Trusts (Main Deck)* Flashcards
WHAT MUST YOU CONSIDER
WHEN APPROACHING A
TRUSTS QUESTION?
STEP 1: IDENTIFY THE TYPE OF TRUST
STEP 2: DETERMINE IF THE TRUST WAS PROPERLY CREATED
STEP 3: DETERMINE IF THE TRUST CAN BE ALIENATED, MODIFIED OR TERMINATED
STEP 4: IDENTIFY THE TRUSTEE’S AUTHORITY AND DUTIES
STEP 5: DETERMINE IF THE ADMINISTRATION OF THE ESTATE IS PROPER
PRELIMINARY MATTERS:
LIST THE 3 PARTIES TO A
TRUST
1) Settlor
2) Trustee
3) Beneficiary
PRELIMINARY MATTERS:
SETTLOR
(Define)
Definition: The Settlor is the owner of property who creates the trust, generally by transferring legal title to a Trustee to hold for another’s benefit.
Note: The Settlor is also known as the Grantor or the Trustor.
PRELIMINARY MATTERS:
BENEFICIARY
(Define)
Definition: The Beneficiary is the person or entity for whose benefit the trust was created. The Beneficiary has an equitable interest in the property of the trust.
PRELIMINARY MATTERS:
TRUSTEE
(Define)
Definition: The Trustee is the person who holds legal title to the property of the trust and who manages the trust for the benefit of the Beneficiaries. The Trustee owes fiduciary duties to all Beneficiaries.
STEP 1 -
IDENTIFY THE
TYPE OF TRUST:
LIST 2 WAYS TRUSTS CAN
BE CREATED
1) Express Act of Settlor
2) Operation of Law
EXPRESS TRUST
(Define)
Definition: An express trust is created based on the expressed intent of the Settlor.
LIST 2 TYPES OF EXPRESS
TRUSTS
1) Private Express Trust
2) Charitable Trust
PRIVATE EXPRESS TRUST
(Define & State the Rule)
Definition: A private express trust is a fiduciary relationship with respect to property in which the Trustee holds legal title for the benefit of the Beneficiary.
Rule: Private express trusts are created by a Settlor’s manifestation of intent to create a private express trust for a legal purpose.
CHARITABLE EXPRESS
TRUST
(Define & State the Rule)
Definition: A charitable trust is a trust created for a charitable purpose that benefits a large number of unidentifiable people, or society as a whole.
**Common Law (Statute of Elizabeth): **Charitable trusts can be created only for the purposes of education, alleviation of poverty, alleviation of sickness, or assisting orphans.
Modern Law: Charitable trusts may be created for any purpose that benefits society as a whole.
Note: Charitable trusts are created by a Settlor’s manifestation of intent to create a charitable trust for a legal purpose.
WHY IS THE DISTINCTION
BETWEEN A PRIVATE
EXPRESS TRUST & A
CHARITABLE TRUST
IMPORTANT?
The distinction between a private express and a charitable trust is important because of the Rule Against Perpetuities and Cy Pres.
Rule Against Perpetuities
Rule: The Rule Against Perpetuities applies to private express trusts, but does not apply to charitable trusts.
Cy Pres
Rule: Under the doctrine of CyPres, if the charitable purpose selected by the Settlor is impracticable or becomes illegal, a court may modify the trust to effectuate the Settlor’s charitable intent.
Note:
1) Cy Pres cannot be applied to save an invalid private express trust.
2) Cy Pres will be applied only if the court finds that the Settlor’s intent was for a general charitable purpose.
3) The Court may introduce extrinsic evidence to determine the Settlor’s intent.
LIST 2 TYPES OF TRUSTS
CREATED BY OPERATION OF
LAW
1) Resulting Trust
2) Constructive Trust
RESULTING TRUST
(Define)
Definition: A resulting trust is an implied trust that is based on the presumed intent of the parties.
Rule: If a resulting trust is decreed by the court, the resulting Trustee must transfer the corpus of the trust back to the Settlor, if the Settlor is alive. If the Settlor is not alive, the property will be transferred to the Settlor’s estate.
Note:
1) A resulting trust is a type of passive trust.
2) Resulting trusts are created by court decree, often upon failure of an express trust.
CONSTRUCTIVE TRUST
(Define & State the Rule)
Definition: A constructive trust is an equitable remedy decreed by a court to prevent fraud or unjust enrichment.
Rule: When a constructive trust is decreed by a court, the wrongdoer is named as a constructive Trustee whose only obligation is to transfer the property to the intended
Beneficiary.
Note:
1) A constructive trust is a passive trust.
2) Constructive trusts are created through court decree.
STEP 2 -
PROPER CREATION
OF A TRUST:
WHAT IS REQUIRED TO
CREATE A VALID EXPRESS
TRUST?
Rule: The creation of a valid express trust requires:
1) Intent,
2) Property,
3) Legitimate purpose,
4) Beneficiary,
5) Trust writing, AND
a) Note: Required for trusts containing real property only.
