TBE--T/G & C.R (Trusts) Flashcards
02/14 #11:
Prior to her death in 2000, Sandi set up an express trust for the benefit of her son, Miguel, and named her good friend, Tom, as the Trustee. The trust instrument provided, in part, the following statement:
“Trustee is hereby immune from liability for any negligent or intentional acts or omissions committed while acting as Trustee. Furthermore, any legal claim against the Trustee for any breach of duty must be tiled
in court no later than six (6) months from the date of the breach. Otherwise, the claim is waived.”
Miguel received minimal cash distributions from the trust but had not actually communicated with Tom for several years. Late in 2013, Miguel met with Tom to discuss the status of the trust. During their meeting,
Tom reported that, except for the minimal payments to Miguel, the trust had been “mostly inactive” and had “lost money in the market.” When Miguel asked to see all accounting records prepared for the trust, Tom said there weren’t any.
Upset by what Tom told him at the meeting, Miguel sent a letter to Tom demanding that Tom produce, within 24 hours, a written statement of all accounts covering all transactions since the creation of the trust, and that he do so on a monthly basis “from now on.” Tom never produced an accounting, and he ignored Miguel’s demand for one within 24 hours and on a monthly basis “from now on.”
After making his request and receiving no response, Miguel hired an attorney and sued Tom for breach of his duties as Trustee. Miguel asked the court to:
(i) order Tom to restore to the trust all losses and inappropriate expenditures; and,
(ii) remove Tom as Trustee.
During Tom’s pretrial deposition, Miguel learned the following facts for the first time:
• Shortly after Tom was appointed Trustee, he used trust funds to purchase a $90,000 luxury vehicle and signed the sales agreement “Tom, as Trustee.” Tom claimed that he used the vehicle “mainly” to conduct
trust business.
• In 2002, Tom loaned himself$250,000 interest free from trust funds. Six months later, he paid the trust back the total sum of $250,000.
• In 2005, Tom invested $100,000 of trust money in anew alternative fuels business that was started that same year by two of his former business partners. Although the business is still a going concern, it has yet
to produce any income for the trust.
Tom asserted that all of his actions as trustee were proper and that there was no intent on his part to breach the trust. Tom also argued that Miguel’s claims were not filed within six months of any alleged breach and were, therefore, waived under the trust instrument.
Did any of the following actions violate Tom’s duties as Trustee? Explain fully.
a. Failing to prepare an accounting for the trust.
b. Purchasing a luxury vehicle.
c. Loaning himself $250,000.
d. Investing trust money in the alternative fuels business.
a)
The issue is if a trustee violates duties when he does not make an accounting statement of the trust to the trust beneficiary. When a trustee gets the property of the trust into his possession, it is mandatory that the trustee put together a statement of accounting showing all the assets of the trust. This should be done within 90 days of receiving the trust property. After that, a trustee should put together a new statement of accounting every 12 months after the initial accounting to show what is in the trust and what has come out and what has gone back in. A trust beneficiary has the right to demand a statement of accounting from the trustee at any time and the trustee will have to show the statement of accounting to the beneficiary of the trust.
b)
A trustee is not allowed to partake in any type of self-dealing. A trustee is only allowed to be reasonably compensated for being a trustee and buying a luxury vehicle is not a way that you can be compensated. Also, a trustee may pay reasonable costs of maintaining the trust out of the trust, but buying a luxury car to help maintain the trust is not something that is allowed.
c)
The issue is whether a trustee has violated their duties as trustee when they loan themselves money from the trust, but later pay the trust back. When a trustee loans themselves money, they are self-dealing from the trust. This is not allowed and is a breach of duty as a trustee. Even if a trustee pays the money back with interest, it does not matter; the trustee has still participated in self-dealing and will be violating their duties as trustee.
d)
A trustee has a duty to invest the trust funds as a reasonably prudent investor. The Uniform Prudent Investment Act (UPIA) governs the investment of trust funds. Under the UPIA, a trustee must invest under the modern portfolio theory which looks at an investment portfolio as a whole rather than at each individual investment. Further, reasonableness is determined at the time of the investment and not in hindsight. A trustee may also invest in the “legal list” of statutorily approved investments that are considered safe without court approval. Otherwise, court approval is typically required. Here, investing trust money in the alternative fuels business was probably improper.
02/14 #11:
Prior to her death in 2000, Sandi set up an express trust for the benefit of her son, Miguel, and named her good friend, Tom, as the Trustee. The trust instrument provided, in part, the following statement:
“Trustee is hereby immune from liability for any negligent or intentional acts or omissions committed while acting as Trustee. Furthermore, any legal claim against the Trustee for any breach of duty must be tiled
in court no later than six (6) months from the date of the breach. Otherwise, the claim is waived.”
Miguel received minimal cash distributions from the trust but had not actually communicated with Tom for several years. Late in 2013, Miguel met with Tom to discuss the status of the trust. During their meeting,
Tom reported that, except for the minimal payments to Miguel, the trust had been “mostly inactive” and had “lost money in the market.” When Miguel asked to see all accounting records prepared for the trust, Tom said there weren’t any.
Upset by what Tom told him at the meeting, Miguel sent a letter to Tom demanding that Tom produce, within 24 hours, a written statement of all accounts covering all transactions since the creation of the trust, and that he do so on a monthly basis “from now on.” Tom never produced an accounting, and he ignored Miguel’s demand for one within 24 hours and on a monthly basis “from now on.”
