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Flashcards in Trust Deck (81):
1

What is a Trust?

Trust is an arrangement for making gifts of property and for the management of assets under which the trustee holds legal title to trust assets for the benefit of the beneficiaries. Trustee has all of the burdens of ownership ( duty to manage, invest, insure, safeguard etc) Beneficiaries have equitable title and all of the benefits of ownership.
No consideration required (but it can be there). Consideration required for future trust

2

To have a valid trust

There must be a settlor who delivers the trust property to a trustee with the intent to create a trust for the benefit of beneficiaries. Trust must be for lawful purpose

3

Settlor

Must have legal capacity
- Age 18 or over, must have capacity to convey title to the trustee, a higher test for capacity than for wills

4

Delivery

There must be delivery of the subject matter of the trust with intent to convey legal title to the trustee
- For inter vivios trust that names third party as trustee the mere intent to create a trust or a gratuitous promise to create a trust is not sufficient
- Requirement does not apply to a self-declaration of trust (“I hereby declare myself trustee”) or testamentary trust.
Ex: Person wants to place securities in trust but dies before delivering securities. There is no valid trust because no delivery of the trust assets with intend to transfer title during lifetime.
- Same answer if person gave agent authority to transfer securities to trustee but person died before delivery was made. Agents authority to transfer title terminated on principals death

5

Trust Property

To have a trust legal title to a specific interest in property must be conveyed to the trustee. The subject matter of the trust must be certain and identifiable.
- If there is no trust property there is no trust
Ex: ‘ I create a trust to distribute $400 a month from dividends paid on stock that I own and after death this will continue until mimis death’ No cash stock or other property was set aside as the corpus of the trust
- Valid trust not created, no trust property was segregated and identified. Trust duties must relate to specific property interest. This is a mere promise to make gifts in the future
- Same answer where person promise to fund trust with “whatever money or property that I contribute to the trust over the next 10 years” merely a promise to create a promise to create a trust in the future, unenforceable if not supported by consideration
Ex: Instead of above it says “ I cant pay you right now but if you continue to work for me I shall sell some of my stock and create a trust for your benefit, naming myself as trustee. Shall pay you $4,000 a month and after death trustee shall pay you $4,000 until your death”
- Different result would be reached because the promise to hold property (to be received in the future) in trust is supported by a consideration.

6

Trustee

Must have legal capacity to deal with the property (age 18 or older etc)
Trustee must have capacity to contract and to execute a deed a higher standard of capacity than is required for execution of wills.
Settlor or Beneficiary can be trustee but if sole trustee of a trust is also beneficiary, no trust because legal and equitable title merges.
An unincorporated association cannot be a trustee.
Only banks and trust companies given trust powers In their charters and charities as to charitable trusts only can serve as trustees

An individual named as trustee must post a fiduciary bond to secure the faithful performance of her duties unless the settler waived the requirement of a bond
A corporate trustee (bank or trust company) does not have to give bond

A trustee is entitled to reasonable compensation for serving as trustee

7

What if trust is established but does not name trustee.

Valid Trust
- No trust ever fails for lack of a trustee. IF the intent to create a trust is clearly manifested but no trustee is named or if the name trustee dies, resigns or becomes incapacitated with no provision for a successor trustee, the court will appoint a suitable successor to execute the trust.
- If trust is created by will, court will usually appoint executor named in will

8

Can someone names as trustee decline to serve as trustee?

Yes, no one can be compelled to accept fiduciary responsibilities and duties
- And trust won’t fail, court will appoint trustee

9

What constitutes acceptance of the trust office by the trustee named in the trust instrument?

1. Trustee signature, signifying acceptance of the trust.
- What if he does not sign a written acceptance of the trust?
2. Acceptance by Conduct
- If he exercises trust power or performs trust duty

10

What if conflicts arise between trustee and beneficiaries. Can trustee resign? IF so what procedures must be followed?

Court approval upon showing can longer appropriately serve as trustee
- Conflicts justify resignation
Accounting has to be given
Accounting is: 1. Property initially received, 2. Receipts and disbursements, 3. Property now on hand plus liabilities

11

What if trustee has no powers or active duties to perform under the trust?

