WHAT IS A TRUST?
A trust is 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 hold equitable title. person creating trust = settlor presumed revocable unless stated otherwise. revocable becomes irrevocable upon death of S. if any part of an express trust fails it becomes a resulting trust.
CREATION OF A TRUST
to create a valid trust there must be INTENT by the settlor to presently create a trust, TRUST PROPERTY, one or more BENEFICIARIES, a TRUSTEE, and a valid trust purpose. ICRTBP * need not be in writing unless res=RP, or testamentary (SoWills) *elements* 1. INTENT- intent manifested by written or spoken words or by the conduct of the settlor showing PRESENT INTENT TO CREATE TRUST; -Precatory Language – language expressing a hope, wish, or desire does not create a trust. The trustee named under such gift generally can take it outright for himself or choose to hold it in trust for the named beneficiary. The inference of trust may be overcome if: • The directions aren’t vague, but are definite and precise • The directions are addressed by a decedent to his executor or administrator • Failure to impose a trust results in an unnatural disposition by the testator • Extrinsic evidence shows that the transferor had providing been support the intended beneficiary before executing the instrument. 2. CAPACITY- SETLOR must have capacity to convey, ie. sound mind 18+. Settlor lacks legal capacity when there is undue influence, fraud, or duress. This renders the trust void. To create an irrevocable trust, settlor must have legal power to convey the trust property. - Undue Influence: contestants must establish that the product of the influence was a trust that would not have been created “but for” the influence. 3. RES-TRUST PROPERTY – Trust Res is the subject matter of the trust. The res may consist of any of the following, alone or in combination: 1) real property, 2) tangible personal property, or 3) intangible personal property. The trust res must be in existence for the trust to be enforced. A mere expectancy may not serve as the trust res. The trust res must be sufficiently specific, identified and described. • trust may be created without res if res is to be transferred by will at S's death or is a death benefit POD. • A trust of tangible property need not be in writing, but a trust of real property must be in writing. • If the settlor promised to create a trust in the future and the promise is supported by consideration (ie. The settlor made a contract to create a trust), the trust can arise when the property is acquired w/o any manifestation of intent. • HOMESTEAD PROPERTY – If a married settlor solely owns any property that qualifies as HS, he may not make a gift of the property or transfer title by deed to the trustee unless the settlor is joined by his spouse. • where there is no trust property, the trust fails because the trustee has no property to manage. 4. BENEFICIARIES- A private trust requires DEFINITE, ASCERTAINABLE beneficiaries. A beneficiary is necessary to validate every trust except charitable trusts, and honorary trusts. Settlor may give power to 'ee to select beneficiary from an indefinite class, but such right must be exercised within a reasonable time. • Beneficiaries need not be identified at the time the trust is created, but they must be susceptible to identification by the time their interests are to come into enjoyment (w/n RAP PERIOD). • RULE AGAINST PERPETUITIES – violations can arise in creating trusts. FL has adopted a 360 year vesting period. A non-vested property is valid if: 1) when the interest created is certain to vest or terminate w/n the common law period of 21 years after the death of a life in being OR 2) it actually vests or terminates w/n 360 years. *settlor may be beni and 'ee, but must not be the only one of each. need someone to hold 'ee responsible 5. TRUSTEE – must have a trustee with legal title and fiduciary duties. A trust will not fail because of death, removal, incapacity, or resignation of trustee. If the settlor failed to name a successor trustee, the court will appoint one. A person can create a trust by declaring himself trustee of another. 6. PURPOSE- a trust is invalid if its purpose is illegal, contrary to public policy, impossible to achieve, or intended to defraud settlor’s creditors or based on illegal consideration.