After making his request and receiving no response, Miguel hired an attorney and sued Tom for breach of his duties as Trustee. Miguel asked the court to:
(i) order Tom to restore to the trust all losses and inappropriate expenditures; and,
(ii) remove Tom as Trustee.
During Tom’s pretrial deposition, Miguel learned the following facts for the first time:
• Shortly after Tom was appointed Trustee, he used trust funds to purchase a $90,000 luxury vehicle and signed the sales agreement “Tom, as Trustee.” Tom claimed that he used the vehicle “mainly” to conduct
trust business.
• In 2002, Tom loaned himself$250,000 interest free from trust funds. Six months later, he paid the trust back the total sum of $250,000.
• In 2005, Tom invested $100,000 of trust money in anew alternative fuels business that was started that same year by two of his former business partners. Although the business is still a going concern, it has yet
to produce any income for the trust.
Tom asserted that all of his actions as trustee were proper and that there was no intent on his part to breach the trust. Tom also argued that Miguel’s claims were not filed within six months of any alleged breach and were, therefore, waived under the trust instrument.
What remedies, if any, does Miguel have as a result of Tom’s actions as Trustee? Explain fully.
The beneficiary can get back any trust property that has not passed to a bona fide purchaser. If the property cannot be recovered, the trustee is liable for damages resulting from the improper use of the trust funds. In addition, a constructive trust may be used to disgorge an unjust enrichment based on wrongful conduct, such as a breach of a fiduciary duty. Furthermore, a trustee may be removed for breach of his fiduciary duties to the beneficiaries.
02/14 #11:
Prior to her death in 2000, Sandi set up an express trust for the benefit of her son, Miguel, and named her good friend, Tom, as the Trustee. The trust instrument provided, in part, the following statement:
“Trustee is hereby immune from liability for any negligent or intentional acts or omissions committed while acting as Trustee. Furthermore, any legal claim against the Trustee for any breach of duty must be tiled
in court no later than six (6) months from the date of the breach. Otherwise, the claim is waived.”
Miguel received minimal cash distributions from the trust but had not actually communicated with Tom for several years. Late in 2013, Miguel met with Tom to discuss the status of the trust. During their meeting,
Tom reported that, except for the minimal payments to Miguel, the trust had been “mostly inactive” and had “lost money in the market.” When Miguel asked to see all accounting records prepared for the trust, Tom said there weren’t any.
Upset by what Tom told him at the meeting, Miguel sent a letter to Tom demanding that Tom produce, within 24 hours, a written statement of all accounts covering all transactions since the creation of the trust, and that he do so on a monthly basis “from now on.” Tom never produced an accounting, and he ignored Miguel’s demand for one within 24 hours and on a monthly basis “from now on.”
After making his request and receiving no response, Miguel hired an attorney and sued Tom for breach of his duties as Trustee. Miguel asked the court to:
(i) order Tom to restore to the trust all losses and inappropriate expenditures; and,
(ii) remove Tom as Trustee.
During Tom’s pretrial deposition, Miguel learned the following facts for the first time:
• Shortly after Tom was appointed Trustee, he used trust funds to purchase a $90,000 luxury vehicle and signed the sales agreement “Tom, as Trustee.” Tom claimed that he used the vehicle “mainly” to conduct
trust business.
• In 2002, Tom loaned himself$250,000 interest free from trust funds. Six months later, he paid the trust back the total sum of $250,000.
• In 2005, Tom invested $100,000 of trust money in anew alternative fuels business that was started that same year by two of his former business partners. Although the business is still a going concern, it has yet
to produce any income for the trust.
Tom asserted that all of his actions as trustee were proper and that there was no intent on his part to breach the trust. Tom also argued that Miguel’s claims were not filed within six months of any alleged breach and were, therefore, waived under the trust instrument.
Did Miguel waive his claims of breach, if any? Explain fully.
A trustee cannot waive his rights to pursue a legal claim against a trustee who has breached their duties to the trust. Duties of a trustee cannot be waived in general because this would be against public policy. If this were to happen then trustees would have this type of clause put in the trust so they can be sure they will not get in trouble for breaching duties against the trust.
07/12 #4:
After hearing that the city of Verde, Texas, intended to create a downtown park called Green Park, Sam, a well-known environmental advocate, established the Green Park Trust (“OPT”). The pertinent trust
documents specifically provided that the purpose of OPT was “to support the beautification of the city of Verde and the preservation of nature” and “to provide funding for the construction, upgrade, and maintenance of Green Park forever.”
Sam named his good friend, Ron, a local business developer, as OPT’s trustee. Because of his friendship with Ron, Sam included the following statement in the trust document: “Trustee is hereby relieved
of any liability for any action taken in his capacity as trustee.” Green Park was constructed and maintained with funding from OPT.
Sam died in 2009. In 2011, the city of Verde negotiated a deal to sell Green Park to Private Development, Inc. (“PDI”), a private developer, which announced its intention to construct a large shopping center over the entire area comprising Green Park. Ron is the majority owner of PDI stating:
In his capacity as trustee of GPT, Ron sent a letter to POI, with a copy to the Texas Attorney General,
Inasmuch as Green Park will continue its existence as a shopping center, I hereby
designate Private Development, Inc. as the replacement beneficiary, and Green Park
Trust will provide funding to assist in the construction of the shopping center and for
the ongoing upkeep of a statue to be erected in Sam’s honor in recognition of Sam’s
community service.
