Three Types of "Trusts"
A trust arises from the expression intention of the owner of property to create a trust with respect to property. The trustee holds legal title to specific property under a fiduciary duty to manage, invest, and safeguard the trust assets for the benefit of the designated beneficiaries, who hold equitable title.
- Express trusts;
- Resulting trusts; and
- Constructive trusts
Only express trusts are "real" trusts; resulting and constructive trusts are equitable remedies.
- A legal device that allows the owner of property to make transfers of property and have those assets managed on behalf of someone else (rather than have the beneficiary manage money on behalf of him or herself).
- Operation: the settlor (creator of the trust) gives legal title to a trustee to manage the money, and the beneficiaries have equitable title to enjoy the distributions from the trust, for a lawful purpose. No consideration is required.
- Express tusts can be of two types:
- Lifetime trusts, set up during the lifetime of the settlor (also called inter vivos)
- Testamentary trusts, set up in the settlor's will (court trust: Surrogate's Court supervision)
Requirements to Create a Valid Trust
No consideration is necessary to create a trust.
- A settlor (person 18+ with capacity to enter into contracts)
- Delivery of legal title to property (must be formally transferred to the trustee to be valid. Things like real property, cars, stock certificates must have formal conveyance).
- Property can consist of almost anything, but must be property that the settlor presently owns, not a mere expectancy of future ownership and is readily identifiable, not subject to future determination (can't be "whatever money/property I choose to contribue over the next ten years")
Trustee (failure to name does not defeat trust; court can appoint someone. Court can appoint to replace as well as long as no express intention that it is personal to trustee)
- Lifetime - can be almost anyone of legal age not incapacitated (no court involvement)
- Testamentary - anyone over 18, except judicially-declared incompetents, convicted felons, and those incapable b/c of drunkenness, dishonesty, want of understanding, or improvidence.
- For either type, a non-resident "alien" can serve as trustee only if a New York resident serves as co-fiduciary.
- Beneficiary (must be definite and ascertainable; no ambiguity. If there is ambiguity, the trustee holds in a resulting trust for the residuary beneficiary of a will or intestate heirs in the absence of valid will. Exception: when "family" or "next of kin" words are used, these are recognizable beneficiaries based on the intestacy statutes).
- Intent (settlor must intend to create trust; precatory (non-binding) language is insufficient. Trustee must be given duties to perform; no duties = passive trust/not really a trust. Just using the word "trust" does not show intent to create a trust; look to all of the language and all of the facts to determine intent).
- Lawful purpose (a trust cannot call for the commission of a crime, the destruction of property, or have conditions against public policy such as provisions calling for the destruction of property, or those restricting marriage/promoting divorce [unless those purposes are to provid support for single persons or restrictions to marriage between certain ethnic groups (ok partial restraints)]).
- Lifetime trust (in writing, signed by both settlor and trustee, and either acknowledged by notary public or signed by two witnesses).
- Testamentary trust (must be created by will)
Nature of Trustee's Estate
- A trustee's creditors cannot satisfy claims from the trust's assets.
- On the death of the sole surviving trustee, the trust estate vests in the Surrogate's Court, whihc names a successor.
- Conveyance to two or more trustees creates joint tenancy.
Resignation and Removal of Trustee
- Unless trust instrument expressly permits resignation, once a trustee has accepted the trust, he cannot resign nless the court permits resignation for good cause shown.
- The court may REMOVE a trustee for:
- violating / threatening to violate the trust;
- insolvency or imminent insolvency of trustee;
- unsuitability to serve as trustee
- A beneficiary can REMOVE a trustee only when:
- grounds for removal
- power is granted to them by trust instrument
- mere fricton/hostility is not suficient grounds unless it interferes with proper administration of the trust
Situations in Which No Trust Arises
- A transfer "in trust" but with NO TRUST TERMS;
- A gift of income with no time limit and no disposition of the principal
- Note that a trust is NOT invalid because the settlor or another person is the sole trustee and sole current beneficiary, as long as at least one other person holds a beneficial interest in the property (such as a vested or contingent remainder interest).
Revocability of Trusts
- All trusts are presumed to be irrevocable, unless the trust explicitly authorizes revocation.
