Wills and Trusts Bar Flashcards
What are some examples of non probate property?
Intervivos gifts
Intervivos transfers
Future interests
Joint tenancy
Assets held in pay on death format including
- bank accounts
- corporate securities
- life insurance
- retirement plans
- annuities
- 401ks
- pensions
3 overall requirements for a valid will
(1) Testamentary capacity;
(2) Testamentary intent; AND
(3) Execution of will formalities.
Define testamentary capacity
Legal and Mental
Legal - testator must be at least 18 years old
Mental
Testator must:
(1) Understand nature of act;
(2) Understand general nature and extent of property; AND
(3) Understand who family members are.
- Note: Cannot be suffering from an insane delusions/hallucinations.
- Note: Mentally challenged can make will so long as they comply with above. If adjudicated incompetent, raises rebuttable presumption of lack of mental capacity.
Define testamentary intent
Testator must intend that the document be his will.
4 requirements for execution of will formalities
(1) A writing;
(2) Signed by the testator or by a proxy in the testator’s presence and under the testator’s direction;
(3) Two disinterested witnesses who are both present to witness the signing and understand that the document is a will; AND
(4) Both witnesses sign the will at some point prior to the testator’s death.
- Signature: Any mark by T (initial, nickname, rubber stamp)
- Signature can appear anywhere on the document
- Witnesses do not need to know specific contents of will
Define interested witness
An interested witness is one who takes under the will. This raises a presumption of undue influence and the respective part of the will is ineffective unless the proponent rebuts by clear or convincing evidence or by having two disinterested witnesses.
What is the harmless error rule?
If the will is otherwise invalid, the proponent of the document can show by clear and convincing evidence that the testator intended the document to be their will. The court will probate the will.
- If will might be invalid, run it both ways. If valid, this is how distribution works. If not valid, then apply intestacy laws.
- A spouse needs permission of other spouse to fund a trust with CP funds.
What is the rule on conservators?
A conservator may make a will or a codicil so long as the court appoints the conservator. The conservator owes the testator fiduciary duties including the duty of care and the duty of loyalty.
Define the Savings Statute
A will is valid if validly executed under:
(1) California law
(2) The laws of the state where the testator was domiciled when the will was executed, or
(3) The laws of the state where the testator was domiciled at his death.
Which state law do we use when looking at real property versus personal property?
For real property, we use the laws of the state in which the real property sits
For personal property, we use the laws of the state in which the testator was domiciled at the time of his death
What are the 4 situations in which undue influence is presumed?
When the following 4 people take under the gift:
(1) The person who drafted the will
(2) A person who drafted the will in a fiduciary relationship with the testator
(3) Care custodian during care period or within 90 days of provision of services
(4) Employee or cohabitant of any group above
3 exceptions to rebut the presumption?
(1) Beneficiary is blood relative or cohabitant
(2) Property valued at $5K or less
(3) Independent counsel reviews instrument and counsels testator without the beneficiary being present
Note: Surviving spouse and children are not on this list except as an exception.
3 requirements for undue influence
(1) Influence exerted;
(2) Overcoming the free will of the testator; AND
(3) Caused an unnatural devise where the Testator would not have made the decision but for the influence.
Notes
If only a portion of the will is through undue influence, only that part is void.
Analyze age, actions, tactics, vulnerability
Where confidential relationship exists, burden of proof shifts to that party
Define duress
Duress is similar to undue influence yet involves a physical threat or physical force
4 requirements for fraud
(1) False representation;
(2) Made knowingly by the person who made the statement;
(3) Reasonable reliance; AND
(4) Testator would not have made executed the will had it not been for the statement
Effect: Only fraudulent provisions invalid
What are the 3 types of fraud
(1) Fraud in execution
(2) Fraud in inducement
(3) Fraud preventing will execution or revocation
2 elements for fraud in execution
(1) Testator did not know he was signing will or will was forged; AND
(2) Entire will invalid.
2 elements for fraud in the inducement
(1) Misrepresentations cause T to include provisions in the will; AND
(2) Only fraudulent provisions invalid.
What is the rule for fraud in attempts in will execution or revocation?
Split Jx
- Some courts apply intestate succession
- Some courts apply a constructive trust
But a court will likely probate the will and apply a constructive trust
2 instances where the court can consider parole evidence to resolve a mistake or ambiguity?
(1) Words added
(2) Mistake in the description
Words added: court can strike out words
Mistake in description (ambiguity): allow parole evidence to determine T’s intent
Examples that court can resolve
* I leave 50% to each of A, B, and C.
* To my sister Pat, but the brother is Pat.
2 situations where the court will not be able to provide a remedy for a mistake?
