Wills and Trusts Flashcards
Elements of an Express Trust (5)
1) SETTLOR with capacity to convey;
2) PRESENT INTENT to create a trust relationship;
3) Competent TRUSTEE with duties;
4) Definite BENEFICIARY; and
5) Same person is not the SOLE beneficiary
Also must be a PRESENT DISPOSITION in trust of SPECIFIC PROPERTY then owned by the settlor, and the trust must have a VALID TRUST PURPOSE
Consideration ≠ required
p. 1 of Trusts CMR
What law governs express trusts?
Uniform Trust Code (“UTC”)
SC has adopted
p. 1 of Trusts CMR
Settlor Must Have Capacity (What is required?)
One of five requirements for an express trust
Capacity requirement to create REVOCABLE or testamentary trust = same capacity required for making a will
Settlor’s lack of legal capacity to convey = NO trust
Undue influence, fraud, or duress = trust UNENFORCEABLE
For an IRREVOCABLE trust, settlor must have LEGAL POWER to convey the trust property
p. 1 of Trusts CMR
Present Intention to Create a Trust
One of five requirements for an express trust
Intent = ESSENTIAL to existence of express trust
Manifested by WRITTEN or SPOKEN words, or by CONDUCT OF SETTLOR - unless S.o.W. or S.o.F. apply
ORAL trust of PERSONAL property = VALID
DELIVERY of deed to trustee = SUFFICIENT
COMMUNICATION OF INTENT to beneficiaries ≠ necessary
p. 1 of Trusts CMR
Statute of Wills (S.o.W.)
Statute of Wills Requirements
1) Will must be in WRITING;
2) SIGNED by TESTATOR (the person making the will); and
3) WITNESSED by at least TWO other persons.
UPC carries forward the two witness requirement, except that a document is valid as a HOLOGRAPHIC WILL, whether or not witnessed, IF the SIGNATURE and MATERIAL PORTIONS of the document are in the TESTATOR’S HANDWRITING
Holographic Wills
ENTIRELY in testator’s HANDWRITING and has NO ATTESTING WITNESSES
MUST contain testator’s signature; NOT required to be at bottom of the will
Nickname, first name, even initials = signature
GIVES EFFECT to handwritten changes made by testator AFTER will is completed
If regular will meets all requirements EXCEPT two witnesses MAY be a holographic will, IF the SIGNATURE and MATERIAL PORTIONS of the document are in the TESTATOR’S HANDWRITING (and jurisdiction allows)
NOT GIVEN EFFECT: interlineations, changes in beneficiaries, amounts, etc. made AFTER the execution of an ATTESTED will - may work as a REVOCATION
Note - Watch for a fact pattern, HOWEVER, with these changes made to an [attested will] in a jurisdiction that [recognizes holographic wills.] If requirements met, OFTEN these changes = valid holographic CODICIL
p. 8 of Wills CMR
Interlineation
Legal term that signifies writing has been inserted between earlier language
It is commonly used to indicate the insertion of new language between previous sentences in a contract
Changes in beneficiaries, interlineations, amounts, etc. AFTER EXECUTION of an [attested will] in a jurisdiction that recognizes holographic wills, where other requirements are met = ?
Given effect as a [valid holographic CODICIL]
p. 8 of Wills CMR
Changes in beneficiaries, interlineations, amounts, etc. AFTER EXECUTION of an [attested will] in a jurisdiction that does not recognize holographic wills, where other requirements are met = ?
Not usually given effect
May work as a REVOCATION
p. 8 of Wills CMR
Statute of Frauds (S.o.F.)
“MY LEGS”
Requirement that certain kinds of Ks be memorialized in
(i) WRITING,
(ii) SIGNED by the party to be CHARGED,
(iii) with SUFFICIENT CONTENT to evidence the K
Required for Ks:
- In consideration of MARRIAGE
- Cannot be performed within one YEAR
- Transfer of an interest in LAND
- EXECUTOR of a will to pay a debt of the estate with his own money.
- Sale of GOODS totaling $500.00 or more.
