Wills and Trusts Flashcards
Will Validity (Essay Heading)
A will is a written instrument that dictates how a person’s estate is to be distributed upon death. It goes into effect only upon the death of the testator. For a will to be valid there must be: 1) Present testamentary intent; and (2) Capacity. In addition, the will must comply with all the requisite formalities.
Deed (Real Property Cross over)
In order for a deed to be valid there must be: (1) a writing that satisfies the statute of frauds; (2) delivery; and (3) acceptance
Holographic Will Requirements
To be valid, a holographic will must be signed by the testator, the testator must possess testamentary intent, and the material provisions of the holographic will must be in the testator’s handwriting. Material provisions of the will consist of identifying the beneficiaries and the property to be devised.
Capacity (wills)
In California Capacity refers to the testator’s age (18 or over) and mental competence (sound mind).
Capacity - Common Law:
Be 18 or older
Understand the extent of their property
Know the natural objects of his or her bounty
Know the nature of his or her act
Present Testamentary Intent
Refers to the testator’s intent to create a will at the time the instrument is drafted.
Will Formalities / Statute of Wills
The statute of wills dictates what formalities are to be followed in order for a will to be probated. THe specific formalities required depend on what type of will is being executed. There are two types of wills, Attested and Holographic.
Attested Will
A formal or attested will is a written will that, in California, must be 1) signed by the testator and 2) signed by two competent, disinterested witnesses.
Holographic Will
A holographic will is one that is handwritten and unattested. In California a holographic will is valid if the signature and material provisions of the will are in the handwriting of the testator.
Competent Witness
One that understands that the document being signed is a will
Disinterested Witnesses
Two disinterested witnesses are required in California. An interested witness is one who is a beneficiary under the will. Traditionally, if one of the two required witnesses was interested the will could not be probated. In California, the presence of an interested witness does not invalidate the will; however, it merely creates a presumption that the witness procured the devise by fraud, duress or undue influence.
Interested Witness
If the presumption of fraud, undue influence or duress is not rebutted, the witness takes his or her intestate share.
- Be creative here!! How would you make this argument if you represented the witness? Did the witness really have a significant interest in the will? How much would s/he have gotten? Bring up any extrinsic evidence.
Charitable Trusts
Trust that confers a substantial benefit onto society
Rule of perpetuities does not apply
Creation
- Intent to form a trust
- Either through a settlors death or will, or during a testator’s lifetime by declaration of trust or transfer of trust
- Presently existing property
- For legal charitable purpose
Private Express Trusts
A fiduciary relationship with respect to assets or property whereby a trustee holds legal title for the benefit of the beneficiary.
Must be:
- Res
- Beneficiary
- Trustee
- Present intent to form a trust
Cy Pres
The settlor has a general charitable intent and only the mechanism for effectuating that intent is not practicable or possible. A court will attempt to modify the mechanism in order to effectuate this settlor’s intent.
Pour-Over Will
Transfers assets to the trust to ensure that these assets will be subject to the distribution plan in the trust and will also receive the benefit of the trust’s tax reduction provisions. * only one primary beneficiary- the testator’s living trust.
Honorary Trust
A trust that has no ascertainable beneficiary and confers no substantial benefit on society
Totten Trust
The named beneficiary takes whatever is left in a tentative bank account trust at the death of the owner of the bank account.
Spendthrift Trust
When beneficiary cannot alienate their interest such that the interests are protected from creditors unless for necessaries, alimony, child support or government creditors
In short: beneficiary cannot transfer his right to future payment and creditors cannot attach beneficiary’s right to future payments.
Beneficiary cannot transfer their right to future payments of income or principal, and creditors cannot attach rights for future payments unless for necessaries, such as alimony and child support, a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust or government creditors.
Voluntary Alienation on Spendthrift:
Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the spendthrift provisions?
Answer: No, as a general rule.
This would defeat the terms of the trust.
Þ But sometimes a court will recognize the assignment on the ground that the beneficiary merely has given the trustee a direction or order to pay the beneficiary’s agent or representative, i.e. the assignee.
→ In such case, prior to the time of payment, beneficiary would have the right to revoke the order or direction.
Involuntary Alienation on Spendthrift:
Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions?
Answer: No, as a general rule.
Common Law Exceptions:
Preferred creditors can attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions.
The key is that they are not typical creditors.
Support Trust
Trustee is required to use only so much income as is necessary for the beneficiary’s health, support, and education.
Voluntary Alienation on Support Trust:
Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the support trust provisions?
Answer: No. Why?
To allow any type of assignment would defeat the purpose of the trust and violate settlor’s intent.