(1) Words were left out of the will
(2) Mistake made due to an external, erroneous belief like something belonging in another country
Define a codicil.
A codicil is an amendment to an existing will. The codicil must be executed with the same requirements as those for a will. The codicil and will are treated as a single instrument and are read together. If there are inconsistencies between the two documents, the codicil will be applied. The codicil republishes the will as of the date of the codicil.
- Example – bootstrapping invalid will
1. T executes invalid will. Later, T executes valid codicil. Codicil bootstraps otherwise invalid will.
2. Exam Tip: Valid: Witness is a friend and given a gift in will but T later executes a valid holograph will/codicil, which republishes original will and eliminated interested witness issues
How are alterations to the face of the will treated?
Any alterations on the face of a will are ineffective unless:
(1) The will is re-executed with proper formalities, or
(2) The changes qualify as a holographic will.
Define a holographic will.
A holographic will is an unattested will that is signed by the testator with the material provisions of the will in his handwriting. The testator must have testamentary intent and capacity.
Where a holographic will is missing a date, the will only be given accordance for its consistencies between the holographic will and another instrument.
Listen to some notes on holographic will
Crossing out an item by handwriting (e.g., drawing an X on a disposition to someone) and supplying a signature
Handwritten changes
1. Made to a holographic will: Given affect
2. Made to an attested will: Not given affect and may work a revocation
Note
1. Oral wills are never allowed
define a pour over will and its 2 requirements
A pour over will is created when a testator provides that the residuary or left over of his assets will be poured into the trust. The property goes into the trust on the date of the testator’s death, not the date when the will was written.
Requirements
(1) Trust identified in testator’s will; AND
(2) Written instrument exists containing trust terms, that was made before or concurrently with the will.
Define republication
A validly executed codicil operates as a republication of the will as of the date on the codicil.
Conclusion: The will is republished to 2012.
What are 4 ways to bring in outside information and/or a document into a will?
(1) Integration
(2) Incorporation by reference
(3) California special rule for limited tangible personal property
(4) Acts of independent legal significance
Define integration.
A document will be integrated into the will if:
(1) Testator had an intent to incorporate the document; AND
(2) The document was physically present at the time the will was executed.
Define incorporation by reference.
Incorporation by reference occurs when:
(1) Testator intended to incorporate the document by reference;
(2) The document was in existence at the time the will was executed; AND
(3) The document is sufficiently described in the will.
Define the California Special Rule for Tangible Personal Property
A list of items will be admitted into probate if:
(1) The will refers to the list;
(2) The list is dated;
(3) The list is handwritten or signed;
(4) The list describes the property and beneficiary with sufficient certainty; AND
(5) The entire list does not exceed $25K in value and one item does not exceed $5K in value
One sentence definition for acts of independent significance
A will may identify beneficiaries or dispose of property by reference to acts that have independent significance.
Note: Applies whether events occur before or after will execution or after T’s death
Example: Marriage; identifying who employees are in a class gift; identifying which car to leave Rachel in “I leave my car to Rachel” and event is buying of BMW later; referencing newspaper clippings
EXAM TIP – Issue spotting
1. Anytime you issue spot integration, also run incorporation by reference and acts of independent significance.
What is the rule on revoking a gift?
A person with testamentary capacity may revoke their will at anytime prior to their death.
What are the 3 ways to revoke a will or a part of a will?
(1) By subsequent written instrument
(2) By physical act
(3) By operation of law
Define revocation by subsequent written instrument
A will may be revoked in whole or in part by a subsequent written instrument. The two documents are read as a single instrument. Where there are inconsistencies, the latest instrument will control.
Define revocation by physical act.
- Rule: A will/codicil or part of one can be revoked by a physical act (e.g., by cancellation where lines are drawn through a codicil). The testator’s intention to revoke must be concurrent with the physical act.
Note: Increasing a gift on its own is not OK unless to a residuary. - Duplicates
Revocation by physical act revokes all duplicates. - Codicil
- Physical destruction of codicil does not revoke will, even if T intended
- Physical destruction of will revokes codicil, unless T did not intent to
- When will and codicil on same paper, defacing will revokes codicil but not other way around, unless T intended
listen to examples of revoking by operation of law
Subsequent will or codicil
Adding an unintentionally omitted spouse
Removing all devises to previous spouse after divorce.
Look to see if a codicil was created as it republishes the will as of that date and thus the spouse or child would no longer be omitted.
2 presumptions on revocation
(1) If will found at death in normal place with no suspicious circumstances, will not revoked
(2) If will never found, presumed destroyed with intent to revoke
Define the Dependent Relative Revocation
A DRR cancels the revocation of a prior will where the revocation was based on a mistake. The DRR only revokes the most recent instrument. The more similar the wills, the more likely the court is to revive the first one. Parole evidence is allowed.