Revocable Lifetime Trusts:
- Must have at least one beneficiary who is not the settlor;
- The settlor cannot be a beneficiary when also named the sole trustee (but settlor can be an income beneficiary for life and a trustee).
- Settlor's estate can be the beneficiaries of the principal so long as there is at leat one other beneficiary.
- Settlor can retain power to terminate/end the trust
- Manages assets efficiently, particulary using professional trustee;
- Helps plan for possible incapacity of settlor by avoiding guardianship proceeding;
- Avoids probate process (process of proving a will)
- Does not avoid taxes
- If settlor keeps income interest, or keeps a power to revoke, the full trust assets will be included in the settlor's gross estate for federal estate tax purposes.
- Testamentary gifts made to an existing revocable trust are okay as long as the trust is either ALREADY IN EXISTENCE or is EXECUTED CONCURRENTLY with the will.
- Trusts are easier to change during the lifetime of the settlor than a will is.
- Pour-over is not limited to trusts created by the settlor; can be to any existing trust, including those executed by other persons.
- Pour-over gifts are valid even if the trust was unfunded or only partially funded during the settlor's lifetime (because their will be identifiable property at the moment of settlor's death).
Life insurance proceeds (also savings accounts, pension plans) can be payable to a trust by:
- Insured can create an unfunded revocable trust and name the trustee as the policy beneficiary; OR
- Have the trust be a testamentary trust and have the life insurance police contract name the "trustee named in my will" as the life insurance policy beneficiary.
- Also called a "bank account trust": a bank account in the depositor's name "as trustee for" a named beneficiary.
- E.g., "Mary as Trustee for John Smith"
- Key Characteristics
- Depositor makes withdrawal as he or she wishes during the depositor's lifetime.
- Beneficiary has no beneficial interest during the depositor's lifetime, but gets whatever is in the account when the depositor dies (but no guarantees).
- T-sub subject to elective share rights (see WILLS)
- if minor/incompetent: where gift is >$10,000 payment must be made to legal guardian; less than $10,000 payment MAY be made to legal guardian.
- Creation of Totten Trust
- No particular WORDS are required as long as intent is clear (e.g., Joan Cohen ITF Rose Cohen).
- Revoking Totten Trust Account
- of all money in the account
- during lifetime through writing naming the beneficiary and financial institution and having the revocation notarized and delivered to the bank. (All of these elements must be met for revocation to take effect).
Revocation in a will
- same requirements for revocation during a lifetime but stated in will EXPRESSLY stating beneficiary's name.
Death of beneficiary
- Revokes Totten Trust; money free and clear to depositor.
- Change in Beneficiary
- Same way as a revocation (notarized statement sent to the financial institution naming the old beneficiary and the new one).
- Creditor of the Depositor
- can always reach the Totten Trust account balance either before or after the depositor's death, since it is a form of revocable trust revoked partially each time a withdrawal is made.
Joint Bank Accounts
joint bank accounts are a trust-like alternative (but they are not Totten Trusts)
- "John and Jame with Right of Survivorship"
- The money in the bank account will go to the survivor of the joint tenancy unless there was clear and convincing evidence that a survivorship account was not intended when the account was opened and it was only meant for convenience of parties. If clear and convincing evidence is produced, then the survivorship language can be set aside.
- Each joint account-holder owns one half of the joint account no matter who deposits the money, and if one person makes the entire deposit it is considered a gift of one-half to the other account holder.
- Irrevocable to the extent of one-half. Taking more than one's fair share from the account while the JTs are alive severs the joint tenancy in the account and gives non-withdrawing party the right to recover withdrawal in excess of one-half.
Uniform Transfers to Minors Act
UTMA is a trust-like alternative
- UTMA is not a trust, it is a special statutory conservatorship where the custodian does not hold legal title (minor holds legal title): Transfer of property by deed, will, or power of appintment to "[name of custodian] as custodian for [name of minor] under the NY UTMA"
- Why make a gift to a minor under UTMA?
- Avoids a guardianship proceeding;
- Avoids a trust;
- Qualifies for the $14,000 per donee annual exclusion from federal and state gift tax.
