Trusts Flashcards
Express Trust
A trust is a fiduciary relationship with respect to property in which one person, the trustee, holds legal title to the trust property, the res, subject to enforceable equitable rights of another, the beneficiary. Creation requires: 1. Settlor 2. Trustee with duties 3. Definite beneficiary
Valid if:
- Settlor has the intent and capacity to create a trust.
- Must have trust property
- The trust must have a valid purpose
- Definite beneficiaries
- Trustee with duties (doesn’t fail for lack of trustee)
Settlor’s Intent
Intent may be manifested by written or spoken words or conduct. An oral trust of personal property is valid. Some expression of intent is required, but it need not be manifested in a particular form.
The use of precatory words such as “wish”, “hope” are presumed not to show intent to create trust. “Ask” can go either way, and the court may infer that no trust intended.
Inference can be overcome with additional evidence, such as endorsement on instruments.
Trustee’s Duties
A trustee’s acceptance of a trust is presumed.
Once the trust is accepted, the trustee cannot disclaim, he must resign. Duties are attached when trustee accepts trust.
1. Duty of care (includes the below duties)
2. Duty to separate and earmark property
3. Duty to preserve trust and make it productive
4. Duty to invest (from the duty to make productive)
5. Duty to diversify (from the duty to invest)
6. Duty of loyalty/accounting
7. Duty of fairness to beneficiaries
Duty of Care
In administering a trust, a trustee must exercise the care, skill, and caution that a reasonably prudent person would exercise in managing her property.
Factors: diligence, skill and capabilities, and conservatism in administering the trust
Refers to the breach of the other implied duties (earmark, accounting, etc.)
Revocable v. Irrevocable Trusts
Some states hold that a trust is presumed revocable unless the trust states otherwise. Other states presume the trust is irrevocable unless intent or trust states otherwise.
An irrevocable trust dictate the trustee’s duties are owed to the beneficiaries
The trustee owes fiduciary duties to the settlor in a revocable trust.
Duty to separate and earmark property
Issue: commingling
Rule: Trust assets must be kept physically separate from the trustee’s personal assets. The property must be titled in the trustee as the trustee
Breach: If a trustee commingles the trust property with her own property, the trustee will be liable to the trust for any loss, because the loss will be presumed to be the trustee’s. Any increase in profit or gain, or money in the account will be presumed to be the trust’s property
Duty to Preserve Trust Property and Make it Productive
RS: there is basic duty to preserve and protect the trust property. From this duty, there is an implied duty to make the property productive, which includes the duty to invest.
Duty to invest: RS: the trustee must invest trust funds within a reasonable time after receiving them and continually review the investments
Breach: If the trustee fails to invest, she is chargeable with the amount of income that would normally accrue from appropriate investments
Duty to Invest–Uniform Prudent Investor Act
RS: most states have the uniform prudent investor act
Under the act, the trustee must invest and manage trust assets as a prudent investor would
Factors: investor is prudent considering:
- The purposes and terms
- Distribution requirements
- Other circumstances of trust
Rule: any type of investment is permitted, and prudence is evaluated as to the overall investment strategy rather than each investment.
Overall investment strategy: within a reasonable time, the trustee should review the assets and make decisions about their retention and disposition taking into account
- General economic conditions
- Tax consequences
- Role of each investment portfolio
- Expected total return
- Other resources of beneficiary
- Regularity of income
- Preservation of capital
- Asset’s special relationship to trust or beneficiary
Duty to Diversify
Under the investment duty, there is a duty to diversity the trust investments.
Exception: unless the trustee reasonably determines, that under the circumstances, the purpose of the trust is served better with diversification
Duty of Loyalty
The trustee owes a duty of undivided loyalty to the trust and its beneficiaries. That loyalty is breached by personal interest and self-dealing. A trustee must not deal with the trust in her personal capacity. She may not use or borrow trust funds for herself.
Duty to account: must keep and render accounts and records.
General Liability for Trustee’s Breach of Duties
A trustee is liable to the trust for:
- Losses resulting from breach
- Profit that would have accrued but for the breach and
- Any profit made by trustee as a result of breach
Co-trustee liability:
Each co-trustee owes the beneficiary a duty of prudent participation in administering the trust. (including the above duties)
Two co-trustees must act unanimously in administering trust. One trustee cannot generally delegate administration of the trust to co-trustee. Can be liable for:
1. Failure to address or prevent other trustee’s breach
2. Improper delegation of duties
Third Party Liability for Trustee breach
Rule: A TP who knowingly participates in a breach of trust is liable for the resulting loss to the trust estate.
Exception: one who innocently participates in a breach is generally not liable to the B except to the extent that he is liable to return property transferred to him. Unless BFP
Duty of Fairness to Beneficiaries
RS: the trustee is under a duty to administer the trust impartially based on what is fair and reasonable to all of the beneficiaries.
Successive beneficiaries: when a trust has successive beneficiaries the trustee has a duty to the income beneficiary to ensure that the property produces income, and a duty to remaindermen to ensure that the trust property will not depreciate in value.