If named trustee has no powers or activities duties to perform then no trust arises. If trustee has no duties only legal title. To have trust must owe duties to someone.
Ex: Alan transfers title to Blackacre to betty as trustee for the benefit of Clyde. Under the agreement Clyde has power to manage and control the use of blackacre and betty as trustee has no powers or active duties over the property
- State of title: Clyde holds full title, not equitable trust interest
- If spendthrift clause was included it is not valid.
To have spendthrift clause have to have valid trust so now creditors can reach property

12

Trustee by Estoppel

Trustee by Estoppel not recognized. (procedure not followed to appoint someone and another person stepped forward to act as trustee for several years)
- Person acting as trustee without formal and proper appointment has no authority to deal with trust property, and beneficiaries are not estopped form suing to recover any resulting loses

13

Beneficiaries must be ascertainable

A noncharitable trust must have definite and ascertainable beneficiaries and their interest must vest if at all not later than lives in being plus 21 years
- Charitable trust cannot benefit identifiable individuals and charitable trusts are not subject to RAP

Ex: “to best friends” to vague, but family and relatives are ok

Ex: Mother conveys land to “John Smith as trustee”. No trust power or terms are set out in deed or any other document. Then mother dies.
No valid trust created. No beneficiaries named an not trust purposes indicated. Therefore land passes through mothers estate by will or intestacy. No gift to john intended, trustee

But if trust involves minor children courts seem to be more apt in letting trust be created (Ex: andy brown, Betty brown, james brown as trustee) As for trustee powers and duties read trust code.
- Different because nobody was named as possible beneficiary and oral testimony is not admissible to identify the beneficiaries

14

Beneficiary Disclaims

-Testamentary Trust: must be in writing and filed within 9 months after testators death
- Inter Vivios Trust: written instrument acknowledged before a public notary and delivered to trusete no later then 9 months after (1) date on which the transfer creating interest was made, (2) the date on which the beneficiary turned 21, (3) for future interest, date on which the even that causes the taker of the interest to indefeasibley vest (may be sopped if accepted trust benefits)

15

Resulting Trust

A resulting trust is not a trust. Term courts employ when a trust fails for some reason.
Ex: $100,000 To B as trustee to pay income there from to my best friends. Residuary to Sam.
- Because trust fails B holds a Resulting Trust for Sam.

16

Words to Create a Trust

Intent to create a Trust:
Is the language precatory (a non-binding suggestion) or does it impose an enforceable obligation
Precatory Words: Request, hope, wish and desire, I would life

No particular words needed to create a trust. It’s a question of intent
Ex: Check to H for “the use and benefit of G”. No gift to H intended, it’s for G’s benefit and use so a trust results and H will not be allowed to keep and not distribute the funds

17

Trust will fail if:

involves crime or tort, created with intent to defeat settlors creditors, based on illegal consideration.
- Total restraints on marriage

18

Trust objectives/ purposes prohibited by law

3 Example of trust objectives/purposes which are prohibited by law
1. Trust calls for commission of a crime
Ex: Running drug operation.
But trust can be created with illegally obtained funds but heirs of defrauded party can bring action to recover property
2. Trust calls for destruction of property
Ex: capricious purpose- trustee shall tear down house and plant gross but leave chicken coop and shed
3. Unlawful condition that is against public policy
Against Public Policy:
- Encourages Divorce
- Total Restraint on Marriage
Person would be able to take property free of trust and free of condition
- Partial restraints on marriage are valid (must/must not marry a jewish man)
- It’s ok to condition support to widow until she remarries (motive is to provide support during widowhood)

19

All Trust Must be In Writing Except

- A transfer of personal property to a trustee other than the settlor or beneficiary coupled with a declaration of intent to create a trust simultaneously with or prior to the transfer
However trusts of land must be evidenced by a writing (SOF)

20

Are Trust Revocable?

