Rule of Suspension
Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 yrs, that is (i.e. no persons alive & identifiable can transfer fee simple title).
If present & future interests are alive - they can convey full fee simple.
Future interests not yet born – suspension problem b/c spendthrift rule keeps interests from being transferred during their lifetimes (i.e. beyond any lives in being plus 21 yrs.)
Look for contingent remainder for life in open class of persons - “On Jane’s death, to pay income to Jane’s children for their lives” - interest to Jane’s children is subject to the suspension rule.
éNOT about vesting - only concerned w/ possible suspension of ability to transfer a fee simple
Personal liability of trustee in tort & contract claims.
Trustee signed only on behalf of trust - no personal liability (Jim Jones Trust, by Mary Jones, trustee; Mary Jones, as Trustee of the Jim Jones trust, and not individually)
Trustee signed personally & merely mentioned trust - personal liability (Mary Jones, trustee of the Jim Jones Trust)
Even if there is personal liability - trustee will be reimbursed from the trust if (1) K was w/in the powers of the trustee, and (2) Trustee was acting in the course of proper administration of the trust.
Trustee is personally liable for all torts by trustee or trustee’s employees (absolute rule) - should buy liability insur. & charge cost to the trust.
Can be reimbursed from the trust for tort claims if: (1) Trustee was acting within trustee’s powers, and (2) Trustee was not personally at fault.
Rule Against Perpetuities
Interest is vested when there is no condition that has to be satisfied & the exact identity of the taker is known
Perpetuities Reform Statute - automatically reduces all age contingencies to 21 years, thus saving the gift
Does not apply to charitable trusts.
NY does not follow the “wait & see” reform except for powers of appointment - look at the facts to see if the power of appt is exercised during the time period of the Rule – if so no RAP violation.
Remedies for breach of fiduciary responsibilities? The “No Further Inquiry” Rule? B actions against 3rd party purchaser? Indirect self-dealing?
Trustee breaches…beneficiary can:
sue to remove the trustee
ratify the transaction & waive breach
sue for any loss (*action called “surcharge”)
“No Further Inquiry” Rule - breach of fiduciary duty by engaging in self-dealing is an automatic wrong, & no further inquiry need be made (GF or reasonableness no defense)
Cannot sue 3rd party if he was a BFP without notice à B must show TP knew he was dealing w/ a trustee and knew he was engaged in self-dealing
Indirect Self-Dealing – S-D rules apply to loans/sales to relative of trustee, or a business of which the trustee is an officer, employer, partner, or principal shareholder
Trustee Investment Power
Uniform Prudent Investor Act (UPIA) - gives broad latitude to trustees to choose investments – can pursue the modern portfolio theory of investment, where the trustee creates a custom-tailored investment strategy for this particular trust
Must consider role each investment plays w/in overall trust portfolio
Must consider the expected total return from income & capital gain
No need to justify prudence of each investment by itself - can balance risky w/ safe
If investment prudent at the time it was made in context of overall strategy then okay.
Trustee can exercise adjustment power & allocate capital gains to income (if nec. to protect income beneficiary)
End goal is fairness to all beneficiaries
NY Fiduciary Powers Act controls - sets out powers that can be exercised by a trustee w/o ct. order & w/o express authorization in the trust
Trustee can – sell, mortgage or lease any real or personal property, make ordinary repairs, & contest, compromise, or settle claims (anything to manage the corpus of the trust)
Trustee cannot - engage in self-dealing, borrow money, continue a business
Trustee is liable for losses incurred by the business unless trustee has court approval to continue the business
What are the 2 affirmative duties on trustee self-dealing?
2 affirmative duties on self-dealing:
Duty to segregate trust assets from personal assets
Asset goes down in value – presumption that personal funds used
Asset goes up – conclusive presumption that trust funds used
Duty to earmark trust assets by titling them in trustee’s name
Termination by the settlor.
Trusts are presumed irrevocable & unamendable unless power to revoke/amend is expressly reserved in trust instrument BUT, settlor can terminate an irrevocable trust if all beneficiaries-in-being consent
Often impossible b/c NO ONE can give consent for any beneficiaries who is a minor or who is incompetent (kids in gestation don’t count)
If trust gives property to beneficiary’s “heirs” & “next of kin”, that interest is not considered a beneficial interest, & no consent is needed from them.
What are the 5 prohibitions on trustee self-dealing?
