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Wills and Trusts > Trusts > Flashcards

Trusts Flashcards

1
Q

What is a trust?

A

A transfer of property to one person for the benefit of another.

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2
Q

Who are the 3 players in a trust?

A
  1. Donor (settlor)
  2. Trustee (person who holds the asset; holds legal title)
  3. Beneficiary (one who enjoys the equitable interest)
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3
Q

What are the 4 requirements to make a trust?

A
  1. Intent to create a trust
  2. Funding (property transferred to the trust/trustee)
    (i) Future expectancies/profits do not count
  3. Ascertainable beneficiaries
    (i) Exception: unborn children
  4. Writing (not always requirement)
    (i) Required for real property and testamentary trusts
    (ii) Not required for inter vivos trusts
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4
Q

How can trusts be created?

A
  1. Inter vivos (during lifetime; non-revocable)
  2. Testamentary (trust terms contained in the will; will not avoid probate)
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5
Q

What happens when a trustee fails to deploy the funds to the beneficiary?

A

The trustee is personally obligated to restore those funds/trust to the beneficiary.

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6
Q

What are the 3 levels of bifurcation in a trust?

A
  1. Legal v. Equitable Title
  2. Separates the equitable interest into present and future equitable interests
  3. The trust property is separated into income and principal
    (i) income = money generated from the trust principal
    (ii) principal = the property the settlor transferred to the trust
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7
Q

What are the 4 scenarios of Transfers?

A
  1. An outright gift
  2. A gift in trust
  3. Precatory trust: not a trust at all; a gift with a wish attached; does not impose a legal duty
    4 A promise to make a gift is nothing
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8
Q

Delivery

A
  1. Actual delivery
  2. If actual delivery is not possible:
    (i) Symbolic: giving something that represents ownership
    (ii) Constructive: giving something that provides access to the assets.
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9
Q

What is a revocable trust?

A

In CA, we presume that gifts in a trust are revocable unless expressly made irrevocable.

Only works when there are contingent beneficiaries.

Do not have to comply with the Wills Act formalities.

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10
Q

Do beneficiaries under a revocable trust have standing to contest a trust?

A

No, because their interest is contingent and unenforceable during the settlor’s lifetime.

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11
Q

Can a settlor also be a trustee of the trust instrument?

A

Yes.

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12
Q

What is the doctrine of merger?

A

Titles will reunite in one person holding both the legal and equitable interests. This is when the trust ends.

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13
Q

What is a resulting trust?

A

When the assets go back to the settlor when the trust purpose terminates.

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14
Q

Identify the types of trusts

A
  1. Private trust
  2. Charitable Trust
  3. Arises by Operation of Law
    (i) Resulting trust: reverts back to settlor
    (ii) Constructive trust: not really a trust but rather a remedy for unjust enrichment
    (iii) Purchase money trust: deals with real estate transactions
  4. Others
    (i) Honorary: For the benefit of pets - in CA, you can leave leave money to a pet
    (ii) Secret/Semi-Secret Trust: Will/trust hybrid
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15
Q

What is a power of appointment and what are the 2 types?

A

Power of appointment is a provision you put in your will where you give a third party to make decisions over who gets what after your death. it is discretionary, so no fiduciary. duties are created.

  1. General: You can give the property to anyone including yourself.
  2. Specific: You can give the property to anyone except yourself.
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16
Q

The exercise of the powers of appointment (2 types)

A
  1. Inter vivos: operable while the individuals are alive; can only be exercised during the life of the holder.
  2. Testamentary: Can only be exercised by will after the holder’s death.
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17
Q

What fiduciary duties arise within a trustee when a trust is created?

A
  1. Duty of Loyalty: no self-dealing; avoid conflict of interest
  2. Duty of Prudence/Care: such as not segregating the assets
  3. Duty of Impartiality
  4. Duty to Invest
  5. Duty to Account and Inform
  6. Duty to Inquire
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18
Q

What is an Honorary Trust?

A

It is an exception to a trust - it is not ascertainable.

If the intent of the settlor is honorable, then the court will turn a blind eye, so long as the person named at the putative trustee agrees to serve.

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19
Q

The Pet Trust

A

This is a trust for the care of an animal where we waive the ascertainable beneficiary requirement. Extrinsic evidence is allowed.

Requirements: The animal must be alive at the time of T’s death.

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20
Q

Oral trusts of personal property

A

They are recognized in CA. Must show by clear and convincing evidence that the oral trust exists.

