trust
revocable trust - can be revoked at any time during settlor’s life
irrevocable trust - can’t be revoked
- traditional rule - trust presumed irrevocable unless trust doc says otherwise
- UTC reverses this presumption, trust is revocable unless trust doc says otherwise
mention both rules
terms
settlor
person who creates the trust
terms
UTC
Uniform Trust Code
terms
types of trust distributions –> mandatory, discretionary, support trusts
- mandatory trust - trustee must make distributions from the trust, no discretion
- discretionary trust - trustee may make distributions in their discretion, complete discretion
- support trust - trustee makes distributions to support the beneficiary
terms
trustee
manages the trust, holds legal title to the property
has power to manage the property
can be individual, bank, or trust company
will NOT fail for lack of trustee
terms
beneficiary
receives benefit of the trust
holds equitable title to the property
has power to enforce the trust investment
can be multiple classes of beneficiaries
animal may NOT be direct beneficiary of a private trust
express trusts
express trusts (in general)
owner expressly indicates the intent to create a trust
may be private or charitable
express trusts
private express trust - what are the elements to create one?
RIC PAT
1. res - trust res (property)
- can’t be a trust if there’s no property in it (no empty trusts)
- EXCEPT pour-over trust (trust terms must be in writing at time will is executed, properly need not be in trust at time of will)
2. settlor’s intent
- “trust words” create a presumption of a trust (“in trust” “for the benefit of”)
- oral trusts are valid
- minority rule: valid trust must be in writing
- precatory language does not create a trust (“hope” “wish”)
BUT trust must be in writing in certain situations
- SOF (conveying real property)
- devise
3. capacity of settlor
4. trust purpose - valid if not illegal or contrary to pbpl
5. ascertained beneficiary - either specific person or criteria to determine (ex. Chatterbox students)
EXCEPT
- unborn children
- class gifts must be definite
- charitable trusts
6. trustee has duties
tip
trust vs. gift
look at intent
gift is a revocable, outright gift
trust involves a bifurcated transfer - settlor gives the property to one person for the benefit of another
tip
trust vs. debt
debt - obligation to pay money, source of money to repay doesn’t matter
trust involves a segregated source of funds
express trusts / charitable trusts
charitable trusts
must have a charitable purpose
ex. relief of poverty, advancement of education or religion, promotion of good health, govt, benefit the community at large or a specific segment, etc.
express trusts / charitable trusts
charitable trusts - does RAP apply?
no wooo
express trusts / charitable trusts
cy pres doctrine
court can modify a trust if the trust’s charitable purpose is no longer possible
to modify, you need a general charitable purpose
want to make the new purpose as close as possible to the original purpose
if there is no general charitable purpose, property goes to a resulting trust
like if the trust is to support the school’s pottery program, but the pottery program ends so the trust’s money can go to the painting program instead b/c the larger charitable purpose is art, not just pottery
express trusts / charitable trusts
standing - who has standing to enforce terms of charitable trust?
- Attorney General’s Office has standing to enforce the terms of a charitable trust
- UTC gives settlor standing too
express trusts / creation
what are the ways to create an express trust
- inter vivos transfer - created during settlor’s life
- testamentary transfer - created according to terms of a will
express trusts / creation
inter vivos transfer
created during settlor’s life
- declaration of trust
settlor declares herself holder of property in trust for beneficiaries
settlor also serves as trustee - deed of trust
settlor conveys property to a trustee
settlor is NOT trustee
remedial trusts
remedial trusts (general info)
- not driven by interest
- equitable remedy created by operation of law
- passive in nature - trustee’s only duty is to convey the property back to the settlor
- two types - resulting trust + constructive trust
remedial trusts
resulting trusts
used when trust fails (ex. property is supposed to go to A’s kids and A dies without any kids –> trust fails, property goes back to O)
trustee must return property to seller or settlor’s estate
goal is to avoid unjust enrichment
avoid a resulting trust by creating a gift-over clause (ex. if A dies without kids, then the property goes to B)
purchase-money resulting trust
P1 buys property but it’s taken in P2’s name
If P2 is not the natural object of P1’s bounty (not a close friend or relative), court will create this type of trust
remedial trusts
constructive trust
- remedy used to prevent unjust enrichment if 3p takes advantage of a settlor
- wrongful conduct like fraud, duress, undue influence, breach of a duty, detrimental reliance by 3p
tip
FLAG: bad actor involved in a trust
think of a constructive trust
creditors’ rights
alienability of trust property and creditors’ ability to reach –> two basic rules
1. beneficiary’s equitable interest in trust property is freely alienable
creditor can reach beneficiary’s equitable interest
EXCEPTION: trust instrument or statute limits this rights
2. creditor CANNOT reach trust principal or income until such amounts become payable to beneficiary or beneficiary can demand it
has to be in beneficiary’s hand for creditor to get it
creditors’ rights
asset protection trusts
goal: shield beneficiaries from creditors’ claims
- support trust
- discretionary trust
- spendthrift trust
creditors’ rights / asset protection trust
support trust
creditors cannot reach trust property b/c beneficiary can’t demand payment
creditors can reach when trustee makes support payment
creditors’ rights / asset protection trust
discretionary trust
creditors cannot reach trust property b/c beneficiary cannot demand payment
creditors can reach when trustee makes a payment
