Trusts/Guardianships Flashcards
spendthrift clause
Protects the trust corpus from the claims of the beneficiary’s creditors. Prevents the voluntary/involuntary transfer of trust corpus.
settlor cannot create spendthrift trust for own benefit and creditors can reach the interests retained by the settlor
Valid and enforceable to extent of beneficiary’s interest in the trust. Spendthrift provisions do not apply to child support, federal taxes, or necessities of life
Once a disbursement is made to a beneficiary, the disbursement is available to satisfy debts
irrevocable trusts
not available to satisfy the debts of the settlor, absent fraud. The trustee has a fiduciary duty to refuse suits
HOWEVER, if settlor retains an interest in the trust, his creditors may reach trust income in satisfaction of their claims to the maximum extent that the trustee could make distributions to a settlor
all trusts are revocable by the settlor unless expressly made irrevocable
Declining Trustee Duties
individual can decline to be appointed as trustee and the court will replace him, but taking actions of a trustee will result in individual incurring fiduciary duties.
Trustee Duty
trustee has the duty of reasonable care and skill but not expected to be infallible, not strict liability.
Duty to make property productive, but when making investments must follow prudent-investor rule, using reasonable skill, care and caution
duty of loyalty and good faith, avoid position where personal interests are contrary to trust and no self-dealing
Suits against trust
against the trust estate UNLESS court finds the suit would not have occurred but for the trustee’s failure to properly discharge his duties. In that case, judgment is entered against trustee personally.
Trustee as income beneficiary
Trustee should resign or beneficiaries can seek removal and request of accounting. If trustee makes an investment decision resulting in receiving a higher income, likely conflict of interest
insurance proceeds from destruction of trust asset
not income but rather replaces loss of trust corpus
Rule against perpetuities
trust creating successive life interests, so that remainder interest could vest at a time greater than lives in being plus 21 years is invalid.
Does not apply to charitable trusts
Cy pres
court has power to reform trust to affect a settlor’s intent (charitable trusts)
Court has power to reform trust if all beneficiaries agree and the trust intent would not be significantly altered (non-charitable trusts)
Can work to limit the trust language to not violate RAP
Allocation of trust property
interest received on obligation = income
rental income = income
net proceeds from sale of assets outside ordinary course (selling business) = principal
net proceeds of livestock sale = Trustee can choose between income and principal
proceeds from insurance policy that protects trust from loss of asset = principal
Sale/purchase of stock
Trustee’s investment decisions are governed by Uniform Prudent Investor Act, which looks at total return and not just ordinary income. Investment conduct is measured at the time the decision is made
lack of trustee
no trust ever fails for lack of a trustee. If the name trustee is unable to serve (or refuses to) courts will appoint a suitable person/company as successor trustee to carry out the settlor’s intent
Judicial termination of trust
(1) the trust’s purpose has been fulfilled or has become illegal/impossible to fulfill;
(2) circumstances not known or anticipated by settlor and termination will further the purpose of the trust
Charitable trust
must benefit the public at large (regardless of settlor’s motives).
RAP does not apply
Texas AG has the authority to represent the public in all matters regarding the trust and has the statutory authority to intervene in any judicial proceeding
change of beneficiary (charitable trust)
Trustee may name a new beneficiary after giving adequate notice to the AG, but only when the replacement charitable beneficiary has the same or similar purpose as the failed beneficiary
Best Interest of Ward
primary factor in determining who should be appointed guardian. Court must inquire into the qualifications, abilities, and capabilities of the person seeking appointment, and must give due consideration to any preferences indicated by the ward
guardianship for incapacitated person
application cannot be granted unless the applicant presents a letter or certificate from a physician based on an examination within 120 days before the filing of the application
must describe the nature, degree, and severity of the incapacity, including the ward’s ability to handle financial matters, make personal decisions, and to consent to medical, dental, psychological, or psychiatric treatment
Guardian of Adult person
court will appoint if there is clear and convincing evidence that he is incapacitated
Guardian of estate (adult)
will be appointed if it is shown the adult person is substantially unable to mange his financial affairs
Trust Accounting
trustee must maintain records of all transactions relating to the trust and must, on demand by a beneficiary, provide a written statement reporting all transactions since the last accounting OR no later than 15 months after trust creation
Trustee must be given reasonable time to prepare the accounting, and is not obligated to provide more than one in any 12 month period
Trustee Compensation
Code gives no guidance, but a fee of 1% of the value of the trust corpus is often seen as reasonable
Trustee reimbursement
trustee is entitled to reimbursement for all expenses reasonably incurred in the administration of the trust
Trustee liability
Settlor can exculpate a trustee from liability for ordinary negligence, but not for liability for breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of the beneficiary
Uniform Prudent Investor Act (UPIA)
Trustee has duty to invest as a prudent investor would, taking into account the purposes, terms, and distribution requirements of the trust. Trustee must exercise reasonable care, skill, and caution.
This does not prohibit a speculative investment, but trustee must show the investment will effectuate the settlor’s intent as to the purpose of the particular trust
Self-Dealing
Code explicitly prohibits self-dealing transactions unless settlor has waived this rule.
Occurs when a personal interest may affect trustee’s judgment as to whether the asset should be sold at all
Trustee cannot profit from serving as trustee, other than reasonable compensation and reimbursement
improperly borrowing money is a misapplication of trust funds that would warrant a removal without notice or a hearing
Remedies to Trustee’s breach
beneficiary has option to: (1) ratify the transaction and waive the breach of trust; or (2) bring a surcharge action to recover the amount subtracted from the trust due to the breach
Court can reduce or deny compensation, compel reimbursement, remove trustee if numerous breaches occur, and order trustee to pay court/attorney’s fees
Appointment of Guardian for child
appointments made based on best interest of child. A child 12 years and older can choose his guardian in a writing filed by the court (subject to court’s approval and best interest of child).
Last surviving parent may designate a guardian in a written, signed declaration. Appointment of this designee takes preference over other persons qualified, unless appointment is not in child’s best interest.