All inter vivos trust are recoverable and amendable by the settlor unless expressly made irrevoacable and unamendable
- Where a trust is created by written instrument, any revocation or amendment must be made in writing, an oral revocation is ineffective
- Settlor creates revocable trust, later becomes incapacitated: Guardian does not have authority to revoke the trust; only a court can revoke the trust upon finding that revocation is in wards best interest
- Divorce revokes all revocable trust provisions in favor of a former spouse and relatives of a former spouse who are not relatives of the settlor (unless reexecuted)

21

As long as there are one or more trust beneficiaries besides the settlor a trust is not void as an attempted testamentory disposition (doesn’t have to executed with formalities of a will) even though settlor retains any one or more of the following rights a powers:

- Income for life
- Power to revoke, alter or amend the trust
- Power to control trustee in the administration of the trust
- Power to add property, life insurance proceeds, employee benefits to the trust
- Settlor can name herself trustee to serve as long as she has capacity

22

Pour Over Will Provision

The Testamentary gift to the trust called a pourover will, provides a means for adding testamentary assets to a trust created by the testator during lifetime
By statute, such a pourover gift is valid even if trust is subject to revocation and is later amended, even if trust is unfunded (eliminates concern about trust property In an unfunded life insurance trust).
Trust need not be in existence before or executed concurrently with will, it can be created after the will is signed

23

Trust amendment vs. Will amendment

Trust Law controls, not wills law in situations where you amend a trust agreement.
Even though it wasn’t carried out as formally executed will, it’s a trust amendment so it doesn’t matter. Just must be in writing ,not witnesses

24

Situation where there is life insurance policy but don’t want lump sum to be paid and want a trust for beneficiaries benefit.

- Person could create an unfunded revocable life insurance trust and name the trustee as beneficiary. This would result in additional legal fees for preparation of trust and will already establishes a trust for beneficiaries behalf.
Such a beneficiary designation is expressly validated by statute
Statue also authorized payment of employee death benefits to trustee of intervivos trust, trustee named in will

25

Joint Bank Accounts

Signature card says the bank is authorized to pay the funds on deposit to surviving party.
Does this create Right of survivorship? No need specific language, whoever gets it in will, will get it not joint owner of bank account
- Is extrinsic evidence admissible to show that person meant to have bank account of right of survivorship? No, language on account agreement controls
Need language like “ all sums in the account shall vest in and belong to the suriving party” or “with right of survivorship”
Joint Tenats: The agreement cannot say JT or JTWROS, must be spelled out

The right of survivorship in a joint bank account is valid if the signature card was signed by the party who has died even if the survivor didn’t sign unless the survivorship account between husband and wife was funded with community property in which case both spouses must sign the signature card.
During the parties lifetimes ownership of a joint bank account is in proportion to each parties deposits

26

Durable Power of Attorney

A durable power of attorney which must be signed and acknowledge before a notary public authorized another person to act on behalf of principal.
- The agents authority is not affected by the principals incapacity if it states “that the power of attorney is not affected by my subsequent disability or incapacity” or contains words of like effect. The principal can grant a springing durable power: this power of attorney becomes effective upon my incapacity
- Third parties who rely on durable power without actual knowledge that it has been revoked or that the principal ahs died are protected.
- A durable power given to principals spouse terminated on divorce (unless reacknowledged) but not on principals bankruptcy.
Appointments of guardian of the estate for principal terminates the durable power. (or can suspend for temporary) But for many families a durable power of attorney to a child trusted friend may eliminate the need to have a guardian appointed

27

Charitable Trust Rules

Charitable Trust Rules:
- Not subject to Rule Against perpetuities, may be perpetual
- Must be a charitable purpose. Must confer a substantial amount of social benefit, religion, education, relief of poverty, medical research (“to be sued for charitable purpose” ok, “to support fine arts” ok
- Must be in favor of a reasonable large segment of public at large and cannot benefit identifiable individuals (trust for “my poor relatives” not a trust)
- When specific charitable propose can no longer be accomplished may be reformed in judiciable proceedings under cy pres

RAP: no interest is good unless it must vest if at all not later than 21 years after some life in being at the interests creation
If a will or trust violates RAP, the instrument shall be reformed or construed so as to carry out settlors general intent as far as possible (within lives in being plus 21 years)

28

Who can enforce a charitable trust that has no identifiable trustees?

- In any action involving a charitable trust a certified copy of the petition must be sent to attorney generally be registered certified mail so attorney general can decide whether to appear in the proceeding. Failure to give notice makes judgment voidable by attorney general. Only attorney general and trust settlor have standing to bring an action concerning a charitable trust. No other person or entity has standing.

29

Where charitable trust purpose can’t be carried out (solved) Result when heirs are now saying they get money?

