Trusts Flashcards
1
Q
Who holds which interests?
A
Legal interest: trustee
Equitable interest: bfy
Settlor: person who causes trust to come into being
2
Q
Role of trustee
A
Fiduciary (reasonable care/ loyalty)
- Personally responsible if conduct falls beneath
3
Q
How does trust move upon death of settlor
A
Inter vivos trust passes outside probate
4
Q
Types of express trusts
A
Private – private bfy Charitable – charitable bfy (indefinite class or general public) Honorary/purpose – pet/ maintain memorial
5
Q
Types of trusts created by operation of law
A
Resulting – arise from presumed intention of owner of property
Constructive – equitable remedy to prevent unjust enrichment
6
Q
Elements of a valid trust
A
To form a valid trust, the settlor must intend to create a trust for a valid trust purpose, and delviers trust property to the trustee to hold for the benefit of one or more identifiable beneficiaries.
- Intent to create trust relationship (split legal/equitable title)
- Proper purpose
- Identifiable corpus
a) Capacity to convey - Trustee
- Ascertainable bfy (Private trust: definite beneficiaries)
- Mechanics and formalities
7
Q
Result of no identifiable corpus
A
If no corpus then trust will arise when funded with assets if:
- if no valid consideration: Remanifest intent to create trust when funded
- If valid consideration:
8
Q
Testator - Capacity
A
Same as capacity to make a will.
Understand:
- Nature of act (executing will)
- Nature & extent of property
- Natural objects of their bounty (family members)
- Able to formulate orderly scheme of disposition
9
Q
Trust - What renders trust unenforceable
A
Lack of legal capacity, undue influence, fraud, duress
10
Q
Trust - Technical Requirements
A
Written (sometimes oral) but no specific words
Delivery of property to trustee (no communication to bfy)
- Not necessary if self-trustee but must seperate
Trust takes effect immediately
11
Q
Trust - Precatory expressions
A
Hope/wish/ suggestion does not create (must impose legal obligation not moral), inference of non-creation overcome by:
- Definite & precise directions
- Directions to fiduciary
- Unnatural disposition if no trust imposed
- Extrinsic evidence shows settlor previously supported bfy
12
Q
Corpus – Result of no corpus on trust
A
Trust fails for lack of/ insufficient trust property
13
Q
Corpus - Types of future interests that can be corpus
A
Future interests may be held in trust
Mere expectancy is not
14
Q
Corpus - Requirement for trust corpus
A
Identifiable
Segregated
15
Q
Corpus - Debt
A
Debtor cannot hold own debt in trust // other can hold debt in trust
Debtor can declare themselves trustee of property from which debt is to be paid
16
Q
“Mechanics” – when is oral trust permitted
A
Established by clear & convincing evidence
- Trust of land must usually be in writing
17
Q
“Mechanics” – If fails for lack of writing
A
Usually must be in writing - invalid trust may be valid through constructive trust
18
Q
How to resolve Statute of Fraud issue
A
Holder of legal title acting like trustee will preclude SoF defense
19
Q
Use of Parole evidence?
A
Most states allow
20
Q
Requirement for Beneficiaries in private trust
A
Mut be identifiable (not so with charitable trusts) Trustee may select members in its discretion as long as class is reasonably definite
21
Q
Qualified beneficiary
A
Has additional rights compared to other byf – must receive notice and get to decide re: certain things.
Is a bfy who, on the date trust becomes functional:
1. Is a Current bfy (not a contingent remainder) OR
2. First-line remainderman (is eligible to receive distributions were the event triggering term of bfy’s interest/ the trust itself to occur on the qualification date)
Contingent remainders are not qualified bfy
22
Q
Requirement of bfy
A
- Capable of taking/ holding title
- Must accept to become bfy (express/implied – generally presumed)
Need not be competent
No notice necessary – lack of notice implies no trust
23
Q
How to disclaim
A
- File signed & written instrument
- Usually within 9 months (time doesn’t start until 21 years)
- Has not exercised domion/control
- Irrevccaoble
- Sometimes affidavit
Treated as if bfy predeceases
Date of disclaimer relates back to defeat creditor’s liens but not tax liens
24
Q
Applcaiton of Anti-lapse to trusts
A
Some states/ UPC – applies anti-lapse to future interests created in trusts even if expressly conditioned on survival
25
Effect of divorce
Revokes all beneficial gifts/ fiduciary appointments in favor of former spouse
26
Definite Bfy – Unascertained
May be definite even if not ascertained (ie unborn children)
| Must be ascertainable by the time their interests come into enjoyment
27
Definite Bfy – Class gift
```
Class closes when member of class can call for distribution of share of gift.