Conclusion: The first will is revoked. The subsequent one is voided.
Define the rule for reviving a will
Where an initial will is revoked, and the subsequent will is revoked by physical act, the first will is revived if this is what the testator intended.
Listen to background notes
- SP
Rule: A married person is entitled to dispose of their separate property as death as they wish. - Devise: Gift of real property
- Bequest: Gift of personal property
what are the four types of gifts
(1) Specific
(2) General
(3) Demonstrative
(4) Residual
Define a specific gift
A specific gift is a gift of particular, identifiable property. Such gifts may adeem is no longer available at the time of the testator’s death.
Examples: My diamond earrings, my cottage in Malibu, my ABC stocks
Note: A specific gift may be of general nature. Example: “I leave my computer to Walter.”
Define a general gift
A general gift is a gift from the general assets that is not required to be funded from a particular source. Such gifts should typically do not adeem.
Example: 100 shares of ABC stock
define a demonstrative gift
Defined: A demonstrative gift is a gift of a specified amount of money that is directed to be paid from a particular source.
Impact: These gifts generally should not adeem.
Example: “I leave Bill $500 from my BofA account.”
Note: If designated fund is insufficient, balance will be paid from other assets of the estate.
Define a residuary gift
A residuary gift is whatever remains of the estate after all the debts and taxes are satisfied and the gifts have been distributed.
Example: I leave whatever is left-over to Bill.
What is the distribution rule for these 4 types of gift? Assuming ALL funds and items available
Distribute in the following order of priority
(1) Specific gifts
(2) General and demonstrative gifts
(3) Residuary
EXAM TIP
Argue both ways whether a gift can be specific or general and discuss T’s intent, even if you must make inferences to do so.
Define ademption as it relates to wills
Ademption provides that where a specific gifts no longer exists at the time of the testator’s death, the gift fails and the purported devisee takes nothing.
Note: ONLY applies to specific gifts.
What are the 3 exceptions to the ademption rule
Person can receive money in exchange for the specific gift if:
(1) Balance of a purchase price from a purchaser who owes money to the T
(2) Proceeds from foreclosure or eminent domain
(3) Proceeds from a sale by a conservator or guardian
What is ademption by satisfaction as it relates to wills?
A gift adeems by satisfaction where
(1) Testator or beneficiary declare in writing at the time of the gift that the gift is satisfied, OR
(2) The same property is given to the beneficiary during his lifetime.
Define abatement
Abatement occurs where there are insufficient funds in an estate to pay all of the legacies in full. The legacies must abate in reverse order of distribution. The gifts are reduced proportionately within a certain category.
What is the order of abatement?
To satisfy claims, the personal rep uses:
(1) Any property not disposed of in the will
(2) The residuary
(3) General/demonstrative gifts to non relatives
(4) General/demonstrative gifts to relatives
(5) Specific gifts to non relatives
(6) Specific gifts to relatives (the strongest; least likely to get taken away to pay estate expenses).
Listen to fact pattern involving an omitted child and intestacy and abatement under the will
Example: Omitted child. He is not in will. No surviving spouse. 2 other children but they are in will. Absent a will for a certain individual, apply intestate. Under intestate, children take first, so each child gets 1/3 share. After intestate share calculated, other two children take under the will. In abating shares to pay for the claim of a pretermitted child the other beneficiaries will have their benefit reduced in proportion to the value they receive. We do not go intestate for people in the will, because there is direction in a will. People in the will are going to have their gifts abated down to fund the intestate share.
What is the rule for exoneration?
In CA, liens on devised property are not exonerated (e.g., first paid off with estate funds before distributed).
Define lapse.
Lapse occurs where the beneficiary predeceases the testator. The gift lapses and falls into the residual. If there is no residual, the gifts falls into intestacy.
Note: Deceased class member gifts lapse.
Define California’s Anti-Lapse Statute
Under California’s anti lapse statute, the gift passes to the predeceased beneficiary’s heir. The statute only applies if the predeceased beneficiary was a blood relative of either the testator or the testator’s spouse, former spouse, or deceased spouse.
The Anti Lapse Statute Also Applies to Trusts: Where it lapses, it falls into residuary, look to will to see who gets residuary
Notes
* Anti lapse does not apply to residuary gifts when other beneficiaries remain. Remaining residuary devisees will take the gift of deceased beneficiary.
* Example: Where residual passes to A, B, and C (all are friends), and A dies, A’s portion goes to B and C.
Define class gift
A testator may make a gift to a class of unascertainable beneficiaries so long as the class is capable of being ascertained at the testator’s death and at which time the class will be closed. Only class members who survive the T take unless anti-lapse applies
By how much does an heir have to survive the decedent to take under intestate law?