Trustee powers - A trustee can exercise powers specifically conferred by the terms of the trust or by statute. Duties of Trustee – An appointed trustee owes fiduciary duties in his position. A trustee has many duties, including: (1) distribute assets as the trust indicates, (2) loyalty: administer the trust solely in the interest of the beneficiaries, and prohibits self-dealing; (3) invest prudently: manage the trust as any prudent investor would, looking at whether the portfolio, as a whole, has a good balance between security and risk; (4) preserve and protect trust property; (5) impartiality: act in good faith towards all the beneficiaries; and (6) account and inform the beneficiaries of the trust assets, income, and expenses at least annually. • Duty to Administer Trust in a good faith and prudent manner in favor of the beneficiaries interests. • Duty of Loyalty – trustee cannot represent both her personal interest and the interest of the trust. (ie. No self-dealing). o Specific Self Deal Rules § Cannot buy or sell trust assets § Cannot buy assets from one trust to another § Cannot borrow trust funds or make loans to trust • Duty of Impartiality – Trustee must act for the benefit of the beneficiaries. If there is more than one beneficiary, she must act impartially in investing and managing the trust taking into account the beneficiaries different interests. • Duty to Separate and Earmark Property – trust assets must be physically separate from trust’s personal assets and assets of other trusts. NO COMMINGLING. • Duty to Perform Personally – Trustee must perform functions that a reasonably prudent person would not delegate. There are however, exceptions: o a trustee can delegate investment and management decisions as long as the trustee uses reasonable care, skill, and caution in: 1) selecting the agent, 2) establishing the scope and terms of the delegation, and 3) monitors agents performance and compliance with the terms. • Duty to Preserve Trust Property and Make It Productive o Collect all claims due the trust o Lease land and manage it o Record recordable documents o Invest trust funds. o invest AS a PRUDENT investor would. --> Prudent Investor Rule – a trustee has the basic duty to invest prudently. FL applies this rule in determining the propriety of investments made by the trustee. Trustee must take into account both probable imcome and the safety and preservation of principal. Trustee must exercise reasonable care, skill, and caution. • Investment performance is measured by OVERALL RETURN • Diversification of Investments
Inter Vivos Trust: Writing is not required for transfer of personal property. Oral trusts may be established by clear and convincing evidence. Trusts of land require a written instrument signed by the person entitled to impress the trust upon the property. Imposing a constructive trust may enforce an otherwise invalid oral trust of land. An inter vivos trust can be created: 1) by a declaration of trust by a property owner stating that he holds the property as trustee in trust, or 2) by transfer of property by the settlor during his lifetime. Testamentary Trusts: A testamentary trust is created in the settlor’s will, to become effective and irrevocable upon the settlor’s death. The trust intent and the essential terms of the trust must be ascertainable from the will itself, or a writing incorporated by reference into the will, or from facings having independent legal significance. Charitable Trust: "A charitable trust may be a perpetual, and may be created to benefit a charitable purpose, such as religion, health, or education. It may designate a charity or an indefinite group as a beneficiary of the trust but must have indefinite beneficiaries. If the purpose of a charitable trust fails, a court may fashion a new charitable purpose that is as close as possible to the original purpose under the Cy Pres Doctrine. RAP does not apply to shifts from one charitable use to another. " CHARITABLE TRUSTS – Must have 1) “indefinite beneficiaries” 2) it may be perpetual, and 3) the cy pres doctrine applies. Purpose- must benefit the public (ie. Relief of poverty, education, religion, health, etc.) Beneficiaries – courts consider the community at large and a particular individual eligible for benefits has no standing to enforce the terms. Enforcement is placed upon the state attorney general. Cy Pres Doctrine – When a charitable purpose selected by the settlor is impractical, if the court finds that the settlor had a general charitable purpose rather than a specific purpose to help only the named charity, it will select an alternative charity to be the beneficiary. The alternative must be “as near as possible” to the settlors intent. SPENDTHRIFT TRUSTS – the beneficiary cannot voluntarily or involuntarily transfer his interest in the trust, and his creditors are precluded from reaching it to satisfy their claims. Once trust property is distributed from the trust, it loses its trust character and creditors may reach it. Exceptions: A spendthrift clause cannot be used to shield the beneficiary from: • His own creditors where the beneficiary is the settlor • Claims for support, alimony, and services provided to protect his interest • Claims by the government. SUPPORT TRUST – provides for the beneficiary’s support such as housing, food, tuition. Trustee has no right to provide for luxuries. This trust can be mandatory or discretionary. DISCRETIONARY TRUST – grants trustee discretion to make distributions. Beneficiary cannot compel distribution. Court will order distribution only when there is an abuse of discretion. Trustee