Before Ron distributed any trust funds to POI, the Attorney General of Texas, acting as the
representative of the city of Verde, filed a civil action (a) challenging the designation of PDI as a replacement beneficiary and (b) seeking to remove Ron as trustee. PDI intervened on behalf of itself, as replacement
beneficiary, claiming it is a necessary party to the action.
What standing, if any, do the following parties have under the Texas Trust Code to proceed in the lawsuit:
a. PDI?
b. the Attorney General?
(1) Under the Texas Trust Code, the Attorney General has standing to proceed in the lawsuit concerning GPT, but PDI does not have standing.
GPT is a valid charitable trust, as its purposes (construction, support, and maintenance of a public park) will benefit the public at large.
The Rule Against Perpetuities does not apply to charitable trusts, and thus the trust could be (and was established as) a perpetual trust.
Under the Trust Code, the Attorney General is charged with the duty of representing the public in all matters concerning charitable trusts, and has the statutory authority to intervene in any judicial proceeding involving a charitable trust.
Case law establishes that a potential recipient of benefits from a charitable trust has no greater interest in the performance of the trust than any other member of the general public, and statutes provide that enforcement of such a trust is the responsibility of the Attorney General. Therefore, PDI has no right (and thus no standing) to participate in an action concerning the trust.
07/12 #4:
After hearing that the city of Verde, Texas, intended to create a downtown park called Green Park, Sam, a well-known environmental advocate, established the Green Park Trust (“OPT”). The pertinent trust
documents specifically provided that the purpose of OPT was “to support the beautification of the city of Verde and the preservation of nature” and “to provide funding for the construction, upgrade, and maintenance of Green Park forever.”
Sam named his good friend, Ron, a local business developer, as OPT’s trustee. Because of his friendship with Ron, Sam included the following statement in the trust document: “Trustee is hereby relieved
of any liability for any action taken in his capacity as trustee.” Green Park was constructed and maintained with funding from OPT.
Sam died in 2009. In 2011, the city of Verde negotiated a deal to sell Green Park to Private Development, Inc. (“PDI”), a private developer, which announced its intention to construct a large shopping center over the entire area comprising Green Park. Ron is the majority owner of PDI stating:
In his capacity as trustee of GPT, Ron sent a letter to POI, with a copy to the Texas Attorney General,
Inasmuch as Green Park will continue its existence as a shopping center, I hereby
designate Private Development, Inc. as the replacement beneficiary, and Green Park
Trust will provide funding to assist in the construction of the shopping center and for
the ongoing upkeep of a statue to be erected in Sam’s honor in recognition of Sam’s
community service.
Before Ron distributed any trust funds to POI, the Attorney General of Texas, acting as the
representative of the city of Verde, filed a civil action (a) challenging the designation of PDI as a replacement beneficiary and (b) seeking to remove Ron as trustee. PDI intervened on behalf of itself, as replacement
beneficiary, claiming it is a necessary party to the action.
Assume the Attorney General has standing. Considering the benevolent, public purpose
of GPT and the Texas Trust Code, how should the Court rule on each provision of the Attorney General’s action? Explain fully.
(2) The court should rule in favor of the Attorney General’s challenge of the designation of PDI as a replacement beneficiary and the removal of Ron as trustee.
Judicial modification of a charitable trust under the equitable cy pres doctrine can be invoked when (and only when) the settlor’s intended charitable purpose has been accomplished or has become impracticable.
That is not the situation here. Sam’s charitable purpose, of maintaining and supporting a public park in Verde, can (and should) continue to be carried out. Ron’s proposal to transform a charitable trust into a noncharitable trust and divert the trust assets to a business purpose would be wholly unacceptable even if Ron did not personally benefit from the transition. The court should grant summary judgment on this issue.
Under the Trust Code, a trustee may be removed if the trustee has materially violated or attempted to violate a term of the trust and the violation or attempted violation results in a material financial loss to the trust.
That test can be met here, as Ron has attempted to divert the trust’s charitable funds to a noncharitable purpose that would personally benefit Ron. Moreover, a trustee can be removed if the court finds “other causes for removal.” Ron’s conduct reflects that he is unwilling and therefore cannot be trusted to carry out Sam’s charitable purposes.
The trust instrument included an exculpatory clause relieving Ron from any liability for any actions taken by Ron as trustee. Exculpatory clauses are not a defense where, as here, the trustee’s actions are taken in bad faith or with reckless indifference to the beneficiaries’ rights. Since, however, there has been no attempt to impose liability on Ron, the fact that the exculpatory clause would not protect him from damages is not relevant. The court can assess court costs and attorney’s fees against Ron nevertheless.
07/11 #5:
Susan, a resident of Bexar County, Texas, was planning to go on an extended trip to study meditation in the Himalayas. Before leaving, she established a charitable trust granting $500,000 to the Institute for the
Advancement of Spiritual Endeavors (“The Institute”) for the purpose of” promoting the study of meditation techniques.” She named her sister, Annette, as Trustee. The trust document contained no provision for a
successor beneficiary.
Two months after Susan departed, The Institute’s building and archives were destroyed by fire, and its directors announced it would not reopen.
