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Trusts Flashcards

1
Q

What is a trust?

A

A trust is a fiduciary relationship where a trustee holds legal title to specific property + beneficiaries hold the equitable title

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2
Q

What does the trustee do?

A

Trustee is a fiduciary and must:
(1) deal with the property with reasonable care
(2) must maintain the utmost degree of loyalty AND
(3) is personally responsible if their conduct falls beneath required standards

Owes these duties to the beneficiary

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3
Q

Who is the beneficiary?

A

Hold the equitable title and receive the benefit of ownership as laid out in the trust instrument

Generally has little/no control over the trust property

Do not need capacity–just need to be able to take + hold property

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4
Q

Whats a settlor?

A

The person who creates the trust

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5
Q

How do trusts actually work?

A

(1) settlor transfers legal title to trustee + equitable title to beneficiary
(2) trustee manages + invests the property per legal duties and trust instrument
(3) trustee makes payments to or for the benefit of the beneficiary
(4) when trustee’s duties are done, the trust terminates and remaining property goes to remainder beneficiaries

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6
Q

Why trusts?

A

(1) provide for + protect beneficiaries
(2) flexibility of asset distribution
(3) protect against own incompetence
(4) professional management of property (+ someone to sue)
(5) probate avoidance (especially in states where probate is cumbersome)
(6) tax benefits

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7
Q

What are the types of trusts?

A

Express Trusts
Resulting Trusts
Constructive Trusts

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8
Q

What is an express trust?

A

MOST COMMON

They are created by the express intention of the settlor

Private Trusts: for ascertainable persons

Charitable Trusts: for indefinite class of persons/public generally

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9
Q

What trusts are created by operation of law?

A

Resulting Trusts: arises from presumed intention of owner of property

Constructive Trusts: used as an equitable remedy to prevent unjust enrichment

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10
Q

What makes for a valid trust?

A

(1) trust intent
(2) identificable corpus
(3) identificable beneficiaries
(4) proper purpose
(5) compliance with mechanics + formalities

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11
Q

How does trust intent work?

A

Settlor must INTEND to split equitable + legal title and to impose fiduciary duties on legal title holder

No specific words are required
There need not be any communication to the beneficiary–delivery of property to trustee is enough

Must intend for the trust to take effect immediately
Promise to make a future trust isn’t enforceable sans consideration

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12
Q

Trust purpsoe

A

GENERAL RULE: can be created for any purpose

Invalid if:
-illegal
-performance requires crime or tort
-contrary to public policy
-violates RAP

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13
Q

Inter Vivos Trusts

A

Trust created while settlor is still alive

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14
Q

Declaration of Trust

A

Settlor declares themselves the trustee
-no conveyance of personal property needed but real property should be conveyed from the settlor as person to settler as trustee

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15
Q

Conveyance of Trust

A

Settlor transfers legal title to a trustee + either retains or transfers equitable title

-personal property identified or physically delivered
-real property = conveyed by need OR devised by will to testamentary trust

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16
Q

Pour over gift from will

A

A gift in will to inter vivos trust

Goes into trust as to date of death

NOTE: pour over gifts can be initial trust funding as long as (1) the trust is IDed in the will AND (2) the trust is executed before the testators death`

trust is created before death but SPRINGS into existence AT death when funding comes through

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17
Q

Testamentary Trusts

A

Trusts created in the settlors will

Requirement: must be a valid will

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18
Q

Secret Trust

A

“Constructive Trust” imposed when the settlor + will beneficiary orally agree that beneficiary will hold as trustee for someone else
-settlor relies on this promise
-but the will does not explicitly note the nature of the gift

Intended beneficiary: can use extrinsic evidence + must prove by clear and convincing evidence

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19
Q

Semi-Secret Trust

A

Will makes a gift in a trust but fails to name beneficiary

Gift fails + named trustee will hold property in a resulting trust for the testator’s successors in interest

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20
Q

Resulting Trust + Trust Formation

A

If a trust fails for lack of a beneficiary–a resulting trust in favor of the settlor or their successors is presumed

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21
Q

How to designate a trustee

A

-must have enforceable duties
must have ability to manage property
-capacity to hold and take

If trustee not named or can’t do it–courts will often appoint a trustee

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22
Q

Spit of Title

A

All good unless the sole trustee and the sole beneficiary are the same person

THEN title would merge and trust is terminated

This is only OK with a life estate so long as there is a reminder beneficiary

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23
Q

Honorary Trusts

A

Trust set up to provide benefits for a non-human, non-charitable purpose

Ex: pets, maintain a grandfather clock

24
Q

Trusts contrary to public policy

A

Public policy is violated if the purpose of trust is to to induce others to
-engage in crime or tort
-encourage immorality
-induce a person to neglect parental, familial or civic duties

If condition is contrary to public policy:
*Settlors alternative desire if expressed will control
*If illegal condition is a condition subsequentcondition is invalidated but trust is OK
* if condition precedent–preferably will hold the interest valid unless there is evidence to show that the settlor’s wish would be to void altogether