General Charitable Intent that can still be accomplished: To devote the entire estate to medical research for the prevention and cure of disease
Specific Direction that can longer be accomplished: That disease be something certain, no reason to frustrate general intent

If Cy Pres is applied the court will instruct the trustee to pay the income to an organization doing medical research for something “as close as possible”
- Cy pres, that trust can carry on with something as close as possible applies only to charitable trusts.

30

Must the trustee bring a judicial cy pres action to reform charitable trust?

No
If the named charitable beneficiary under a trust ceased to exist or ceased to qualify as a charity for federal income tax purposes: trustee can name new charity as beneficiary without court approval. However trustee must give notice of the selection of the attorney generally and replacement charity must have same or similar charitable purpose as the failed charity

31

Where the trust purpose was changed (not just a new charitable beneficiary carrying out the same charitable activity)

A judicial cy pres proceeding must be brought to divert income to a related charitable activity “as near as possible”
But when you just need new charity to carry out same charitable purpose under statute no judicial proceeding is necessary

32

Objective Trust

To have a trust, the trustee must owe enforceable duties to someone.
- Can’t set up trust to maintain rose garden, wax car once a month.
This is not a charitable trust and it has no individual beneficiaries who can enforce the trust.
- This type of gift (in which an object is the beneficiary) is sometimes called an honorary trust gift.
Trustee is on her honor in deciding whether to perform the trust. The gift is valid only in the sense that it will be upheld if Trustee choose to perform. If she doesn’t the gift fails and there is a resulting trust
- Additional problem with such trust: RAP, unless trust limit to 21 years duration (roses and cars cant be used to measure lives, trust might last longer then 21 years)
Problem result under Texas cy pres perpetuities reform statue: Trustee is willing to perform honorary trust gift valid for 21 years

33

Animal Trust

Valid trust where beneficiary is beneficiary as an animal
Only animals alive during settlors lifetime can be beneficiaries, trust terminates on death of animal (or last surviving animal), individuals named in instrument creating the trust can be used as measuring lives for perpetuities purposes, trust is enforceable by a person named in trust or appointed by court and trust property not used for animals care distributed to settlor if living, otherwise under settlors will or by intestacy.
- Outright bequest to an animal is void, animals cannot hold title to property

34

Purchase Money Resulting Trust

Where A pays for purchase price and puts title in Bs name
- Presumed: A had no intent to make gift
Evidence is admissible to show 1. Gift or 2. Loan of purchase price
- If B is related then there is presumption of gift, not purchase money resulting trust but evidence is admissible to rebut the gift presumption and show no intent to make a gift

35

Can also have resulting trust by Reversion?

(incomplete disposition of the trust assets), or when an express trust fails and there is no indication of what is to be done with trust property

36

Define Constructive Trust and Give a Short Example

A constructive trust is not a trust. It is an equitable remedy whose object is to discourage unjust enrichment. Benefit of constructive trust: Enables injured party to recover the very property in dispute doesn’t have to settle for judgment for money damages
Two Elements: 1. Wrongful conduct 2. Unjust enrichment
- Can hold in constructive trust for someone else’s benefit
Does the trust code apply to resulting trusts or constructive trusts? No they are not really trusts

37

Constructive Trust by Statute

By statute (meaning constructive trust remedy not necessary) if the beneficiary willfully brings about the death of the insured, proceeds are distributed as though killer predeceased the insured victim. Proceeds are distributed to Alternate beneficiary and if no alternate beneficiary is named proceeds are paid into insures estate
- Killers children could take, they are not precluded

38

Spendthrift Clauses

given full effect in Texas.
Purpose of spend thrift – Protects a trust beneficiary’s interest from creditors by prohibiting voluntary assignment or involuntary transfer of the beneficiaries interest. Thus judgment creditor cannot reach beneficiary’s interest in spendthrift trust by garnishment or attachment

Exceptions:
- Contracts for necessaries (medical, food, rent) (this exception is actually seen as benefit to any beneficiary whose sole source of income is income from a trust)
- Child support obligations
- Any interest retained by the settlor
- Revocable Trust
Federal Tax liens

39

Does a beneficiary have an action against trustee for paying creditor pursuant to the assignment?

No, Beneficiary who participate in breach of trust estoppel applies. Beneficiary is estopped from complaining when trustee carries out instructions

40

Can beneficiary creditors reach income after it has been distributed to him from a spendthrift trust?