Annette, an animal lover, decided to designate the Animal Shelter as the new beneficiary of the trust. She did not seek court approval for the designation, and did not send out any notification of the new
designation to any state agency.
Upon hearing about the fire and of Annette’s new designation, the Director of the Center for Meditation Study (“The Center”) filed a suit in Bexar County District Court against Annette and the Animal Shelter alleging that Annette’s designation of the new beneficiary was improper because Annette had not
sought court approval. In the suit, The Center sought to have itself named the new beneficiary of the trust on the ground that its purposes were more consistent with Susan’s intent in establishing the trust. Annette and the Animal Shelter were the only defendants named in the lawsuit.
After a protracted period of litigation, Annette, the Animal Shelter, and The Center agreed to settle the lawsuit, with The Center receiving one-half of the corpus of the trust. The trial judge entered a final order approving the settlement.
The Texas Attorney General’s office timely filed a motion seeking to revoke the settlement agreement. The court ruled in favor of the Attorney General, setting aside the settlement agreement.
Upon her return from the Himalayas, Susan learned of these events and, angry over Annette’s actions, filed suit to have Annette removed as trustee. Annette filed a pleading challenging Susan’s standing to bring the suit.
Did The Center have legal standing to bring suit challenging Annette’s designation of the new beneficiary of the trust? Explain fully.
(1) The Center does not have standing to challenge Annette’s designation of a new trust beneficiary.
At issue is the identification of the persons or entities who have standing to bring an action concerning a charitable trust.
As a general rule, only the attorney general, charged with a statutory duty to represent the public and all potential beneficiaries of a charitable trust, has standing. The tax courts have carved out an exception for the settlor of the trust, who has a special interest in the trust not shared by the general public. However, no other person or entity, not even a potential recipient of benefits from the trust, has standing.
Therefore, The Center does not have standing to bring any action with respect to the trust.
07/11 #5:
Susan, a resident of Bexar County, Texas, was planning to go on an extended trip to study meditation in the Himalayas. Before leaving, she established a charitable trust granting $500,000 to the Institute for the
Advancement of Spiritual Endeavors (“The Institute”) for the purpose of” promoting the study of meditation techniques.” She named her sister, Annette, as Trustee. The trust document contained no provision for a
successor beneficiary.
Two months after Susan departed, The Institute’s building and archives were destroyed by fire, and its directors announced it would not reopen.
Annette, an animal lover, decided to designate the Animal Shelter as the new beneficiary of the trust. She did not seek court approval for the designation, and did not send out any notification of the new
designation to any state agency.
Upon hearing about the fire and of Annette’s new designation, the Director of the Center for Meditation Study (“The Center”) filed a suit in Bexar County District Court against Annette and the Animal Shelter alleging that Annette’s designation of the new beneficiary was improper because Annette had not
sought court approval. In the suit, The Center sought to have itself named the new beneficiary of the trust on the ground that its purposes were more consistent with Susan’s intent in establishing the trust. Annette and the Animal Shelter were the only defendants named in the lawsuit.
After a protracted period of litigation, Annette, the Animal Shelter, and The Center agreed to settle the lawsuit, with The Center receiving one-half of the corpus of the trust. The trial judge entered a final order approving the settlement.
The Texas Attorney General’s office timely filed a motion seeking to revoke the settlement agreement. The court ruled in favor of the Attorney General, setting aside the settlement agreement.
Upon her return from the Himalayas, Susan learned of these events and, angry over Annette’s actions, filed suit to have Annette removed as trustee. Annette filed a pleading challenging Susan’s standing to bring the suit.
Was it within Annette’s powers as Trustee to designate the Animal Shelter as the new trust
beneficiary? Explain fully.
(2) It was not within Annette’s power as trustee to designate the Animal Shelter as the new trust beneficiary.
At issue is whether the trustee of a charitable trust may, without a judicial proceeding or notice to anyone, name a new charitable beneficiary if the named beneficiary ceases to exist.
A trustee may name a new charitable beneficiary upon giving notice to the attorney general, but only when the replacement charitable beneficiary has the same or a similar charitable purpose as the failed beneficiary. Where the trust funds are to be diverted to a different charitable purpose, a judicial cy pres proceeding must be brought, in which the court may reform the trust to divert the funds to a charitable purpose as near as possible to the original purpose.
Here, Annette’s action would divert the trust funds from the study of meditation techniques to the sheltering of animals, a totally different charitable purpose. Under the facts given, even if a cy pres proceeding had been brought, a court could not properly direct the trust finds to animal rescue. In any case, Annette did not have the power to designate the Animal Shelter as the new trust beneficiary, because the shelter has a wholly different charitable purpose from the study of mediation techniques.
07/11 #5:
Susan, a resident of Bexar County, Texas, was planning to go on an extended trip to study meditation in the Himalayas. Before leaving, she established a charitable trust granting $500,000 to the Institute for the
Advancement of Spiritual Endeavors (“The Institute”) for the purpose of” promoting the study of meditation techniques.” She named her sister, Annette, as Trustee. The trust document contained no provision for a
successor beneficiary.
Two months after Susan departed, The Institute’s building and archives were destroyed by fire, and its directors announced it would not reopen.
Annette, an animal lover, decided to designate the Animal Shelter as the new beneficiary of the trust. She did not seek court approval for the designation, and did not send out any notification of the new
designation to any state agency.