6) Delivery.
a) Note: Delivery is not required for self-
settled trusts.
CREATION OF AN EXPRESS
TRUST:
INTENT
(State the Rule)
Rule: A trust is valid only if the Settlor properly manifests her intention to create a trust.
Note:
1) The Settlor need not specifically state she is creating a trust, but her language must evince an affirmative intention to create a legal obligation for a Trustee to hold property for the benefit of a Beneficiary.
2) If precatory language is used, the court may admit parol evidence to determine the Settlor’s intent.
3) As with a Testator creating a will, the Settlor must have legal capacity to create a trust.
CREATION OF AN EXPRESS
TRUST:
PROPERTY
(State the Rule)
Rule: A trust can be created only if there is trust property (corpus).
Note: Any presently existing interest in real or personal
property capable of being transferred by the Settlor may be the corpus of the trust.
CREATION OF AN EXPRESS
TRUST:
LEGITIMATE PURPOSE
(State the Rule)
Rule: A trust may be created for any purpose that is not
illegal or against public policy.
CREATION OF AN EXPRESS
TRUST:
INDEFINITE OR GENERAL
PURPOSE
(State the Rule)
Rule: A trust created for an indefinite or general purpose is not invalid if it can be determined with reasonable certainty that a particular use of the trust property comes within the purpose intended by the Settlor.
PASSIVE TRUST
(Define & State the Rule)
Definition: A passive trust is a private express trust with a corpus of property, in which the Trustee has no active duties and holds bare legal title.
Rule: A passive trust terminates automatically by operation of law (Statute of Uses).
STATUTE OF USES
(State the Rule)
Rule: The Statute of Uses operates to transfer legal title to real property held as the trust corpus from the Trustee to the Beneficiaries when a Trustee merely holds legal title and lacks any active duties. The unity of legal and equitable title in the Beneficiaries results in the termination of the trust.
CREATION OF AN EXPRESS
TRUST:
BENEFICIARY
(State the Rule)
Rule: A trust, other than a charitable trust, is created only if there is a foreseeably identifiable Beneficiary. This requirement will be satisfied if the trust instrument:
1) Clearly identifies a Beneficiary or class of Beneficiaries,
2) Describes a Beneficiary or class of Beneficiaries sufficiently to determine whether a person meets the description or falls within the class,
3) Grants power to a Trustee to select the Beneficiaries based on a standard provided by the Settlor, OR
4) Grants power to a Trustee to select the Beneficiaries at the Trustee’s discretion.
Note: Under modern law, both corporations and unincorporated associations can be named as Beneficiaries.
HONORARY TRUST
(Define & State the Rule)
Definition: An honorary trust is a trust that has no ascertainable human Beneficiary and confers no substantial benefit upon society.
Rule: The Trustee is not required to carry out the Settlor’s wishes, but may do so if the Trustee desires. If the Trustee refuses to do so, the court will not appoint a Trustee, and the trust fails.
Note:
1) A trust for the care of a domestic animal is valid for the life of the animal.
2) Honorary trusts are created through the Settlor’s manifestation of intent in an express trust for the stated purpose.
CREATION OF AN EXPRESS
TRUST:
TRUST WRITING - REAL
PROPERTY
(State the Rule)
Rule: A trust of real property is not valid unless:
1) It is evidenced by a written instrument signed by the Trustee (or the Trustee’s agent).
2) It is evidenced by a written instrument conveying the trust property that is signed by the Settlor (or the Settlor’s agent). OR
3) The trust arose by operation of law.
CREATION OF AN EXPRESS
TRUST:
IS A TRUST WRITING
REQUIRED FOR PERSONAL
PROPERTY?
Rule: Oral trusts over personal property are valid, subject to the following conditions:
1) An oral declaration of the Settlor is not sufficient evidence of the creation of a trust of personal property unless the declaration is accompanied by an affirmative act (delivery) that demonstrates the Settlor’s present intent to create a trust, AND
2) The existence and terms of an oral trust of personal property must be established by clear and convincing evidence.
CREATION OF AN EXPRESS
TRUST:
WHAT MUST BE INCLUDED IN
THE TRUST WRITING?
Rule: The trust writing must set forth with reasonable
definiteness:
1) The Trustee,
2) The Beneficiary/ies,
3) The trust property, AND
4) The Settlor’s present
intent to create a trust.
CREATION OF AN EXPRESS TRUST:
IDENTIFICATION OF A TRUSTEE
(State the Rule)
Rule: Generally, a court will not allow a trust to fail due to
lack of an identifiable Trustee or a Trustee’s refusal to serve, and will instead appoint a Trustee to fulfill the duties required to accomplish the purpose of the trust.
CREATION OF AN EXPRESS TRUST:
CONSIDERATION
(State the Rule)
Rule: Consideration is not required to create a trust.
Exception: A promise to create a trust in the future is enforceable only if the requirements for formation of an enforceable contract are satisfied.