5 Prohibitions on Self-Dealing
Cannot buy or sell trust assets to himself (absolute rule)
Cannot borrow trust funds (absolute rule)
Cannot lend money to the trust (absolute rule) – any interest earned must be returned to trust
Cannot profit from serving as trustee (except for appropriate trustee fees) – i.e. cannot take advantage of confidential info received while trustee
Corporate trustee cannot buy its own stock as a trust investment
Types of Trusts
Statutory Spendthrift Rule & Protection from Creditors
*All trusts in NY are spendthrift unless affirmatively assert it is not.*
Protects trust beneficiary’s interest from creditors by prohibiting (in)voluntary transfers of beneficiary’s interest. (i.e. B cannot assign interest either) - creditors can’t get at income or principal until it is paid to beneficiary.
Income – presumed to be spendthrift
Principal - to provide spendthrift protection to the residuary beneficiary (one who gets principal) spendthrift clause must be expressly stated in the trust
Spendthrift clause does NOT apply to any interest retained by the settlor (but will protect 3rd party named under trust).
Trusts are considered irrevocable unless they are made revocable à all revocable trusts are fair game for settlor’s creditors.
When is modification appropriate & what is the appropriate test?
Only appropriate when the objectives of the trust would be defeated or substantially impaired if the trust is not modified.
Primary purpose of trust overrides specific directions.
Ex – primary purpose to provide income, sell stock b/c stock is just incidental.
Two level modification test:
Determine primary intent of settlor re: trust purpose
Look at specific directions in the trust instrument to determine whether, because of changes in circumstances, those specific directions would now frustrate the primary intent of the trust.
The court (by statute) can authorize the invasion of the principal if the income is not enough to carry out the settlor’s purpose of the trust.
Resulting Trusts & Purchase Money Resulting Trusts
An equitable remedy used when trust fails for some reason.
Beneficiary ambiguous à trustee holds on a resulting trust for residuary beneficiary
Purchase Money Resulting Trust – purchaser buys property & has title put in another’s name & later claims no gift & asks for title back but title holder won’t – most states impose PMRT, allowing purchaser to compel title holder to give up title
NY does NOT recognize PMRT UNLESS – C&C evidence G’ee expressly or impliedly promised to reconvey the land to the purchaser (then constructive trust can be imposed)
Types of Trusts
What are the 5 exceptions to spendthrift clauses?
Five Major Exceptions to Spendthrift Clauses:
Creditors for furnish necessities (food, clothing, shelter, health services)
Child support & alimony
Federal tax liens
Income beyond that needed for beneficiaries for support & education (must show all other remedies exhausted before using this)
The 10% levy under CPLR 5205(e) – judgment creditors can use – all share 10% levy together
é Ex – P was income beneficiary under a trust. She ran up high debts & four of her creditors sued her & gained judgments against her. The creditors can use the 10% levy against the trust even when it is spendthrift.
Private trust must have a human beneficiary so failed honorary trust falls to residuary EXCEPT:
Pet Trusts - a valid pet trust can last for no more than 21 years
Cemetery trusts - trusts for perpetual care & maintenance of cemeteries & burial plots are classified as charitable trusts & are OK (no RAP)
Deed of land by G’or to G’ee & claim that G’ee orally promised to hold the land in trust for G’or à NO constructive trust is imposed to give effect to any alleged oral trust UNLESS:
Fraud in the inducement - C&C evidence that G’ee agreed to hold property in trust & at the time of agmt had no intention of carrying out the trust, then a constructive trust imposed for intended beneficiaries
Confidential relationship tra G’or & G’ee – C&C evidence of oral agmt
“Confidential relationship” – family, business partner, attny-client, priest, etc.
éBeneficiaries could still get quantum meruit for the value of services rendered.
Types of Trusts
Must have indefinite beneficiaries & must be a reasonably large group
Must be for a charitable purpose (e.g. health, education, religion) BUT a trust for masses for relatives is okay.
Trust may be perpetual (not subject to RAP).
Equitable doctrine of cy pres can be used to change the trust - if stated purpose of charitable trust can no longer be accomplished, or charity goes out of existence, ct. uses this to make the trust as near as possible to what settlor wanted.
AG has duty of representing the beneficiaries of charitable trusts in the state
AG is indispensable party to any suit & AG & donor have standing to sue to enforce the trust’s form.
Flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.
“Trustee’s” only duty - convey the property to the person who, in equity, should have the property
Child kills parent & takes under intestacy – property goes in constructive trust & is then transferred as if wrongdoer predeceased decedent (note, this means child-killer’s issue get property)
Types of Trusts
The Totten Trust (Bank Account Trust) - a bank account in the depositor’s name as trustee for a named beneficiary – no particular words nec. (“Mary Smith as trustee for John Smith”)
Beneficiary has no beneficial interest during the depositor’s lifetime but gets acct. at death.
Change beneficiary - notarized stmt, sent to financial institution, naming old beneficiary and the new one.
