Trusts (DONE) Flashcards
(119 cards)
1
Q
Are spendthrift trusts valid in Texas?
A
yes
2
Q
Can a trustee be the beneficiary of a trust?
A
Yes, as long as the individual is not the sole trustee and sole beneficiary.
If a person is the sole trustee and sole beneficiary, there is not trust. The legal and equitable titles merge, and the person holds title free of any trust.
3
Q
What is required when the beneficiaries of a trust are a class?
A
The individuals of the class must be readily ascertainable.
4
Q
By default, are trusts revocable or irrevocable?
A
Trusts are revocable unless expressly made irrevocable.
The purpose of this provision is to prevent ill-considered irrevocable dispositions. If a trust is revocable, the settlor can modify or amend the trust even though the trust instrument is silent as to the power to alter or amend. Thus, a settlor can revoke, modify, or amend a trust unless the instrument provides that the trust is irrevocable and not subject to amendment.
5
Q
If one party provides the consideration and title is taken in the name of another party, a presumption of a resulting trust may arise. How can the purchase money resulting trust presumption be rebutted?
A
By evidence showing that the person providing consideration intended to make a gift to the title holder.
6
Q
What is a constructive trust?
A
Not really a trust, but an equitable remedy created by a court to disgorge unjust enrichment and prevent someone from profiting by her wrongful conduct. In imposing the constructive trust, the court can compel delivery of the property involved to the person who would have owned it but for the wrongful conduct.
7
Q
A is in breach of his fiduciary duty to B. As a remedy, the court may impose a constructive trust, as long as:
A
A wrongfully acquires or retains property in violation of his fiduciary duty.
Imposition of a constructive trust enables the party to recover the very property involved.
8
Q
What is the purpose of a spendthrift clause?
A
To prohibit a beneficiary from voluntarily or involuntarily transferring his interest in the trust.
These are a common drafting practice to expressly provide that a beneficiary’s interest is not transferable and is not reachable by others.
9
Q
The settlor of a trust transfers his assets into a spendthrift trust. Is the principal protected?
A
So long as the settlor does not retain an interest in it.
Under the “cake and eat it” principle, a settlor cannot transfer assets into a spendthrift trust for his benefit, hoping to immunize them from his creditor’s reach. A spendthrift provision is invalid with respect to any interest retained by the settlor.
To the extent that the settlor has retained an interest in the trust’s income or principal, his creditors can reach that interest.
10
Q
What is the UPIA, and can it be expanded or restricted in a trust?
A
The Uniform Prudent Investor Act.
It MAY be expanded, restricted, or eliminated by the provisions of a trust. However, to deviate or modify the UPIA, the trust language must be SPECIFIC.
11
Q
When will the UPIA apply to the provisions of a trust?
A
Always, unless the trust manifests contrary intent by:
12
Q
Proceeds from a life insurance policy or any other contract in which the trust or trustee is named beneficiary are allocated to:
A
The Principal.
Under the Uniform Principal and Income Act (“UPIA”), proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to the principal. If, however, a contract insures the trustee against loss of profits from a business, the proceeds are allocated to income.
13
Q
Explain the fiduciary duty of the trustee via her personal interest in dealings.
A
Absent a contrary trust provision or court approval, a trustee cannot “wear two hats” and enter into any transaction in which she is dealing with the trust in her individual capacity. A trustee owes a duty of undivided loyalty to the trust and its beneficiaries, and that loyalty might be tainted by her personal interest.
14
Q
May a trustee loan his personal funds to the trust?
A
No.
15
Q
May a trustee use trust assets to secure a personal loan?
A
No. And if the lender know or had reason to know that the assets belonged to a trust, then the lender does not obtain a valid security interest.
16
Q
What relief is available for a trustee’s breach of trust?
A
The court may order any appropriate relief necessary to remedy the breach.