CREATION OF AN EXPRESS TRUST:
DELIVERY OF TRUST PROPERTY
(State the Rule)
Rule: Except in the case of a self-settled trust, the Settlor must place the trust property out of her control. Delivery can be accomplished by:
1) Actual Delivery,
a) The property is manually transferred to the Trustee.
2) Symbolic Delivery, OR
a) A representative item of the property is given to the Trustee.
3) Constructive Delivery.
a) Common Law: The Trustee is provided access to the place where the corpus is located,
b) Modern View: The Settlor has done everything possible to effectuate a delivery, and no issue of fraud or mistake exists.
WHEN WILL A TRUST TAKE EFFECT?
Rule: A trust can take effect:
1) During a Settlor’s lifetime (inter vivos trust), OR
2) At Settlor’s death (testamentary trust).
INTER VIVOS TRUST
(Define)
Definition: An inter vivos trust is an express trust that is created during the Settlor’s lifetime.
Note: A Settlor may create an inter vivos trust through manifestation of present intent to create a trust by:
1) Declaring oneself as Trustee for the benefit of another (declaration of trust), OR
2) Delivering the trust corpus to another to hold as Trustee (transfer in trust).
SELF-SETTLED TRUST
(Define)
Definition: A self-settled trust is an inter vivos trust in which a Settlor places his assets into trust for herself as the Beneficiary.
TESTAMENTARY TRUST
(Define)
Definition: A testamentary trust is a trust that is created by a Testator’s will and does not take effect until the Testator’s death.
Note: Testamentary trusts are created through the terms of a properly executed will.
LIST 3 TYPES OF TESTAMENTARY TRUSTS
1) Pour-Over Trust
2) Semi-Secret Trust
3) Secret Trust
POUR-OVER TRUST
(Define)
Definition: A pour-over trust arises from a provision in a
Testator’s will that declares certain assets or the entire estate will pour over into a trust already existing at the Testator’s death and will become part of the trust
corpus.
SECRET TRUST
(Define & State the Rule)
- *Definition**: A secret trust is a trust that arises when property is gifted to an individual in a will, but the gift is based on the Testator’s understanding (from an oral
agreement) that the individual will hold the property as Trustee for Beneficiaries who are not identified in the will.
Rule: The court will admit parol evidence to determine whether an oral agreement existed. If the court determines such an agreement was made, the individual to whom the gift was given on the face of the will is declared a constructive Trustee, with the sole duty of transferring the property to the intended Beneficiary.
SEMI-SECRET TRUST
(Define & State the Rule)
Definition: A semi-secret trust arises when a will makes a gift and explicitly directs the Donee to hold the gift in trust, but fails to identify the Beneficiary.
Majority Rule: The lack of an identifiable Beneficiary will cause the trust to fail and a resulting trust in the Settlor’s heirs to arise.
Minority Rule: Parol evidence will be allowed to determine the identity of the intended Beneficiary.
HOW IS A RESULTING TRUST CREATED?
Rule: A resulting trust may arise if:
1) A private express trust ends by its own terms, and no provision is made for distribution of the remaining corpus,
2) A private express trust fails due to lack of a Beneficiary,
3) A private express trust fails due to illegality,
4) The corpus of a private express trust is more than is needed to accomplish the trust purpose,
5) A charitable trust ends due to impossibility or impracticability and Cy Pres cannot be applied to save the trust,
6) A semi-secret trust is found to exist, OR
7) A purchase money resulting trust is found to exist.
PURCHASE MONEY RESULTING TRUST
(Define & State the Rule)
Definition: A purchase money resulting trust is an implied trust that arises when real property is purchased and paid for by one party, but title is transferred to a third party as owner of the property.
Rule: If the purchasing party and the third party are not closely related and no further evidence of the purchaser’s intention is provided, a presumption arises that the third party holds the property as a resulting trust for the purchaser.
Note:
1) If the third party is a natural object of the purchasing party’s bounty, a presumption of gift will arise, and a resulting trust will not be implied.
2) A purchase money resulting trust will not be implied if the purchaser manifests an intention (through words or actions) to give the property as a gift to the third party.
HOW IS A CONSTRUCTIVE TRUST CREATED?
Rule: A constructive trust is created when a court determines that the equitable remedy of a constructive trust is required to prevent fraud of unjust enrichment.
Note: The fraud or unjust enrichment must be established by clear and convincing evidence before a court will impose a constructive trust.
CONSTRUCTIVE TRUST:
THEFT OR CONVERSION OF PROPERTY
(State the Rule)
Rule: A constructive trust will be imposed if a party steals or converts another’s property and uses the proceeds to gain title to another asset.
Note: The court will use tracing to determine the property over which a constructive trust should be imposed.
CONSTRUCTIVE TRUST:
FRAUDULENT CONDUCT
(State the Rule)
Rule: A constructive trust will be imposed if a party, through an act of fraud, causes another to convey title
to the wrongdoer.