Upon hearing about the fire and of Annette’s new designation, the Director of the Center for Meditation Study (“The Center”) filed a suit in Bexar County District Court against Annette and the Animal Shelter alleging that Annette’s designation of the new beneficiary was improper because Annette had not
sought court approval. In the suit, The Center sought to have itself named the new beneficiary of the trust on the ground that its purposes were more consistent with Susan’s intent in establishing the trust. Annette and the Animal Shelter were the only defendants named in the lawsuit.
After a protracted period of litigation, Annette, the Animal Shelter, and The Center agreed to settle the lawsuit, with The Center receiving one-half of the corpus of the trust. The trial judge entered a final order approving the settlement.
The Texas Attorney General’s office timely filed a motion seeking to revoke the settlement agreement. The court ruled in favor of the Attorney General, setting aside the settlement agreement.
Upon her return from the Himalayas, Susan learned of these events and, angry over Annette’s actions, filed suit to have Annette removed as trustee. Annette filed a pleading challenging Susan’s standing to bring the suit.
Did the court err in setting aside the settlement agreement? Explain fully.
(3) The court did not err in setting aside the settlement agreement.
The issue is whether a charitable trustee may institute a judicial proceeding concerning the trust without giving notice to anyone.
In any proceeding involving a charitable trust, a certified copy of the petition initiating the proceeding must be sent to the attorney general by registered or certified mail, enabling the attorney general to decide whether to participate in the proceeding. If such notice is not given, any judgment or settlement in the proceeding is voidable by the attorney general.
Here, as no notice was given to the attorney general, the court properly granted the attorney general’s motion to set aside the agreement.
07/11 #5:
Susan, a resident of Bexar County, Texas, was planning to go on an extended trip to study meditation in the Himalayas. Before leaving, she established a charitable trust granting $500,000 to the Institute for the
Advancement of Spiritual Endeavors (“The Institute”) for the purpose of” promoting the study of meditation techniques.” She named her sister, Annette, as Trustee. The trust document contained no provision for a
successor beneficiary.
Two months after Susan departed, The Institute’s building and archives were destroyed by fire, and its directors announced it would not reopen.
Annette, an animal lover, decided to designate the Animal Shelter as the new beneficiary of the trust. She did not seek court approval for the designation, and did not send out any notification of the new
designation to any state agency.
Upon hearing about the fire and of Annette’s new designation, the Director of the Center for Meditation Study (“The Center”) filed a suit in Bexar County District Court against Annette and the Animal Shelter alleging that Annette’s designation of the new beneficiary was improper because Annette had not
sought court approval. In the suit, The Center sought to have itself named the new beneficiary of the trust on the ground that its purposes were more consistent with Susan’s intent in establishing the trust. Annette and the Animal Shelter were the only defendants named in the lawsuit.
After a protracted period of litigation, Annette, the Animal Shelter, and The Center agreed to settle the lawsuit, with The Center receiving one-half of the corpus of the trust. The trial judge entered a final order approving the settlement.
The Texas Attorney General’s office timely filed a motion seeking to revoke the settlement agreement. The court ruled in favor of the Attorney General, setting aside the settlement agreement.
Upon her return from the Himalayas, Susan learned of these events and, angry over Annette’s actions, filed suit to have Annette removed as trustee. Annette filed a pleading challenging Susan’s standing to bring the suit.
How should the court rule on Annette’s challenge to Susan’s standing? Explain fully.
(4) The court should rule that Susan has standing to bring the removal action against Annette.
The issue is whether the settlor of a charitable trust has standing to bring an action concerning the trust.
As noted above, as a general rule only the attorney general has standing to bring an action relating to a charitable trust. However, the Texas courts have carved out an exception for the trust settlor, who has an interest in the trust not shared by the general public.
Accordingly, Susan should be found to have standing to bring the removal action.
02/11 #11:
In 2000, Ronald established an express trust naming his granddaughter Bonnie as income and remainder beneficiary. Ronald named himself trustee, and his brother Willard as successor trustee. The trust property included a 300-acre parcel of land located in Texas; 10,000 shares of stock in a wind farming: company called WindPower, Inc.; and $1,000,000 in cash. Ronald died in 2002, and Willard assumed his position as trustee.
As the years passed, Bonnie became increasingly concerned over Willard’s actions as trustee. In 2010, she retained an attorney to sue Willard for mismanagement of the trust. At trial, the following facts were established:
- In 2006, Willard invested $25,000 of the trust’s assets in a racehorse owned by his girlfriend. He testified that he made the investment in an effort to diversity the trust’s portfolio and that the racehorse was from an excellent bloodline and had a good chance of becoming a champion.
- In 2008, Willard purchased for himself from the trust 5,000 of its shares of the WindPower, Inc., stock. He paid fair market value for the stock.
- In 2009, Willard sold the 300-acre parcel of land after learning of a developer’s plan to build a theme park in the area. The sale resulted in a large profit to the trust, and Willard, a real estate agent, took a 6% commission on the sale as a broker’s fee.
- Every year that Willard had served as Trustee, he paid himself$20,000 per year out of the trust assets as compensation for acting as Trustee.
Explain fully whether or not each of the following actions violated Willard’s duties as trustee:
a. Investing in the racehorse.
b. Purchasing the WindPower, Inc., stock from the trust.
c. Selling the 300-acre parcel of land and taking a commission from the sale.
d. Paying himself compensation for acting as trustee.