25
Voluntary Transfers of Beneficiaries
Presumption that a beneficiary can freely transfer their interest in the trust Doesn't really happen though
26
Involuntary transfers
Creditors Presumption that beneficiary's creditors can reach their interest in the trust -subject to judicial sale -to avoid--have trustees pay the beneficiary's income to creditors
27
Discretionary Trusts
MOST COMMON -trustee determines how much beneficiary receives -beneficiary has nothing t transfer until trustee transfers to them -beneficiary cannot interfere with the discretion unless there is an abuse of power--court can intervene Creditors rights: before trustee sends money--creditors cannot get at anything -cannot compel a trustee to make a transfer
28
Spendthrift Trust
Restraints on alienation Precludes beneficiary transferring interest in the trust and the beneficiary's creditors are precluded from reaching it to satisfy claims -purpose to to protect beneficiary from themselves Limitations: Majority Rule: ineffective if settlor is beneficiary -growing number of states are allowing this though Exception: for special class of creditors -claims of dependents, the government, and persons supplying necessities
29
Support Trusts
What property that the trustee transfers to beneficiary is restricted in use: HEMS Standard -health -education -maintenance -support Issues: Standard of support: previous standard of living Question of whether the beneficiary's other income + resources should be taken into account (generally case by case)
30
How does a trust end?
(1) by terms of trust [express terms] (2) by the settlor (3) by the beneficiaries if settlors intent is not frustrated (4) by operation of law if trust exhausted or merger of title (5) by the court
31
Revocable Trusts
Modern Rule: a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable Traditional Rule [still followed by some states]: trust is irrevocable unless the right to revoke or amend is reserved
32
Beneficiaries + Revocation
May agree to modify/terminate if all the following are true: (1) all beneficiaries agree (this can be extra hard if some aren't born yet) (2) all are legally competent (3) the settlors intent is not frustrated (a) the settlor consents OR (b) will not impair any material trust purpose
33
Court + Revocation
Early Termination: may prematurely end when the trusts purpose has been completed or has become illegal or impossible
34
Duties of Trustee at Revocation
(1) wind up trust business (2) distribute remainder to the remainder beneficiaries
35
Source of Trustees Power
(1) Express Powers -those conferred by the trust instrument, state law + court decree (2) implied powers -had all powers that are necessary or appropriate to carry out terms of the trust if those powers are not expressly forbidden in the instrument (3) joint powers--if there are 2+ trustees Traditional view: must act by unanimous Modern/Majority View: 3+ just need a majority
36
Fiduciary Duty of Trustee
Owed to beneficiaries NOTE: that in some states in a revocable trust--a trustee owes their duties only to the settlor
37
All the trustee duties
Duty to administer trust Duty of Loyalty Duty to Account Duty to Separate + Earmark Trust Property
38
Duty to administer trust
bound to follow terms of trust
39
Duty of Loyalty
Owes beneficiaries loyalty + good faith in all matters pertaining to the trust (1) may not purchase property from trust (2) cannot sell property to trust (3) cannot borrow from trust (4) cannot claim excessive comp
40
Duty to Account
must keep accurate records + give accountings to beneficiaries/court when asked
41
General Standard of Care required
Reasonably Prudent Person Standard -must exercise the degree o skill, care, and causation that would be exercised by a reasonably prudent person in managing their own property
42
Duty to separate and earmark trust property
Keep separate from own property DO NOT COMMINGLE Exception: corporate trustees often create common trust funds to create diversification + higher rate of return
43
Investment + Management Decisions
Traditionally could not be delegated NOW: a trustee may delegate investment and management functions that a prudent trustee of comparable skills would properly delegate under the circumstances
44
Prudent Investor Rule
Must consider: -purpose of trust -terms of trust -distribution requirements Must exercise: reasonable care, skill, and caution when investing + managing NOTE: re loyalty to beneficiaries that social investing might be an issue unless you re returns
45
Portfolio Approach
Prudent re prudent investor rule is evaluated as to overall investment strategy/context to entire trust portfolio
46
Duty to Review Trust Property
When assume office or when there is a new trustee Must review investments to ensure continued compliance
47
Impartiality
Trustee must be impartial and cannot favor one beneficiary over another
48
Liability to the Trustee
Beneficiaries may bring actions for $ damages if there is breach: (1) lost profits (2) depreciation of losses to trust property If trustee self-dealing: (1) if trust profited--affirm transaction (2) if trust lost money--set aside transaction (3) trace profits from the trustee if trustee profitted
49
Removal of Trustee
Court may remove if continued work would be detrimental to the trust
50
Trustees liability to 3rd parties
Generally personally liable to 3rd parties in contracts made in course of their work for the trust -can put express condition in that they don't have personal liability -may also seek reimbursement
51
Tort Liability + Trustee
Personally liable for torts committed in the course of trust work- Modern Rule: Liable for torts of agents/employees only if personal fault can be traced to the trustee
52
Charitable trust
Charitable Trusts: (1) no clearly ascertainable beneficiary (2) Goal is to benefit community or society
53
Class to be benefited + charitable trust
The class to be benefitted can be limited but it can’t be so narrow as to only benefit a few people whom the settlor wishes to aid personally
54
Cy Pres
Doctrine of Equitable Approximation Used for when the trustee cannot carry out the charitable trust as written for some reason * Court has to determine charitable intent broader than what can’t be carried out anymore * Charities are going to have to argue their purpose is basically the same * Extrinsic evidence is OK to try and figure out what would be more in line with settlor’s intent Note: that if a specific intent is found instead of general--the trust fails and passes to settlor’s successors in title NOT BOUND BY RAP Often enforced by the state attorney general
55
Resulting Trusts
Resulting Trusts: involve revisionary interests and are based on presumed intent of settlor Creation: conveyed to trustee AND (1) Failure of express trust (a) trust is void or unenforceable (b) no beneficiary (v) cy pres is not doable (2) Purchase money resulting trusts (3) Incomplete disposition of trust assets
56
Purchase Money Resulting Trust
Unusual Fact Pattern Presumed whenever: (1) The beneficiary furnishes consideration (usually money) for the acquisition of real or personal property but with the beneficiary’s consent--title is taken in the name of the trustee Three possible relationships here: (1) Settlor/beneficiary of PMRT (2) Donor-donee (3) Creditor-debtor a. If person providing money intends to be repaid then no PMRT Exception: **when close family relationship—gift is presumed**if NOT close relative, then PMRT

Flash Cards (14 decks)

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