By 120 hours. Otherwise, treat the heir as predeceased.
Exception
- where application of the rule would result in property escheating to state
By how much does the beneficiary have to survive the testator to take under the will?
By an instant
Where both the testator and the beneficiary die around the same time and it is unclear who died first, the beneficiary is deemed to have lapsed first and so anti lapse may apply
How are adopted children treated and how are children born out of wedlock treated?
adopted children treated as regular children
children born out of wedlock also treated as regular children so long as evidence established parent child relationship
what is the rule about adoption and the natural parents?
Adoption severs the parent relationship with the birth parents unless:
(1) Spouse of natural parent adopts child; AND
(2) Adopted child and natural parent lived together for any time.
What is the rule for how step and foster children are treated?
Under intestate succession, step and foster children have no relationship unless:
(1) Relationship began during child’s minority;
(2) Relationship continued through lifetime; AND
(3) A legal barrier prevented adoption.
what happens if the will mentions the ex spouse
If after executing will couple divorces, any references to ex-spouse omitted
What is the rule for advancements in intestacy?
If a person dies intestate, property the decedent gave to an heir during lifetime is treated as an advancement against that heir’s share of intestate estate if:
(1) Decedent declared so; AND
(2) Heir acknowledged in writing.
when is intestate distribution applied
where any property is not disposed of by will or someone is missing in a will or there is no will
4 general rules of intestate distribution
Any property that does not pass by will upon decedent’s death will be distributed according to intestacy statutes.
In CA, ex-spouses do not take any portion.
Children take per capita, equally.
Omitted spouses and children take their share of intestate BEFORE the will assets are distributed.
What is the surviving spouse share of community property?
Under intestate, surviving spouse takes all of decedent spouse’s CP or QCP.
Under intestate, if the decedent is only survived by a spouse, meaning he has no descendants, what does the spouse receive?
100% of the SP
Applies where: No surviving descendant, no parents, no siblings, and no descendants of a deceased sibling
Assuming the decedent dies with no will, when does the surviving spouse take one-half of the decedent’s SP?
When the decedent is survived by either:
- One child
- Deceased child’s descendant
- No descendants, but a parent or descendants of a parent
Assuming the decedent dies with no will, when does the surviving spouse take one-third of the decedent’s SP?
When the decedent is survived by either:
- More than one child
- One child plus a deceased child’s descendants
- Descendants of two or more deceased children
Under intestate, if there is no surviving spouse but children what is rule
divide shares equally
what happens under intestate if there is no surviving spouse and no descendants
the decedent’s parents inherit equally. if no surviving parents the descendants of the decedent’s parents will inherit the estate (i.e., decedent’s brothers/sisters, nieces/nephews, and their descendants down the line).
what are the three schemes called under intestate distribution where the child predeceases the parent?
(1) Strict
(2) Per capita at each generation
(3) Per capita with representation (modern rule)
define strict approach
- All descendants of Same Degree of Relationship: If the surviving descendants are of equal degree of kinship to the decedent (for example, all children or all grandchildren), each receives an equal or per capita share. A descendant in a younger generation (for example, a grandchild) cannot take if an older generation is still alive.
Define per capita at each generation
Under the per capita at each generation, people at each generation are treated equally. Assets are handed out at the first generation where someone is alive. Where someone at the first generation is not alive, the assets are pooled together and distributed evenly to the subsequent generation.
Define per capita with representation (modern per stirpes)
Under the per capita with representation approach, each person at a generation is not treated equally. Assets are distributed equally at the first generation were someone is living. Where someone is deceased, that share drops down to the next person in line under the decedent. If no one is available in the subsequent line, the assets are added to the original distribution.
Where decedent dies intestate with no descendants and property already given to surviving spouse, how is property distributed?
PDGD
Parents
Descendants of parents
Grand parents
Descendants of grand parents
Descendant of predeceased spouse (e.g., step-child)
Next of kin (more distant relatives)
Parents of predeceased spouse and their descendants
Escheat to state
Define the Widow’s Election
Where a decedent spouse attempted to dispose of more than his fair share of the CP, the wife can elect to take under the will or her statutory share.
Define the Illusory Transfer Doctrine
If a decedent, prior to his death, transfers their QCP to a third party for less than substantial consideration, without their spouse’s consent, and reserves a right to survivorship, a right to revoke, or an income right, upon the decedent’s death, the surviving spouse can claw back a one-half interest in the property. The remaining half interest remains with the third party.
NOTE
- Tenancy in Common—No Survivorship Rights: The decedent’s share passes via the decedent’s will or under intestacy. There are no survivorship rights; thus probate is not avoided.
