Trusts Flashcards
What is a Trust
A fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard and administer the trust assets and income for the benefit of designated beneficiaries who own equitable title
Trustee
A fiduciary who must:
1. deal with the property with reasonable care
2. maintain utmost degree of loyalty, and
3. is personally responsible if their conduct falls beneath required standards.
Equitable Interest
Held by the beneficiary who receives the benefits of ownership as set forth in the trust.
Elements of a valid Trust
I Identify A Proper Form
1. Intent to create a trust (words, writing, or conduct)
2. Identifiable corpus (trust property)
3. Ascertainable beneficiaries
4. Valid Trust purpose
5. Mechanics and formalities (Trustee)
Intent
- No formal words required
- Communication to intended Beneficiary not required unless settlor is also trustee then need to segregate trust assets or otherwise show trust intent.
- Must be manifested while settlor owns property and prior to conveyance to another.
- Must intent for trust to take effect immediately (not future time unless supported by consideration).
- Outright gift cannot be turned into a trust.
- Hopefull language does not create a trust unless:
Definate and precise directions
Directions addressed to fiduciary
unnatural disposition of property (close relative will take nothing) if no trust or
Extrinsic evidence showing that settlor previously supported intended beneficiary.
Spit of Title
Any split is sufficient so long as the sole trustee is not the sole beneficiary. If so, equitable and legal titles merge and trust terminates.
Identifiable Corpus
Sufficient Trust Property- existing interest in existing property (future interest okay) but must be existing property that settlor has the power to convey or assignable interest.
Must be segregated from other property.
Debtor cannot hold own debt in trust.
Beneficiaries
- must have capacity to take and hold tilte to property (need not be competent).
- notice to beneficiary not required but lack of notice may indicate that no trust was intended.
- Acceptance is required (generally presumed) but can happen after creation
Disclaiming Trust
- filing written instrument with trustee/probate court resulting in trust is read although disclaimant deceased as of that date
- Must be disclaimed within 9 months of creation or 9 months after 21 years of age but some states do not impose a time limit and may disclaim as long as not estopped from doing so.
- estoppel when they exercised any dominion or control over the interest or accepted any benefits under the trust.
- Disclaimants creditors in most states are defeated but not federal tax lien.
AntiLapse Statutes and Trusts
Some states and the UPC apply it to future interests created in trusts (even those contingent on survival) unless trust makes alternate gift in case of beneficiary’s non survival.
Class Gifts and Unascertained Beneficiaries
Beneficiaries may be “definite” although not ascertained but must be acertainable by the time their interest are to come into enjoyment
(must be able to determine who belongs to the class). (grandchildren ok friends not).
If trust fails for lack of beneficiary
Trust in favor of settlor or successors is presumed.
Purpose
Invalid if:
* illegal
* performance requires criminal or tortious act
* contrary to public policy (induce others engage in criminal/tortious acts, encourage immorality, or induce neglectful parenting, familial or civic duties.
* violates Rule of Perpetuities.
If Purpose fails
- settlor’s alternative desire controls if expressed
- if illegal condition is condition subsequent then condition invalidated but trust valid.
- If condition precedent then preferred view is to hold interest valid unless evidence that the settlor’s wish would be to void interest altogether if condition unenforceable.
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 person who is alive when it is created.
Many states have adopted wait and see approach or alternative 90 year vesting period that would save the interest.
number of states have abolished the rule against perpetuities as it applies to trusts.
Trustee Qualifications
Capacity to
* acquire and hold property for their own benefit and
* to administer that property
Removal of Trustee
- Court - can remove or force to confirm appointment
- Grounds for removal whether continuatio in office would be detrimental to the trust - serious breach of trust, habitual drunkenness, conflice of interest
- Beneficiaries must have grounds to remove unless power granted to them by trust instrument.
Disclaimer/Resignation by Trustee
Must take all or nothing
Must have court’s permission to resign unless all beneficiaries consent or trust provides otherwise.
Inter Vivos trust Creation
- By Settlor declaring themself trustee for another or by transfer toanother as trustee.
- Present intent must be manifested by conduct (delivery- placing trust property out of settler’s control) or words (declaraing oneself trustee and segregating property). Real property should be conveyed by deed and personal by personal delivery or written assignment.
- Statute of Frauds applies so in writing for trusts of land AND part performance precludes statute of frauds (holder of legal title acts like trustee)
- Parol evidence rule does not apply where ambiguity appears on face of writing.
Pour-Over Gift Will to Trust
- Trust must be established in Testator’s lifetime
- Can be initial funding if identified in will and executed before testator’s death.
Testamentary Trusts
Created in Settlor’s valid will
* trust intent and essential terms (res, benes, purpose) must be ascertained from will itself/incorp into will or exercise of a power of appointment created in the will
* Secret Trust - settlor agrees with a will beneficiary that bene will hold property in trust for someon else and relies on that promise but will does not state nature of the trust. Beneficiary may present extrinsic evidence of the will bene’s promist to hold property in trust. If promise proven by clear and convincing evidence a constructive trust imposed in favor of intended trust beneficiary. Timing not an issue just testator’s reliance on promise.
* Semi Secret Trust - Gift in will to a person in trust but does not name beneficiary then extrinsic evidence not allowed and trustee holds on resulting trust for testator’s successors in interst.
Transfer of Beneficiaries Interest
Voluntary - generally free absent statute or trust instrument
Involuntary (creditors) - unless statute or trust provides otherwise beneficiary creditors may reach inteterst in trust and interest is subject to judicial sale. Court may order trustee to pay beneficiary’s income tot he creditors until the debt is satisfied.
Discretionary Trusts
Trustee given discretion whether to apply or withhold payments of income or principal to a beneficiary.
prior to which beneficiary’s interest is not assignable and cannot be reached by creditors.
Creditors are usually allowed to attach beneficiary’s intererst but cannot compel trustee to make distribution. If they have notice, trustee must make payments directly to creditors unless protected by spendthrift provision.
Beneficiary has no rights to enforce against truste unless trustee abuses power then court will intervene.
Spendthrift Trust
Precludes beneficiary from transferring interest in trust and creditors are precluded from reaching it to satisfy their claims.
Most courts uphold them. Generally invalid for settlor to create. (look to who furnished consideration) some states allow bc out of country places started to allow.
Exceptions: dependants, gov’t , persons supplying necessities, and in a few states tort collectors.