Thus, beneficiary cannot transfer his right to future payments in a support trust.
Discretionary Trust
Trustee is given sole and absolute discretion in determining how much, if anything, to pay the beneficiary, if ever.
Can beneficiary ever transfer his interest, his right to future payments, notwithstanding the discretionary trust provisions?
(a) On one hand, no: Beneficiary cannot voluntarily transfer his right to future payments because, the question may be asked, what exactly is the beneficiary assigning?
The beneficiary may not get anything.
(b) But, on the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the beneficiary.
Because the beneficiary could not force payment by the trustee, neither can the assignee.
However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.
Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the discretionary trust provisions?
(a) On the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach.
The trustee may never allocate anything to the beneficiary.
The beneficiary could not force payment, and neither can the creditors.
Thus, there is nothing to attach by the creditors.
(b) On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee does decide to pay, he must pay the creditors or be held personally liable.
Resulting Trust
An implied-in-fact trust decreed by a court that is based on the presumed intent of the parties.
Trustees Duties
- Duty of Loyalty - Administer for the benefit of the beneficiaries
- Duty to Invest - See Duty to Invest Card
- Duty to Earmark - Label trust property as trust property
- Duty to Segregate - No commingling of funds
- Duty not to delegate - May rely on professionals but not delegate decision making except, modernly can delegate management of money to a professional
- Duty to Account - Provide statements of income and expenses on a regular basis
- Duty of Care - Act as a reasonable person would in dealing with their own affairs
- Duty to defend - Trustee must defend actions that may result in a loss and enforce claims that are part of the trust property.
Duty to Defend
Resulting Trust is created when:
- Private Trust Fails for lack of beneficiary.
- Private Trust fails because of illegal purpose after creation.
- Charitable Trust Ends and Cy Pres cannot be used.
Constructive Trust
A remedy to prevent fraud or unjust enrichment
Breach of Trustee Duties
Damages
Remove Trustee
Constructive Trust Remedy
Tracing and Equitable Liens
Ratify the transaction if good for the beneficiary
Constructive Trust is created when:
Trustee engages in self-dealing
Fraud/Undue Influence
Secret Trust
Oral Real Estate Trust
Secret Trust
The will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B.
Remedies of Beneficiary for Breach of Duties
- Damages.
- Constructive Trust remedy.
- Tracing and Equitable Lien on property.
- Ratify the Transaction if good for beneficiary.
- Remove Trustee.
Duty to Invest
There are three rules that courts may follow:
1) Common Law Prudent-Person Test: Must act as a reasonable person would managing their own funds. Requires examining each individual investment.
2) Uniform Prudent Investor Act (UPIA): Must invest as a “prudent investor.” Requires examining the portfolio as a whole (not each individual investment)
3) State Lists: Lists that trustees must follow in the absence of directions. Does not include investment in a new business or second deeds of trust in real estate. (Examples: Government bonds, first deeds of trust in real estate, sometimes stocks of public traded companies).
Duty to Diversify - All three rules require an investor to diversify the investments
Remedy: The trustee must recoup the loss
Modification by the Settlor
Settlor can modify the trust if he expressly reserves the power to modify or revoke.
Duty to Account Remedy
If there has been a breach of a duty to account then the beneficiary may file an action for accounting.
Modification by Court
Court’s can modify a Charitable Trust under the Cy Pres Doctrine.
Doctrine of Changed Circumstances
A court can change the administrative or management provisions of the trust, but not the beneficiaries. Unforeseen circumstances on the part of the settlor and the change must be necessary to preserve the trust.
Termination of Revocable Trust
Majority Rule
Settlor must reserve power to revoke expressly in trust instrument.
Minority Rule
Settlor has the power to revoke, unless the trust is expressly made irrevocable.
Termination of Irrevocable Trust
- Naturally
- Agreement between settlors and ALL beneficiaries
- Beneficiaries agree and material purposes have been accomplished
- By operation of law
Allocation of Trust
Unless the trust itself state otherwise, trust assets are allocated as follows:
Beneficiaries: Entitled to income from interest, cash dividends, and net business income, but must pay interest on any loan debt, taxes, or minor reports.
Remainderman: Entitled to principal from the net proceeds on the sale of an asset stock dividends, profits from the sale of stock, but must pay the principal part of the loan debt and for major repairs.
Uniform Principal and Income Act
Application of rules when a trust has Botha. life tenant and a remainder man to determine how income and expenses are calculated. Trustee can disregard these rules if doing so is necessary to allocate the trust fairly.