Listen to example of illusory transfer doctrine
Example: H gives QCP land to himself and to his daughter as a gift and as joint tenants (this means JTROS). W did not consent. At H’s death, W can compel daughter to restore one-half of property to H’s estate. If the land is worth $100K, W gets $50K, which is her decedent spouse’s interest.
* Treatment of the other half interest: The other half interest remains with the third party. Thus, if H had not performed the transfer, and had not disposed of it in his will, W would have received the full property. However, H altered the ownership and adversely affected W’s rights to the land. Thus, W ends up with 50% and the third party ends up with 50%.
* Note: Isolate the house as an intervivos transfer. ½ belonged to H. ½ belonged to third party. W claws back H’s ½. Third party keeps half. Also, segregate from will provisions concerning CP. Do not think that because it is CP we extend it to children in will you are given some portion of CP. This was an intervivos transfer.
What is the rule for an omitted spouse?
A spouse who is omitted from a premarital will receive an intestate share of the decedent’s CP along with up to half the SP unless:
(1) Omission intentional on face of will
(2) Spouse otherwise provided for by transfers outside of the will
(3) Spouse waived her right in writing
(4) Spouse was care custodian, marriage began while spouse was providing services or within 90 days of service ending and decedent died less than 6 months after marriage began
What are the 2 categories for omitted children?
Born before the will was created
Born after the will was created
What is the rule for when child is born after the will is created
Child will receive his intestate share unless
(1) Omission intentional on face
(2) Child provided for outside of will with other transfers
(3) Decedent has other children and substantially all of assets DEVISED to omitted child’s parent,
Note: Giving surviving spouse an intestate share is not a devise or transfer.
how is an omitted child treated who was born before the will was created
He will not receive an intestate share unless:
(1) Father did not know about child’s existence; AND
(2) Court satisfied evidence proves parent child relationship
NOTE: Rule above applies to adopted children. Also note that the timing for adopted child is timing of adoption, not of their birth.
3. Exam Tip
Republication by codicil can change child status. A child born before the republication is not considered omitted and is not entitled to protection.
Define the Slayer Statute
A person who feloniously and intentionally kills the decedent is not entitled to be an heir in any way.
Note: Negligence resulting in homicide is insufficient.
Includes by will, trust, intestacy, insurance, joint tenancy, or otherwise.
3 ways in which a parent will not have a right to children’s estate
(1) Didn’t acknowledge child
(2) Parents rights terminated
(3) Abandoned child for at least 7 consecutive years
What is the rule on elder abuse
A person found liable by clear and convincing evidence of elder abuse will be treated as though he predeceased the decedent. This includes physical abuse, neglect, and fiduciary abuse.
Define the No Contest Clause
A No Contest Clause penalizes a beneficiary if he contests the instrument. Such clauses are enforced unless the beneficiary has probable cause to support the contest.
What is a contract relating to wills?
- Contracts to make wills can take numerous forms. The most common types of contracts related to wills are:
1. A contract to make a gift by will;
2. Joint or mutual wills that may or may not be contractual;
3. A contract not to revoke a will or a provision included in the will; and
4. A contract not to make a will at all. - Contract law rather than wills law governs the outcome of many disputes. Additionally, the contract associated with the will is separate from the will itself. The will is valid and may be probated, provided it was executed with the requisite formalities, even if its execution was in breach of contract.
- Breach of Contract
1. If first party to contract dies in breach, courts will deny a remedy because other party has not been harmed, because party can still change their will.
2. If second T dies in breach, injured beneficiaries sue to impose constructive trust.
Define a trust
A trust is a fiduciary relationship in respect of property. The settlor gives a trustee the right to hold legal title subject to fiduciary duties, for the benefits of certain beneficiaries, who have equitable rights in the property.
What is the only limitation on the split of legal and equitable title?
The same person cannot be the sole trustee and the sole beneficiary.
Can the settlor name himself sole beneficiary during the lifetime?
Yes so long as there are more beneficiaries at death.
Note also that the settlor can also be the trustee.
- “To be held in trust for 5 years for benefit of Bob” means that income from trust goes to Bob, he is income beneficiary, and whoever actual asset goes to later is the remainderman
To whom does a trustee owe fiduciary duties while the settlor is alive
In the case of a revocable trust, a trustee’s duties are owed exclusively to the settlor, whereas under an irrevocable trust, the trustee’s duties are owed solely to the beneficiaries.
Can a trustee resign after he has accepted the job?
No, unless the trustee has:
(1) Court permission, or
(2) Consent of all the beneficiaries
Can the beneficiaries remove the trustee?
