Trusts MEE Flashcards
Trust Requirements
A. Grantor/settlor—the creator of a trust (may also be trustee and/or beneficiary)
B. Intent to create a trust
C. Trustee—holds legal interest or title to the trust property; a court will appoint a trustee if the settlor fails to designate one or more or if the trustee dies
D. Ascertainable beneficiary—holds equitable title to the trust property; a beneficiary must impliedly or expressly accept his interest
E. Trust assets—cash, securities, real estate, or life insurance policies
Private express trust
clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries
Elements of private express trust
- Intent
o Rule—a settlor with capacity may manifest the present intent to transfer to trustee who has duties to perform for the benefit of one or more ascertainable beneficiaries for a valid purpose; manifestation of intent must occur prior to or simultaneously with the transfer of property (use of common trust terms will create a presumption of intent); no consideration required
o Precatory trust (expresses a hope or wish that the property transferred be used for the benefit of another rather than creating a legal obligation)—must contain specific instructions to a fiduciary, and must be shown that absent imposition of a trust, there would be an unnatural disposition of the donor’s property because of familial relations or history of support between donor and intended beneficiary - Trust property
o A trust must be funded with identifiable trust property (res), but if a trust that is invalid for lack of assets is later funded, a trust arises if the settlor re-manifests the intent to create a trust
o Trust property must be identifiable and segregated, and it must be described with reasonable certainty - Valid trust purpose—a trust can be created for any purpose as long as it is not illegal or contrary to public policy and possible to achieve, and is for the benefit of its beneficiaries; if one of several trust terms violates public policy, alternative terms will be honored, or, if none, the term will be stricken; but the trust will not fail unless removal of the term is fatal
- Ascertainable beneficiaries
o Rule—beneficiaries must be identifiable by name so that the equitable interest can be transferred automatically by operation of law and directly benefit the person; the settlor may refer to acts of independent significance to identify the beneficiaries
o Exceptions—trusts for the benefit of unborn children or to a reasonably definite class will be upheld, and charitable trusts (trusts that exist for the good of the public at large) do not need individual ascertainable beneficiaries
Types of private express trusts
- Inter vivos
o Rule
Delivery—must accompany the declaration of trust if a third-party trustee is named, whereby the settlor parts with dominion and control over the trust property
Writing—required only for real property; a court will impose a constructive trust when a writing is lacking
Parol evidence—evidence outside of the written agreement is permitted to show the settlor’s intent only if the written agreement is ambiguous on its face
o Pour-over trust—a provision in a will that directs the distribution of property to a trust upon the happening of an event, even if the trust instrument was not executed in accordance with the Statute of Wills, as long as the trust is identified in the will and its terms are set forth in a written instrument
o Totten trust—a designation given to a bank account in a depositor’s name as trustee for a named beneficiary (no separation of legal and equitable title); can be revoked by any lifetime act manifesting the depositor’s intent to revoke, or by will
o Life-insurance trust—proceeds go to trust upon insured’s death; trust is owner of policy and trust is irrevocable
o Living trust—typically settlor names himself trustee until death; settlor can change successor trustee and beneficiaries until death; trust property not protected from creditors or federal estate taxation - Testamentary
o Definition—occurs when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will
o “Secret” trust—looks like a testamentary gift, but is created in reliance on the named beneficiary’s promise to hold and administer the property for another (a constructive trust is imposed on the property for the intended beneficiary) o “Semi-secret” trust—occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust (a resulting trust is imposed on the property to be held for the testator’s heirs)
o Modern trend—impose a constructive trust in favor of the intended beneficiaries (if known) in both secret and semi-secret trusts
Charitable Trusts
- Purpose—relief of poverty, advancement of education or religion, good health, governmental purposes, and other purposes benefiting the community at large
- Indefinite beneficiaries—the beneficiaries must be the community at large (directly or indirectly)
- Rule against perpetuities—exempt; may continue indefinitely
- Cy pres doctrine—a court may modify a charitable trust to seek an alternative charitable purpose if the original one becomes illegal, impracticable, or impossible to perform
- Honorary trusts—no private beneficiaries (usually for pet or noncharitable purpose)