- One party becomes a SURETY (acts as guarantor) for another party’s debt or other obligation
“MY LEGS”
Ks of indefinite duration do not fall under S.o.F., regardless of how long the performance actually takes
Present Intention to Create a Trust - Timing
Must be externally manifested while SETTLOR OWNS property and PRIOR to conveyance
(Evidence of conduct subsequent to conveyance may be evidence of earlier incident)
Settlor’s intent must be that the trust take effect IMMEDIATELY, not at some future time
(Future interest can be trust property)
p. 1 of Trusts CMR
Precatory Expressions
Expressions of a HOPE, wish, or mere suggestion that the property by used in a certain way
DOES NOT CREATE A TRUST
UNLESS -
1) DEFINITE and PRECISE directions;
2) Directions addressed to a FIDUCIARY (e.g.: executor under a will);
3) A resulting “UNNATURAL” DISPOSITION of property (e.g.: close relative will otherwise take nothing) if no trust imposed; OR
4) Extrinsic evidence showing that the settlor PREVIOUSLY SUPPORTED the intended beneficiary
p. 1 of Trusts CMR
Trustee - Appointment
Established trust ≠ fail because trustee dies, refuses to accept appointment, or resigns
Ct. will appoint successor trustee, UNLESS clear that settlor only wanted the trust to continue if that particular trustee served
Absence of a trustee may cause ATTEMPTED INTER VIVOS TRUST to fail for LACK OF DELIVERY
p. 2 of Trusts CMR
Acceptance of Trusteeship
Person accepts by:
(i) SUBSTANTIALLY COMPLYING with the acceptance terms in the trust instrument; or
(ii) ACCEPTING delivery of trust property, EXERCISING POWERS or PERFORMING DUTIES as trustee, or INDICATING acceptance
Person designated to serve as trustee may still preserve trust property WITHOUT accepting trusteeship, provided he sends NOTICE OF REJECTION to the settlor or a qualified beneficiary
Trusteeship NOT accepted within a REASONABLE TIME, presumed to be REJECTED
p. 2 of Trusts CMR
Trustee Must Have Duties
Settlor must INTEND to impose enforceable duties on the trustee
Duties not spelled out in trust instrument ➝ Ct. implies duties if there is INTENTION to create a trust, a RES, and an identified BENEFICIARY
p. 2 of Trusts CMR
Qualifications of Trustee
Anyone who has (i) CAPACITY TO ACQUIRE AND HOLD property for HIS OWN benefit, and has (ii) CAPACITY TO ADMINISTER the trust may be a trustee
Minors and insane persons can HOLD property, but CANNOT administer
State statutes limit the right of some persons or corporations to serve as trustee (e.g.: foreign corporations)
p. 2 of Trusts CMR
Compensation and Reimbursement of Trustee
Trustee is entitled to REASONABLE compensation or to compensation SPECIFIED in the TRUST instrument
Also entitled to REIMBURSEMENT for expenses incurred in [trust’s administration] and any other expenses that resulted in a [benefit to the trust]
p. 2 of Trusts CMR
Removal of Trustee - Who Can Remove
(i) Ct. can remove a trustee on its OWN motion, or upon REQUEST by the (ii) SETTLOR, (iii) a BENEFICIARY, or (iv) a CO-TRUSTEE
p. 2 of Trusts CMR
Disclaimer or Resignation by Trustee
BEFORE acceptance, a trustee can disclaim or refuse appointment for ANY reason
Trustee CANNOT accept a trust in part and disclaim it in part
p. 2 of Trusts CMR
Successor Trustees
Successor trustee succeeds to ALL of the RIGHTS, POWERS, and PRIVILEGES of the original trustee, and ALL of the original trustee’s DUTIES, LIABILITIES, and RESPONSIBILITIES
p. 3 of Trusts CMR
Merger of Title Where Sole Trustee is Also Sole Beneficiary
Sole Trustee = Sole Beneficiary
Same individual and hold the same interests ∴
titles MERGE ➝ trust TERMINATES
p. 3 of Trusts CMR
Res
Legal term for PROPERTY
Required element for a trust; trust w/o res FAILS
Removal of Trustee - Grounds for Removal (4)
Grounds for removal of a trustee include:
1) A serious BREACH OF TRUST;
2) LACK OF COOPERATION among co-trustees;
3) UNFITNESS, UNWILLINGNESS, or PERSISTENT FAILURE to administer; or
4) A SUBSTANTIAL CHANGE IN CIRCUMSTANCES
Basic factor considered ➝ continuation in office detrimental to trust?
p. 2 of Trusts CMR
Removal of Trustee - What is Considered?