No, unless the power is expressly granted to them in the trust
Listen to other notes
- Notes on Trust Property (Res)
Must be described with certainty - Notes on Beneficiaries
Holds equitable title
Must be capable of taking and holding title to property
Notice not required but beneficiary must accept; acceptance is presumed
Listen to notes on trust income
Almost everything earned by the principal of the trust is income. Stock dividends, interest earned on bank accounts or bonds, rents from real estate owned by the trust, and earnings received from a business the trust owns all constitute income of the trust.
The largest exception to the income/principal distinction is how you classify capital gains and losses. Capital gains occur when you sell a piece of property for more than your acquisition cost. Capital losses, on the other hand, are what you get when you sell property for less than your acquisition cost. Whether the trust generates gains or losses, those gains and losses stay on the principal side of the trust.
What does a trust involving real property require?
A trust for real property must be in writing and signed by the settlor, trustee, or authorized agent.
Is there a writing requirement for the trust of personal property?
No, the existence of an oral trust for personal property may be established by clear and convincing evidence
For how many years may one serve as a trustee?
For 21 years following the testator’s death regardless of the terms of the trust
Define a power of appointment
A power of appointment is a right the settlor gives to another to direct the disposition of property. There are two types of power of appointment - a general power of appointment and a specific power of appointment.
Define the general power of appointment
The donee can exercise a power of appointment in favor of an unlimited class
Example: H tells W, “You can pick who gets my car.” W is not limited to anyone.
Define the specific power of appointment
A donee can exercise a power of appointment over a limited class
Example: H tells W, “You can choose between our 2 sons to get the car.”
What are the 2 ways to form a trust?
Intervivos trust (private)
Testamentary trust
Define intervivos trust and its 5 requirements
An intervivos trust is a private trust created during the settlor’s lifetime. The trust requires:
(1) The settlor’s present intent to make a trust, requiring intent to split legal and equitable title;
(2) A trustee, though the trust will not fail for lack of one because the court may appoint one;
(3) Trust property (res);
(4) Ascertainable beneficiaries (with the exception of a charitable trust or honorary trust), or a class where the class is reasonably definite; AND
(5) A valid purpose (not unlawful or against public policy).
What happens if the beneficiaries item fails?
A resulting trust in favor of the settlor
Note: Land trust requires SoF.
Note: Settlor’s capacity required for trust is same as that of will.
Define a testamentary trust and its 3 requirements
A testamentary trust is created in the settlor’s will. It will go through probate.
3 requirements:
(1) Valid will;
(2) Includes essential trust terms; AND
(3) Trust must serve a lawful purpose.
Note: If information missing, run integration and incorporation by reference
Define a secret trust
A secret trust is a gift made in a will but the will does not mention the facts of the trust. The promise is enforceable as a constructive trust in favor of the intended beneficiary.
2. Example: “I leave $5K to Stephen” is written in will. However, Testator secretly asked Stephen to hold the money in trust for Robert.
Define a semi secret trust
A semi-secret trust occurs where the trustee is named but the beneficiaries are secret/not listed. The trusts is unenforceable and the court will apply a resulting trust.
Define a pour over trust
A pour over trust is created when the settlor makes gifts from the will to the trust during the settlor’s lifetime. The trust must be clearly identified in the will. Property goes into the trust at the testator’s death. The trust will go through probate.
Notes
i. Gifts valid even if unfunded during settlor’s lifetime
Define a spendthrift trust
Generally, a beneficiary may voluntary transfer their interest. However, under a spendthrift trust, the beneficiary trust may not voluntarily or involuntarily transfer his interest (usually due to the beneficiary’s lack of ability to effectively manage money and spending). The beneficiary does not have direct access to the funds and instead must wait until the trustee gives the beneficiary a payment.
Creditors cannot reach the beneficiary until he receives an income payment. Also, the majority of jurisdictions provide that a settlor cannot create a spendthrift trust for himself in order to protect his assets.
Exceptions
Government creditors (taxes)
Creditors for necessaries
Alimony and child support
Tort creditors
Define a support trust.
A support trust directs the trustee to only as much of the principal or income is necessary to support the beneficiary’s health, education, maintenance, and support. The degree of payment is based on the beneficiary’s standard of living that he was accustomed to. The beneficiary’s interest is not assignable, and the interest of the beneficiary cannot be assigned or reached by creditors.
Define a discretionary trust
A discretionary trust gives the trustee discretion on when to pay the income or principal. The beneficiary has no right to payment unless the trustee abuses their discretion.
What are the creditors right related to a discretionary trust?
Before the trustee makes a payment, a beneficiary’s interest is not assignable and cannot be reached by creditors. However, the creditors may attach themselves to the interest. If this occurs, the trustee if making a payment should first direct the payment to the creditors unless a spendthrift clause exists.