Description can be generic if ascertainable at time of benefit
CL: description of class must be reasonably definite (thereafter settlor can pick)
UPC: settlor may empower trustee to choose bfy from indefinite class
Where bfy is born after trust made but gift is to “surviving children” consider class but determine that ok.
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28
Remedy for lack of bfy
Resulting trust is created in favor of the settlor and their successors
29
Invalid purposes
Illegal
Contrary to public policy
Impossible
Intended to defraud settlor’s creditors
30
Remedy if for lack of public policy
Settlor’s alt. desire
If illegal condition is condition subsequent, condition is invalidated
If illegal condition is condition precedent, hold interest valid unless evidence that settlor would wish it to be void
31
Rule against perpetuities
Nonvested property interest is invalid unless it is certain to vest or fail no later than 21 years after the death of a life in being
OR wait and see
OR 90 year vesting period
OR abolished
32
Will a trust fail for lack of a trustee?
No
| However, lack of trustee may cause attempted inter vivos trust to fail for lack of delivery
33
How to accept to be trustee
Sign trust/ separate acceptance
Substantially comply with acceptance terms
Accept delivery of trust property
Trustee may still act to preserve trust property without acceptance if they send notice of rejection first
34
Relation back of acceptance
Testamentary trust treated as in existence as of settlor’s death; trustee’s acceptance “relates back” to the death.
35
Resignation
Either:
- 30 day notice to qualified bfy/settlor/ co-trustees OR
- Obtain court approval
36
Qualification of trustee
Capacity to acquire & hold property and administer
37
Removal of trustee
Breach of trust
Serious lack of cooperation between co-trustees
Unfitness, unwillingness or persistent failure to administer
Substantial change in circumstances
38
Intervivos trust
Created while settlor alive by either
- Settlor declaring self trustee for another OR
- Transfer of property to antoher as trustee
Intent is show by:
- Conduct (delivery)
- Words (declaring self trustee)
39
Delivery requirement for declaration of trust
No conveyance necessary but property must be identified and segregated (property re-deeded to settlor/trustee by changing deed name to trustee)
40
Delivery requirement for conveyance in trust
Convey to trustee (real property – deed); personal – physical delivery + written assignment
41
Testamentary Trust
Created upon death
Determine if requirements of valid will satisfied
Fund the trust – convey title (if land, must deed land to trustee; personal: deliver items; title item:
42
Way to fund trust through a will
Pour-over will –will grants property to an intervivos trust
Property governed by rules of that trust (ie governed by amendments)
If trust revoked, there is a lapse
Pour-over will can be the initial trust funding
Springs into existence at death
43
Testamentary Secret Trust
Absolute gift in will made in reliance on bfy’s promise to hold the property in trust for another (Will does not state trust nature of gift)
- Extrinsic evidence permissible
- Show by clear & convincing evidence
- Result: constructive trust imposed in favor of intended bfy
44
Testamentary Semi-Secret Trust
Gift in will to a person “in trsut” but no bfy listed
- No extrinsic evidence
- Result: gift fails and “trustee” holds for settlor’s legatees or heirs
45
General transfer rule
Generally transferable
Creditors can involuntarily get property
BUT RARE TO TRANSFER
Bfy’s interests usually limited to life estates (no ability to transfer)
46
Spendthrift provision
Provision that prevents a trust bfy from using a future distribution to secure credit & prevents payment to creditor if it extends credit to bfy based on future distirbutions & prohibiting BFY from being able to transfer
- creditors cannot attach to interest until granted to bfy
- provision permitting voluntary but not involuntary transfer is prohibited
- trustee may choose to honor purported assignment by bfy (but not required)
47
Who can still access assets despite spendthrift
Bfy’s children/spouse
Creditors who supplied necessaries
Tort creditors
Self-settled: If settlor is bfy, usually cannot protect own property from own creditors
-- Exception: state allows such a trust (Domestic Asset Protection Trust)
48
Discretionary trust
Trustee has discretion (substituted judgement) to make payment
Bfy has no right until transferred
49
Discretionary Trust
| - Right of creditor & discretionary trust
May attach to interest but cannot compel distribution
If trustee has notice of attacahment, must make distributions to creditor unles bfy’s interest is protected by spendthrift provision
50
Discretionary Trust
| - Who can reach contents of discretionary trust?