To remedy a breach of trust that has occurred or might occur, the court may:
(i) compel the trustee to perform the trustee’s duties;
(ii) enjoin the trustee from committing a breach of trust;
(iii) compel the trustee to redress a breach of trust, including compelling the trustee to pay money or restore property;
(iv) order a trustee to account;
(v) appoint a receiver to take possession of the trust property and administer the trust;
(vi) remove or suspend the trustee;
(vii) reduce or deny compensation to the trustee;
(viii) void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property of which the trustee wrongfully disposed and recover the property or the proceeds from the property; or
(ix) order any other appropriate relief.
Because the court may enjoin a trustee from committing a breach, it need not wait until a breach has occurred. Beneficiaries are under no obligation to attempt to remedy the trustee’s actions.
17
Q
When a prohibited transaction occurs, a trust’s beneficiaries may:
A
Either ratify the transaction or hold the trustee personally liable.
18
Q
What is required to have a valid trust?
A
To have a valid trust:
1) Settlor…
2) Delivers
3) Title to trust property
4) For the benefit of beneficiaries
5) With intent to create a trust
6) With a lawful purpose.
NO consideration is required for a trust.
19
Q
What is required of the legal capacity of the Settlor?
A
Must have legal capacity:
1) Age 18 or over
2) Must have capacity to convert title to the trustee
(Higher test for capacity than for wills)
20
Q
What is the delivery requirement for a trust?
A
Does not apply to a self-declaration of trust (“I hereby declare myself trustee”) or testamentary trust.
But for inter vivid trust that names third party as trustee, the mere intent to create a trust or a gratuitous promise to create a trust, is not sufficient.
As with the law of gifts, there must be delivery of the subject matter of the trust, with the intent to convey LEGAL TITLE to the trustee.
21
Q
What is required of “trust property”?
A
To have a trust, legal title to a specific interest in property must be conveyed to the trustee.
The subject matter of the trust must be certain, segregated, and identifiable.
If there is no trust property, there is no trust.
22
Q
What is required of a trustee?
A
1) Must have legal capacity to deal with the property (18 or older)
2) Must have capacity to contract and to execute a deed
3) An unincorporated association cannot be a trustee
4) Only banks and trust companies given trust powers in their charter, and charities as to charitable trusts only, can serve as trustee.
23
Q
What is required of an INDIVIDUAL named as trustee?
A
An individual names as trustee must post a fiduciary surety bond to secure the faithful performance of her duties unless the settlor WAIVED the requirement of a bond.
A corporate trustee does not have to give bond.
24
Q
If a trustee fails to qualify, what is the effect on the trust?
A
“No trust ever fails for lack of a trustee”
If the intent to create a trust is clearly manifested, but no trustee is named or if the trustee dies/resigns/incapacitated, with no provision for a successor trustee, the court will appoint a suitable successor to execute the trust.
25
If a named trustee does not want to serve, can he be compelled to serve as trustee?
NO. No one can be compelled to accept fiduciary responsibilities and duties.
The court will appoint a trustee, since no trust ever fails for lack of a trustee.
26
What constitutes acceptance of the trust of the trust office by the trustee named in the trust instrument?
1) Trustee's signature, signifying acceptance of the trust.
| 2) If no signature, then acceptance by conduct.
27
If irreconcilable conflicts arise between the trustee and the beneficiaries, can the trustee resign?
Yes, if:
1) Court approval, upon showing it can no longer appropriately serve as trustee.
2) Must given an accounting
28
HYPO: Mother conveys land to her son "John Smith, trustee." No trust powers or terms are set out in the deed or any other document. Then mother dies.
Valid trust created?
NO.
No beneficiaries were name, and no trust purpose was indicated.
Therefore, the land passes through mother's estate by will or intestacy.
29
HYPO: Alan transfers title to Blackacre to Betty, as trustee for the benefit of Alan's son Clyde. Under the parties' agreement, Clyde has the power to manage and control the use of Blackacre, and Betty as trustee has no powers or active duties over the property
Valid trust with respect to Blackacre?