4 ways to revoke:
Withdraw all the money in the account
Express revocation during lifetime by depositor - writing naming beneficiary, the financial institution, notarized & delivered to the bank (absolute reqs.)
Revocation in a will (same reqs. as lifetime)
Death of beneficiary – $ goes to depositor & not heirs of B
éCreditors of depositor can reach the totten trust account balance before or after depositor’s death. (b/c form of revocable trust)
Types of Trusts
Joint Bank Account
(not a trust)
Joint Bank Account
“John & Jane with right of survivorship” or “to the survivor of them”
Not a trust account, because no intent to create a trust
To block $$ from going to survivor – C&C evidence that survivorship not intended when acct. est. & was only opened as a matter of convenience to depositor (v. hard)
Each joint account holder owns ½ of the joint account no matter what.
If holder hastily removes all amounts right before the other’s death, they will have to return ½.
Types of Trusts
How can an insured make life insurance proceeds payable to a trust?
Inter vivos unfunded trust - Insured can create an unfunded revocable insurance trust & name the trustee of the trust as policy beneficiary
Testamentary trust to receive proceeds - have the trust itself be a testamentary trust & name the “trustee named in my will as beneficiary”
é Proceeds of savings accounts or pension plans can be handled the same way
Types of Trusts
Uniform Transfers to Minors Act (not a trust)
Gifts under UTMA must be - made to a named custodian for a named minor, & it must specify that it is made under the NY UTMA.
Special statutory conservatorship where minor holds legal title – not a trust.
Duties of Custodian
Hold, manage, & invest property under a prudent person standard
Pay over what part of the property that the custodian deems advisable.
Pay what is left of the property to the minor when the minor turns 21 (then custodianship ends).
Donor names himself as custodian - amt of gift is includible in gross estate for fed. & state estate taxes.
UTMA gifts can be made in a will if the nec. language is used
Intent to create.
Settlor must intend to create an enforceable obligation – precatory language is not enough.
“Trust income to be paid to X” = intent to create enforceable obligation
Precatory language – “would like”; “request”; “wish and desire”
Use of the word “trust” not enough – look at all the facts.
Trustee must be given duties to perform - no duties = a passive trust, (i.e. no trust at all)
Types of Trusts
Testamentary gift to an existing revocable trust
Pour-over trust must be executed prior to or contemporaneously with the will & identified in the will.
Can be to any existing trust (even 1 created by another).
Trust need not be funded during settlor’s lifetime since will have a res at time of death.
Trust cannot call for:
commission of a crime
destruction of property
condition against public policy (e.g. promoting divorce, restricting marriage)
éMarriage restrictions to members of a certain religion or ethnic group are valid & so are trusts that continue until a spouse remarries.
Types of Trusts
Revocable Lifetime Trusts
Revocable Lifetime Trust
Must have at least one beneficiary who is not the settlor - settlor CANNOT be the only beneficiary.
Can retain the power to terminate or amend the trust
Creation - “to myself for life, then to Bobby upon my death”
Principal passes directly to beneficiary & does not go through probate ever BUT a revocable trust does NOT avoid taxes - if a settlor keeps income interest or power to revoke then included in gross estate for fed. estate taxes
What is necessary to create a valid trust?
Settlor who makes a
Delivery of legal title of
Property (res, corpus, principal) to a
Trustee who holds legal title for the benefit of a
Intent to create a trust for
A lawful purpose
Must be in writing signed by settlor & trustee, & either (1) acknowledged, or (2) signed by 2 Ws.
No consideration is required to create a trust.
What are the requirements for trusts beneficiaries?
Must be definite and ascertainable - if trust fails for ambiguity the trustee holds in a resulting trust for the residuary beneficiary.
“Family” or “Next of kin” = definite b/c can just consult intestacy statutes for persons who fit the description
Who can create a trust? What type of property? How is property transferred?
Settlor can be anyone 18 or older, w/ capacity to enter Ks.
Must be delivery of title to trustee – titled assets need a formal transfer of title – i.e. registered transfer (stocks, deed, car, etc.)
Settlor must have a present interest in property – NOT an expectancy
Mere promise to put unspecified property into trust is not enough – must be identified property that the settlor owns, not subject to future determination (e.g. “promise to put whatever money I may choose to contribute in the next ten years” is not enough).
Who can be a trustee?
Lifetime trust – almost anyone b/c no court involvement
Testamentary trust – created under court supervision, anyone can be a trustee EXCEPT:
Those under 18
Those incapable because of drunkenness, dishonesty, etc.
Non-resident aliens can serve as trustee if (1) related to decedent, and (2) a NY resident serves as co-fiduciary.
éNo trust fails for lack of a trustee – the court can appoint someone