Note: If the wrongdoer later transfers title to a non-Bona Fide Purchaser, the constructive trust can be imposed over the proceeds of the sale or the property transferred.
CONSTRUCTIVE TRUST:
ABUSE OF CONFIDENTIAL RELATIONS
(State the Rule)
Rule: A constructive trust will be imposed if a party wrongfully induces another to transfer property in reliance on a close relationship.
Note: A very close relationship is usually required (e.g., parent-child, siblings, attorney-client, or business partners).
CONSTRUCTIVE TRUST:
UNPERFORMED PROMISES MADE IN CONTEMPLATION OF DEATH
(State the Rule)
Rule: A constructive trust will be imposed if a person induces a promise in contemplation of death to transfer property by promising to do something with the property at a later time, but then reneges on the promise.
LIST 2 TYPES OF TRUSTS OFTEN USED AS WILL SUBSTITUTES
1) Totten Trust
2) Life Insurance Trust
TOTTEN TRUST
(Define & State the Rule)
Definition: A Totten trust is a payable-on-death bank account.
Rule: The Settlor (depositor) of a Totten trust:
1) Owns the account during her lifetime,
2) May use the money in the account however she wishes,
3) Owes no fiduciary duties to the named Beneficiary, AND
4) Makes no guarantee as to the amount of money the Beneficiary will receive.
Note:
1) Totten trusts are created by designating a Beneficiary on a bank account.
2) If the Settlor manifests an intent to create a present trust, the Totten trust may be elevated to and treated as a private express trust.
3) If the court finds a private express trust has been created, the Settlor will be deemed Trustee of the account, with all associated fiduciary duties, and charged with the responsibility of holding or managing the funds for the sole benefit of the named Beneficiary.
LIFE INSURANCE TRUST
(State the Rule)
Rule: A life insurance trust is created when the owner of a life insurance policy places the policy or the proceeds of the policy in trust for a Beneficiary.
Note:
1) Life insurance trusts are usually inter vivos transfers.
2) A minority of states allow for testamentary transfers.
STEP 3 -
ALIENATION, MODIFICATION OR TERMINATION OF A TRUST:
VOLUNTARY & INVOLUNTARY ALIENATION
(Define)
Voluntary Alienation: A Beneficiary’s transfer of her right to future payments from the trust.
Involuntary Alienation: The attachment of the Beneficiary’s right to future payments by creditors.
Note: Alienation issues typically arise in matters regarding protective trusts.
LIST 3 TYPES OF PROTECTIVE TRUSTS
1) Spendthrift Trusts
2) Discretionary Trusts
3) Support Trusts
SPENDTHRIFT TRUST
(Define & State the Rule)
Definition: A spendthrift trust is a trust created to provide security and financial maintenance for a Beneficiary and provides the Trustee with discretion to determine how income will be allocated to the Beneficiary and the Beneficiary’s creditors.
Rule: The Beneficiary cannot transfer his right to future payments of income or principal, and creditors generally cannot attach the Beneficiary’s right to future payments of income or principal.
Note:
1) After the Beneficiary receives the income from the trust fund, he may dispose of the property at will, and creditors may attach the property.
2) Spendthrift trusts are created through the inclusion of a spendthrift provision in a private express trust.
SPENDTHRIFT TRUSTS:
CAN CREDITORS EVER ATTACH A BENEFICIARY’S INCOME FROM A SPENDTHRIFT TRUST?
Common Law: Preferred creditors can attach the Beneficiary’s right to future payments, but only for satisfaction of a particular claim. Common law preferred
creditors include:
1) Tort creditor,
2) Ex-spouse (for alimony),
3) Children (for child support),
4) Those who provide necessities of life to a Beneficiary.
Modern Approach: In many jurisdictions, any creditor can attach the surplus of the Beneficiary’s trust income, as measured by the Beneficiary’s station in life.
1) Surplus: The difference between the amount required for the Beneficiary to maintain her standard of living and the income received by the Beneficiary from the trust.
2) Station in Life: The Beneficiary’s standard of living is measured subjectively, though it must be reasonable.
SELF-SETTLED SPENDTHRIFT TRUST
(Define & State the Rule)
Definition: A self-settled spendthrift trust is a spendthrift trust created by the Settlor for the Settlor’s benefit.
Rule: Generally, the self-settled trust in which the spendthrift clause is included is valid, but the restraint on involuntary alienation is invalid. Courts are split as to whether the restriction on voluntary alienation is valid:
1) Some jurisdictions ignore the restrictive provision and allow the Settlor to voluntarily alienate his interest,
2) Other jurisdictions will not allow the Settlor to transfer his right to future payments, based on a theory of estoppel.
DISCRETIONARY TRUST
(Define & State the Rule)
Definition: A discretionary trust is a trust in which the Trustee is given complete discretion to determine the amount and timing of payments to the Beneficiary.
Rule: Distribution of the trust income or principal remains at the sole discretion of the Trustee (i.e., the Beneficiary cannot force the Trustee to make a distribution).