Yes, Once the income is distributed it is no longer subject to the trust or its spend thrift clause. But creditors would have to file suit each time beneficiary received a distribution. Spend thrift clause takes away creditors efficient remedied of garnishment and attachment. Moreover, creditor cannot use turnover statute of Creditors rights law to compel beneficiary to pay over the income to the creditor upon its receipt

41

Spendthrift clause and A Settlor retaining interest


If you are also the settlor and you retain any interest (or the entire trust if settlor retained the power to revoke the trust) No spendthrift protection as to any interest retained by settlor

42

What result as to trust principal if you also get distributions? / Spendthrift Clause

What result as to trust principal if you also get distributions? As to interest irrevocably transferred to third parties (whether outright or in the trust) Settlors creditors: cannot reach it
Exception: Fraudulent transfer- transfer made with intent to defeat, delay or defraud creditors

43

How to create a Spendthrift Clause

Do not need any special words for spend thrift clause. Can simple say “this shall be a spendthrift trust”

44

Discretionary Trusts

If trust is set up lie “trustee may distribute to settlor so much of the trust income and/or principal as trustee in its sole discretion deems appropriate”
- Settlor request that trustee makes a distribution of trust income to settlor, trustee refuses, can settlor compel trustee to any standard? No, trustee has sole discretion not subject to any standard
Can creditor reach the trust income or principal in satisfaction of the obligation it creditor obtains judgment against Settlor? Yes, to maximum extent trustee could make distribution to him. Self-Settled Asset Protection Trusts are not valid in Texas
- Beneficiaries creditors could not reach

45

Support Trusts

“Income to dolly for life, remainder to her children. In addition if the trustee determines that the income is insufficient for dollys support trustee may in its sole discretion not subject to challenge by any persons, distribute dolly so much of the principal as is needed for her support
- Does dolly have a cause of action if she is laid off and sues to compel principal distribution contending that income is insufficient to support her needs? Yes
Dolly can compel a distribution of amount she shows is needed for her support. Purpose of the trust was not to give the trustee discretion, it was to provide for Dolly’s support. It would be an abuse of discretion to not make a distribution if needed for support.
Conversely any distribution of principal far in excess of dollys actual support needs is a breach of trust, and the remainderman have an action against the trustee

What if same trust but Dolly occurs medical bills of $30,000 can hospital reach trust principal in satisfaction of the $30,000 debt? Yes
Creditor who furnished necessaries can reach a support trust. If beneficiary could compel a distribution for support purposes, so also can a creditor who furnished necessaries

46

Jurisdiction of Trust

District Courts, Statutory Probate Courts have concurrent jurisdiction over all proceedings regarding inter vivos trusts and testamentary trusts

47

Venue of Trust

If an individual trustee
i. County of trustees residence or
ii. County in which situs (principal office) of trust has been maintained.

Two or more individual trustees: county in which principal office of trust has been maintained

Corporate trustee: County of the corporations principal office

If settlor is deceased and an estate administration is pending, action involving iner vivios trust created by the settlor or a testamentary trust created by his will may be brought under above rules or in he county in which estate administration is pending

48

Accounting

Trust beneficiaries are entitled to an accounting on demand no sooner than 12 months after trust was created and to successive accountings on demand at same intervals.
Has to keep records, but accounting only on demand

Settlor cannot restrict or eliminate the right to demand an accounting by primary beneficiaries- beneficiaries who at the time of the demand (i) are entitled or permitted to receive distributions from the trust (ii) who would receive a distribution if the trust terminated then.
However the right of any other beneficiary to demand an accounting can be restricted or eliminated
Ex: IF trust provides “income to alice for life and on her death to Ben if he is then living otherwise to carl” and alice ben carl are all living a restriction in the trust on the right to demand an accounting cannot apply to alice and ben but it does apply to carl.

49

Texas Trustee Act

IF a fee simple owner can do it so can trustee
- The Texas trust code which applies to all trust in Texas except to the extend the trustess powers are expanded or limited by the settlor gives broad fiduciary powers to trustee. Specifically the trust code expressly authorizes a trustee to (do whatever question involves)
Exception: There are two situations where the answer is no, the trustee doesn’t have the power to do this
1. Self Dealing
2. Imprudent Investment

50

List 6 powers trustee may exercises in managing real property held in trust

- Sell property at public or private sale, lease the property for any term the trustee seems appropriate, give a mortgage, make improvements’, make repairs, give mineral leases, partition and subdivide the property

51

Who must bring an action if trust property is damaged?