lecture handout has this as basically a repeat of support trust, not an error
creditors’ rights / asset protection trust
spendthrift trust
trust expressly restricts beneficiary’s power to alienate her interest
creditors cannot reach trust property until trustee makes a payment
EXCEPT creditors can reach trust property if spousal or child support, creditor provides basic necessities to beneficiary, holder of federal or state tax liens
trust termination
expiration
express trust can expire at end of stated term
trust termination
material purpose
if trust has been satisfied, it auto terminates
trust termination
unfulfilled material purpose doctrine / Claflin Doctrine
if settlor is dead and beneficiary wants to terminate the trust prematurely and trustee opposes termination (beneficiary wants their money early)
trustee can block premature termination if the trust is still serving some material purpose
discretionary trust, support trusts, age-dependent trusts
trust termination
settlor’s power
settlor can unilaterally terminate unless trust is irrevocable
trusts are presumed revocable so a settlor doesn’t need to expressly reserve right to terminate
trust modification
if settlor is alive
- can unilaterally modify unless trust is irrevocable
- if trust is irrevocable, seller can terminate if all beneficiaries consent
trust modification
if settlor is dead
- all beneficiaries agree to a modification consistent with material purpose of trust
OR - an unforeseeable event has frustrated purpose of the trust (equitable dedication)
if fact pattern involving unforeseen events, think clearly about purpose of the trust
trust termination + modification
can trustee terminate or modify a trust through unilateral action?
no!
trust modification
removal of a trustee
- removal of a trustee is a remedy when trustee has breached a fiduciary duty or grossly mismanaged the property
likely to be granted if
- trustee became incapable of performing duties
- material breach of a duty
- trustee develops a conflict of interest
- serious conflict b/c trustee and beneficiary
- trust persistently performs poorly as a result of trustee’s action/inaction
- if settlor is alive, trustee can resign with written notice to co-trustee and beneficiaries
principal vs. income
what is principal vs. income about?
how should the trustee balance interests of multiple beneficiaries when their interests are different?
- lifetime beneficiaries want quick return, remainder holders want greater growth over time
- All assets received by a trustee must be allocated to either income or principal
- The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument
additional info from Essay 3571
principal vs. income
old rule
classified income and principal based on nature of money
life beneficiary entitled to income
holder of remainder interest was entitled to trust principal
money generated by trust property = income
money generated in connection with conveyance of trust property = principal
additional info from Essay 3571
principal vs. income
modern approach
more holistic
governed by Uniform Principal and Income Act
trustee focuses on total return of trust portfolio
trustee can re-characterize items and reallocate investment returns as necessary
distrbution of stock = principal
additional info from Essay 3571
where does trustee get their powers?
- look at trust document first
- if trust doc is silent, statutory + common law principles apply
- modern trend is to grant trustee all those powers necessary to act as a reasonably prudent person
- ex. powers to sell or transfer, lease trust property, pay taxes, sever or consolidate trust property
- trustee owns legal title and can act as owner
trustee’s duties (in general)
like fiduciary duties not admin tasks
- duty of loyalty + duty of care
- ANY beneficiary has standing to enforce these duties
trustee’s duties - duty of loyalty
- objective standard - did trustee act reasonably
- self-dealing is breach –> no further inquiry rule (if established self dealing, that’s a per se breach)
- even if trust docs allow self dealing, transaction must still be reasonable + fair for trustee to avoid liability
- conflicts of interest may still breach - reasonable and good faith tests
trustee’s duties - duty of care (duty of prudence)
- subjective standard - did trustee act in good faith
- care that a person of ordinary prudence would practice in the care of their own estate
- trustee should treat property as their own
- trustee must use their special skills - held to heightened standard
delegation
- common law rule: trustee can never delegate authority
- modern rule: permits delegation when unreasonable for trustee to undertake such functions (ex. investment decisions), trustee has duty to oversee
investments
- old rule: trustees were limited to specific list of acceptable investments, breach if outside the list
- modern rule (Prudent Investor Rule): trustee has discretion to invest and manage property as a prudent investor, expected to diversify, look at portfolio as a whole
duty of impartiality
- trustee has duty to balance the competing interests of present and future beneficiaries
- old rule: life beneficiary entitled to income, remainder holder to principal
- modern rule: allocation b/t income and principal must be balanced, treat them fairly
trustee’s duties - administrative duties
- duty to inform beneficiaries about nature of trust
- duty to account for actions taken on behalf of the trust, report on health of trust portfolio
tip
make sure to review future interests in property notes
you’ve got this!
how does a spendthrift clause work in a discretionary trust?
Essay 4984
w/o clause: if trustee pays beneficiary, then beneficiary’s creditors have same rights as beneficiary
- spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest
- applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary
- creditors can’t reach the beneficiary’s trust interest
- most states allow certain classes of creditors to reach a beneficiary’s interest even w/ clause
- some states have exception for a provider of necessities to the beneficiary