Uniform Principal and Income Act: Life Tenant
The life tenant gets the following income:
1. Cash Dividends
2. Interest Income
3. Net Business Income
The life tenant’s interest pays for the following expenses:
1. Interest on loan indebtedness
2. Taxes
3. Minor repairs
Uniform Principal and Income Act: Remainderman
Remainderman gets the following income:
1. Stock Dividends
2. Stock Splits
3. Net Proceeds on sale of a trust asset
Remainderman’s interest pays for the following expenses:
1. Principal part of loan indebtedness
2. Major repairs or improvements
Trustee Duties to Third Persons - Contract Liability
Common Law: A trustee can be sued personally and his or her personal assets are vulnerable to suit, but they can get indemnification from trust assets if not personally at fault.
Modernly: If the other contracting party knows that the trustee is entering into the contract in his or her representative capacity, then the trustee can only be sued in his or her representative capacity.
Trustee Duties to Third Persons - Tort Liability
Common Law: A trustee can be sued in personal capacity but if they are not at personal fault they can receive indemnification from trust assets.
Modern Law: A trustee can be sued in an individual capacity only if the trustee is personally at fault.
Trust
A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard and administer the trust assets and income for the benefit of the designated beneficiaries.
Express Trust Creation
An express trust is created with the express intention of the owner of property. An express trust is created by: 1) inter-vivos declaration that the property is to be held in trust, 2) an inter-vivos transfer of property by the settlor during his or her lifetime, or 3) by will (testamentary trust).
Valid Trust Purpose
A trust purpose is invalid if 1) it is illegal, 2) its performance requires a criminal or tortious act, or 3) it is otherwise contrary to public policy.
Modification of an Express Trust
Trusts normally terminate when the trust purpose is accomplished. Generally, once a trust is created, a settlor may not revoke or amend a trust, unless such a right is expressly reserved.
Trust potential calls of the question on the bar
Trustee’s breach of Fiduciary Duty
Distribution - Pour over, omitted spouse or child
Termination of trust
Modification and Termination by trustee
A trustee has no power to terminate the trust except as provided in the trust
Modification and Termination by beneficiary
Beneficiaries can compel modification or termination only when all beneficiaries consent and the modification or termination will not frustrate any material trust purpose (“The Claflin Doctrine”). Where the beneficiaries have a right to terminate, the settlor’s objection will not be a bar.
Abatement
Arises if an estate lacks sufficient assets to pay the decedent’s debts as well as all devises.
○ As a result some devises must be abated or reduced.
* In the absence of an indication in the will of how devises should abate, devises ordinarily abate in the following order:
○ 1. Residuary devises are reduced first
○ 2. General devises are reduced second
○ 3. Specific and demonstrative devices are the last to abate and are reduced pro rata.
The plan is believed to follow testator’s intent. the order of abatement is based on classification of the gifts
Substantial Compliance (will formalities)
In California if a testator died BEFORE 2009 then a court will still admit a will into probate even though the formalities were not completely followed if there was substantial compliance with the Statute of Wills.
Clear and Convincing Evidence (will formalities)
In California if a testator died AFTER 2009 then a court will still admit a will into probate even though the formalities were not completely followed if there was clear and convincing evidence to prove any or all of the missing elements.
Lapse
The Uniform Probate Code recognizes that “under the rule of lapse, all devises are automatically and by law conditioned on survivorship of the testator.” When a beneficiary fails to survive the testator by 120 hours, or 5 days, the gift lapses and fails, becoming part of the residuary estate.
Anti-lapse
Anti-lapse prevents a testamentary gift from lapsing by presuming that the testator intended for the beneficiary and his or her relatives to enjoy the benefit of the gift. However, the beneficiary must be a relative of the testator: a grandparent, a descendant of a grandparent, or a stepchild. If so, then a substitute beneficiary takes the gift. For instance, a lapsing gift is saved by anti-lapse if the beneficiary is Tom’s daughter, but not if the beneficiary is Tom’s friend.
Under anti-lapse, the surviving descendants of the beneficiary take the individual gift, per capita at each generation. Remember that this method of distribution means that each member of a generation receives an equal share of the property
Anti-lapse
Anti-lapse prevents a testamentary gift from lapsing by presuming that the testator intended for the beneficiary and his or her relatives to enjoy the benefit of the gift. However, the beneficiary must be a relative of the testator: a grandparent, a descendant of a grandparent, or a stepchild. If so, then a substitute beneficiary takes the gift. For instance, a lapsing gift is saved by anti-lapse if the beneficiary is Tom’s daughter, but not if the beneficiary is Tom’s friend.
Under anti-lapse, the surviving descendants of the beneficiary take the individual gift, per capita at each generation. Remember that this method of distribution means that each member of a generation receives an equal share of the property