must follow directions given by settlor and honor settlor’s intent. TRUST FOR THE CARE OF AN ANIMAL – A trust for the care of an animal alive during the settlor’s lifetime is valid. It terminates when the animal dies (if created for more than one animal, on the death of the last surviving animal). TOTTEN TRUST – the name given to a bank account in the depositor’s name “as trustee” for a named beneficiary. Under such bank accounts trustee has a pass book and continues to make withdrawals during her lifetime - The depositor retains full control of the money in the account during her life-time. The beneficiary has no rights until the trustee’s death. POUR OVER GIFT FROM WILL TO TRUST – "In a pour-over trust, the testator’s will “pours assets over” into a trust. To create a pour-over trust, the following elements must be satisfied: 1) the trust may be established before or concurrently with the execution of the will, 2) the trust must be identified in the testator’s will, and 3) the trust terms must be set forth in a written instrument. " - a settlor can make gifts by will to a trust, even a revocable trust, established during his lifetime. Requirements: • Trust must be in existence before or created concurrently with the will • Trust may be amendable or revocable • Gift is valid even though trust unfunded during settlor’s lifetime Pour-Over Trust:
MODIFICATION AND TERMINATION OF TRUST
MODIFICATION AND TERMINATION OF TRUST – "Trust will AUTOMATICALLY terminate at a term specified in the instrument or when the purposes have been accomplished or unlawful, contrary to public policy, or impossible to achieve. A revocable trust can be modified, terminated, or revoked by a settlor, so long as he substantially complies with the method specified in the trust document. An irrevocable trust can be modified by judicial modification or non-judicial modification. Under judicial modification, the court can modify a trust when: (1) the trust purpose has been fulfilled, or has become wasteful, illegal, or impracticable; (2) unanticipated circumstance substantially impairs a material purpose; or (3) material purpose no longer exists. A trustee or living beneficiary can petition for judicial modification. On the other hand, in order to modify a trust without court intervention there must be unanimous consent from all living beneficiaries and trustees, and the settlor must be dead." o A settlor can revoke or amend a trust unless it expressly states it is irrevocable. o Trustee can terminate trust if the trust prop is less than 50K and the amt is insufficient to justify the cost of administration. o Trust may be modified or terminated by the court upon petition from trustee or a qualified beneficiary if: § Modification or Termination is not inconsistent w/settlor’s purpose § It is in the best interests of the beneficiaries § Continuation would uneconomical (under 50K) § Modification would achieve settlor’s tax objectives § Reformation is necessary to correct a mistake. The doctrine of changed circumstances can be used to modify terms of a trust when a change in circumstances renders them obsolete or inconsistent with the settlor’s intent. This applies to charitable and private trusts. Resulting trust A resulting trust may arise when: (1) express trust purposes have been accomplished but the res was not exhausted, or (2) failed to create an express trust. In this case, the res will go to the settlor or his heirs. A constructive trust is a remedy to avoid unjust enrichment, which arises by operation of law. Elements include: (1) breach of promise; (2) transfer of property in reliance on that promise; (3) transferor and transferee were in a confidential relationship, and (4) unjust enrichment.
RESULTING TRUST; PURCHASE MONEY RESULTING TRUST;CONSTRUCTIVE TRUSTS
RESULTING TRUST – arises where settlor conveyed property to a trustee under an express trust and 1) the trust was void or unenforceable or 2) the beneficiary is dead or cannot be located. A resulting trust may also apply when on failure of a charitable trust where cy pres is inapplicable- or when the trust purpose is fully satisfied and some trust property still remains. The resulting trust is held for the settler or her successors In such event, the express trust terminates and the settlor becomes the beneficiary of the resulting trust. Purchase money resulting trust -PMRT is when the purchase price is paid by one person, but title is taken by another person. The presumption is that the title holder holds the property in trust for the purchaser. In order to overcome the presumption, the person with title has the burden to prove it was a gift. CONSTRUCTIVE TRUSTS – not really a trust but prevents unjust enrichment from wrongful conduct, such as fraud, undue influence, or breach of fiduciary duty. The trustee’s only duty in CT is to convey the property to the person who would have owned it but for the wrongful conduct. Proof of facts necessary to establish a constructive trust must be made by CLEAR AND CONVINCING EVIDENCE.
TRUSTEE REQUIREMENTS; COMPENSATION; DISCLAIMER
A trustee may be any person 18 years or older. He is entitled to receive reasonable compensation for the performance of her duties, according to the terms of the trust instrument. An individual may accept the trusteeship or may resign from the position by: 1) giving 30 days notice of his intent to resign to the settler, co-trustees, and qualified beneficiaries, OR 2) obtaining court approval of the resignation. *A new trustee may be appointed by unanimous vote of all living beneficiaries; otherwise, one will be appointed by the court.