Basic factor considered = whether continuation in office would be DETRIMENTAL to the trust
p. 2 of Trusts CMR
Relation Back of Acceptance of Trusteeship
Testamentary trust is treated in existence as of SETTLOR’S DEATH and trustee’s acceptance “relates back” to THAT DATE
∴ possible for trustee, by accepting, to become LIABLE (in his fiduciary capacity) on TORT CLAIMS arising PRIOR to the time he accepted
p. 2 of Trusts CMR
Resignation by Trustee
Once appointment ACCEPTED, trustee can resign by either:
1) Giving 30 DAYS NOTICE to the qualified beneficiaries, settlor (if living), and co-trustees; OR
2) Obtaining COURT APPROVAL
p. 2-3 of Trusts CMR
Beneficiaries
Trust cannot exist w/o someone to enforce
∴ beneficiary NECESSARY to the validity of EVERY trust, EXCEPT charitable and honorary trusts
p. 3 of Trusts CMR
Qualified Beneficiary
Beneficiary who, on the date the beneficiary’s qualification is determined, is:(i) a CURRENT BENEFICIARY, or (ii) a FIRST-LINE REMAINDERMAN
p. 3 of Trusts CMR
First-Line Remainderman
One who would BECOME ELIGIBLE to receive distributions IF the EVENT triggering the TERMINATION of a BENEFICIARY’S INTEREST, or of the TRUST itself, OCCURS ON THE QUALIFICATION DATE
p. 3 of Trusts CMR
Beneficiaries - Capacity
Any person, natural or artificial, capable of TAKING and HOLDING title to property can be the beneficiary of a private trust
p. 3 of Trusts CMR
Incidental and Indirect Beneficiaries
Trust must operate DIRECTLY to the BENEFIT of the person to be a beneficiary
∴ not everyone who benefits from the trust is a beneficiary (e.g.: attorney designated by trust instrument ≠ beneficiary)
p. 3 of Trusts CMR
Notice to and Acceptance by Beneficiary
Notice to beneficiary NOT essential to validity of trust
Acceptance by beneficiary is REQUIRED; can take place AFTER valid trust created
Acceptance may be EXPRESS or IMPLIED, and is generally PRESUMED
(Lack of notice may indicate no trust intended)
p. 3 of Trusts CMR
Disclaimer by Beneficiary
Beneficiary MAY DISCLAIM an interest by FILING a WRITTEN INSTRUMENT with the trustee (or, trust created by will involved, w/ the probate ct.)
Valid disclaimer made ➝ trust read as though disclaimant was deceased as of the relevant date
No one can be compelled to accept interest in a trust against her will
p. 3 of Trusts CMR
Disclaimer by Beneficiary - Timing
Require disclaimer to be made WITHIN 9 MONTHS of interest’s CREATION (also relevant period for federal gift tax purposes)
Beneficiary under 21? Time limit does not apply
Disclaimer timely made if WITHIN 9 MONTHS AFTER beneficiary attains age 21
p. 3 of Trusts CMR
Disclaimer by Beneficiary - Where to File
Beneficiary may disclaim (i) an interest by filing with the TRUSTEE or, (ii) if a trust created by a [will] is involved, with the PROBATE COURT
p. 3 of Trusts CMR
Disclaimer by Beneficiary - Estoppel
Beneficiary may be estopped from making a disclaimer IF she has EXERCISED any dominion or control over the interest, or ACCEPTED any benefits under the trust
p. 4 of Trusts CMR
Disclaimer by Beneficiary - Disclaimant’s Creditors
Disclaimer relates back to the DATE OF THE TRANSFER for ALL purposes
Disclaimer by INSOLVENT BENEFICIARY can be used to DEFEAT CREDITOR’S CLAIMS, but NOT a FEDERAL TAX LIEN
p. 4 of Trusts CMR
Beneficiaries - Anti-Lapse Statutes
Most states ➝ only applies to wills; come into play ONLY if will beneficiary within certain degree of relationship PREDECEASES the testator
UPC ➝ applies to FUTURE INTERESTS created in trusts - even to future interests EXPRESSLY made contingent on SURVIVAL - UNLESS the trust makes an ALTERNATE gift in case of a beneficiary’s nonsurvivial
p. 4 of Trusts CMR
Beneficiaries - Effect of Divorce
Final decree of divorce or annulment REVOKES ALL beneficial gifts and fiduciary appointments IN FAVOR of a former spouse
UPC ➝ extended “Divorce Revokes” Rule to ALL revocable dispositions, including revocable trusts and designation of a former spouse as AGENT under a DURABLE POWER OF ATTORNEY
Governing instrument read AS IF former spouse (and his relatives) DECEASED
p. 4 of Trusts CMR
Definiteness of Beneficiaries Under Private Trust
Must have DEFINITE beneficiaries in order to have a PRIVATE trust
NOT required for CHARITABLE trusts
p. 4 of Trusts CMR
Resulting Trust Remedy for Lack of Beneficiary
Trust fails for LACK OF BENEFICIARY ➝ resulting trust IN FAVOR of the SETTLOR or his successors is PRESUMED
p. 4 of Trusts CMR
Definiteness of Unascertained Beneficiaries Under Private Trust
Beneficiaries may be “DEFINITE” even though not yet ascertained (e.g.: unborn beneficiaries)
Beneficiaries MUST be ASCERTAINABLE by the TIME their interests come into enjoyment
p. 4 of Trusts CMR
Definiteness of Class Gifts Under Private Trust
CL ➝ Private trust exists for benefit of a class, class must be REASONABLY DEFINITE
As long as class reasonably definite, trust MAY AUTHORIZE trustee to exercise his DISCRETION in selecting members to be benefited, or may provide that only those who meet certain requirements will benefit (Broad power to choose beneficiaries may constitute a GIFT or POWER OF APPOINTMENT rather than a trust)
UTC ➝ Settlor MAY EMPOWER the trustee to SELECT the beneficiaries from an INDEFINITE class Failure to exercise power ➝ resulting trust IN FAVOR of the SETTLOR or his successors
p. 4 of Trusts CMR
No Res?