- Gifts under UTMA must be made to a custodian and must specify that it is made under the NY UTMA. UTMA gifts can be made in a will so long as the same required statutory language is used.
- Duties of a UTMA custodian:
- Hold, manage, and invest property under a prudent person standard;
- Pay over to the minor, or for the minor's needs, what part of the property that the custodian deems advisable (minor's best interests or whatever specified in transfer language; >$50,000 requires court approval); and
- Pay what is left of the property to the minor when:
- Post-Jan 1, 1997 gift: minor turns 21
- Pre-Jan 1, 1997 gift: minor turns 18
- Tax Consequences
- If donor names himself as custodian then the amount of the gift is includable in the custodian's gross estate for federal and state estate taxes;
- If the donor names someone else as custodian, then the amount of the gift is not includable.
Powers of Attorney
- Springing power of attorney: arises only on the happening of a specified future event.
- Special power of attorney: limited to only specific transactions.
- General power of attorney: covering all legal acts on principal's behalf.
- Survives disability unless expressly provides that it will terminate upon principal's incapacity.
- Terminates on death unless it expressly provides it will survive death.
- Gift by agent to himself --> presumption of improper self-dealing, overcome only by clear showing of principal's intent to make a gift.
Accumulation Trust and Trust for Disabled Persons
- Accumulation trusts: directors to accumulate trust income within the perpetuities period are permissible, but accumulations may be reached for the support/education of beneficiary. When income is not disposed of or no validdirection given for its accumulation, it passes to the person presumptively entitled to the next eventual estate.
- Trusts for benefit of a person with servere chronic disability: In addition to other specific terms, trust must prohibit trustee from spending or distributing trust assets in a way that supplants, impairs, or diminishes medicaid or other gov't benefits for which the beneficiary is elligible.
Indefinite Beneficiary Requirement. Charitable trusts must have indefinite beneficiares and they must be a reasonably large group. Cannot be specific named persons.
- NOT OK
- "to all my children" to improve health/education
- "to provide scholarships for descendants of settlor"
- "to benefit all orphans living next door to me at 815 Albany Avenue, Syracuse" (too small)
- "to benefit all orphans in Syracuse"
- Masses for relatives
- NOT OK
CHARITABLE PURPOSE REQUIREMENT.
- Health, education, religion most common; trusts for dissemination of ideas may be charitable even if purpose is to accomplish change in present law.
- Charitable trusts may be indefinite/perpetual and therefore are not subject to the Rule Against Perpetuities, which indirectly limits the duration of trusts (Except to extent of shifting interest between private and charitable uses).
- Can be used to change the trust, if the stated purpose of the chariable trust can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust be as near as possible to what the settlor wanted.
ATTORNEY GENERAL REPRESENTATION
- AG has the duty of representing the beneficiaries of charitable trusts in the state. The AG is an indispensable party to any suit on construction or enforcement of a charitable trust. The AG and the donor have standing to sue to enforce the trust's terms.
- NY AG or a trustee, beneficiary of the trust may petition for termination if market value of trust asset is
honorary trusts: where no human being is the beneficiary of a private (i.e., non-charitable trust), New York does not recognize a trust, and the money designated for such trust falls into the residuary of the estate.
- pet trusts. a valid pet trust can last no longer than the duration of the pet's lifetime. Someone designated in the will or appointed by the court can enforce the trust and make sure the trust's purposes are carried out. Terminates on death of last surviving animal.
- cemetery trusts. trusts for the perpetual care and maintenance of cemetaries and burial plots are classified as charitable trusts and are okay (can last indefinitely) even though they have no human beneficiaries. Since they are called charitable trusts there is no RAP problem.
- A constructive trusts is a flexible equitable remedy to disgorge unjust enrichment that results from wrongful conduct. The trustee's only duty is to convey the property to the person who, in equity, should have the property.
- constructive trust can arise in the context of:
- interference with creation of a will (intending to alter or remove a bequest) resulting in the bequest remaining in place prior to testator's death.
- killing someone in order to get inheritance money. This is unjust enrichment. The result is that a constructive trust is imposed and killer treated as though he pre-deceased the decedent.