REMOVAL OF TRUSTEE; REMEDY FOR BENEFICIARY
The court can remove if a trustee if he breaches their fiduciary duties or if the continuation of the trustee in charge would be detrimental to the intent of the beneficiary. Grounds for removal include: 1) a serious breach of the trust, 2) incapacity, 3) trustee’s insolvency, 4) extreme hostility between the trustee and the beneficiaries, 5) a conflict of interest, etc. Remedy to Beneficiary for Violation: "Upon a breach of trust, beneficiaries may either ratify the transaction and waive the breach; sue for resulting loss; or in trustee self-dealing cases, trace the transaction and recover property for the trust." The trustee of a revocable trust cannot be sued for breach if he acted with the consent of the settlor. o Beneficiary can “ratify” or accept the improper conduct o Sue for the full “surcharge” or the full amount of the loss to the trust Removal of Trustee – a court may remove a trustee if his continuation would be detrimental to the interest of the beneficiaries. Grounds for Removal are: • Commission of a serious breach of trust • Legal or practical incapacity to administer trust • Unfitness for the position such as drunkenness, extreme old age, and other practical inability • Refusal to post bond or account • Existence of a significant conflict of interest • Trustee’s insolvency • Extreme friction or hostility between the trustee and beneficiaries where such hostility is likely to interfere with the proper administration of the trust.
Liability of a Trustee: "A trust may have multiple trustees. If there are multiple trustees, decisions must be made by a majority vote. A trust may also have current trustees and successor trustees. Only the trustee who participated in the transaction will be liable to beneficiaries for breach. A successor trustee is not liable for a previous trustee’s breach, unless he continues the breach or fails to take proper remedial measures." If the trustee commits or is about to commit a breach of these duties, the court can: 1) enforce specific performance, 2) enjoin the trustee from committing the breach, or 3) compel the trustee to pay money/restore the property. Claims against the trustee for breach must be brought within 4 years. Although a beneficiary must bring her action within 6 months of receiving any report disclosing the breach. In a co-trustee situation, a trustee will not be liable for the acts of co-trustees if he did not join in the action and used reasonable care to prevent the breach. A trustee will not be liable to a beneficiary for a breach of the trust if he acted in reasonable reliance on the terms of the trust or the beneficiary consented to the conduct.
ACTIONS AGAINST TRUSTEE; K;TORT
Tort actions - In the event of a tort, a third party can sue a trustee in his representative capacity. Trust assets will be used to pay expenses, unless the trustee was personally at fault. K actions - A trustee will not be personally liable for contracts if he discloses he is acting in the capacity of trustee.
Transfer of Beneficiary’s Interest: A beneficiary may freely transfer his interest in the trust absent restrictions by state or by instrument. Creditors can levy on the interest from the debtor’s trust, and can levy on the property of a revocable trust. Creditor access Generally, a beneficiary may alienate his interest in a trust. However, a spend thrift provision prohibits the beneficiary from alienating his interest, and therefore prevents creditors from attaching such interest to satisfy their claims. This provision is to protect the beneficiary from his own negligence with the funds. Absent such a provision, a creditor can reach the income interest of the trust, but not the principal. A spendthrift clause however, cannot be used to protect the beneficiary from his creditors if he is the settler. A creditor will be able to reach the distribution only once it is in the hands of the beneficiary. Despite a valid spendthrift provision, a creditor may be able to attach the interest if the debt is for: (1) alimony or child support (last resort: must try to attach other assets); (2) attorney who provided services to secure the beneficiary’s interest in the trust (last resort); (3) government claims; or (4) settlor is a beneficiary—a settlor will not be able to hide behind a spendthrift provision in a self-settled trust. Although creditors can attach a settlor’s interest in a trust, access will depend on the type of trust: (1) irrevocable trust: C can reach the max amount that could be distributed to S as a beneficiary; (2) revocable trust: C can attach the entire res in the trust. Mandatory trust provision is where the trustee must make mandatory distributions according to instructions in a trust. A creditor can garnish the property once it is in the beneficiary’s hands. Pure discretionary trust is where the trustee has sole discretion to make distributions. Neither a beneficiary nor a creditor can compel distributions. A creditor can get a writ of garnishment once the trustee decides to make discretionary payments. A discretionary trust is where the trustee has the discretion to make distributions for the beneficiary’s support. ('ee must follow (t) directions and honor S' intent). A beneficiary cannot compel distributions- a court will order distribution ONLY where there is an ABUSE of DISCRETION. A creditor can get a writ of garnishment once the trustee decides to make discretionary payments.
No-Contest Provision: An action to contest the revocation of the entire trust may not be commenced until after the settlor’s death. A no- contest provision in a trust is unenforceable. Any beneficiary of a trust has standing to challenge the trust, or can assert a claim that the trust must be distributed in a particular way.