No res = no trust
No trust property, trust FAILS because trustee has no property to manage
p. 5 of Trusts CMR
Trust Property Must Be Existing Interest in Existing Property
Future interest MAY be held in trust, but an interest not yet in LEGAL EXISTENCE (i.e.: mere expectancy) CANNOT be held in trust
Future PROFITS from an existing K can be a trust res
p. 5 of Trusts CMR
Property that Settlor Has Power to Convey Can Be Subject of Trust
Trust res must be EXISTING PROPERTY that the settlor has the POWER TO CONVEY, including INTANGIBLES in which the settlor has an ASSIGNABLE INTEREST (e.g.: promissory notes)
p. 5 of Trusts CMR
Trust Res Must Be Segregated from Other Property
Res MUST be IDENTIFIABLE and SEGREGATED
Res MAY be a FRACTIONAL or UNDIVIDED interest in specific property
p. 5 of Trusts CMR
Debtor Cannot Hold Own Debt in Trust
Debtor CANNOT hold his OWN debt in trust
The debtor CAN declare himself TRUSTEE of particular PROPERTY from which the debt is to be paid
The debt can be held in trust by ANOTHER PERSON
p. 5 of Trusts CMR
Invalid Trust Purposes (4)
Trust purpose is invalid if it is:
(i) Illegal;
(ii) Contrary to public policy (e.g.: encourages immorality);
(iii) Impossible to achieve; or
(iv) Intended to defraud the settlor’s creditors or based on illegal consideration
p. 5 of Trusts CMR
Invalid Trust Purposes - Acts Contrary to Public Policy
Public policy violated if purpose of trust is to:
(i) Induce others to engage in criminal or tortious acts;
(ii) Encourage immorality; or
(iii) Induce a person to neglect parental, familial, or civic duties
If condition attached to an interest is against public policy:
1) The settlor’s ALTERNATIVE DESIRE controls, if expressed
2) If the illegal condition is a condition SUBSEQUENT, the condition is invalidated, but the TRUST IS VALID
3) If the illegal condition is a condition PRECEDENT, hold interest VALID, unless evidence that settlor’s wish would be to VOID the beneficiary’s interest altogether if the condition is unenforceable
p. 5 of Trusts CMR
Rule Against Perpetuities - Trust Purposes
CL Rule Against Perpetuities (RAP) ➝ Nonvested property interest INVALID unless it is CERTAIN TO VEST or FAIL no later than 21 YEARS after the death of a person WHO IS ALIVE when it is created
Most states ➝ “Wait-and-See” Approach, or an alternative 90-year vesting period that would save the interest
p. 6 of Trusts CMR
Unenforceable Gratuitous Promise Cannot Be Trust Res
Unenforceable gratuitous promise CANNOT be subject of a trust
p. 5 of Trusts CMR
Wait-and-See Approach
The Rule Against Perpetuities (RAP) DOES affect an estate or interest in property UNLESS AND UNTIL it becomes CERTAIN that the estate or interest WILL NOT VEST WITHIN THE PERPETUITIES PERIOD
p. 6 of Trusts CMR
Creation of Express Trusts
Can be created by
a) Inter vivos transfer
b) Inter vivos declaration of trust
c) By will (testamentary trust)
p. 6 of Trusts CMR
Inter Vivos Trusts - Present Declaration or Transfer of Trust
Present declaration or transfer of trust REQUIRED for inter vivos trust
Trust created either by:
a) person declaring himself trustee for another; or
b) by the transfer of property to another trustee
Present INTENT required must be manifested BY CONDUCT (delivery) or WORDS (declaring oneself trustee)
Delivery means placing the trust property OUT OF the settlor’s control (UNLESS settlor serves as a trustee)
p. 6 of Trusts CMR
Inter Vivos Trusts - Failure to Name Trustee
Failure to name trustee, or a promise to name trustee in the future may evidence a LACK OF PRESENT INTENT and PREVENT DELIVERY OF RES
p. 6 of Trusts CMR
Inter Vivos Trusts - Manifestation of Intent
Must manifest intent when TRUST RES EXISTS
If present trust not established bc there is no trust res, trust arises when settlor SUBSEQUENTLY ACQUIRES RES and REMANIFESTS TRUST INTENT
p. 6 of Trusts CMR
Inter Vivos Trusts - Formal Requirements
Statute of Frauds (S.o.F.)