Note: Discretionary trusts are created through the inclusion of a discretionary provision in a private express trust.
SELF-SETTLED DISCRETIONARY TRUST
(Define & State the Rule)
Definition: A self-settled discretionary trust is a trust in which the Settlor is the Beneficiary, and the Trustee is given complete discretion to determine the amount and timing of payments to the Settlor/Beneficiary.
Rule: Generally, the self-settled trust that contains the discretionary clause is valid, but the restraint on involuntary alienation that arises from leaving distribution at the Trustee’s sole discretion is invalid as a matter of public policy.
SUPPORT TRUST
(Define & State the Rule)
Definition: A support trust is a trust in which the Trustee is required to use only as much of the income or principal as is necessary for the Beneficiary’s health, support, maintenance, or education.
Rule: The Beneficiary of a support trust cannot transfer his right to future payments of income or principal, and creditors cannot attach the Beneficiary’s right to future payments of income or principal.
Note: Support trusts are created through the inclusion of a support trust provision in a private express trust.
MODIFICATION OF A TRUST:
MODIFICATION BY SETTLOR
(State the Rule)
Rule: The Settlor may modify the trust if the Settlor expressly reserves the power to modify or revoke the trust.
Note:
1) If only the power to revoke is reserved, the Settlor’s power to modify the trust will be implied.
2) If the Settlor retains the righ t to modifyor revoke and exerts excessive control and dominion over the trust corpus (e.g., making frequent deposits or withdrawals, selling property, etc.), the trust may be declared invalid.
3) If the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court determines that the reason for doing so outweighs the interest in accomplishing the material purpose of the trust.
MODIFICATION OF A TRUST:
REVOCABLE TRUST
(Define & State the Rule)
Definition: A revocable trust is an inter vivos trust in which the Settlor retains the right to amend or revoke the trust during the Settlor’s lifetime.
Rule: A Settlor may revoke or amend a revocable trust by:
1) Complying with the procedure provided in the trust instrument for revocation or amendment, OR
2) Delivering a signed writing stating the Settlor’s intent to revoke.
Note:
1) If the trust instrument provides a procedure for revocation or amendment, the Settlor must follow that procedure to amend or revoke the trust.
2) In a majority of states, trusts are presumed to be revocable unless the trust is expressly made irrevocable by the terms of the trust instrument.
MODIFICATION OF A TRUST:
IRREVOCABLE TRUST
(Define & State the Rule)
Definition: An irrevocable trust is an inter vivos trust in which the Settlor relinquishes the right to amend or revoke the trust during his lifetime.
Rule: Notwithstanding the Settlor’s intent to create an irrevocable trust, an irrevocable trust may be amended or
revoked if:
1) The Settlor and all Beneficiaries agree to terminate or amend the trust,
2) All Beneficiaries agree to terminate the trust and the material purpose of the trust has been accomplished, OR
3) By operation of law (Statute of Uses).
Note: In a majority of states, a trust is irrevocable unless otherwise stated in the trust instrument.
MODIFICATION OF A TRUST:
MODIFICATION BY THE COURT
(State the Rule)
Charitable Trusts Rule: Courts may apply the Doctrine of Cy Pres to effectuate a Settlor’s general charitable intent.
Private Express Trusts Rule: The Doctrine of Changed Circumstances provides that a court can modify or terminate a trust upon petition by the Trustee or Beneficiary if continuing in the present manner would defeat the purpose of the trust due to changed circumstances. To exercise this power:
1) Circumstances unforeseen by the Settlor must have arisen, AND
2) Deviation from the terms of the trust instrument must be required to preserve the purpose or corpus of the trust.
TERMINATION OF A TRUST:
WHEN WILL A TRUST TERMINATE?
Rule: A trust terminates when:
1) The term of the trust expires,
2) The trust purpose is fulfilled,
3) The trust purpose becomes unlawful,
4) The trust purpose becomes impossible to fulfill,
5) The trust is revoked, OR
6) The trust is terminated by operation of law.
TERMINATION OF A TRUST:
REVOCABLE TRUSTS
(State the Rule)
Rule: Trusts are presumed to be revocable unless the trust is expressly made irrevocable by the trust instrument.
Note: If the trust instrument provides a procedure for revocation or amendment, the Settlor must follow that procedure to revoke or amend.
TERMINATION OF A TRUST:
IRREVOCABLE TRUSTS
(State the Rule)
Rule: An irrevocable trust may terminate before the time set forth in the trust instrument if:
1) The Settlor and all Beneficiaries agree to terminate,
a) Note: This includes all contingent
remaindermen.
2) All Beneficiaries agree to terminate the trust and all the material purposes of the trust have been accomplished, OR
3) The Statute of Uses applies (in the case of a passive trust over real property).
Rule: An irrevocable trust may terminate before the time set forth in the trust instrument if:
1) The Settlor and all Beneficiaries agree to terminate,
a) Note: This includes all contingent remaindermen.