NO.
Under the "Statute of Uses", if named trustee has no powers or active duties to perform, no trust arises.
To have a trust, the trustee must owe duties to someone.
Clyde holds full title, not equitable trust interest.
30
What is required to have a spendthrift clause?
In order to have a valid spendthrift clause, you MUST have a trust.
Spendthrift clauses allow beneficiaries to take free of creditor's interests.
31
What is the effect on a trust if the trustee is the sole beneficiary?
There is no trust.
32
What is required of beneficiaries?
A non charitable trust must have definite and ascertainable beneficiaries, AND their interest must vest, if at all, no later than lives in being plus 21 years.
33
If there are no ascertainable beneficiaries, but there's a residual beneficiary for the residuary estate, what happens to the trust?
A "resulting trust" is created.
A resulting trust is not a trust. It is the term courts employ when a trust fails for some reason.
The court will order that the estate be distributed to the residual beneficiary.
34
What is the "lawful purpose" requirement for a trust?
In order to be valid, trusts must be given a lawful purpose.
UNLAWFUL purposes include:
1) Trust calls for commission of a crime
2) Trust calls for destruction of property
3) Unlawful conditions that are against public policy
35
Can a trust condition receipt of income to beneficiaries on divorce?
No, this is against public policy. Cannot encourage divorce or implement a total restraint on marriage.
Beneficiary will take free of trust and free of condition.
36
Are partial restraints on marriage valid in a trust?
Yes, as long as it's not a total restraint.
37
What is the writing requirement for a valid trust?
All trusts MUST be in writing, except:
1) A transfer of personal property to a trustee other than a settlor or beneficiary coupled with a declaration of intent to create a trust simultaneously with or prior to the transfer
38
Can inter vivos trusts be revoked or amended?
Yes. All inter vivos trusts are revocable and amendable by the Settlor unless expressly made otherwise.
Any revocation/amendment must be made in writing.
ORAL revocation is ineffective.
39
If a Settlor creates a revocable trust, but later becomes incapacitated, does Settlor's guardian have authority to revoke the trust?
No, only a court can evoke the trust upon finding that revocation is in ward's best interest.
40
What effect does divorce have on revocable trust provisions in favor of a former spouse?
Divorce revokes all revocable trust provisions in favor of a former spouse and relative of a former spouse who are not relatives of the settles, unless the trust is re-executed or a contract or court order provides otherwise.
41
If a will creating a trust is not valid because it doesn't meet the formalities, is the trust still valid?
The trust is still valid.
As long as there are one or more trust beneficiaries besides the settlor, a trust is not void as an attempted testamentary disposition (i.e., does not have to be executed with will formalities)
42
What is a pourover will? Requirements?
A testamentary gift to a trust that provides a means for adding testamentary assets to a trust created by the testator during lifetime.
By statute, a pourover gift is valid:
1) Even if trust is subject to revocation and amendment and is later amended,
2) Even if trust is unfunded
The trust NEED NOT be in existence before or executed concurrently with will, if can be created after the will is signed.
43
If a written amendment to a trust indirectly changes a will, is it valid?
Yes, even though the change to the will was without attesting witnesses.
Trust law controls, not wills law.
In amending a trust, it must be in writing and signed, but witnesses are not required, even though this indirectly affected the pourover provision of a will.
44
HYPO: Sam is the insured under a $500,000 life insurance policy that names his 11-year-old daughter Diane as beneficiary. Concluding that it would be inappropriate to have the proceeds paid in a lump sum to Diane, Sam desires to have the proceeds paid to a trust for Diane's benefit. What should Sam do?
Sam could create an unfunded revocable life insurance trust, and name the trustee as beneficiary.
But this would result in additional legal fees for preparation of a trust; and Sam's present will already establishes a trust for Diane's benefit. Instead, Sam could name "the trustee named in my will" as policy beneficiary.