Writing requirement for trusts of LAND
Written instrument signed by person entitled to impress the trust upon the property is commonly required under S.o.F.
Most states do NOT require writing for trust of PERSONAL PROPERTY
Oral trust may be established ONLY by [clear and convincing evidence]
Note - otherwise invalid oral trust of land may be enforced by imposing CONSTRUCTIVE TRUST
p. 7 of Trusts CMR
Inter Vivos Trusts - Parol Evidence Rule
Most states ALLOW extrinsic evidence where an AMBIGUITY appears on the face of the writing
p. 7 of Trusts CMR
Testamentary Trusts - Formalities
Trust INTENT and the ESSENTIAL TERMS of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from:
a) the WILL ITSELF;
b) from a WRITING INCORPORATED by reference into the will; or
c) from exercise of POWER OF APPOINTMENT created by the will
p. 7 of Trusts CMR
Testamentary Trusts - “Secret Trusts”
Secret Trust ➝ Constructive Trust imposed
Will makes gift that is absolute on its face, but was IN FACT made in RELIANCE on the beneficiary’s PROMISE to hold the property in trust for ANOTHER - intended trust beneficiary MAY present extrinsic evidence of the promise
Promise can be proven by [clear and convincing evidence]
If proven, CONSTRUCTIVE TRUST imposed on property in favor of intended trust beneficiary
Constructive trust imposed EVEN IF the will beneficiary did not make the promise until AFTER the will was executed
Does not matter whether the will beneficiary INTENDED to perform the promise when he made it
Only matters is that TESTATOR RELIED on the promise
p. 7 of Trusts CMR
Testamentary Trusts - “Semi-Secret Trusts”
Semi-Secret Trust ➝ Resulting Trust implied
Semi-secret trust, will makes gift in trust but FAILS TO NAME beneficiary
Gift FAILS and named trustee holds property on a resulting trust for TESTATOR’S HEIRS
p. 7 of Trusts CMR
Charitable Trusts - Distinctive Rules
Differ from rules for private trusts in 3 important ways:
1) Charitable trust must have INDEFINITE BENEFICIARIES;
2) It may be PERPETUAL; and
3) The CY PRES DOCTRINE applies
p. 8 of Trusts CMR
Charitable Trust - Purposes
Must have a purpose considered to BENEFIT THE PUBLIC
Include the relief of poverty, advancement of education or religion, promotion of health, and accomplishment of govt. purposes (e.g.: parks, museums)
Class to be benefited may be limited, but MAY NOT be so narrow as to only benefit a FEW individuals whom the settlor wishes to aid personally
p. 8 of Trusts CMR
Charitable Trusts - Indefinite Beneficiaries
Beneficiaries of charitable trust must be INDEFINITE
Ct. can select a charitable purpose or beneficiary if none specified in trust instrument, so long as selection consistent w settlor’s ascertainable intention
(Does not mean beneficiary cannot be specific entity like Red Cross or ASPCA; ultimate beneficiaries are indefinite, even though entity is specific)
p. 8 of Trusts CMR
Charitable Trusts - Enforcement
Suit to enforce can be brought by the SETTLOR, a qualified BENEFICIARY, or the STATE’S AG
p. 8 of Trusts CMR
Charitable Trusts - Rule Against Perpetuities
May be PERPETUAL
Rule Against Perpetuities (RAP) DOES NOT APPLY to the shifting of the beneficial interest in a trust from one charity to another on the happening of a condition
(Charity-to-Charity Exception)
Rule DOES apply to shifts between private and charitable uses
p. 9 of Trusts CMR
Charitable Trusts - Cy Pres
Charitable purpose selected by settlor = impracticable, unlawful, impossible to achieve, or wasteful, ct. may select ALTERNATIVE under the doctrine of cy pres by ascertaining the settlor’s PRIMARY PURPOSE
Doctrine applies to outright charitable gifts AND charitable trusts
Cy Pres = “as near as possible”
p. 9 of Trusts CMR
Honorary Trusts
Commonly established for benefit of PETS or maintenance of BURIAL places
CL ➝ no human beneficiary to enforce the trust, trustee is “on her honor” to carryout its terms
UTC ➝ trust is enforceable by someone named in the trust instrument or appointed by the ct.