(1) Willard’s investment in the racehorse did not satisfy the standards imposed by the Texas Uniform Prudent Investors Act. His purchase of WindPower stock constituted impermissible self-dealing, and he received an impermissible benefit by taking a commission on sale of the trust’s land.
A trustee is entitled to reasonable compensation for serving as trustee, and a $20,000 annual fee may be reasonable. However, in view of Willard’s numerous breaches of trust, upon motion the court may deny compensation and compel Willard to reimburse the trust for the compensation he already has received.
(a) The issue is whether Willard’s investment in his girlfriend’s racehorse satisfies the duties and standards established by the Uniform Prudent Investor Act.
Investment in a racehorse is inherently speculative. While the UPIA does not prohibit speculative investment per se, a trustee must be able to show that the investment will effectuate the settlor’s intent as to the purposes of the particular trust.
The facts strongly suggest that Willard’s motive in investing in the racehorse (which apparently gave him only a share of ownership and not outright ownership) was to favor and benefit his girlfriend rather than the trust beneficiary, an impermissible motive. If the investment had been in a racehorse owned by Willard’s sister or other relative, under the Texas Trust Code this would constitute impermissible self-dealing. While the Trust Code provision relating to self-dealing does not list girlfriends or paramours, such a transaction raises similar concerns, and should be viewed accordingly.
The court will likely rule that Willard’s investment in the racehorse was imprudent and constituted a breach of trust.
(b) The issue here is whether it was permissible for Willard to purchase WindPower stock from the trust when he paid fair market value for the stock.
The Trust Code explicitly prohibits self-dealing transactions unless the settlor has waived the self-dealing rules.
There is nothing in the facts suggesting that Ronald, as settlor, waived the prohibition against self-dealing. The fact that Willard paid fair market value for the stock is no excuse or defense.
The concern of the self-dealing rules is not necessarily that a trustee would unfairly take advantage of the situation, but that his personal interest may affect his judgment as to whether the asset should be sold at all. A trustee has a duty of loyalty to the trust, and that loyalty may be tainted by his self-interest in the transaction. By purchasing this trust asset, Willard committed a breach of trust.
(c) The next issue is whether it was proper for Willard to take a commission for selling real property owned by the trust. It was not.
A trustee cannot profit from serving as trustee (except for being reasonably compensated as trustee).
By receiving a commission for the sale of trust property, Willard committed a breach of trust.
(d) The next issue is whether it was proper for Willard to pay himself $20,000 per year as compensation for serving as trustee.
Under the Trust Code, a trustee is entitled to “reasonable” compensation.
The Trust Code gives no guidance as to what is reasonable, and so in practice individual trustees often look by analogy to what corporate trustees customarily charge. A fee of 1% of the value of the trust corpus is often seen as reasonable.
In addition to the $1 million in cash, the trust owned 300 acres of land and 10,000 shares of WindPower stock. The facts do not state the value of these assets, but if they were valued at several million dollars, a $20,000 annual fee may have been reasonable. However, the court has the power to deny compensation to a trustee who has committed a breach of trust. Given that Willard has committed numerous breaches of trust, upon motion the court may deny compensation and compel Willard to reimburse the trust for the compensation he has received.
02/11 #11:
In 2000, Ronald established an express trust naming his granddaughter Bonnie as income and remainder beneficiary. Ronald named himself trustee, and his brother Willard as successor trustee. The trust property included a 300-acre parcel of land located in Texas; 10,000 shares of stock in a wind farming: company called WindPower, Inc.; and $1,000,000 in cash. Ronald died in 2002, and Willard assumed his position as trustee.
As the years passed, Bonnie became increasingly concerned over Willard’s actions as trustee. In 2010, she retained an attorney to sue Willard for mismanagement of the trust. At trial, the following facts were established:
- In 2006, Willard invested $25,000 of the trust’s assets in a racehorse owned by his girlfriend. He testified that he made the investment in an effort to diversity the trust’s portfolio and that the racehorse was from an excellent bloodline and had a good chance of becoming a champion.
- In 2008, Willard purchased for himself from the trust 5,000 of its shares of the WindPower, Inc., stock. He paid fair market value for the stock.
- In 2009, Willard sold the 300-acre parcel of land after learning of a developer’s plan to build a theme park in the area. The sale resulted in a large profit to the trust, and Willard, a real estate agent, took a 6% commission on the sale as a broker’s fee.
- Every year that Willard had served as Trustee, he paid himself$20,000 per year out of the trust assets as compensation for acting as Trustee.
What remedies does Bonnie have for Willard’s violations, if any, of his duties as trustee? Explain fully.
(2) Bonnie is entitled to recover:
(i) the $25,000 Willard invested in the racehorse,
(ii) the 5,000 shares of WindPower stock that Willard improperly purchased,
(iii) the commission Willard improperly paid himself, and
(iv) the trustee compensation that Willard paid himself.
Additionally, in view of Willard’s numerous breaches of trust, Bonnie should petition for his removal as trustee and the appointment of a successor trustee.
At issue are the remedies that are available to a beneficiary against a trustee who commits a breach of trust.
A beneficiary always has an option. She can ratify the transaction and waive the breach of trust if it is in her interest to do so. If, for example, the WindPower stock has gone down in value since Willard bought it, Bonnie should ratify his self-dealing purchase and stick Willard with the loss. If, on the other hand, the stock has increased in value, Bonnie can petition for the imposition of a constructive trust and have the stock restored to the trust.