Trustee must bring action against those who injure trust property unless trustee is not able to bring action or refuses (then beneficiary can) or trustee participated with third party

52

Self Dealing

When trust is lender and trustee is the borrower (even if you give the note same interest as banks would)
- Concern of the no self dealing rules is not that the trustee will cheat or steal but rather that trustees personal interest in the transaction may taint his judgment under the duty of loyalty is to act solely in the interest of beneficiaries
1. Trustee cannot borrow trust funds or use trust assets as collateral for a personal loan
- Exceptions: corporate trustee (bank, trust company) can make interim deposits of trust funds in its own bank accounts, settlor can authorize corporate trustee to invest in banks own certificates of deposits as a trust investment
2. Trustee cannot buy or sell trust assets to itself
- Corporate trustee exception: can be allowed on court order
- Settlor can waive the self-dealing rules even as to corporate trustees as well as individuals named as trustees
3. Trustee cannot loan funds to the trust, and any interest eared on such a loan must be returned to the trust. Any security received in connection with such a loan is invalid if they had reason to know assets belonged to trust
4. Trustee cannot profit from serving as trustee (except for being compensated) as by taking advantage of confidential information received in his capacity as trustee or accepting a commission for selling real estate owned by the trust
5. Corporate trustee cannot buy its own stock as trust asset (but can retain such stock when received in trust if it’s a prudent investment)

53

Third Parties and Self Dealing

Third parties who deal with trustee in good fatih and for value without notice of misconduct or who in good faith pay money to a trustee are protected from the transactions later being questioned because of the trustees misconduct

54

If Trustee breaches any fiduciary duty Beneficiary options

IF trust breaches any fiduciary duty (commits a breach of trust) self dealing, speculative investment, or exercises a power not given to the trustee in addition to bringing an action to deny the trustees compensation and remove the trustee, beneficiary has option:
1. He can ratify the transaction and waive the breach of trust (eg if the trustee invests the entire trust in treasure-hunting company stock and it goes up in value, “Thanks for doing such a good job for the investing”)
2. He can bring surcharge action for the resulting loss. Moreover if the case involves self-dealing under the no further inquiry rule breach of a fiduciary duty is an automatic wrong; good faith reasonableness is no defense. Only issue in a self-dealing case: measure o damages (eg difference between what he paid for the stock and what it is wroth at the time of suit)
3. If trustee still has possession of the property beneficiary can petition for the imposition of a constructive trust

Four year statute of limitations does not begin to run on action against a fiduciary (trustee, executor, guardian) unless and until he (i) repudiates the trust; that is, denies the existence of a trust with respect to the property (ii) dies or resigns or (iii) gives an accounting that makes full disclosure of the facts upon which the action is based

55

What if trustee comingels personal and trust funds

If value goes up, trust profit. If goes down trustees profit

56

Does a beneficiary have a right against a purchaser who purchased from trustee

(if they knew he was trustee). Not if purchaser is a boneafide purchaser. Conveyance to a bone afide purchaser cuts off equitable title unless she knew or should have known he was self dealing.
- If the purchaser was related it doesn’t matter that hazel didn’t know, it will be self dealing

57

Self Dealing and Trustees family

Self dealing rules also apply to loans or sales to a relative and to a business entity of which trustee is an officer, director, partner, employee or principal shareholder (sometimes called indirect self dealing)

58

Can Trustee make a loan to Beneficiary

Yes, subject to the general test of prudence (interest rate must be fair, loan must be secured, reasonable repayment schedule)

59

Trustees duty to insure

A trustees duty to protect and preserve the trusts assets includes the duty to insure them against loss if a prudent person would insure such assets

60

No Further Inquiry Rule

all the beneficiary has to show is that the trustee enaged in self-dealing behavior. No further inquiry, just damages. Doesn’t matter if the trustee had good faith or actual benefit to trust

61

What if co-trustees are about to act improper and one wants to protect himself from liability?