2) All Beneficiaries agree to terminate the trust and all the material purposes of the trust have been accomplished, OR
3) The Statute of Uses applies (in the case of a passive trust over real property).
STEP 4 -
TRUSTEE’S AUTHORITY AND DUTIES:
WHAT POWERS DOES A TRUSTEE HAVE?
Rule: The Trustee has both enumerated and implied
powers.
ENUMERATED & IMPLIED POWERS
(Define)
Enumerated Powers: Those powers expressly given to the Trustee in the trust instrument.
Implied Powers: Those powers helpful, appropriate, or necessary to carry out the trust purpose.
WHAT ARE THE TRUSTEE’S POWERS UPON TERMINATION OF A TRUST?
Rule: Upon termination of the trust, the Trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust.
HOW MUST A TRUSTEE ADMINISTER THE TRUST?
Rule: The Trustee has a duty to administer the trust according to the trust instrument and according to her statutorily determined duties.
Note: In a self-settled trust, the Trustee must also make a reasonable attempt to follow any reasonable directive provided in writing by the Settlor/Beneficiary unless the directive would have the effect of improperly modifying the trust.
LIST 8 DUTIES A TRUSTEE OWES TO BENEFICIARIES
1) Duty of Due Care
2) Duty of Loyalty
3) Duty to Invest
4) Duty to Earmark
5) Duty to Segregate
6) Duty to Account
7) Duty Not to Delegate
8) Duty of Prudence when Delegating
Note: A violation by the Trustee of any of these duties is a breach of trust.
TRUSTEE DUTIES:
DUTY OF DUE CARE
(State the Rule)
Rule: A Trustee must administer the trust with the reasonable care, skill and caution a prudent person in the circumstances would use in dealing with his own affairs.
TRUSTEE DUTIES:
DUTY OF LOYALTY
(State the Rule)
Rule: A Trustee must administer the trust solely in
the interest of the Beneficiaries, having no other consideration in mind.
Note: This includes the prohibition of self-dealing.
WHAT ARE A TRUSTEE’S DUTIES TO 2 OR MORE BENEFICIARIES?
Rule: If a trust has two or more Beneficiaries, the
Trustee has a duty to act impartially in the investing and
managing of the trust property, taking into account the
differing interests of the Beneficiaries.
MAY A TRUSTEE WHO ADMINISTERS 2 OR MORE TRUSTS EXCHANGE OR SELL PROPERTY BETWEEN THE TRUSTS?
Rule: A Trustee who administers two or more trusts may sell or exchange property between the trusts if:
1) The sale or exchange is reasonable and fair to the Beneficiaries of both trusts, AND
2) The Trustee provides all Beneficiaries with notice of the material facts related to the sale or exchange.
TRUSTEE DUTIES:
DUTY TO INVEST
(State the Rule)
Rule: A Trustee has a duty to invest and manage trust assets.
Note:
1) In the absence of instructions in the trust instrument, three approaches may be used to evaluate the Trustee’s investments:
a) State Lists,
b) Reasonably Prudent Person Rule,
c) Uniform Prudent Investors Rule.
2) Regardless of the approach used, the Trustee always has a duty to diversify the trust’s investments.
DUTY TO INVEST:
STATE LISTS
(State the Rule)
Rule: A small minority of states provide statutory lists of approved trust investments if instructions are not provided in the instrument:
1) Mandatory State Lists: If a state list is mandatory, the Trustee must invest only in the state-approved investments.
2) Permissive State Lists: If a state list is permissive, the Trustee should invest in the state-approved investments.
Note: Regardless of the regime, the Trustee always has a duty to:
1) Scrutinize each individual investment, AND
2) Diversify the trust’s investments.
DUTY TO INVEST:
REASONABLY PRUDENT PERSON RULE
(State the Rule)
Rule: Under the Reasonably Prudent Person Rule, the Trustee has a duty to act as a reasonably prudent person investing her own property. The Trustee must:
1) Examine the safety of each investment,
2) Determine the investment’s potential to appreciate, AND
3) Evaluate the income the investment is expected to generate.
Note:
1) The Trustee should always try to maximize income while preserving the corpus.
2) The Trustee’s decisions with respect to each individual investment will be scrutinized.
3) If a Trustee holds herself out as having greater investment skill than an ordinary person, she will be held to the higher standard.
DUTY TO INVEST:
UNIFORM PRUDENT INVESTOR RULE
(State the Rule)
Rule: Under the Uniform Prudent Investor Rule, the Trustee has a duty to invest and manage trust assets as a prudent investor and must exercise reasonable care, skill, and caution. A Trustee’s decisions respecting individual assets will be evaluated in the context of the trust portfolio as a whole and as part of an overall investment strategy.
Note: The Prudent Investor Rule may be expanded or restricted by express provision in the trust instrument.
WHAT SHOULD A TRUSTEE TAKE INTO CONSIDERATION WHEN MAKING INVESTMENT & MANAGEMENT DECISIONS UNDER THE PRUDENT INVESTOR RULE?