- promise to keep a life insurance policy in force is breached
- not a trust but an equitable remedy, where beneficiary holds legal and equitable title and can compel transfer of assets, b/c: (1) failure of express trust (e.g., for failure to ID beneficiaries); or (2) resulting trust by reversion (incomplete disposition of assets transferred in an express trust)
Purchase Money Resulting Trust: NOT RECOGNIZED IN NY AND 5 OTHER STATES. This is when a purchaser buys property and has something put in someone else's name (not a relative) and later claims no gift was intended and asks title holder for title to property; holder refuses. Most states find that this situation creates a PMRT allowing purchaser to compel the title holder to give up title; not New York.
- In NY: if there is CLEAR AND CONVINCING EVIDENCE that the grantee had agreed to or promised to reconvey the land to the purchaser, then a constructive trust can be imposed to benefit the purchaser.
Secret Trust and Semi-Secret Trusts
secret trust -- where a will makes an absolute gift but a trust was intended, if the trust beneficiary (trustee holding in the name of another) can show C+C evidence of the agreement.
but if a will makes a gift "in trust" without specifying beneficiaries, there is no trust (NY/majority rule) and legatee holds on a resulting trust for the testator's heirs.
Statutory Spendthrift Rule and Protection From Creditors
FOR IRREVOCABLE TRUSTS ONLY
Also not applicable to self-settled trusts, even if expressly stated: any interest retained by the settlor, to benefit the settlor.
- Protects a trust beneficiary's interest from creditors by prohibiting voluntary or involuntary transfer of beneficiary's interest (keeps money secure for beneficiary to enjoy -- no alienation of trust interest).
- NEW YORK ALLOWS SPENDTHRIFT CLAUSES IN NY: special statutory rule that protects all income interests in trusts with spendthrift protection even if the trust does not contain a spendthrift clause, but this just applies to income from the trust, not the principal. Principal protection requires affirmative provision for.
- To provide spendthrift protection to the Remainder Beneficiary, the one who gets the principle, the spendthrift clause must be expressly stated in the trust.
- "No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary's creditors by attachment or other legal process."
- (1) creditors who furnish necessities (food, clothing, shelter)
- (2) child support and alimony creditors;
- (3) federal tax liens (IRS)
- (4) excess income beyond that needed for support and education (last resort remedy; all other remedies must be exhausted; what is needed for support is based on the life style of the beneficiary, which is an uphill battle for creditors.
- (5) 10 percent levy provided by CPLR § 5205(e). This is available to all creditors, but all creditors together share in the 10 percent; it's not 10 percent per creditor.
If expressly authorized:
To Trustee: if the invasion power is given to the trustee (usually for health, support needs) there is usually a standard inserted governing when invasion of the principal is allowed. Trustee must conisder beneficiary's other sources of income in determining need.
- the standard may be enforceable by beneficiary.
- If no standard is given, beneficiary cannot compel distribution b/c trustee has unfettered discretion.
- To Trustee-Beneficiary: a trustee-beneficiary cannot make a discretionary distribution of income or principal to himself unless (1) instrument provides otherwise; (2) power limited by ascertainable standard related to health, education, maintenance, and support; OR (3) the trust is revocable and grantor is serving as trustee.
- To Beneficiary: almost invariably limited to health, education, maintenance, or support or a $5,000/5% standard. Beneficiary must be given these limited powers, and is deemed not to have general power of appointment.
- By Court: where beneficiary's support not sufficiently provided for. Must further purposes and intentof seller. A court cannot authorize invasion where remainder is to charity.
Modification of Trusts
- Trust modification by the trustees and/or beneficiaries is appropriate only when the objectives of the trust would be defeated or substantially impaired if the trust is not modified. The purpose of the trust comes first, overriding any specific directions in the trust (Claflin Doctrine).
- Modification requires a two-level test:
- (1) Finding out the primary intent of the settlor regarding the trust purposes;
- (2) Look at specific directions in the trust instrument to determine whether, because of changes in the circumstances, those specific directions would now frustrate the primary intent of the trust. If so, they can be changed by the court.
- The court can authorize INVASION of the principal if the income is not enough to carry ut the settlor's purpose of the trust.
