Flashcards in Trust Deck (81)
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
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
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
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
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.
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
What if trust is established but does not name trustee.
- 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
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
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
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
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
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
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
-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)
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.
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
Trust will fail if:
involves crime or tort, created with intent to defeat settlors creditors, based on illegal consideration.
- Total restraints on marriage
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)
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)
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)
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
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
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
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
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
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
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)
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.
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.