Create a Valid Trust
A valid trust arises when the settlor, with the intent to create a trust for a legal purpose, delivers title of the res to the trustee to hold for the benefit of the beneficiaries.
The res is the trust property. The res must be certain and identifiable.
What happens if a settlor promises to create a trust before the res exists?
If a settlor promises to create a trust before the res exists and the promise is gratuitous, a trust will arise only if the settlor remanifests their intent to create the trust when the res comes into existence. They may remanifest their intent either expressly or impliedly.
If the settor's promise is supported by consideration, then it may be enforced on contract principles.
What happens if the settor creates an empty trust?
An otherwise empty trust is valid if the settlor names the trust as a beneficiary of:
- A life insurance policy;
- A pension plan death benefit;
- Their will.
What happens if the settlor fails to name a trustee or the named trustee dies?
If the settlor fails to name a trustee or the named trustee dies, then the court will appoint a trustee.
⇒ Exception: Powers personal to the named trustee.
Powers Personal to the Named Trustee
If the court finds that the settlor intended that the trust powers be personal to the named trustee, and the named trustee is unable to serve as trustee, then the trust will terminate.
⇒ This is very rare! The court will generally find that the settlor intended that the trust continue for its indicated purpose.
Beneficiaries must be ascertainable.
The members of a class of beneficiaries must be ascertainable.
⇒ A settlor cannot give a trustee discretion to name beneficiaries, although a settlor may give a trustee discretion to determine the shares that each beneficiary is entitled to.
What happens if a settlor fails to name an ascertainable class of beneficiaries?
Under the traditional rule, the trust would fail. However, under the modern rule, the trust will be allowed to continue as a power of appointment.
An honorary trust is a trust that is not for the benefit of a living person. It may be for the benefit of animals or graves. At common law, honorary trusts violate the Rule Against Perpetuities. Under the UTC:
- Honorary trusts are valid (e.g., for the life of the animal);
- The court will appoint someone to enforce the trust;
- If the purpose of the trust is fulfilled, the remaining trust corpus will be returned to the estate by resulting trust.
Is a recovable trust valid?
Yes, even if the settlor:
- Retains the right to revoke, alter, or amend the trust;
- Keeps an income interest in the trust;
- Retains a power of apointment over the trust corpus;
- Retains everyday control over the trust, such as by naming herself trustee.
A pour-over clause is a clause in a will that leaves property to a revocable trust. It is valid if:
- The trust instrument is written;
- The will identifies the trust.
What happens if the settlor alters the terms of a trust that is named as the beneficiary of a pour-over clause?
Nothing. The pour-over clause succeeds even though the trust was amended without testamentary formalities.
When must the settlor create that trust that is the beneficiary of a pour-over clause?
The settlor may create the trust that is the beneficiary of a pour-over before, concurrently with, or after, the will is executed.
May the settlor name herself as both trustee and beneficiary of a revocable trust?
Yes, as long as the settlor is not both the sole trustee and sole beneficiary of the trust.
A totten trust is a bank account that functions as a trust.
How may a Totten trust be revoked, and what happens if it is?
At Totten trust may be revoked by any manifestation intended to revoke the trust or by the depositor's will.
If a Totten trust is revoked, it functions as a normal bank account.
Are oral inter vivos trusts valid?
Yes, oral inter vivos trusts are valid, UNLESS the Statute of Frauds applies, such as to trusts taht create an interest in land.
Is an oral contract to devise property by will enforceable?
- The contract is supported by consideration;
- The contract can be established clear and convincing evidence;
- The Statute of Frauds doesn't apply to the contract.
A secret trust is a testamentary trust that combines an absolute devise by the settlor's will with trustee's oral promise to hold the property.
What happens if a secret trust's trustee claims that there is no trust?
If a secret trust's trustee claims that there is no trust, extrinsic evidence may be used to demonstrate by clear, convincing, and satisfactory evidence that a trust exists.
What happens if a trustee of a secret trust was never told about the trust?
If the trustee of a secret trust was never told about the trust, then the trust takes the property free of any trust obligations.
A semi-secret trust is a testamentary trust that combines an absolute devise in trust with an oral agreement as to beneficiaries.