Bona fide purchaser rule If trust property was wrongfully sold to a BFP, beneficiaries will not have rights to the asset, but will be entitled to any consideration the trustee received. If trust property was wrongfully transferred to a non-BFP, beneficiaries can asset rights against the original asset, or the consideration the trustee received.
Undue Influence: Contestants must establish that the product of the influence was a trust that would not have been created “but for” the influence.
1. WHAT TYPE OF TRUST IS THIS? Is this invivos or testamentary- Take effect during lifetime, testamentary intent that will only take effect after death
2. Testementary/ RP RES - need SO wills, signed by setlor and 2 witnesses and Ws sign in eachothers presence and in front of S. RP res need transfer with two witnesses and X writing.
3. ELEMENTS OF A TRUST
PRESENT INTENT- no precatory language or speculative lang, or language creating in future
CAPACITY- S must be of sound mind and 18+
VALID PURPOSE- not contrary to PP, Laful
RES- must be funded, S must have interest in property, not expectation, IF RP IN W
BENEFICIARIES- ascertainable beneficiaries
TRUSTEE- with duties
3. REVOCABLE OR IRREVOCABLE- PRESUMPTION- that trusts are revocable unless expressly stated otherwise. Safe from creditors, Settlor cant change mind.
4. SPENDTHRIFT- the person making the rust that the benficiaries could blow the mony, provision prevents voluntary or involuntary transfer of the beneficiaries interest. * creditors cant get at beneficiaries interest, unless special creditor - spousal/child support & S/Fed government creditors* .
5. TYPES OF TRUSTS-
- CHARITABLE TRUSTS- INDEFINITE BENEFICIARIES, BROAD PUBLIC CHARITABLE PURPOSE, LASTS PERPETUALLY, NO RAP. CYPRES= When purpose fails for some reason, and S created T with general charitable purpose, ct will fashion new similar purpose for the trust that is as near as possible to the S intended purpose.
- DISCRETIONARY TRUST- 'EE has FULL DISCRETION to DISTRIBUTE TRUST ASSETS TO BENEFICIARIIES, as she DEEMS FIT, in accordance with S intent. B NOR CREDITORS cannot compel distribution. Once T dstributes assets to B, creditors can get at it. B may assign right to payment to C, UP TO T's DISCRETION on whether TO ENFORCE, and if so it is FREELY REVOCABLE BY T/B.
- SUPPORT TRUST- HOME, FOOD, DAILY EXPENSES, not for lunxuries. Up to 'EES discretion.
- TOTTEN TRUST- bank account held in trustees name for the benefit of the beneficiary.
- EQUITABLE TRUSTS:
- RESULTING- When trust fails for some reason, CT enforces RT anyways- or - trust purpose satisfied and assets leftover will revert back to S estate as RT
- CONSTRUCTIVE- Fraud misrepresentation, duress etc- Cts imposes this trust to prevent UE.
6. TRUSTEE DUTIES
- GENERAL FIDUCIARY DUTIES-
- 18+ Comptetent to own and acquire property and understand the consequences of managing the property.
- Act PRUDENTLY and in GF to comply and fulfill S intent and act pudently in B best interest.
- SPECIFIC DUTIES
- PRUDENT INVESTOR- Invest as a conservative investor would, intellegent, diversitifcation of risk and judgement on return as a whole.
- ADMIN PERSONALLY- may ~ delegate duties a RT wouldnt
- EARMARK PROPERTY- no comingly of funds, keep separate and labelled separately as such.
- DOL- NO SELF DEALING; any conflict of interest
- COMPENSATION- 'EE entitled to REAS COMPENSATION in light of the amount of work, frequency of decisionmaking and dealing wiht beneficiaries, complexity of management.
- 'EE CAN BE BENI- SLA not the only one. And also must not violate duties in decisionmaking ( ie. DOL)
- REMOVAL OF TRUSTEE- 1) breach of trust aka breach of any duty; 2) Unfit 3) incapacitated
- possible when:
- purpose fulfilled
- impracticable to continue- assets depleted to the extent that they would not justify administration.
- Circumstances have changed so inconsistent with material purpose of T
8. RAP- Trust must vest within 21 years of the life in being at the time of the trusts execution or within 360 years. For Trusts created earlier than 12/31/2000 the RAP period is 90 years.
** LOOK OUT FOR PR, PROPERTY, HOMESTEAD, WILLS.