Define a charitable trust and the RAP provision
A charitable trust is one that is directed toward a charitable purpose (e.g., one that reduces poverty or relieves hunger) and has unascertained beneficiaries. RAP provides that an interest that does not vest within 21 years of the death of a life in being at the time of creation of the interest must fail. However, RAP does not apply to charitable trusts unless the trust becomes a private trust.
Define Cy Pres and what the term means
Cy pres is a doctrine of equitable approximation which provides that where a charitable trust fails (e.g., because the organization is no longer in existence), the court will substitute another charitable purpose to the trust, one that is as close as possible to the settlor’s initial intent. The court must find that the settlor had general charitable intent.
Notes
1. If charity petitions for cy pres right away before charity’s interest becomes due, the request should be denied, because it is premature. [They have a ‘future interest in the remainder of the trust’]
2. RAP does not apply, so a charitable trust can have unlimited duration
Define honorary trust
A honorary trust is not valid in that it lacks human beneficiaries, but the trustee can carry out the settlor’s wishes to care for animals, maintain a grave, etc. Absent this, a resulting trust is imposed. Generally the trustee may not operate for more than 21 years in such a role.
Define a life insurance trust.
A life insurance trust provides a contingency beneficiary in case the original beneficiary is not alive at the time the trust is in place.
(e.g., “proceeds to A, but if A does not survive, to B in trust for my children”)
Assignment of policy trust allowed (assign policy to party to hold in trust)
Define a totten trust
A totten trust is known as a payable on death account, a bank account for which the person who opens the account names a beneficiary. Upon the depositor’s death, the money in the account goes directly to the beneficiary. The depositor is free to make withdrawals from the account during her lifetime and the depositor’s creditors can reach the fund during the depositor’s life.
Define a resulting trust
A resulting trust is an implied-in-fact-trust based on the presumed intent of the parties. The resulting trustee will transfer property to the settlor if the settlor is alive, if not to the residuary, or to the heirs.
When is a resulting trust used?
No listed beneficiary so trust failed
Excess funds in the trust and no one listed to take it
Purchase money resulting trust results where one party pays consideration but seller gives title to a trustee
Charitable trust ends and cy pres doctrine is inapplicable
Trust is illegal
Semi secret trust
Trust to help a business that doesn’t exist anymore
Define a constructive trust
A constructive trust is an equitable remedy to prevent unjust enrichment.
- (1) Self-dealing or breach of fiduciary duties
- (2) Fraud in the inducement or undue influence
- (3) Secret trusts involved
- (4) Oral real estate trusts created
ii. P must be able to identify particular property as the trust res.
Define a gift causa mortis
Rule: A gift causa mortis is a gift of personal property made in contemplation of death. While inter vivos gifts are typically irrevocable as soon as the donee accepts a gift, a gift causa motis can be revoked during the donor’s lifetime. The gift only becomes irrevocable at the donor’s death.
b. Notes
i. Cannot apply to gift of real property
ii. Cannot be abstract fear
iii. Revocable by operation of law if donor recovers from condition
iv. Still valid even if donor dies of difference cause
v. Subject to creditor claims on donor’s estate
Define modification or termination of trust by the settlor for a revocable trust
Intervivos trusts presumed revocable. Can be terminated at any time.
Define termination of trust by the settlor for a irrevocable trust
Settlor can only terminate a irrevocable trust if all beneficiaries are in existence and agree.
Can a trustee terminate a trust?
No, trustee has no power to terminate the trust except as provided in the trust.
After the settlor’s death, can the beneficiaries or remaindermen modify the trust?
No, unless there is
(1) unanimous consent; and
(2) no material purpose yet to be performed
CHAFLIN doctrine
Note: Includes unborn and unascertained bens, bens with future interests
Note: Includes unborn and unascertained bens, bens with future interests
Areas where material purpose yet to be performed
* Support provisions
* Spendthrift provisions
* Payment at certain ages or on certain dates
* Discretionary trusts
When can the court modify or terminate a trust?
A court can modify or change the trust (upon petition by the trustee or beneficiary) upon changed circumstances or for other good reason (e.g., purpose of trust accomplished)
What is the rule for the powers of the trustee?
The trustee can exercise powers that are expressly or impliedly conferred.
Examples of implied powers
* Sell or lease trust property
* Incur reasonable expenses
* Hire agents
* Mortgage trust property
* Repair
* Courts split on whether borrowing money ok
What is the header line on the fiduciary duty of trustee?
A trustee owes a fiduciary duty to administer the trust solely in the interest of the beneficiaries.