Such a beneficiary designation is expressly validated by statute.
45
HYPO: Donna deposits funds in a joint bank account that names her sister Sarah as joint owner. The account signature card provides that "upon the death of either party, the bank is authorized to pay the funds on deposit to the survivor." Donna dies leaving a will that devises "all my property" to her son John. There is $84,000 in the joint bank account at Donna's death.
1) Does Sarah take the amount on deposit by right of survivorship?
2) Is extrinsic evidence admissible to show that Donna actually intended to create a right of survivorship account?
3) Would Sarah be entitled to the amount on deposit if the signature card said "on the death of one party, all sums in the account shall vest in and belong to the surviving party” or said “with right of survivorship” [or similar wording]?
4) Would a valid right of survivorship have been created if the account agreement stated (simply) JT, JTWROS, or “as Joint Tenants”?
1) No. Scotus held that this language merely protects the Bank if it pays out to Sarah, but not create a valid right of survivorship. John would get the money in the bank account.
2) NO. Language on the account agreement controls.
3) YES. This language creates a right of survivorship.
4) NO. "As joint tenants" does not create a valid right of survivorship.
46
HYPO: Hank opened a savings account at Credit Union with a deposit of $40,000. The account agreement named Hank and his daughter Jenny as owners of the account with right of survivorship, Hank signed the account agreement but Jenny did not. Hank died in 2016, leaving a will that devised “all my property” to his son Sam. On Hank’s death the amount on deposit in the Credit Union account was $42,000.
1) Did Hank make a gift to Jenny when he opened the account in 2015?
2) Did Jenny take the $42,000 by right of survivorship when she didn’t sign the account agreement?
3) Did spouse Jenny take the $42,000 by right of survivorship when she did not sign the account agreement?
1) NO. He could revoke the account at any time by changing beneficiary or withdrawing funds.
2) YES. Because it was signed by the party who died (by statute).
3) NO. Both spouses must sign. If it's community property and a right of survivorship between spouses, BOTH PARTIES must sign. Since she did not sign, Jenny takes 1/2 CP and the son takes Hank's 1/2.
47
What is a durable power of attorney? Requirements?
Authorizes another person (Agent) to act on behalf of the principal.
A DPA must be signed and acknowledged before a notary public.
48
Is an agent's DPA authority affected by a principal's incapacity?
Not unless the DPA states that "this power of attorney is not affected by my subsequent disability or incapacity", or contains words to that effect.
49
DPA - What is a "springing durable power"?
This power of attorney becomes effective upon incapacity of the principal.
50
What occurs when third parties rely on a durable power without knowing it was revoked or that the principal has died?
They are protected, because they acted in reliance without actual knowledge.
51
If an agent is the spouse of the principal, what effect does divorce have on the durable power?
TERMINATED
52
What effect does a principal's bankruptcy have on the agent's durable power of attorney?
Not terminated
53
What effect does appointment of a guardian of the principal's estate have on the durable power of an agent?
Terminated
54
When do the fiduciary duties of an agent with durable power of attorney arise?
When the agent exercises their powers and authority under the durable power.
55
DPA HYPO: Five years ago, Dad executed a will that left his estate to son Sam and daughter Donna in equal shares, and executed a power of attorney that named Sam (who lives in the same city) as agent. Dad now has Alzheimer’s. Daughter Donna (who lives in Kansas) has reason to believe that Sam is abusing the power of attorney, and is appropriating Dad’s assets for his personal benefit. She has retained you to investigate the situation and take appropriate action.
Does Donna have standing to take action without first being appointed guardian?
YES. Under the 2017 statute, an action to review an agent's conduct may be brought by a person named as beneficiary to receive property on principal's death (whether by will or otherwise), or any other person who persuades the court that she has sufficient interest in the principal's' welfare or estate to justify the action.