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21
Q

What is a Secret Trust?

A

When there is nothing on the face of the will that holds the intent to create a trust, but the intent is found outside the will; a latent ambiguity which we will clarify by allowing in extrinsic evidence.

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22
Q

What is a Semi-Secret Trust?

A

Trust that by its terms appears on the face of the will itself and indicates that the devisee was not intended to take the property for his own benefit so the gift fails. A patent ambiguity which we will not let in extrinsic evidence. The resulting trust will go back to the estate of the decedent.

Will provides some indication of intent to create a trust but the terms are missing.

23
Q

Discretion of Trustee in a Mandatory Trust

A

Trustee must distribute all of the income on a regular basis.

24
Q

Discretion of Trustee in a Discretionary Trust

A

When the trustee has discretion over when to distribute the income and/or principal, or how much to distribute.

Elements:
1. The trustee must act reasonably and in good faith (unless settlor provides a different standard), but good faith can never be waived; AND
2. Ascertainable standards which provide regulated guidance in the exercise of that discretion.

25
Q

Exculpatory Clause

A

Eliminates the personal risk/liability from the trustee.

Modern approach: If the trustee drafted the will, the burden is on the trustee to show that it was not an abuse of confidential relationship and that it was in fact disclosed to the settlor, and the provision MUST be fair. If not, the clause will be deemed invalid and unenforceable against the beneficiaries.

26
Q

To what extent can a trustee consider the other resources available to a beneficiary, in making a decision to evade principal?

A

The inference ought to be that the settlor intended the trustee to consider the beneficiaries other resources before they exercise the right to evade principal.

27
Q

What are the 2 Types of Alienation?

A
  1. Voluntary: Beneficiary assigning their interest to the third party (ex: to pay off a debt or use it as a collateral for a loan)
  2. Involuntary: Creditor tries to attach debt to the trust and force trustee to pay the debts of the beneficiary with trust income.
28
Q

What is the general rule for creditors reaching a beneficiary’s trusts?

A

A creditor can reach any asset of the debtor as long as the asset in question is transferable - applies whether it’s mandatory/discretionary or principal/income.

Since the beneficiaries do not yet own the trust, the creditors can only seize whatever interest the beneficiary has in the trust.

29
Q

What are the transfer rules to creditors for trustees?

A

1) Before the trustee exercises his or her discretion to make payments of income and/or principal to the beneficiary, the beneficiary’s interest is not assignable and cannot be reached by creditors.

2) Once the trustee elects to pay trust income or principal to the beneficiary then the beneficiary has a property interest which is assignable and reachable by creditors.

3) Once the trustee makes the decision (election) to make a distribution, a creditor can attach the beneficiary’s interest and compel the trustee to make payment directly to the creditor.

30
Q

Spendthrift Provision

A

Another level of protection from creditors; beneficiaries cannot voluntarily transfer or alienate their interest in a trust; creditor cannot reach the beneficiary’s interest in a trust.

31
Q

4 creditors who are NOT subject to a spendthrift clause

A
  1. Ex-spouses who are entitled to alimony
  2. Children entitled to child support
  3. Government (ex: IRS)
  4. Creditors who provide basic necessities of life
32
Q

What are the 2 exceptions for the spendthrift provision?

A
  1. CA does not recognize a self-settled spendthrift provision (when the settlor is a beneficiary; one cannot use a trust to shield their own assets from creditors)
  2. If it runs a fraudulent transfer provision we won’t recognize it
33
Q

What is a support trust?

A

Designed to provide a minimal level of support for a beneficiary requiring the trustee to distribute income as necessary for the beneficiary’s support and education.

Only considered a support trust when the payment is limited to the amount necessary for the beneficiary’s support.

*Courts will imply a spendthrift provision when they see a support trust.

34
Q

What is a sprinkle trust?

A

A form of discretion some settlors use which allow the trustee to to “sprinkle” the trust to some creditors and not to others.

A protection tool.

35
Q

What is a protective trust?

A

A 3rd party trust protector can be appointed.

A trust that gives the beneficiary the right to trust payments but gives asset protection features of a discretionary trust.

When a creditor comes after a beneficiary’s trust, the mandatory income is automatically changed into a discretionary interest, which prevents creditors from taking the trust money.

Ex: If one of the beneficiaries gets sued, the trust protector can simply convert what was a mandatory income distribution into a discretionary one.

36
Q

What is a special needs trust?

A

A trust that is designed to hold assets for the benefit of an individual without destroying that individual’s eligibility for otherwise available government benefits.