Trust property may ONLY be applied to carryout terms of the trust
Excess property distributed to the settlor of his successors, unless governing instrument provides otherwise
p. 9 of Trusts CMR
Honorary Trusts - Duration
Many jurisdictions will VOID honorary trust (not for care of animals) on basis of RAP if its duration may be more than a human life in being plus 21 years
UTC ➝ expressly provides that honorary trust (not for care of animals) MAY NOT be enforced for more than 21 years
p. 9 of Trusts CMR
Honorary Trusts - Trust for the Care of an Animal
Trust for the care of an animal alive during the settlor’s lifetime is VALID
Trust terminates when animal DIES
p. 9 of Trusts CMR
Voluntary Assignment
Beneficiary may FREELY TRANSFER his interest in trust (absent restriction by statute or instrument)
Assigned interest remains subject to all previous conditions and limitations
p. 9 of Trusts CMR
Involuntary Transfer - Rights of Creditors
Insolvent trust beneficiary’s creditors MAY LEVY on his beneficial interest (absent restriction by statute or instrument)
Interest is subject to JUDICIAL SALE
Ct. may ORDER TRUSTEE to pay BENEFICIARY’S INCOME to the CREDITORS until debt satisfied to avoid judicial sale
p. 9 of Trusts CMR
Restraints on Alienation - Spendthrift Trusts
Spendthrift trust PRECLUDES beneficiary from voluntarily OR involuntarily TRANSFERRING HIS INTEREST in the trust, and his CREDITORS are PRECLUDED from reaching it to satisfy their claims
Purpose is to protect beneficiary from his own improvidence (lacking foresight)
Spendthrift trust = restraint on alienation, most courts uphold spendthrift restrictions
p. 9 of Trusts CMR
Spendthrift Trusts - Rights of Creditors
Beneficiary’s creditors CANNOT reach his interest UNTIL income has been paid to him
p. 10 of Trusts CMR
Restraint on Involuntary Alienation ONLY
Restriction permitting beneficiary to voluntarily alienate his interest, but purporting to DENY CREDITORS the right to reach the beneficiary’s interest = probably INVALID
p. 10 of Trusts CMR
Effect of Spendthrift Clause
Effect = Assignments are UNENFORCEABLE
Beneficiary’s assignees CANNOT force the trustee to pay them DIRECTLY
Trustee may CHOOSE to honor a purported assignment by the beneficiary, but the trustee may recommence payments to the beneficiary at ANY TIME, and the beneficiary may WITHDRAW his discretion to pay the assignee
Beneficiary’s creditors CANNOT force trustee to pay them
p. 10 of Trusts CMR
Spendthrift Clause - Exceptions
Cannot be used to shield beneficiary from:
(i) his OWN creditors where the beneficiary is the SETTLOR;
(ii) JUDGMENTS or ct. orders for support or maintenance of the beneficiary’s child, spouse, or former spouse; or
(iii) claims by the GOVT.
Creditor can reach mandatory distribution of income or principal IF trustee does not make it within a reasonable time
When unclear whether beneficiary = settlor, determine who FURNISHED THE CONSIDERATION for the creation of the trust
Person who furnishes consideration = SETTLOR, EVEN IF trust created by another person
p. 10 of Trusts CMR
Discretionary Trusts
Trust where trustee is given DISCRETION whether to apply or withhold PAYMENTS of income or principal (or both) to a beneficiary
p. 10 of Trusts CMR
Discretionary Trusts - Creditor’s Rights
Before trustee exercises discretion to make payments to beneficiary, beneficiary’s interest NOT assignable and CANNOT be reached by creditors
Creditors allowed to attach beneficiary’s INTEREST, but MAY NOT COMPEL trustee to make a distribution
If trustee has NOTICE of attachment by creditors and decides to make payments to the beneficiary, must make those payments DIRECTLY to creditors UNLESS interest protected by spendthrift provision
p. 10 of Trusts CMR
Discretionary Trusts - Exceptions to Creditor’s Rights
Ct. can ENFORCE TRUSTEE to satisfy a judgment order against the beneficiary for the SUPPORT or maintenance of the beneficiary’s child, spouse, or former spouse
p. 10 of Trusts CMR
Discretionary Trusts - Beneficiary’s Rights
Beneficiary has NO RIGHT to payment that he can enforce against the trustee
∴ beneficiary cannot interfere w exercise of trustee’s discretion, UNLESS trustee ABUSES his power (ct. will intervene)
p. 10 of Trusts CMR
Support Trusts
Trust that directs trustee to pay ONLY SO MUCH of the income or principal (or both) as is NECESSARY for the beneficiary’s SUPPORT
= discretionary trust w support standard
Creditors’ rights = same for support trust as for discretionary trust
Even w/o spendthrift clause, beneficiary’s interest in support trust NOT assignable
In DETERMINING SUPPORT needs, look at settlor’s INTENT as to whether beneficiary’s OTHER RESOURCES should be considered