Rule: When making investment and management decisions underthe Prudent Investor Rule, the Trustee should consider:
1) General economic conditions,
2) The possible effect of inflation or deflation,
3) The expected tax consequences of investment decisions or strategies,
4) The effect of each investment on the overall trust portfolio,
5) The expected total return from income and the appreciation of capital,
6) Other resources of the Beneficiaries known to the Trustee,
7) Needs for liquidity, regularity of income, and preservation of capital, AND
8) An asset’s special relationship or value, if any, to the purpose of the trust or to one or more of the Beneficiaries.
TRUSTEE DUTIES:
DUTY TO EARMARK
(State the Rule)
Rule: A Trustee has a duty to ensure trust property is labeled as trust property.
TRUSTEE DUTIES:
DUTY TO SEGREGATE
(State the Rule)
Rule: A Trustee has a duty to keep the trust property separate from other property not subject to the trust.
Note: The Trustee cannot commingle:
1) Personal property and trust property, OR
2) The property of two or more trusts.
TRUSTEE DUTIES:
DUTY TO ACCOUNT
(State the Rule)
Rule: A Trustee has a duty to keep the Beneficiaries reasonably informed of the trust and its administration. Upon reasonable request by a Beneficiary, the Trustee must provide an accounting of:
1) The assets, liabilities, receipts, and disbursements of the trust,
2) The acts of the Trustee, AND
3) The terms of the trust.
Note: In the absence of a request from a Beneficiary, the Trustee is required to provide an annual accounting to all Beneficiaries of the trust.
TRUSTEE DUTIES:
DUTY NOT TO DELEGATE
(State the Rule)
Rule: A Trustee must not:
1) Delegate responsibilities the Trustee can reasonably perform personally,
2) Delegate the entire administration of the trust, OR
3) Name another person as Trustee.
Note: In the case of an allowable delegation, the Trustee has a duty to supervise the person performing the delegated function.
TRUSTEE DUTIES:
DELEGATION OF INVESTMENT & MANAGEMENT FUNCTIONS
(State the Rule)
Rule: A Trustee may delegate investment and management functions, but has a duty to exercise prudence when:
1) Selecting an agent,
2) Establishing the scope and terms of the delegation, AND
3) Reviewing the agent’s performance and compliance with the terms of the delegation.
Note: Once an agent has accepted a delegated function, the agent has a duty to reasonably comply with the terms of the delegation.
TRUSTEE DUTIES:
CAN A TRUSTEE BE HELD LIABLE FOR AN AGENT’S DECISIONS REGARDING TRUST PROPERTY?
Rule: Generally, a Trustee will not be held liable for the decisions or actions of an agent to whom a function was properly delegated if the Trustee complies with his duty of prudence in delegating the duties.
Exception: A Trustee will be held liable to the Beneficiaries for decisions or actions of an agent if the Trustee:
1) Directed the acts of the agent,
2) Concealed the acts of the agent,
3) Delegated to the agent the authority to perform an act that the Trustee is under a duty not to delegate,
4) Failed to use reasonable prudence in selecting an agent,
5) Failed to review the agent’s overall performance and compliance with the terms of the delegation, OR
6) Failed to take reasonable steps to compel the agent to redress a wrong, if the Trustee knew of the agent’s wrongful actions.
TRUSTEE DUTIES:
CAN A TRUSTEE BE HELD LIABLE FOR THE ACTIONS OF A CO-TRUSTEE?
Rule: Generally, a Trustee is not liable to the Beneficiary for a breach of trust committed by a co-Trustee.
Exception: A Trustee is liable for a breach committed by a co-Trustee if the Trustee:
1) Participated in the co-Trustee’s breach of trust,
2) Improperly delegated the administration of the trust to the co-Trustee,
3) Approved, knowingly acquiesced in, or concealed a breach of trust committed by the co-Trustee,
4) Negligently enabled the co-Trustee to commit a breach of trust, OR
5) Failed to take reasonable steps to compel the co-Trustee to redress a breach of trust if the Trustee knew or should have known of the breach.
TRUSTEE DUTIES:
CAN A TRUSTEE BE HELD LIABLE FOR THE ACTIONS OF A PREDECESSOR TRUSTEE?
Rule: Generally, a successor Trustee is not liable to the Beneficiary for a breach of trust committed by a predecessor Trustee.
Exception: A successor Trustee is liable for a breach of trust by a predecessor Trustee if the successor Trustee:
1) Fails to take reasonable steps to compel the predecessor Trustee to deliver the trust property to the successor Trustee,
2) Knows or reasonably should know of a breach of trust committed by the predecessor Trustee and the successor Trustee permits it to continue, OR
3) Fails to take reasonable steps to redress a breach of trust committed by the predecessor Trustee if the successor Trustee knows or reasonably should know of the breach.
TRUSTEE DUTIES:
IN THE EVENT OF BREACH, TO WHAT EXTENT MAY A TRUSTEE BE HELD LIABLE?
