Types of Trusts

Question 1

What are the types of trusts and trust-like alternatives?

Answer 1

1) Lifetime (inter vivos) trust: trust created during settler’s lifetime. Can be revocable ONLY IF expressly stated in trust instrument
2) Testamentary trust: a trust that is created by will Gifts made in a will to an existing revocable trust is OK (A “Pour-Over” Gift)
3) Charitable trust: an indefinite life trust for a reasonably large group of beneficiaries

4) Totten trust: a bank account in the depositor’s name “as trustee” for the named beneficiary

5) Joint bank account: a joint account with right of survivorship (NOT a Totten trust)
6) NY Uniform Transfers to Minors Act (UTMA): holds property in trust for a minor, supporting the minor and desolving at age 21

Question 2

What are the non-trusts?

Answer 2

1) Honorary trust: no human being is the beneficiary in a non-charitable trust
2) Constructive trust: designed to disgorge unjust enrichment
3) Purchase money resulting trust (PMRT): results when a purchaser buys property in someone else’s name & expects a later takeback, which is disputed NOT recognized in NY

Question 3

When is a lifetime trust revocable?

Answer 3

General rule: ALL trusts are PRESUMED to be irrevocable, UNLESS the trust explicitly authorizes revocation

Requirement for revocable lifetime (inter vivos) trust =at least 1 beneficiary who is NOT the settler

** To be clear: Settlor’s estate CAN be one of the benefiicaries of the pricnipal so long as there is at least 1 other

Question 4

What roles can a settlor play in a revocablelifetime trust?

Answer 4

1) Settlor can be a trustee
2) Settlor can be an income beneficiary
3) Settlor’s estate can be ONE of the beneficiaries of the principal SO LONG AS there is at least 1 other beneficiary
4) Settlor can retain the power to TERMINATE or AMEND the trust

Question 5

What are good reasons for having a lifetime trust be revocable?

Answer 5

1) Manages assets efficiently (can use a professional trustee)
2) Helps plan for a possible incapacity by avoiding a guardianship proceeding by the court
3) Avoids probate

NOT GOOD reasons…

1) Does NOT avoid taxes
2) If settlor keeps an interest income, or keeps a power to revoke, then the FULL trust assets will be included in the settlor’s gross estate for federal estate tax purposes

Question 6

What is a pour-over gift?

Answer 6

A testimentary gift (made in a will) to

(i) an EXISTING revocable trust; OR 
(ii) a trust executed CONCURRENTLY with the will			 * * Trusts can be changed during the lifetime of the settlor in ways that are somewhat easier than changing a will

** Pour over is not limited to trusts created by the settlor, BUT it can be to ANY existing trust (including those executed by other persons)

** Pour-over gifts are valid EVEN IF the trust was unfunded, or only partially funded, during the settlor’s lifetime

Life insurance proceeds:

** Insured can create an unfunded recovable insurance trust AND name the trustee of the trust as the insurance policy beneficiary

** Insured can setup a testamentary trust and have the life insurance policy contract name “the trustee in my will” as the life insurance policy beneficiary

** Proceeds from saving accounts or pension plans: can be handled like insurance

Question 7

What is a Totten Trust?

Answer 7

A trust-like alternative, which is a bank account in the depositor’s name “as trustee for” a named beneficiary

No particular words are required to create a Totten Trust account (ITF is sufficient)

Depositor makes deposits and withdrawals as he wishes during the depositor’s lifetime (NO restrictions)

Beneficiary has NO beneficial interest during the depositor’s lifetime, BUT get whatever is in the account when the depositor dies

Question 8

How can aTotten Trust be revoked?

Answer 8

1) Withdraw all the $$ in the account
2) Express revocation during lifetime by:
(i) a writing naming the beneficiary + the bank;
(ii) notorizing the writing; AND
(iii) delivering it to the bank
3) Revocation in a will (MUST comply with the same requirements for revocation during lifetime, above)
4) Death of the beneficiary (money goes free/clear to depositor)

Question 9

How can a Totten Trust depositor change the beneficiary?

Answer 9

Same method as express revocation:

1) Notorized statement;
2) Delivered to the bank; AND
3) Naming the OLD beneficiary and the NEW beneficary

Question 10

Are the depositor’screditors allowed to access the $$ in a Totten Trust account?

Answer 10

YUP!

Creditors of the depositor can ALWAYS reach the Totten Trust account balance EITHER before OR after the depositor’s death

Question 11

What is a joint bank account?

Answer 11

An accountwith the right of survivorship created by SPECIFIC WORDS of survivorship (NOTE: this is NOT a Totten Trust)

Each joint acct holder owns 1/2 of the account, NO MATTER who deposits the money (i.e. if ONE person makes 100% of the deposits, it’s considered a gift of 1/2 to the other party)

** Account is irrevocable to the extent the right of survivorship remains in tact

** If one of the parties dies, a creditor would need CLEAR and CONVINCING evidence that survivorship was NOT intended by the parties (very hard req to satisfy)

** Withdrawal of more than 1/2 by a depositor without the other’s consent destroys the right of survivorship, and the other is entitled to restitution

Question 12

What is the Uniform Transfers to Minors Act (UTMA)?