Child support
Support of current spouse
Alimony for ex-spouse
51
Support Trust
- Types of support trust
- Can be assigned?
Trust where use of property is limited to bfy’s support (health, education, maintenance)
Can be
- mandatory (must pay support) or
- discretionary (if paid, must be for support)
Cannot be assigned (impliedly spendthrift)
52
Support Trust
| - Standard of support in support trust
If not explicit, level of support BFY is accustomed to
53
Support Trust
| - Do we look at bfy’s other assets?
Decide in trust
54
Which of trustee’s associates have access to trust?
No one – not creditors, heirs, or will bfy
55
Most common termination
Express terms (death, age, other condition being satisfied early )
By Operation of law (ie property runs out, merger of legal/equitable title)
By Court (illegal, impossible, unanticipated circumstances, purpose satisfied, cost outweighs benefits)
By Settlor
By Beneficiaries
Clear & convincing evidence of scrivener’s error
Trustee
56
Settlor’s right to terminate
Settlor + all bfy = can modify/terminate even if it conflicts with material purpose of the trust.
- Assumed revocable; can modify/ revoke for any reason unless trust expressly
When trust is revocable – settlor is treated as owner of trust assetse and trustee’s duties are owed to settlor (must obey bad investment advise)
- Some States: Can revoke irrevocable trust if all bfy agree
57
Can bfy modify trust?
Can if stated in trust.
Otherwise if:
1. All bfy agree (some states allow virtual representation; even unascertained must consent (ie unborn children)
2. Settlor’s intent not frustrated – change would upset material purpose of test (Claflin Rule)
3. If settlor’s intent would be frustrated, settlor must join to terminate
And even without consent of all bfy if:
1. Trust could have been terminated if all bfy consented (does not upset material purpose)
2. Interest of bfy who does not consent will be adequately protected
58
What are provisions that prevent the bfy from modifying/termianating?
```
Support of bfy
Spendthrift provision
Payment at certain ages
Payment at certain dates
Discretionary trust
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59
If all bfy agree to terminate what is trustee’s role/responsibility?
Must distribute as agreed by bfy
| If all bfy agree – trustee won’t be liable
60
Virtual representation
Represent unborn/unascertained bfy to make various decisions if:
1. Current bfy in similar situation
2. No conflict of interest
61
Why/how can trustee terminate/revise
Can terminate if trust property is lower than 50k (insufficient to justify cost of admin)
Can merge trusts or separate (decanting) – tax or other purposes
62
Trustee’s role after termination
Retains power for reasonable period to wind up business
| Distribute remaining property to bfy
63
How does trust terminate by court?
If termination not available b/c not all bfy consent, court may modify/ terminate if:
1. Trust could have been modified if all bfy consented
2. Interest of non consenting bfy adequately protected
And
Unanticipated circumstances threaten purpose of trust, impracticable/wasteful/ insufficient value in trust to justify cost
In some states, court can reform trust to reflect settlor’s intent
64
Where is power derived?
Express in trust
State Statute (has boiler plate language)
Granted by court
Implied power (necessary/ appropriate to carry out terms) – sell, lease, reasonable expenses, hire agent mortgage property, repair
65
How do multiple trustees exercise power?
Majority
66
When is trustee liable for discretionary acts?
Abuse of discretion or does not exercise any discretion
| No such thing as absolute discretion – court can always intervene
67
Duties of trustee
Administrate according to trust instrument & law
Duty of loyalty
Accurate record & accounting on demand
Preserve & protect trust corpus (make productive – ie invest)
68
Duty of loyalty
Owes the utmost good faith to bfy and all future bfy
Trustee or family cannot benefit in any way – even if fair – except for compensation
Remedy – pay any increase in value
69
When can bfy interfere with Trustee’s discretion?
Abuse (bad faith or dishonesty)
70
Standard for administration
Act as a prudent person
| Ie earmark property so not confused, no comingling
71
Investment standard of care
Prudent investor (same manner as prudent investor unless otherwise stated) - reasonable care, skill, caution
Portfolio approach – examine as a whole and diversify unless specific circumstance not to
Consider: Trust purposes, requirements, economic situation, tax consequences, role of investments, how will BFY be affected, liquidity?