56
DPA HYPO: Four years ago (before losing her capacity), Mom executed a power of attorney that named daughter Sarah as agent. Mom has a bank account in her sole name (not a joint account) at Bank. When Sarah attempted to withdraw funds from the account to pay for Mom’s care, Bank denied her request: “Our policy is to not honor powers of attorney executed more than two years earlier.”
Can Sarah compel Bank to honor the power of attorney?
YES. 2017 statute: Unless specified grounds for refusal exist, a person or institution presented with a durable power of attorney must either
(i) accept the power,
(ii) request certification of facts showing that the power is valid, or
(iii) request an attorney’s opinion that the power is valid. Grounds permitting refusal of the power include knowledge that the power has been revoked, that the proposed transaction would violate a statute or regulation, and that a judicial proceeding involving the power of attorney is pending.
57
What are the distinctive rules of charitable trusts?
1) Not subject to RAP; may be perpetual.
2) Must be a charitable purpose. Must confer a substantial amount of social benefit.
3) Must be in favor of a reasonably large segment of public at least, and cannot benefit identifiable individuals.
4) When specific charitable purpose can no longer be accomplished, MAY be reformed in judicial proceedings under the doctrine of "cy pres". ("as near as possible"). Diverting funds to another charitable activity can't be done by trustee acting on his own; must be judicial proceeding.
58
If a charitable trust does not have identifiable beneficiaries, who can enforce the trust?
The Attorney General - who is a proper (but not necessary) party to any suit concerning a charitable trust.
The AG can join, but is not required to named as a party.
59
CHARITABLE TRUST HYPO:
Forty years later the cure for polio is found; all research on the disease ends. The trustee petitions the court: What should be done with the trust income and principal? Testator's heirs intervene: Since the purposes of the trust can no longer be accomplished, the trust should be terminated and be distributed to them. Result? (At issue is whether the court should apply:)
Cy Pres ("as near as possible")
General charitable intent that can still be accompanied: To devote the entire estate to medical research, for the prevention and cure of disease.
If cy pres is applied, the court will instruct the trustee to pay the income to an organization doing medical research "as near as possible" to polio.
60
State the Rule Against Perpetuities and its purpose
The Rule: "No interest is good unless it must vest, if at all, not later than 21 years after some life in being at the interest's creation." [LIB + 21 years]
Purpose: To limit the duration of noncharitable trusts, and placing a check on attempts to tie up property through the creation of perpetual trusts. The Rule does not apply to charitable trusts.
61
TRUST RAP HYPO: T’s will created a trust, “to pay the income to my son Ben for life, then to Ben’s descendants until the death of the last of such descendants. On the death of the last of Ben’s descendants, the trust principal is to be paid to my sister Ann or her then-living descendants.”
Is the trust (and the gift over on the trust's termination) valid under RAP?
NO. Ben's line of descendants could last for centuries.
62
What is the Texas "cy pres type" perpetuities reform statute?
If a will or trust violates the Rule Against Perpetuities, the instrument shall be reformed or construed so as to carry out settlor's general intent as FAR as possible within the period of the Rule (i.e., within lives in being plus 21 years).
The perpetuities reform statute, which applies to noncharitable trusts, applies only when there is a violation of the Rule Against Perpetuities. The statute that borrows on cy pres-style reasoning to avoid application of the Rule Against Perpetuities: To carry out settlor's intent as FAR as possible within the period of the Rule.
63
CY PRES HYPO: T died in 1940, leaving a will that created a trust under which the trustee (a bank) was to pay the income to the North Texas Humane Society "in perpetuity." A few months ago, the Humane Society ceased to operate—at first blush, this would appear to be a classic case for bringing a cy pres action, seeking judicial approval to pay income to some other charity that has the same or a similar charitable purpose to that of the North Texas Humane Society.
Must the trustee bring a judicial cy pres action to reform this charitable trust?
NO. If the named charitable beneficiary under a trust ceases to exist, or ceases to qualify as a
charity for federal income tax purposes, the trustee may, without court approval, name a new charity as beneficiary.
