Trusts Flashcards
Define Trust
A trust is a fiduciary relationship wherein one or more trustees are called upon to manage, protect, and invest certain property and any income generated from the property for the benefit of one or more beneficiaries.
How is a trust created?
To create a trust, the grantor must have intended to create the trust. A trust is valid as long as it has a trustee, an ascertainable beneficiary, and assets.
Explain bifurcated transfer.
A trust involves a bifurcated transfer. The creator or settlor transfers property to a second-party trustee to be managed for the benefit of a third-party beneficiary. The trustee holds legal title, and the beneficiary holds equitable title. No consideration is required.
Revocable v. Irrevocable Trusts
In most jurisdictions, and under the Uniform Trust Code, a trust is presumed to be revocable unless it expressly states that it is irrevocable. Traditionally, and in a minority of jurisdictions, a trust is presumed to be irrevocable.
Are trust interests transferable?
Trust interests are alienable, devisable, and descendible unless the terms of the trust expressly or impliedly provide otherwise.
Mandatory v. Discretionary Trusts
A mandatory trust requires the trustee to distribute all trust income per the trust agreement. To protect the interests of the beneficiaries, a settlor may instead opt to create a discretionary trust, under which the trustee is given the power to distribute income at his discretion. The trustee does not abuse his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.
Applicability of RAP to trusts
Because future interests are trust components, trusts are subject to the RAP, meaning that a trust may fail if all interests thereunder may not vest within a life in being plus 21 years. Some jurisdictions take a “wait and see” approach, refraining from invalidating future interests until it is clear they will not vest within the perpetuities period.
Parties to a trust
There are three parties to a trust–settlor, trustee, and beneficiary.
The settlor is the creator of the trust.
The trustee holds legal interest or title to the trust property. A trust may have one or more trustees. The same individual cannot serve as sole trustee and sole beneficiary of a trust. If the trustee is the sold beneficiary, then the title merges and the trust terminates.
A named trustee must have capacity to acquire and hold property for his own benefit and capacity to administer the trust.
If the settlor fails to designate a trustee, then the court will appoint a trustee.
The beneficiary is a person for whose benefit property is held in trust.
How can a person designated as a trustee accept the position?
A person designated as a trustee can accept the position (i) substantially complying with a method of acceptance provided for in the terms of the trust; or (ii) by accepting delivery of the trust property, exercising powers as a trustee, performing duties of a trustee, or otherwise indicating acceptance of the trusteeship.
What happens when a trustee dies?
A trust will not automatically terminate upon the death of a trustee. In the event that the trustee dies, a court will appoint a successor trustee, unless the settlor expressed a contrary intent.
What is a private express trust and how is it created?
A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries.
A private trust is created only if the settlor who has capacity to create a trust clearly expresses a present intent to transfer ownership of property to a trustee who has duties to perform for the benefit of one or more ascertainable beneficiaries. The trust must be created for a valid purpose.
How is intent to create a private express trust determined?
The settlor must intend to make a gift in trust. The use of common trust terms such as “in trust” or “trustee” creates a presumption of intent to create a trust, but these words are not required. The settlor’s intent may be manifested orally, in writing, or by conduct.
Intent is only required to be expressed in writing when the Statute of Wills or the Statute of Frauds applies.
To determine a settlor’s intent, the courts will look to the totality of the circumstances.
When must intent manifest to create a trust?
The manifestation of intent must occur either prior to or simultaneously with the transfer of property. If the transfer does not take place immediately, then the intent should be manifested anew at the time of transfer. A promise to create a trust in the future is unenforceable unless supported by consideration.
How do you differentiate between a gift and a trust?
A determination must be made regarding whether a bifurcated transfer was intended, and if so, whether the intent was more than a mere hope or wish.
What is a precatory trust?
If a donor transfers property to a donoee using language that expresses a hope or wish that such property be used for the benefit of another, then the gift may be considered a precatory trust and not an outright gift.
To be considered a precatory trust, the transfer must contain specific instructions to a fidiciary, and it must be shown that, absent imposition of a trust, there would be an unnatural disposition of the donor’s property because of familial relations or a history of support between the donor and beneficiary.
What constitutes as valid trust property?
A valid trust must contain some property that was owned by the settlor at the time the trust was created and was at that time transferred to the trust or trustee. A trust must be funded.
If a trust that is invalid for a lack of assets is later funded, a trust arises if the settlor re-manifests the intention to create a trust.
The exception is a “pour-over” gift, which is valid even if made before there is identifiable trust property.