Trust Termination by the Settlor
- Trusts are hard to terminate in NY; they are irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust instrument except that:
- A settlor can terminate an irrevocable trust if all beneficiaries in being consent. This can be impossible because no one can give consent for a beneficiary who is a minor or who is mentally incompetence.
- Beneficiaries must be born alive to count here; for the purposes of trust termination a child in gestation is not regarded as a person.
- If a trust gives property to heirs or next of kin, the interset is not considered a beneficial interest and no consent need be obtained because their is no heir until the time of death.
- Trustee's Powers are controlled by the New York Fiduciary Powers Act (FPA). It sets out the powers that can be exercised by a trustee without a court order, and without express authorization in the trust.
- FPA also controls what the executor or administrator of an estate can do. (Executor - nominated in testator's will to carry out the will provisions. Administrator - person appointed by probate court to administer the estate of a person who dies intestate).
- TRUSTEE CAN: do almost anything (with some clearly-defined specific exceptions), including sell any real or personal property, mortgage property, lease property, make ordinary repairs, consent/compromise/settle claims, or do almost anything to manage the corpus of the trust.
- TRUSTEE CANNOT: ENGAGE IN SELF-DEALING; BORROW MONEY FROM THE TRUST; OR CONTINUE A BUSINESS IN TRUST PROPERTY (trustee liable for losses incurred by the business unless court approval to continue the business).
Self-dealing / breach of fiduciary duty
(Trustee may NOT...)
- Trustee cannot buy/sell trust assets to himself. This is an absolute rule.
- Trustee cannot borrow trust funds. Another absolute rule.
- Trustee cannot lend money to the trust. Another absolute rule. Any interest earned o nsuch a loan must be returned to the trust, and any security given for the loan is invalid.
- Trustee cannot profit from serving as trustee, except for appropriate trustee fees.
- Trustee cannot take advantage of confidential information received while trustee.
Affirmative Trustee Duties re Self Dealing
- Duty to segregate trust assets from personal assets
- If commingled funds are used to buy an asset, and the asset goes down in value, the conclusive presumption is that personal funds were used.
- If commingled funds are used to buy an asset, and the asset goes up in value, the conclusive presumption is that trust funds were used.
- Duty to earmark trust assets by titling them in the trustee's name as the trustee.
- Not delegate fiduciary responsibilities
- Make periodic accountings
- Exercise reasonable care and skill
- Make trust property productive
- Prevent breach by co-trustee
Remedies for Breach of Fiduciary Duty Responsibilities
- Beneficiary can sue to remove the trustee;
- Beneficiary can ratify the transaction and waive the breach
- Beneficiary can sue for any loss (this is called a surcharge action)
No Further Inquiry Rule
Breach of fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made.
- Good faith is not a defense
- Reasonableness is not a defense
Actions Against Third Party for Trustee Self-Dealing
- If a trustee engages in a prohibited transaction such as self-dealing, and sells trust property to a third party, the beneficiary cannot sue the purchaser of property from the trustee if that purchaser of property was a bona fide purchaser for value without notice (BFP).
- A person is not a BFP if she know she is dealing with a trustee AND knows that the trustee is engaged in self-dealing.
- Self-dealing rules apply to loans or sales to a relative of the trustee; or to a business of which the trustee is an officer, employee, partner, or principal shareholder.
- Cannot be used to shield trustee(s) from liability for breach of a fiduciary duty in a testamentary trust because relieving an executor or testamentary trustee from liability for negligence is void as against public policy.
- Exculpatory clauses can be used in a lifetime/inter vivos trust.
Liability of Trustee in Contract and Tort
- Personal Liability of Trustee in Contract: depends on whether trustee signed on his behalf or on behalf of the trust. If a trustee signed only on behalf of the trust, no personal liability; if the trustee signed personally, and merely mentioned trust, then trustee has personal liability.
- Reimbursement by the trust available if (1) the contract was within the powers of the trustee and (2) the trustee was acting in the course of proper administration of the trust. If trust is insufficient to indemmnify, trustee is out of luck.
- Personal Liability of the Trustee in Tort: the trustee is personally liable for all torts by trustee or trustee's employers. This is an absolute rule, no exceptions. To deal with this, the trustee should buy liability insurance and charge the cost to the trust.