Remedial Trusts
(equitable remedy not subject to trust requirements)
A. Resulting trust
1. Purpose—when a trust fails, a court creates a resulting trust requiring the holder of the property to return it to the settlor or his estate to prevent unjust enrichment
2. When imposed—purchase-money resulting trust, failure of express trust, or incomplete disposition of trust assets due to excess corpus
B. Constructive trust—imposed when the court concludes that the person holding title to the property would profit by a wrong or be unjustly enriched; wrongful conduct is required
C. Gift-over clause—provides for the disposition of trust property if trust purpose fails
Beneficiary/Creditor Rights to Distribution
A. Alienation—a beneficiary’s equitable interest in trust property is freely alienable unless a statute or trust instrument limits this right
B. Support trust—directs the trustee to pay income or principal as necessary to support the trust beneficiary and maintain lifestyle; creditors cannot reach these assets unless providing a necessity to the beneficiary (trustee can pay directly)
C. Discretionary trust—the trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary; creditors have the same rights as a beneficiary if the trustee exercises discretion to pay
D. Mandatory trust—the trustee has no discretion; the trust document explains in detail how and when trust property is to be distributed
E. Spendthrift trust—expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest; creditors usually cannot reach the trust interest if the governing instrument contains a spendthrift clause (unless for child or spousal support, tax lien holders, and sometimes basic necessities providers.)
Revocable trusts-by settlor
- Presumption of revocability—a revocable trust can be terminated by the settlor at any time, and an irrevocable trust usually cannot be terminated
* Majority/UTC rule—a trust is presumed to be revocable unless it expressly states otherwise
* Minority rule—a trust is presumed to be irrevocable unless it expressly states otherwise - Method of revocation—settlor may amend or revoke according to trust terms, or if silent, by manifesting clear & convincing evidence of intent (e.g., will/codicil)
- Multiple settlors—ability of one settlor to amend/revoke turns on whether the trust contains community property
- Distribution of trust property upon revocation—trustee must deliver trust property as settlor directs
- Trustee’s lack of knowledge of revocation—a trustee who does not know that a trust has been revoked or amended is not liable for distributions or other actions
Automatic termination
—trust terminates if it is revoked or expires pursuant to its terms, no trust purpose remains, or the purpose has become unlawful, contrary to public policy, or impossible
Noncharitable irrevocable trust
modification or termination by agreement
- Solely by all beneficiaries, no material purpose violation—trust can be terminated/modified by consent of all beneficiaries if continuance is not necessary to achieve any material purpose or that modification is not inconsistent with material purpose
- All beneficiaries and settlor, material purpose violation—if all beneficiaries and settlor agree, an irrevocable trust may be modified/terminated even if inconsistent with material purpose
- Distribution of trust property upon revocation—trustee must deliver trust property as settlor directs
Judicial modification, reformation, or termination
court may modify/terminate a trust without seeking beneficiary consent (i) due to unanticipated circumstances or an inability to manage the trust effectively, or if the trust is uneconomic; or (ii) to correct mistakes or achieve the settlor’s tax objectives
Combination and division of trusts
—trustee may combine or divide trusts after notice to beneficiaries
Revocation of former spouse’s trust interest by divorce
the current trend is to treat a spousal interest under a trust similarly to one under a will
Principal and income allocations
—life beneficiaries entitle to trust income and remaindermen entitled to trust principal
A. Allocating principal/income—allocation must be balanced so as to treat present and future trust beneficiaries fairly unless otherwise authorized
* UPAIA—trustee can re-categorize and reallocate as necessary to fulfill trust purpose
* Stock distribution—treated as the distribution of principal whether classified as a dividend or a split
B. Allocation of receipts—generally amount received in exchange for trust property is allocated to principal; amount received for use of trust property is income
C. Allocation of expenses—one-half of the trustee’s compensation and one-half of accounting and other costs is charged to income; the remaining one-half of those expenses is charged to principal
Trust Powers
- Rule—the trustee has the powers necessary to act as a reasonably prudent person in managing the trust (e.g., revoke, withdraw, or modify), including the implied power to contract, sell, lease, or transfer the trust property
- Third parties—must act in good faith and give valuable consideration; they are not liable if they act without actual knowledge that such action constitutes a breach of trust