Prohibits the trustee from undertaking any expenditure that is otherwise eligible for governmental benefits.

Cannot pay for necessities, but can pay for anything else.

37
Q

Are interests in trusts transferable, therefore being able to be sold?

A

Yes, interests in trusts are transferable, so therefore they can be sold, transferred or ceased, UNLESS they are made subject to a spendthrift provision, which will prevent a beneficiary from anticipating or accelerating their rights, and will limit creditors ability to seek those interests.

38
Q

Modification of Trusts: What 3 things must exist in order to modify a trust?

A
  1. Consent of all the beneficiaries
    (i) Issue: minor children, unborn children, disability. Here, courts will appoint a guardian to make sure the best financial decision of the beneficiaries are upheld. Modernly, courts will allow guardians to consider non-economic consequences.
  2. Must show that there has been some unforeseen change in circumstance (look for changes not expected by the settlor)
    (i) Historically, it was all about the settlor’s intent.
    (ii) Modernly, it’s all about figuring out what’s best for the beneficiaries
  3. The unforeseen change has substantially impaired that settlor’s intent
39
Q

Can you modify or terminate trust early without restriction?

A

Yes, if it is a revocable trust.

40
Q

When does a trust terminate?

A
  1. When they run out of money; OR
  2. When they run out of purpose
41
Q

Termination of Trusts

A
  1. All beneficiaries consent, trustee consents, settlor is alive and consents: Terminate the trust
  2. All beneficiaries consent, settlor is alive and consents, trustee objects: Terminate the trust
  3. All beneficiaries consent, settlor is dead, trustee objects: Do not terminate the trust as long as there is a material unfulfilled purpose of the trust.
42
Q

What are the 4 per se unfulfilled material purposes?

A
  1. Spendthrift provision
  2. Support trust
  3. Discretionary trust
  4. Specific age for distribution
43
Q

Removal of Trustees

A

Common law: a trustee can only be removed for a serious breach of trust

Modernly: the trust may provide for the the removal of a trustee

44
Q

What is the difference between wills and trusts?

A

Wills avoid intestacy, and trusts avoid probate.

45
Q

What is a pour over will/provision?

A

Transfers assets into the trust after death that were not previously included in the trust. It is like an incorporation by reference.

Ex: If you have less than 180K in your estate at the time of death, then you can use a pour over will to transfer it into a revocable living trust at death.

46
Q

What are the ways to create a pour over will?

A
  1. Incorporation by reference
  2. Acts of Independent Significance (the referenced act is the creation of a trust)
    (i) Only if the trust is already funded will it have independent significance.
47
Q

How do you validate a pour over clause?

A
  1. The will must identify the trust
  2. The terms set forth in the document must be separate from the will
  3. The instrument must be signed within 60 days
48
Q

What is the Uniform Testamentary Additions to the Trusts Act (UTATA)?

A

Provides backup in case trust is not funded at death
To apply:
The trust instrument must be signed concurrently with or before the pour-over will
If requirements are met, then:
the transferor does not have to fund trust during life (inter vivos)
All amendments to the trust are valid, even if executed after the will
Probate property is poured into the trust, trust will be treated as IV trust, and NOT subject to probate court supervision
CA UTATA Statute [CFC 6300]
Can amend trust after execution of will or after T’s death UNLESS T’s will provides otherwise
Subsequent trust amendments do not require a new-codicil
Even if not funded, trust will be treated as inter vivos trust for purposes of probate court supervision

49
Q

What are charitable trusts?

A

A public trust; a trust with a charitable purpose (providing to a group at large; benefiting the community).

50
Q

What are the perks/advantages of a charitable trust?

A
  1. No requirement for ascertainable beneficiaries
  2. The donors and entities can get tax exemptions
  3. Relieved against RAP
  4. Broad/community focused - but can also just be for an individual if it is charity focused
51
Q

What are the recognized categories of charitable trusts?

A
  1. Advancement of Education
  2. Relief of Property
  3. Advancement of Religion
  4. Promotion of Health
  5. Governmental or Municipal Purposes
52
Q

Doctrine of Cy Pres

A

Designed to preserve charitable trusts.

Courts will try to find another purpose within settlor’s general purpose before applying a resulting trust

53
Q

Who has standing to enforce a charitable trust?

A
  1. State Attorney General
  2. If you’re one of those people who fits into what the charity is supposed to accomplish

Wills and Trusts (4 decks)

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