Where there are two or more trustess, majority rules. However each co-trustee has an affirmative duty to prevent a breach of trust by a co-trustee
- So they should attempt to dissuade trustees
- Do not participate in the transaction
- Express dissent in writing

62

Trustees Investment Power

Can trustees be held liable for losses when they invest?
Uniform prudent investor act based on the modern portfolio theory of investing that looks to total return (appreciation and capital gain as well as ordinary income)
- Probably not liable, prudence measure by conduct when investment decision is made
Under the UPIA , trustee must establish and maintain a custom tailored investment strategy that will effectuate settlors intent as to the purposes of the particular trust taking into account such factors as:
- The role that each investment plays within the overall trust portfolio
- The expected total return from income and capital gain
- General economic conditions
- The possible effect of inflation or deflation
- The expected tax consequences of investment decisions or strategies
- Needs for liquidity
- An assets special relationship or value to the purposes of the trust or a beneficiary - Any differing interest of income beneficiaries and the remainderman

63

Does the investments sharp decline in value create a res ipsa case that the investment was imprudent leading to trustee liability?

No, Prudence not measured by hindsight. We look at conduct not outcome and performance

64

Under UPIA what are investment returns measured by?

Under UPIA investment returns are measure by total return, including appreciation and capital gain

65

Adjustment Power

Under the Uniform principal and income act trustee can exercise: Adjustment power and allocate capital gain and principal to income
Starting point: Trustee distributes income (interest income, rental income, dividends on common stocks etc) to the income beneficiary and adds capital gains (part of proceeds of sale of a principal asset) the corpus of the trust however:
- Capital gain and principal can be allocated to income where appropriate

Factors to be considered in exercising adjustment power (ie power to adjust total return between income and principal) and allocate capital gain and principal to income:
- Purpose and expected duration of the trust
- Intent of the settlor as to respective interest of the beneficiaries
- The net amount of ordinary income and capital gain available for allocation
- Circumstances of the beneficiaries
- The need for liquidity, regularity of income and preservation and appreciation of capital
- Any increase or decrease in value of the trust assets
- Whether the trust gives the trustee power to distribute principal (if trustee can distribute principal there’d be no need to exercise adjustment power)
- Effect of economic conditions and effects of inflation and deflation and
- Anticipated tax consequences of an adjustment

66

Delay Rentals and Royalties

All delay rentals allocated to income. $0 allocated to principal
Royalty bonus: allocate receipts equitably

67

An Allocation is presumed to be equitable if

An Allocation is presumed to be equitable if it follows the federal income tax depletion allowance which under the current law is 15%. Therefore of the $100,000 of bonus and royalty, allocate $15,000 to principal to cover depletion and $85,000 to income
However before the enactment of the UP&IA the allocation rule under the trust code was 27 ½ % to cover depletion and 72 ½ % to income and existing trust can do this (January 1 2004)

68

Pension Plans, Annuities and IRAs

For pension plans, annuities and IRAs (individual retirement accounts) that name a trust as beneficiary, distributions are allocated to income until payments equal four percent of the plans or IRAs value at the beginning of the accounting period (typically Jan 1) any excess over four percent is allocated to principal. Thus if the IRA was valued at $500,000 at the beginning of the accounting period (4% of $500,000=$20,000) and distributions during the year total $15,000 allocated to income: all $15,000. If the distributions total $40,000 $20,000 is allocated to income

69

Receipts from Liquidating Assets

For receipts from liquidating assets (patents, copyrights, book royalties) that will decline in value over time allocate 10% to income and 90% to principal

70

All money received form an entity

All money received from an entity (corporation, partnership etc) is allocated to income (unless the receipt is characterized as capital gain for federal income tax purposes)
All receipts from an entity other than money (eg stock dividends) are allocated to principal

71

Expenses: Trustees Commissions, Expenses fo accounting, judicial proceedings

½ charged against income and ½ charged against principal

72

Ordinary Expenses

Expenses that come up every year are charged against income property taxes, casualty insurance premiums, ordinary repairs, mortgage interest payments

73

Capital Expenditures

charged against principal- capital improvements, expenses relating to environmental matters, estate taxes, mortgage principal payments

74

Under the Prudent Investor Rule

Under the prudent investor rule a trustee can’t keep or put all investments eggs in one basket (absent contrary provision), cant retain all stock without any duty to diversify
But the settlor can authorize the trustee to retain the stock without any duty to diversity trust investments

75

When does Texas Trust Code Apply?