Define duty of loyalty - self dealing of trustee and what rule do courts apply
The trustee must not self-deal (e.g., buying trust property for himself, borrowing trust funds). Where there is self dealing, the courts will apply the no inquiry rule. The trustee’s good faith and the reasonableness of a transaction are not relevant.
define duty of loyalty - conflict of interest for trustee
A trustee owes a duty of undivided loyalty to the trust and its beneficiaries
- Duty of Loyalty Examples
Cannot buy assets from or sell assets to the trust
Cannot borrow from trust or loan to trust
Cannot personally gain through position
Cannot use trust assets to secure personal loan
Corporate trustee cannot buy (but may retain) own stock
Treat all beneficiaries equally
Note: Settlor can waive self-dealing restrictions
Define duty of care
Trustee must act as a reasonably prudent person managing their own property
Define duty to invest prudently - 2 rules
Under the common law, the duty to invest requires the trustee to as a reasonably prudent person managing his property, trying to maximize income while protecting the corpus. Each investment is scrutinized.
Under the Uniform Prudent Investor Act, adopted by most states, the trustee must invest as a prudent investor where each investment is evaluated not in isolation but in the context of a portfolio as a whole. Risky investments are permissible so long as on a whole the risk level is reasonable.
must diversify stocks
What is the duty to separate trust property
- no commingling with own property or other trusts’ property
- commingled or lost property presumed to be trustees
- if portion assets increases in value presumed to be trusts assets and if deceases assumes to be trustee assets
what is the duty not to delegate
may not delegate administration
may delete investment function but must monitor agent performance
what is the duty to allocate property to principal and income
ordinary expenses should be allocated to income and extraordinary expenses should be allocated to principal
- Assets allocated to Principal [PLEAD]
o Principal asset proceeds, life insurance proceeds, eminent domain awards, all property other than money, distribution of stock - Assets allocated to Income [RIM]
o Rental income, interest, money
what is duty to account
keep accurate records, render accountings to beneficiaries and court
what is duty of impartiality
deal with income beneficiaries and remaindermen equally
what is duty to defend trust from attack
defend actions that may result in a loss to the trust
enforce claims that are part of trust property
5 remedies for trustee breach
Recover profit
Set aside transaction
Ratify transaction
Constructive trust
Remove trustee
3 ways for trustee to be personally liable?
(1) Violating his trustee duties
(2) Torts committed by him or agent if committed within scope of trustee’s supervision of agent
(3) Contracts made within the scope of trust supervision
listen to more remedies
- Remedies
1. Money Damages
Any losses resulting from breach
Any lost profit that would have accrued had it not been for breach
Any profit made by trustee in relation to breach
2. Other Remedies
Rule: When a trustee breaches his duties, the beneficiaries may seek to have the trustee removed from his role. The court decides whether to remove the trustee.
3. In case of self dealing
Affirm transaction
Set aside transaction
Trace profits from trustee if trustee profited
2 defenses to trustee
- beneficiaries consented
- unclean hands - beneficiaries joined in breach
- Removal of Trustee
1. Court must approve
listen to liabilities of third parties to trust
- Transfer to a BFP
1. Rule: Transfer of property to a BFP. - Transfer to a third party who knowingly receives trust property will hold that property as a constructive trustee and will be liable for any losses to the trust (see Remedies outline)
- Direct suits by beneficiaries is not permitted against third parties who damage trust property; only the trustee can sue.
1. Exception
Trustee participated in breach
Trustee left Jx
Trustee fails to sue third party liable in contract or tort
Creditors
Unless a statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust. The interest is subject to judicial sale. To avoid this, a court may order the beneficiary’s income to the creditors until debt satisfied
Ex. Revocable trust provides that all income will be paid to Andy for life, and on his death, the trust corpus will be distributed to Betsy
In absence of language in the trust to the contrary, which interest may be reached by Andy’s creditors?
* The income interest in the trust.
When Settlor puts money or other assets in the trust and reserves the right to revoke, creditors of the settlor can generally reach these assets. however, once the settlor dies and the trust becomes irrevocable, the creditors can no longer reach these assets. The interest is given to someone else for life, and the creditors cannot reach the trust res
- Apply CP law rules for any CP or SP debts
allocation of trust
- Trustee must administer trust impartially; must be fair to all beneficiaries
- Unless the trust itself states otherwise, trust assets are allocated as follows:
1. Beneficiaries of a trust are entitled to income from interest income, cash dividends, and net business income, but must pay interest on any loan, debt, taxes, repairs.
2. Remaindermen of a trust are entitled to principal from the net proceeds on the sale of an asset, stock dividends, and profits from sale of stock, but must pay the principal part of the loan debt and for major repairs.
3. Subject to the trustee’s best judgement
The trustee can utilize his best judgment in carrying out the terms of the trust to follow the settlor’s intent even if this requires him to disregard the above rules and provide for a different allocation.