However, trustee must give notice of the section to the Attorney General, and replacement charity must have same or similar charitable purpose as the failed charity.
64
CHARITABLE TRUST HYPO:
Client wants to bequeath $25,000 to his sister Sarah as trustee of a 30-year trust, to use the income [to maintain his rose garden] [to pay for a weekly polish-and-wax job on his beloved Porsche, which is to be parked as a headstone over his grave at the cemetery]. Client's residuary estate will be devised to his brother Bob. Can Client create an enforceable trust for either purpose?
NO. To have a trust, the trustee must owe enforceable duties to someone. This it is not a charitable trust and it has no individual beneficiaries who can enforce the trust. Cars [July 1992] cannot file lawsuits. This type of gift (in which an object is the beneficiary) is sometimes called an honorary trust gift. The trustee is on her honor in deciding whether to perform the trust. The gift is valid only in the sense that it will be upheld if Sarah chooses to perform. If she doesn't, the gift fails and there is a resulting trust -- here, in favor of the residuary beneficiary.
Additional problem with such trusts: Rule Against Perpetuities unless the trust is limited to 21 years' duration. Because cars and rose gardens cannot be used as measuring lives, trust might last longer than LIB + 21 years.
Probable result under Texas' cy pres perpetuities reform statute: If Sarah is willing to perform, honorary trust gift valid for 21 years.
65
What is a "purchase money resulting trust"?
If A pays purchase price for land, but causes B to take the title in name, a presumption arises that he had no intent to make a gift, but had some reason to give B title.
Evidence is admissible to show 1) GIFT or 2) LOAN of PURCHASE PRICE.
66
Does a PMRT arise when the buyer of land and the title to which the buyer bought the land in are related?
No. This is presumed to be a gift. If B would be the likely object of a gift from A, then it's presumed a gift.
67
What is required to rebut the gift presumption in favor of a PMRT?
Clear and convincing evidence that the conveyance was a PMRT.
68
What is a constructive trust?
A constructive trust is not a trust. It is an equitable remedy whose object is to disgorge unjust enrichment.
Benefit of constructive trust: Enables injured party to recover the very property in dispute; doesn't have to settle for judgment for money damages.
69
CONSTRUCTIVE TRUST HYPO:
1) Fred is the insured under an insurance policy that names as beneficiary "my son Sam if he survives me," and his daughter Donna as alternate beneficiary. After a heated family argument, Sam bludgeons his father to death with an axe. Fred, who left no will, was survived by Sam, Donna, and Sam's son Jr. Who takes what?
2) However, the one Texas statute on the issue applies only to life insurance policies. What about Fred's intestate estate? Daughter Donna takes 1/2, of course. As to other 1/2:
1) Life insurance proceeds: BY STATUTE [meaning constructive trust remedy not necessary], if the beneficiary willfully brings about the death of the insured, proceeds are distributed as though killer predeceased the insured victim. Therefore, the proceeds are distributed to Donna as alternate beneficiary.
2) Step 1: Apply the law: Under the Estates Code, Sam inherits 1/2 of Fred's estate.
Step 2: Apply equity: Wrongful Conduct plus Unjust Enrichment equals: CONSTRUCTIVE TRUST in favor of Sam Jr. by representation. We distribute the portion of the estate as though the killed predeceased Tom.
70
CONSTRUCTIVE TRUST HYPO:
Tammy has a will that devises all her property to Ann and Ben. Now in her last illness, Tammy asks a friend to have a lawyer prepare a new will that revokes Tammy's present will and devises all her estate to Donna. Several days later, the friend and lawyer return with the new will. The lawyer begins to explain the new will's provisions. Ann and Ben are visiting Tammy that day; as soon as they learn what is happening, they create a disturbance and physically prevent poor Tammy from executing the new will. Highly agitated, Tammy lapses into a coma; she dies three days later. Who takes what?