Difference between a trust and a debt
A trust involves the duty of one party to deal with specific property for another, whereas a debt involves the obligation of one party to pay a sum of money, from any source, to another.
If the recipient of the funds is entitled to use them as if they are his own and to commingle them with his own monies, then the obligation to pay the funds to another is a debt, not a trust.
Segregation of trust property
Trust property must be identifable and segretated. The property must be described with reasonable certainty.
What constitutes a valid trust purpose?
A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or contrary to public policy, and possible to achieve.
An entire trust will not fail if one of the trust terms violates public policy but can be stricken from the trust unless the removal of the term proves fatal.
Who constitutes an ascertainable beneficiary?
The beneficiaries of a private trust must be ascertainable (i.e., identifiable by name) so that the equitable interest can be transferred automatically by operation of law and directly benefit the person.
The settlor may refer to acts of independent significance (think:wills) when identifying trust beneficiaries.
Under the UTC, a trustee can select a beneficiary from an indefinite class, unless the trustee must distribute equally to all members of an indefinite class.
If a beneficiary has died without the settlor’s knowledge prior to creation of the trust, the trust fails and a resulting trust in favor of the settlor is presumed.
Exceptions to “ascertainable beneficiary” requirement
Unborn children: Trusts for the benefit of unborn children will be upheld even though the beneficiaries are not yet ascertainable at the time the trust is created.
Class-gift exception: A trust to a reasonably definite class will be enforced. Even a trust that allows the trustee to select the beneficiaries from among the members of a class is acceptable.
Charitable-trust exception: Only private trusts must have ascertainable beneficiaries. Charitable trusts must not have individual ascertainable beneficiaries.
Define “pour-over” trust
A pour-over devise is a provision in a will that directs the distribution of property to a trust upon the happening of an event, so that the property passes according to the terms of the trust w/o the necessity of the will reciting the entire trust.
In simpler language:
A will that makes a gift to a trust is valid so long as the trust is identified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will. Under the modern approach, later made amendments to the trust are valid. Under common law, amendments
made after execution of the will are not valid.
Validity of a pour-over trust
Under the common-law doctrine of “incorporation by reference,” if a will refers to an unattested document in existence at the time the will is signed, then the terms of that document could be given effect in the same manner as if it had been property executed. Under this doctrine, the terms of an amended recovable trust would not apply to the disposition of probate assets because the amendment was not in effect at the time the will was executed.
Under the UTATA, a will may “pour over” estate assets into a trust, even if the trust was not executed in accordance with the Statute of Wills, as long as the trust is identified in the will and the terms are set forth in a written instrument. If these requirements are met, the pour-over bequest is valid even if the trust is unfunded, revocable, and amendable.
If a trust is revoked, then the pour-over provision in the will must fail.
What is a living trust?
A living or revocable trust is created primarily to avoid probate of a decedent’s property upon the decedent’s death. A settlor transfers ownership of some or all of his assets to a revocable trust. The settlor generally names himself as the trustee of the trust and is the primary current beneficiary of the trust. Upon the settlor’s death, the successor trustee named in the trust instrument is responsible for distributing the trust’s assets in accord with the terms of the trust.
Such a trust does not protect the trust property from the settlor’s creditors and does not avoid federal estate tax on the trust property.
What is a testamentary trust?
Testamentary trusts occur when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will. Testamentary trusts must comply with the applicable jurisdiction’s Statute of Wills.
“Secret”/”Semi-Secret” Trusts
If a testamentary trust does not meet the requirements of the Statute of Wills, it may still be deemed a constructive trust or a resulting trust, depending on whether it is “secret” or “semi-secret.”
A “secret” trust is not a testamentary trust. It looks like a testamentary gift, but it is created in reliance on the named beneficiary’s promise to hold and administer the property for another. The intended beneficiary is permitted to present extrinsic evidence to prove the promise. If the promise is proven by clear and convincing evidence, then a constructive trust is imposed on the property for the intended beneficiary, so as to prevent the unjust enrichment of the “secret” trustee.
A “semi-secret” trust is also not a testamentary trust. A semi-secret trust occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust. In this situation, extrinsic evidence may not be presented, the gift fails, and a resulting trust is imposed on the property to be held in trust for the testator’s heirs.
Requirements for charitable trust
For a trust to be considered charitable, it must have a stated charitable purpose and it must exist for the benefit of the community at large or for a class of persons the membership in which varies. For public-policy reasons, charitable trusts are usually construed quite liberally by the courts.