Consider at time of making investment
If higher skills – exercise higher skills
Review trust property (if successor trustee – ensure all investments comply)
Do not socially invest (don’t take into consideration factors other than economics (ie ESG, human rights))
Can delegate investment and management functions
72
Liability of trustee
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Money damages
Lost profits but for breach
Depreciation in trust property’s value
Return any profits
If for self-dealing
Can affirm
Can set aside transaction and force trustee to give back
Remove Trustee
Incompetent, breach of duty, insolvent , hostility, don’t account, etc.
Court consider’s settlor’s intet
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73
When is trustee not liable?
Bfy ratified
Trustee reasonably relied on terms of trust
Settlor specifically allowed conduct
Exculpatory clause (courts strictly construe – usually only for negligence, not intentional)
74
Co trustee liable?
If they do not agree & join in, the co-trsutee is not liable but must sue (duty to monitor each other)
75
Legal identity of trust & result
Not a legal entity
| Cannot sue – must do so in representative capacity
76
Liability of trustee for contract
Liable for contracts they sign – include provision that not liable or sign “as trustee”
May be indemnified from trust property
77
Liability of trustee for torts
No respondeat superior for trustee (minority – respondeat superior)
Liable for own
78
Liability of third
If trust property improperly in hands of another, court may set aside transaction and get property
May be able to pursue breach of trust transaction
79
Uniform Principal and Interest act
Most courts have adopted
| Instructs how principal and income are to be allocated (trust can alter)
80
How can trustee deviate from this act?
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“Adjustment power”
Consider purpose of trust
Intent
Length of trust
Nature of property
Tax, etc.
Adjustments can’t be done of trustee is bfy
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81
Principal
Sale of the investment + appreciation
Eminent domain, insurance from destroyed property
Stock dividend, stock split, shares from merger etc. is change in form thus prinical
82
Income
Rent, interest, cash dividend
83
Wasting assets
10% income, 90% is principal
| Ie patents, royalties, minerals etc.
84
Business
Use GAAP to determine
85
Unproductive assets
Don’t reimburse, under prudent investor we accept it may diminish in value
86
Money that is expended:
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Ordinary income tax – income
Cap gains – principal
Ord. repairs – income
Extraordinary repairs – principal
Depreciation – income
Compensation – 50/50 income/principal
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87
UniTrust
Rather than bfy entitled to income, they are intitled to percent of value of trust
More popular than P&I Trust now
88
Delegation of trustee duties?
CL: No
Modern: can delegate mgmt./investment if prudent
- Use care, skill, caution to select agent, establish scope and review actions
- Cannot delegate discretionary functions
89
Charitable Trust
Assists society in general (may be specific organization)
Puprose: poverty, science, art, religion, government, - Court determines if charitable
No special language
Settlor must be “sufficiently altruistic in supplying those benefits’ (not just family) but can benefit family
90
Standard to determine if charitable
What would community consider to be charitable
| If religious based – considers if against law or public policy
91
Cy Pres
Court will apply equitable approximation where trust is unable to achieve original charitable purpose
Achieve something as close to original intent as possible
Charitable trust must have a general charitable intent (if specific, cy pres does not apply)
92
Rap
Does not apply to charialbe trust
93
Who enforces charitable trust
Charitable organization
| State’s attorneys’ general
94
Honorary/purpose trust
Trust for non-human, non-charitable trust
No human bfy
Ie pet trust, monument
95
Resulting Trust
- Who benefits?
- Trustee’s role
-
Is implied by settlor’s conduct
Who benefits: settlor & settlor’s beneficiary
- Example: attempt to create trust but it is ineffective
Trustee’s role: trustee conveys back to settlor or settlor’s successor in interests
- Example: does not provide for residuary
Purchase money resulting trust: seller gives property to someone else after settlor gives money to seller.
Could be Gift (law presumes if closely related)
Settlor expected to be repaid (a debt)
Intended other person to hold property for you
96
Constructive Trust
Equitable remedy to avoid unjust enrichment
Holder of legal title becomes trustee because they cannot hold title
There must be nexus between improper conduct & property
Party seeking, must act equitably (ie repay any payment/care they put into it
Holder must return property due to court order
97
Grounds for constructive trust
Invalid will – bfy of trust stopped will from being validly executed (take from all – even innocent)
Where no slayer statute exists
Abuse of confidential relationship – business dealing, family/firnedhips, lawyer, doctor
Secret Trust -