With respect to the $25,000 invested in the racehorse, unless Bonnie decides to waive the breach of trust (e.g., if the racehorse has increased in value or she believes it is a good investment), Bonnie can bring a surcharge action to recover the $25,000, and also to recover the sale commission. Finally, as is noted above, although Willard as trustee was entitled to reasonable compensation, the court has the power and authority to deny compensation (and compel reimbursement for fees already paid) where, as here, the trustee has committed numerous breaches of trust.
07/10 #9:
In 2005, Elizabeth, a highly paid executive officer of a Texas Corporation, established an irrevocable trust naming her nephew Daniel as the beneficiary. The trust is funded with the income Elizabeth receives from mineral interests she owns. Elizabeth named herself as trustee of the trust. The trust document does not provide for a successor trustee.
The trust provides an annual distribution of income to Daniel for a 20-year term. At the end of the 20-year term, the corpus of the trust is to be transferred to Daniel, free of the trust. The trust also contains a spendthrift provision that reads: ‘The beneficiary of this trust is hereby restrained from anticipating,
encumbering, alienating, or in any other manner assigning or disposing of his interest in either the corpus or income of the trust estate, and is without power to do so.”
In January 2008, a judgment was entered against Daniel in a breach of contract suit. Cameo, Inc. (“Cameo”), the judgment creditor, threatened Daniel that, unless Daniel signed an irrevocable assignment to Cameo of the undistributed trust income for the next five years, it would obtain a writ of execution and levy on the trust corpus to satisfy the judgment. Daniel is seriously considering signing the assignment for fear that, if he does not, Cameo will levy on and deplete the corpus of the trust.
In 2009, Elizabeth was involved in a serious accident, became completely incapacitated, lost all her earning capacity, and was unable to carry out her duties as trustee. Graham was appointed by the Court to be her guardian. Graham notified Daniel that, in light of Elizabeth’s condition, he was terminating the trust and that Daniel will no longer receive income payments.
Can Daniel, if he wishes to do so, assign the undistributed income to Cameo in 2008 to satisfy the judgment against him? Explain fully.
(1) Daniel cannot assign the undistributed trust income to Cameo in 2008 to satisfy the judgment against him.
At issue is whether the spendthrift provision in the trust precludes Daniel’s voluntary assignment of his interest in the trust’s income.
The Texas Trust Code permits a grantor to include a spendthrift clause in a trust under which a beneficiary’s interest may not be voluntarily or involuntarily transferred. Such a provision was included in the trust established by Elizabeth.
The provision restraining Daniel from alienating his interest in the trust income will be given full effect.
While the Trust Code provides for exceptions to spendthrift protection (e.g., for child support and contracts for necessities), none of the statutory exceptions apply here. An attempted assignment of the income by Daniel would be invalid.
07/10 #9:
In 2005, Elizabeth, a highly paid executive officer of a Texas Corporation, established an irrevocable trust naming her nephew Daniel as the beneficiary. The trust is funded with the income Elizabeth receives from mineral interests she owns. Elizabeth named herself as trustee of the trust. The trust document does not provide for a successor trustee.
The trust provides an annual distribution of income to Daniel for a 20-year term. At the end of the 20-year term, the corpus of the trust is to be transferred to Daniel, free of the trust. The trust also contains a spendthrift provision that reads: ‘The beneficiary of this trust is hereby restrained from anticipating,
encumbering, alienating, or in any other manner assigning or disposing of his interest in either the corpus or income of the trust estate, and is without power to do so.”
In January 2008, a judgment was entered against Daniel in a breach of contract suit. Cameo, Inc. (“Cameo”), the judgment creditor, threatened Daniel that, unless Daniel signed an irrevocable assignment to Cameo of the undistributed trust income for the next five years, it would obtain a writ of execution and levy on the trust corpus to satisfy the judgment. Daniel is seriously considering signing the assignment for fear that, if he does not, Cameo will levy on and deplete the corpus of the trust.
In 2009, Elizabeth was involved in a serious accident, became completely incapacitated, lost all her earning capacity, and was unable to carry out her duties as trustee. Graham was appointed by the Court to be her guardian. Graham notified Daniel that, in light of Elizabeth’s condition, he was terminating the trust and that Daniel will no longer receive income payments.
Can Cameo reach the trust corpus in 2008 to satisfy its judgment? Explain fully.
(2) Cameo cannot reach the trust corpus in 2008 to satisfy its judgment against Daniel.
At issue is whether the trust’s spendthrift provision applies to Cameo’s attempt to reach trust corpus when the spendthrift clause addresses only what Daniel can or cannot do and does not explicitly address a creditor’s power to reach the trust property.
Under the Trust Code, a spendthrift clause can apply to a trust beneficiary’s interest in both income and corpus.
Here, the spendthrift clause states that Daniel is restrained from anticipating, etc., his interest in the trust. Cameo could argue that while the provision prevents voluntary transfers by Daniel, it does not prevent involuntary transfers to a creditor. Such a contention should be rejected, because the provision states that Daniel is restrained “in any other manner” from disposing of his trust interest. Spendthrift provisions are liberally construed, as is evidenced by the Trust Code provision that a trust term stating that “this shall be a spendthrift trust” is sufficient to give spendthrift protection.