The trustee cannot comply with the trust. The trustee instead takes the property in resulting trust for the testator's heirs.
The Four Rules
Charitable trusts . . .
- Are not subject to the Rule Against Perpetuities;
- Must be for a charitable purpose;
- Must benefit a reasonably large and unidentifiable segment of the public;
- Can be reformed by the doctrine of cy pres.
Doctrine of Cy Pres
Under the doctrine of cy pres, if the specific purpose of a charitable trust can no longer be accomplished, the court may reform the trust to serve a new charitable use that conforms as closely as possible with the settlor's original intent.
A court will not apply cy pres if the settlor's intent was limited to the original charitable purpose of the trust. (Court's rarely decline to apply cy pres.)
What is the private trust companion to the doctrine of cypres?
Deviation from trust administrative terms because of changed circumstances.
May a trustee alienate or assign her income interest in a trust?
A spendthrift trust is a trust whose interest a beneficiary cannot voluntarily or involuntarily transfer. Spendthrift trusts are valid only if they prohibit both voluntary and involuntary transfer.
When may a third party obtain a right to a beneficiary's interest in a spendthrift trust?
- The third party has a claim for necessities;
- To secure alimony or child support;
- When the claimant is the U.S. or a state.
What special rules apply to trusts that benefit the settlor?
- Spendthrift clauses are unenforceable;
- If the trust is revocable, then creditors may access the trust corpus;
- If the trustee has discretion to make distributions to the settlor, then creditors may access the trust corpus.
May a beneficiary sue a trustee to make distributions from a discretionary trust?
Generally, a trustee cannot force distributions. However, a court may order a trustee to distribute in order to satisfy claims by the beneficiary's child, spouse, or former spouse. (Read: alimony and child support.)
Trustee's Fiduciary Duties
- Duty of Loyalty
- Duty to Invest Prudently
- Duty of Impartiality
- Duty to Preserve and Protect the Trust Property
- Duty to Account and Inform
Duty to Invest Prudently
Under the duty to invest prudently, a trustee is required to manage the trust property as a prudent investor would, taking into account the trust's purpose and terms. In so doing, the must exercise reasonable care, skill, and caution.
- Duty not to commingle assets;
- Duty to balance risk and return;
- Duty to diversify;
- Duty to keep the trust property productive.
Whether a trustee satisfies their duty to invest prudently is judged from a whole portfolio view.
If multiple trustees administer a trust, how do they make decisions?
By majority vote.
What actions may a beneficiary take if a trustee breaches their fiduciary duties?
The beneficiary may:
- Ratify the transaction;
- Surcharge the trustee for the loss;
- Trace and recover lost property for the trust.
Is one trustee liable for another trustee's breach?
No, unless the trustee is also responsible for the breach or for failing to correct it.
Who does the trustee of a revocable trust owe fiduciary duties to?
The trustee of a revocable trust owes fiduciary duties only to the settlor. They don't owe fiduciary duties to other beneficiaries.
Under the Claflin doctrine, a trust can be terminated by the beneficiaries if:
- All of the beneficiaries consent;
- There is no further trust purpose to be served.
⇒ If any of the beneficiaries are minors or unborn, then the Claflin doctrine cannot be used to terminate a trust.
How does the Claflin doctrine interact with spendthrift trusts?
A spendthrift trust cannot be revoked under the Claflin doctrine UNLESS the settlor consents. This is because the trust's spendthrift clause manifests the settlor's intent that the beneficiaries be unable to volunarily or involuntarily assign their interest in the trust.
A resulting trust is implied when:
- An express trust fails;
- An express trust's purpose is accomplished and the trust corpus is not exhaused.
The trust corpus reverts to the settlor's estate.
Purchase Money Resulting Trust
A purchase money resulting trust is presumed to arise when consideration is paid for property by one person, but title in that property is taken by another person.
A constructive trust is implied if a person obtains title to property wrongfully. The trust is implied in order to remedy unjust enrichment.
Power of Appointment
If a donor creates a power of appointment, the power of appointment entitles the donee to designate the person who will recieve the property that the power applies to.
- A power of appointment is general if the donee may appoint herself, her estate, or the creditors of either to recieve the property.
- A power of appointment is specific if the donee may not appoint herself, her estate, or the creditors of either.