- Reimbursement by the trust for any tort claim is available if (1) the trustee was acting within the trustee's powers, and (2) trustee was not personally at fault. If trust insuffficient, out of luck.
Trustee's Investment Power
- Trustee must manage the property of the trust on behalf of the beneficiary (investment of the corpus of the trust). Prudent investor standard; must exercise reasonable care, skill and caution.
- Delegation OK
- Trustee with special skills held to higher standard
- Settlor can expand/limit these powers
- Uniform Prudent Investors Act: gives broad latitude to trustees to choose investments. Trustee can pursue modern portfolio theory of investment, in which trustee creates custom-tailored investment strategy for the particular trust.
- Trustee must consider the role the investment plays within the overall trust portfolio;
- Trustee must consider the expected total return from income and capital gains.
- Trustee does not have to justify the prudence of each investment looked at by itself; can balance off risky speculative investments against safe, conservative investments.
- Prudence not measured by hindsight (trustee doesn't have to have a crystal ball);
- Diversification may be appropriate but is not required.
- Trustee can exercise adjustment power and allocate capital gains to income (trustee can switch capital gains into the income category if necessary to protect the income beneficiary, and vice versa). End goal is fairness to all beneficiaries.
- THE KEY TO THE UPIA IS FLEXIBILITY TO SHAPE THE INVESTMENT STRATEGY FOR MAXIMIZATION OF RETURN, ALONG WITH THE FLEXIBILITY TO ADJUST INCOME BETWEEN THE INCOME AND REMAINDER BENEFICIARIES TO BE FAIR TO EACH OF THEM.
THE RULE AGAINST PERPETUITIES
- SAME RULE IN PROPERTY LAW.
- New York RAP has a perpetuities reform statute that automatically reduces all age contingencies to 21 years, thus saving the gift.
- Trust Hypo:
- "John conveyed Blackacre to the First Nat'l Bank in trust, to pay the income to my grandson Ronald for life, and then to pay the principal to any child of Ronald who reaches thirty."
- Income interest does not violate RAP
- Principal interest vioates rap at common law; but in NY would just be reuced to 21.
- "John conveyed Blackacre to the First Nat'l Bank in trust, to pay the income to my grandson Ronald for life, and then to pay the principal to any child of Ronald who reaches thirty."
NY RULE AGAINST SUSPENSION OF THE POWER OF ALIENATION
- The interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years, that is, when there are no persons who could, together, transfer fee simple title.
- Suspension of alienation is a concern when
- Spendthrift income interests are in the trust (quite considerable given NY's automatic spendthrift protction when trust is silent about income alienation); or
- Life estate created in an unborn beneficiary or in an open class that may posibly include unborn persons.
O to A and his heirs so long as no liquor is consumed on the premises, and if liquor is ever consumed, then to B and her heirs.
- suspension rule not violated b/c A and B could together agree to transfer a fee simple within their own lifetimes + 21 years.
- RAP violated because vesting in B's interest might take place after period of lives in being + 21 years.
Trust: to provide income to Jane for life, then on Jane's death to pay the income to Jane's children for their lives, then remainder to Bob. At death, Jane is 30 and has one child, Jed.
- RAP is not violated because all children are known when she dies.
- Suspension rule is violated, because upon creation of the trust Jane could not join the other beneficiaries to transfer a fee simple absolute since the class gift to jane's children includes potential unborn kids who cannot presently consent to join in a transfer of a fee simple absolute and will not have a life in being to validate the duration of their spendthrift income interest. The income interest thus is is void and the remainder goes to Bob immediately upon Jane's death.
Gratuitous Assignment of Income
- A beneficiary may assign her right to "any amount in excess of $10,000 of the annual income ot which the beneficiary is entitled from such trust" AS LONG AS the trust doesn't contain any express spendthrift clause prohibiting transfers.
- The right and amount of assignment is not limited if the trust authorizes the assignment of income interests.
- Assignment must be made by written instrument, signed, acknowledged, and delivered to the trustee accompanied by an affidavit that the beneficiary has not and will not receive consideration for the transfer.
- Permissible transferees: spouse, grandparents, issue of grandparents, whether or not under custodianship.