All provisions of the Texas trust code are default rules and apply absent contrary provision by the settlor. A settlor can write her own rules and modify the otherwise applicable trust code provisions. The only rules that settlor cannot waive:
- Cannot limit requirement that a trust cannot be created for an illegal purpose or require trustee to commit a criminal tortuous act or act contrary to public policy
- Cannot exculpate a trustee from liability for a breach of trust committed in bad faith, intentionally or with reckless indifference to the interest of a beneficiary
- Cannot limit the statute of limitations for commencing a judicial proceeding
- Cannot limit a trustees duty to respond to a demand for an accounting by the trusts primary beneficiaries, to act in good faith and
- Cannot limit courts power to exercises its jurisdiction to modify or terminate a trust to remove a trustee, to require a fiduciary bond, or to deny a trustee’s compensation

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When is trustee personally liable on contract?

Trust Code says that a trustee is personally liable on contracts unless contract excludes personal liability. But addition of words trust or as trustee is prima facie evidence of intent to exclude personal liability
Thus the actual rule is: A trustee is not personally liable on a contract unless she fails to disclose he representative capacity(ie that she is a trustee)
Compare: A personal representative of a decedents estate (executor or administrator) is personally liable on contacts (but is entitle to reimbursement form the estate) unless the contract stipulates no personal liability, and signed contract as executor does not by itself relieve personal liability

77

When is trustee personally liable for torts by itself or agent

Trustee is personally liable for Torts committed by itself and its agents but trustee is entitle to reimbursement from the trust estate if tort was common incident of the business activity in which the trustee was properly engaged when the torts was committed.
- Suit is against the trustee in his individual capacity not against the trust. A trust (or an estate) is not an entity that can be sued

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Exculpatroy Clauses

Exculpatory clauses valid but are strictly construed
Ex: The trustee shall not be liable to the beneficiaries for any act or omission except in cases of gross negligence, bad faith, or fraud
- An exculpatory clause that purports to relieve liability for acts done in bad faith, gross negligence, or fraud is enforceable. While self-dealing rules can be waived, an exculpatory clause but itself does not authorized self dealing

79

State the conditions that cause a trust to terminate

1. A trust terminates automatically according to its terms
Ex: A for life and on As death principal to A’s children, on A’s death the trust will terminate

All of the following apply to termination of the trust or modification of the trusts terms:
2. Upon petition of a trustee or beneficiary court may order that the trustee be changed that the trust terms be modified that the trustee be directed to do acts that are not authorized or prohibited from doing acts that are required by the trust or that the trust be terminated if one of the following test is met:
- Purposes of the trust or any provision thereof have been fulfilled or have become illegal or impossible to fulfill
- Changed circumstances: because of circumstances not known to or anticipate by the settlor the modification or termination will further the purposes of the trust
- Achievement of tax purposes: modification or termination is necessary or appropriate to achieve the settlors tax objectives

3. Termination of uneconomic trust: after giving notice to beneficiaries the trustee of a trust having a value of less than $50,000 may terminate the trust without court approval if the trustee determines the cost of administration does not justify continuation of the trust

Except: for uneconomical (less than $50,000) trusts modification or early termination of a trust must be by court after hearing it cannot by extra-judicial agreement of the parties with one exception
- Division of a trust into two trusts of merger of two trusts into one trust can be accomplished without a judicial proceeding. The division or merger can be done for any reason, but is usually done for some tax purpose designed to produce tax savings

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When can a court modify trust?

We can have a court modified trust based on changed conditions if the modification would further the accomplishment of the trust purposes
Ex: want your widow to live in house rent free for life but now house is in the middle of commercial district, can remove condition to not sell because purpose of trust is to provide for widow for life

What if the trust says you cant get principle until your 35 but by 26 you went out Harvard for MBA and no longer need trust to manage your assets can the court order termination of the trust?
NO, purpose of the trust was for you not to get principal until you are 35
- Has the purpose been fulfilled, become illegal, become impossible to fulfill?
- Do we have changed circumstance?
- Would termination of the trust further the accomplishment of purpose?

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How long can the trustee continue to exercise trust powers after termination of the trust and for what purpose?

After a trust terminates the trustee may continue to exercise trust power for the reasonable time needed to
1. Wind up Trust affairs and
2. Make distribution to beneficiaries