Trust to “pay all of the income to A for his support” ≠ support trust
When whole of income is to paid to A for his support, words “for his support” merely state MOTIVE for transfer
Beneficiary NOT LIMITED to amounts necessary for his support
p. 10-11 of Trusts CMR
Creditors of Trustee
Cannot reach trust property to satisfy claims
Only have personal claim against trustee
p. 11 of Trusts CMR
Modification and Termination of Trust - Generally
Trust will terminate AUTOMATICALLY upon expiration of term specified in instrument or when all purposes have been accomplished or unlawful, contrary to public policy, or impossible to achieve
p. 11 of Trusts CMR
Modification and Termination of Trust - By the Settlor
UTC ➝ settlor can revoke or amend trust UNLESS terms expressly state it is IRREVOCABLE
Many states (even some UTC) follow [traditional rule] ➝ trust is IRREVOCABLE unless settlor EXPRESSLY RESERVES power to revoke or modify the trust
p. 11 of Trusts CMR
Modification and Termination of Trust - By the Beneficiaries
May be modified or terminated upon CONSENT or the SETTLOR (or agent, conservator, guardian) AND ALL BENEFICIARIES, even if modification conflicts w [material purpose] of the trust
May be modified or terminated on CONSENT of ONLY ALL BENEFICIARIES, but only if NO MATERIAL PURPOSE of the trust frustrated
UTC ➝ Ct. may modify trust even w/o consent of all beneficiaries if (i) trust could have been TERMINATED had all beneficiaries consented, and (ii) interest of a beneficiary who does not consent will be adequately PROTECTED
Note - Watch for remote/contingent beneficiaries on early termination or modification Q. ALL BENEFICIARIES MUST CONSENT, INCLUDING UNBORN AND UNASCERTAINED BENEFICIARIES, as well as beneficiaries of future interests - no matter how uncertain or contingent. Any beneficiaries unborn or unascertained must have party appointed to represent their interests; otherwise, trust may NOT be modified or terminated
p. 11 of Trusts CMR
Modification and Termination of Trust By the Beneficiaries - Material Purpose
Indicators of material purposes that may prevent beneficiaries from terminating a trust include:
(i) distributing property to a beneficiary at a DESIGNATED AGE (shows purpose to keep property out of beneficiary’s hands until designated age); and
(ii) a SPENDTHRIFT provision (shows a purpose to protect the beneficiary from creditor’s claims)
p. 11-12 of Trusts CMR
Modification and Termination of Trust By the Beneficiaries - Distribution of Property and Liability of Trustee
Trust terminated by agreement of all beneficiaries
Trustee distributes trust property as agreed by beneficiaries
Where ALL beneficiaries consent to termination, trustee NOT LIABLE if he accommodates them by distributing trust assets, EVEN IF termination violates material purpose of settlor
p. 12 of Trusts CMR
Modification and Termination of Trust By the Beneficiaries - Role of Settlor in Terminating Inter Vivos Trust
As long as beneficiaries have right to terminate, settlor’s objections are NOT a bar (may be evidence to whether termination would defeat trust purposes)
Joinder of settlor may be deemed WAIVER of material purpose that would otherwise block termination
p. 12 of Trusts CMR
Modification and Termination of Trust - By the Court
Termination/modification not available bc not all beneficiaries consent, ct. may terminate/modify trust IF:
(i) trust could have been modified if all beneficiaries had consented; and
(ii) interests of any nonconsenting beneficiaries will be adequately protected
Additionally, ct.may terminate/modify trust IF:
(i) UNANTICIPATED CIRCUMSTANCES threaten purpose of trust;
(ii) continuation of the trust on its existing terms is IMPRACTICABLE OR WASTEFUL; or
(iii) the value of the trust is INSUFFICIENT to justify the cost of administration to achieve settlor’s TAX OBJECTIVES
Ct. may reform terms of trust to reflect settlor’s intent if mistake in terms shown by [clear and convincing evidence] = REFORMATION
p. 12 of Trusts CMR
Modification and Termination of Uneconomic Trust - By the Trustee
Trustee can terminate trust if trust property LESS THAN $50,000 and amount is INSUFFICIENT to justify cost of administration, as long as trustee provides qualified beneficiaries w NOTICE
p. 12 of Trusts CMR
Modification and Termination of Trust - Combination and Division of Trusts by Trustee
Absent contrary terms, trustee can COMBINE several trusts into one trust or DIVIDE one trust into several trusts, provided doing so DOES NOT frustrate purpose of trust or IMPAIR rights of any beneficiary
Trustee NOT required to obtain consent of qualified beneficiaries prior to combining or dividing trusts
Trustee MUST provide beneficiaries w NOTICE