Answer 12

The UTMA allows giftsto benefit minors and transfer principal once they turn 21 (or 18 for pre-1997 gifts)

** UMTA gifts are NOT part of a trust!

Avoids:guardianship proceedings, the trust structure and court supervision of a trust

Gifts under UTMA are made to a CUSTODIAN (although legal title remains with minor) AND it MUST specify that it is made under the NY UTMA

UTMA gifts CAN be in a will so long as the statutory language (above) is made

Tax considerations:

1) Qualifies for the $14k per donee annual exclusion from federal and state gift tax
2) If the donor names himself as custodian, then the amountt of the gift is includible in the custodian’s gross estate for federal/state tax purposes (BUT if he names someone else, then it’s NOT included as a part of the estate)

Question 13

What are the duties of the custodian under the UMTA?

Answer 13

1) Hold, manage and invest property under a “prudent person” standard
2) Pay over to the minor to provide for needs whatever the custodian deems advisable
3) Pay residual balance of property to the minor when he turns 21 (OR 18 for pre-1997 gifts)

Question 14

What are the key aspects of charitable trusts?

Answer 14

1) Charitable trusts must have INDEFINITE beneficiaries, and they must be a reasonable LARGE group

• • CANNOT have specific, named persons as beneficiaries
• • CAN have a trust for Masses for relatives

2) Charitable trusts must be for a CHARITABLE purpose Health, education, and religion

** Cy Pres doctrine can be used to change the trust If the stated purpose can no longer be accomplished, the court may use its pwr to make the trust “as near as possible” to what the settlor wanted

3) Charitable trusts MAY be PERPETUAL

**They are NOT subject to the Rule Against Perpetuities (carveout)

4) The Attorney General (AG) has the duty of representing the beneficiaries of charitable trusts in the state

** AG is an indispensable party to any suit on construction or enforcement

** AG and the donor have proper standing to sue to enforce the trust’s terms

Question 15

What is an honorary trust?

Answer 15

An “honorary” trust is a non-trust that is NOT for charitable purposes and has no individual beneficiaries (e.g. $1k to Fred as trustee, “to use the trust income to maintain my rose garden”)

An attempt to put money into an “honorary” trust leads to the funds being included in the residuary estate (i.e. whatever remains in the probate estate after the pmt of specifcially designated gifts of items or cash)

NOTE: A private trust normally must have a human being as beneficiary;EXCEPT…

** Pet Trusts: a valid pet trust can last for no longer than the duration of the pet’s lifetime. Someone designated in the will, or appointed by the court, can enforce the trust and make sure the trust’s purposes are carried out

** Ceremony Trusts: for the perpetual care and maintenance of ceremonies and burial plots (classified as charitable trusts to avoid RAP even tho no human beneficiaries)

Question 16

What is a constructive trust?

Answer 16

An equitable remedy imposed in cases involving fraud/unconsionable conduct and unjust enrichment

The sole role of the constructive trustee is to transfer title and possession of the property to the person who would have owned it but for the wrongful conduct

Unjust enrichment =

(i) beneficiary kills the testator;
(ii) a beneficiary suppresses a later will; OR 
(iii) a promise to keep a life insurance policy in force is breached

Question 17

What is a purchase money resulting trust (PMRT)?

Answer 17

PMRT arises when a purchaser buys property and has the title put in someone else’s name (who is NOT a relative); later, the purchaser claims NO GIFT was intended and asks title holder for title to the property (who THEN refuses)

The PMRT would then allow the purchaser to compel the title holder to give up title

NOTE: This form of resulting trust DOES NOT EXIST IN NEW YORK

** EXCEPTION: if there is clear and convincing evidence that the grantee EXPRESSLY or IMPLIEDLY promised to reconvey the land to the purchaser, then a CONSTRUCTIVE trust can be imposed to benefit the purchase

Question 18

What is the NY statutory spendthrift rule?

Answer 18

Protects a trust beneficiary’s interest from creditors by prohibiting VOLUNTARY or INVOLUNTARY transfer of the beneficiary’s interest

** AUTOMATIC attachment (even without an express clause): NY protects all INCOME interests in trusts with spendthrift protection EVEN IF the trust instrument does not contain a spendthrift clause

** The spendthrift rule does NOT apply to PRINCIPAL interests

** To provide spendthrift protection to the remainder beneficiary (i.e. the one who gets the principal), the spendthrift clause must be EXPRESSLY state so in the trust

Question 19

What is typical spendthrift clause language?

Answer 19

“No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary’s creditors by attachment, garnishment, or other legal process”

Question 20

What are the major exceptions to spendthrift clause protection from creditors?

Answer 20

Creditors CAN go after trust assets in certain circumstances…

1) Creditors who furnish necessities
2) Child support and alimony
3) FEDERAL tax liens
4) Excess income beyond that needed for support and education

** A last resort remedy; have to show all OTHER possible remedies have been exhausted

** What’s needed for support is based on the lifestyle of the beneficary (i.e. very subjective)

5) The 10% levy provided by the CPLR

** ALL creditors together share the levy; this is NOT 10% per creditor

Question 21

What is the Self-Settled Trust Rule?

Answer 21

Principle: spendthrift protection does NOT apply to any interest retained by the settlor

** Settlor(s) cannot hide out from their own creditors, but they CAN protect other beneficiaries

** ALL revocable trusts have NO protection from creditors EVEN IF the settlor has no immediate financial interest in the trust