Cameo can reach Daniel’s interest in the trust corpus when the trust terminates at the end of 20 years and the corpus is distributed to Daniel, but Cameo cannot reach Daniel’s interest before that time.
07/10 #9:
In 2005, Elizabeth, a highly paid executive officer of a Texas Corporation, established an irrevocable trust naming her nephew Daniel as the beneficiary. The trust is funded with the income Elizabeth receives from mineral interests she owns. Elizabeth named herself as trustee of the trust. The trust document does not provide for a successor trustee.
The trust provides an annual distribution of income to Daniel for a 20-year term. At the end of the 20-year term, the corpus of the trust is to be transferred to Daniel, free of the trust. The trust also contains a spendthrift provision that reads: ‘The beneficiary of this trust is hereby restrained from anticipating,
encumbering, alienating, or in any other manner assigning or disposing of his interest in either the corpus or income of the trust estate, and is without power to do so.”
In January 2008, a judgment was entered against Daniel in a breach of contract suit. Cameo, Inc. (“Cameo”), the judgment creditor, threatened Daniel that, unless Daniel signed an irrevocable assignment to Cameo of the undistributed trust income for the next five years, it would obtain a writ of execution and levy on the trust corpus to satisfy the judgment. Daniel is seriously considering signing the assignment for fear that, if he does not, Cameo will levy on and deplete the corpus of the trust.
In 2009, Elizabeth was involved in a serious accident, became completely incapacitated, lost all her earning capacity, and was unable to carry out her duties as trustee. Graham was appointed by the Court to be her guardian. Graham notified Daniel that, in light of Elizabeth’s condition, he was terminating the trust and that Daniel will no longer receive income payments.
Does Elizabeth’s inability to serve as trustee in 2009 cause the trust to fail? Explain fully.
(3) Elizabeth’s inability to serve as trustee does not cause the trust to fail.
At issue is the effect of a trustee’s inability to serve where the trust instrument does not provide for a successor trustee.
A fundamental principle of trust law is that no trust ever fails for lack of a trustee. If the named trustee is unable to serve or continue to serve as trustee and no successor has been named, the court will appoint a suitable person or trust company as successor trustee in order to carry out the settlor’s intent that there be a trust for the indicated purposes.
Elizabeth can no longer serve as trustee because she is incapacitated. The court should appoint a successor trustee so as to carry out Elizabeth’s trust purposes. Graham might be a suitable appointee because the court has appointed him to another fiduciary office, that of Elizabeth’s guardian. The trust will not fail.
07/10 #9:
In 2005, Elizabeth, a highly paid executive officer of a Texas Corporation, established an irrevocable trust naming her nephew Daniel as the beneficiary. The trust is funded with the income Elizabeth receives from mineral interests she owns. Elizabeth named herself as trustee of the trust. The trust document does not provide for a successor trustee.
The trust provides an annual distribution of income to Daniel for a 20-year term. At the end of the 20-year term, the corpus of the trust is to be transferred to Daniel, free of the trust. The trust also contains a spendthrift provision that reads: ‘The beneficiary of this trust is hereby restrained from anticipating,
encumbering, alienating, or in any other manner assigning or disposing of his interest in either the corpus or income of the trust estate, and is without power to do so.”
In January 2008, a judgment was entered against Daniel in a breach of contract suit. Cameo, Inc. (“Cameo”), the judgment creditor, threatened Daniel that, unless Daniel signed an irrevocable assignment to Cameo of the undistributed trust income for the next five years, it would obtain a writ of execution and levy on the trust corpus to satisfy the judgment. Daniel is seriously considering signing the assignment for fear that, if he does not, Cameo will levy on and deplete the corpus of the trust.
In 2009, Elizabeth was involved in a serious accident, became completely incapacitated, lost all her earning capacity, and was unable to carry out her duties as trustee. Graham was appointed by the Court to be her guardian. Graham notified Daniel that, in light of Elizabeth’s condition, he was terminating the trust and that Daniel will no longer receive income payments.
Can Graham unilaterally revoke the trust or terminate it by legal process in 2009? Explain fully.
(4) Graham, as Elizabeth’s guardian, cannot unilaterally revoke or terminate the trust.
At issue is whether a settlor’s guardian can revoke or terminate an irrevocable trust where the settlor is incapacitated and has lost all of her earning capacity.
The trust created by Elizabeth was expressly stated to be irrevocable. As such, Elizabeth had no power to revoke the trust, and neither does her guardian have such a power.
The Trust Code authorizes judicial termination of a trust under certain circumstances. A trust can be judicially terminated if the purposes of the trust have been fulfilled or have become illegal or impossible to fulfill. Also, a trust can be judicially terminated prior to the time fixed for termination if, because of circumstances not known to or anticipated by the settlor, the termination will further the purposes of the trust.
The only situation in which a trust can be terminated without judicial proceedings is where an uneconomical trust (less than $50,000) is involved, which is not the situation here. Moreover, if Graham were to petition for a judicial termination, he would be unsuccessful. Neither of the statutory tests for early termination can be met. The trust purposes have not been fulfilled, nor have they become illegal or impossible to fulfill. While Elizabeth has undergone changed circumstances in terms of her physical and financial circumstances, an order terminating the trust would not further the trust purposes but, rather, would defeat those purposes, which were to provide economic benefits to Daniel. Hence, Graham cannot unilaterally terminate the trust.