Rule: If a Trustee commits a breach of trust, the Trustee may be held liable for:
1) Any loss or depreciation in value of the trust estate resulting from the breach of trust plus interest,
2) Any profit made by the Trustee through the breach of trust plus interest, AND
3) Any loss of profit to the trust estate, if the loss is a result of the breach of trust.
Exception: If the Trustee has acted reasonably and in good faith, the court may excuse the Trustee in whole or in part from liability.
TRUSTEE DUTIES:
WHAT MAY A BENEFICIARY DO IF A TRUSTEE’S BREACH OF TRUST CONFERS A BENEFIT ON THE BENEFICIARY?
Rule: The Beneficiary may ratify the action and keep the profit.
TRUSTEE DUTIES:
WHAT OPTIONS MAY BE AVAILABLE TO A BENEFICIARY IN THE EVENT OF A BREACH OF TRUST?
Rule: If a Trustee commits a breach of trust, or threatens to commit a breach of trust, a Beneficiary may bring suit to:
1) Compel the Trustee to perform his duties,
2) Enjoin the Trustee from committing a breach of trust,
3) Compel the Trustee to redress the breach through payment of money,
4) Remove the Trustee,
5) Appoint a receiver to administer the trust,
6) Reduce or deny the compensation of the Trustee,
7) Impose an equitable lien or constructive trust on the trust property, AND/OR
8) Trace property that has been wrongfully disposed of and recover the property or its proceeds.
TRUSTEE DUTIES:
LIST 2 WAYS A TRUSTEE CAN BE HELD LIABLE TO A THIRD PARTY
1) Liability in Tort
2) Liability in Contract
TRUSTEE DUTIES:
LIABILITY IN TORT
(State the Rule)
Common Law: At common law, the Trustee can be sued in her personal capacity for tort actions or obligations arising out of the Trustee’s administration of the trust.
Note: The Trustee can sue for indemnification from the trust for liability incurred while acting as Trustee.
Modern Law:
1) The Trustee is personally liable for tort obligations arising from the ownership or control of trust property only if the Trustee is personally at fault.
2) The Trustee is personally liable for torts committed in the course of administration of the trust only if the Trustee is personally at fault.
TRUSTEE DUTIES:
LIABILITY IN CONTRACT
(State the Rule)
Common Law: At common law, the Trustee is personally liable for any breach of contract committed while acting in his capacity as Trustee unless the contract provides that he will be sued in his representative capacity in the case of breach.
Note: The Trustee can receive indemnification from trust assets if the Trustee was acting within his powers as Trustee and was not personally at fault.
Modern Law: If the Trustee enters the contract as the representative of the trust, a suit for breach of contract must be brought against the Trustee in his representative capacity.
STEP 5 -
PROPER ADMINISTRATION OF THE ESTATE:
TRUSTEE’S DUTIES IN ALLOCATING INCOME & EXPENSES
(State the Rule)
Rule: The Trustee must administer the trust impartially unless the trust instrument expresses intent that the Trustee can or should favor one or more Beneficiaries.
ESTATE ADMINISTRATION:
HOW SHOULD A TRUSTEE ALLOCATE INCOME & EXPENSES?
Rule: A Trustee must allocate income and expenses between Beneficiaries according to the instructions provided in the trust instrument. In the absence of instructions, the Trustee must comply with state lists, the Reasonably Prudent Person Rule, or the Prudent Investor Rule.
ESTATE ADMINISTRATION:
TO WHAT EXTENT CAN A TRUSTEE ADJUST ALLOCATION OF INCOME & EXPENSES UNDER THE UNIFORM PRUDENT INVESTOR ACT?
Rule: A Trustee may make an adjustment in allocation to the extent the Trustee considers necessary if:
1) The Trustee invests and manages trust assets under the Prudent Investor Rule,
2) The trust describes the amount that must or may be distributed to a Beneficiary by reference to the trust’s income, AND
3) The Trustee determines the adjustment is necessary to impartial administration of the estate.
ESTATE ADMINISTRATION:
WHAT INCOME & EXPENSES ARE TRADITIONALLY ALLOCATED TO THE PRESENT-INTEREST HOLDER?
Income: Generally, the present-interest holder receives:
1) Cash dividends from stocks,
2) Interest income from the principal, AND
3) Net profits from a business.
Expenses: Generally, the present-interest holder’s interest will pay:
1) Interest on loan indebtedness,
2) Taxes on the trust property, AND
3) Expenses incurred for minor repairs to the property.
ESTATE ADMINISTRATION:
WHAT INCOME & EXPENSES ARE TRADITIONALLY ALLOCATED TO THE FUTURE INTEREST HOLDER?
Income: Generally, the future-interest holder receives:
1) Stock dividends,
2) Stock splits, AND
3) Net profits from the sale of a trust asset.
Expenses: Generally, the future-interest holder’s interest will pay:
1) Principal payments on loan indebtedness, AND
2) Expenses incurred for major repairs or improvements on the property.