p. 12 of Trusts CMR
Powers of the Trustee - Sources (4)
Trustee can properly exercise powers EXPRESSLY or IMPLIEDLY conferred upon her
Powers include:
(i) expressly conferred upon her by TERMS of trust (which control);
(ii) that an UNMARRIED individual has over her own property;
(iii) that are appropriate to achieve proper INVESTMENT, MANAGEMENT, and DISTRIBUTION of trust property; and
(iv) conferred upon her by UTC
p. 12-13 of Trusts CMR
Powers of the Trustee - Joint Powers
Co-trustees unable to reach UNANIMOUS decision may act by MAJORITY DECISION
If co-trustee cannot perform bc e.g., absence or illness, remaining co-trustees may act for the trust
p. 13 of Trusts CMR
Powers of the Trustee - Imperative and Discretionary Powers
IMPERATIVE POWER = power that trust instrument requires to exercise
Trustee fails or refuses to perform under imperative power, ct. will, upon petition, order trustee to exercise power as required by trust instrument (provided not against law or public policy)
DISCRETIONARY POWER = power that trustee may or may not perform
Exercise of discretionary power is subject to final judicial review for abuse of discretion
Trustee NOT IMMUNE from review even if given “uncontrolled” discretion
Ct. will intervene if trustee fails to exercise any judgment at all
p. 13 of Trusts CMR
Duties of the Trustee
Trustee of REVOCABLE trust owes her duties EXCLUSIVELY to settlor
Trustee of IRREVOCABLE trust owes her duties to all trust beneficiaries
p. 13 of Trusts CMR
Duty of Trustee to Administer Trust
Trustee has duty to PERSONALLY administer the trust in GOOD FAITH and in a PRUDENT MANNER, in accordance w terms and purposes of trust instrument and interests of beneficiaries
Trustee w special skills/expertise held to higher standard
More than one beneficiary, trustee must act IMPARTIALLY, taking into account differing interests
Trustee MAY NOT DELEGATE discretionary functions (such as decision to make distributions)
Doing so makes trustee a GUARANTOR for any losses caused by the improper delegation
p. 13 of Trusts CMR
Duties of Loyalty Owed by Trustee to Beneficiaries (7)
Absent ct. approval or express waiver in trust instrument, trustee CANNOT enter into any transaction in which she is dealing w the trust in her INDIVIDUAL CAPACITY
Trustee owes a DUTY OF UNDIVIDED LOYALTY to trust and beneficiaries
(i) Trustee CANNOT BUY OR SELL TRUST ASSETS (even if price is fair);
(ii) Trustee MAY NOT SELL PROPERTY OF ONE TRUST TO ANOTHER TRUST of which she is ALSO trustee;
(iii) Trustee MAY NOT BORROW TRUST FUNDS NOR LOAN HER PERSONAL FUNDS to the trust (except to protect the trust), and any INTEREST paid on such a loan must be RETURNED to the trust;
(iv) Trustee CANNOT USE TRUST ASSETS TO SECURE A PERSONAL LOAN;
(v) Trustee CANNOT PERSONALLY GAIN through her position as a trustee;
(vi) Corporate trustee CANNOT INVEST IN ITS OWN STOCK as a trust investment; can RETAIN its own stock if such stock part of original trust res when trust established (provided that retention meets prudent investor standard);
(vii) SELF-EMPLOYMENT can constitute a form of PROHIBITED dealing; if trustee renders EXTRAORDINARY services to the trust, she may be entitled to ADDITIONAL COMPENSATION
Note - Q re: self-dealing trustee, good faith/actual benefit to trust = IRRELEVANT
p. 13-14 of Trusts CMR
Powers of the Trustee Given by UTC (10+)
Confers many powers on trustee
Powers include power to:
(i) collect and hold trust assets;
(ii) operate a business;
(iii) acquire an undivided interest in a trust asset;
(iv) invest trust assets;
(v) buy, sell, or encumber trust assets;
(vi) enter into a lease;
(vii) vote securities;
(viii) pay taxes and assessments;
(ix) insure assets;
(x) make distributions;
(xi) prosecute and defend actions, etc.
p. 13 of Trusts CMR
Types of Trustee Duties (6)
1) Duty to administer trust
2) Duty of loyalty
3) Duty to report
4) Duty to separate trust property and keep records (no commingling)
5) Duty to enforce claims and defend trust from attack
6) Duty to preserve trust property and make it productive
p. 13-15 of Trusts CMR
Investments - Uniform Prudent Investor Act
Trustee’s investment responsibilities governed by UPIA or statutory “legal lists”
UPIA provisions apply ONLY if there is no contrary provision in the trust instrument
Instrument allows discretion, question if power expanded beyond UPIA or legal list
Language STRICTLY construed
SC has adopted UPIA ➝ PRUDENT INVESTOR jurisdiction ➝ only prudent investments permissible regardless of trust’s terms
Legal List Jurisdiction ➝ trust language giving trustee broad discretion is likely to free trustee from list and permit investment similar to prudent investor rule
p. 15 of Trusts CMR