Step 1: Apply the law: Can the new will be probated? No, because it was not signed and witnessed. Was the old will validly revoked? No, because second will (with revocation clause) wasn’t executed.
Step 2: Apply equity: (1) wrongful conduct + (2) unjust enrichment equals constructive trust
71
What is a spendthrift trust?
A clause that prohibits voluntary or involuntary transfers, allowing a beneficiary to instruct a trustee not to pay out creditor claims.
PURPOSE: Protects a trust beneficiary's interest from creditors by prohibiting assignment or involuntary transfers of the beneficiary's interest. Beneficiary's judgment creditor cannot reach beneficiary's interest in spendthrift trust by garnishment or attachment, or compel a distribution if trustee is given discretion to make distributions to beneficiary.
"No interest of a beneficiary shall be assignable by the beneficiary nor shall it be subject to the claims of the beneficiary's creditors by garnishment, attachment or other legal process."
72
What are exceptions to spendthrift clause protection?
1) Contracts for necessaries (medical, food, rent, etc.)
2) Child support obligations
3) Any interest retained by Settlor (revocable trusts)
4) Federal tax liens
5) Fraudulent transfers: made with intent to defeat, delay, or defraud creditors
73
Can a creditor reach income that was once protected by a spendthrift clause if it has been distributed to beneficiaries?
YES. Once the income is distributed, it is no longer subject to the trust to its spendthrift clause.
74
If a beneficiary orders a trustee to pay a creditor, despite being protected by a spendthrift clause, can he later bring an action to get the money back?
NO. Estoppel applies, because the trustee followed the beneficiary's instruction.
75
If the settlor retains an interest in the income of a trust he created, is that interest protected from creditors under a spendthrift clause?
NO. Any interest retained by Settlor is not protected by spendthrifts.
As to interests irrevocably transferred to third parties, settlor's creditors CANNOT REACH, because he doesn't own the principal anymore.
76
What is a discretionary trust?
A trust in which the trustee has the sole discretion to make distributions, not subject to any standard.
77
What is a support trust?
A trust giving trustee the power to distribute to a beneficiary whatever was needed for their support.
It would be an abuse of discretion for trustee not to make a distribution if needed for support.
Any distribution far in excess of what is needed for support is a breach of trust, and the remainderman have an action against the trustee.
78
How can creditors reach in to support trust if they have claims against the beneficiary?
A creditor for furnishes NECESSARIES to a beneficiary
(food, medical, education) can reach a support trust.
If beneficiary could compel a distribution for support purposes, so also can a creditor who furnishes necessaries.
79
What is the proper venue for trust administration?
District Court and Statutory Probate Courts have concurrent jurisdiction over all proceedings regarding inter vivos trusts and testamentary trusts.
80
What is the proper venue for trust administration?
1) County of trustee's residence, or
2) County in which situs (principal office) of trust is maintained
Two or more individual trustees: county in which situs of trust has been maintained
Corporate trustee: County in which principal office of trust has been maintained
81
What power over real property in a trust does a trustee have?
If a fee simple owner could do it, so can a Texas trustee.
- Can lease for indefinite duration, even if it would outlast the trust
- Can sell real property in exchange for unsecured promissory note
82
What is the model answer for authorizing a trust's actions?
"The Texas Trust Code, which applies to all trusts in Texas except to the extent the trustee's powers are expanded or limited by the settlor, gives broad fiduciary powers to trustee. Specifically, the Trust Code expressly authorizes a trustee to [do whatever the question involves]"
83
What are the two exceptions to a trustee's Brough fiduciary powers?
1) No self-dealing
| 2) No imprudent investments
84
What are six powers a trustee may exercise in managing real property held in trust:
(1) Sell the property at public or private sale;
(2) lease the property for any term the trustee deems appropriate;
(3) give a mortgage;
(4) make improvements;
(5) make repairs;
(6) give mineral leases;
(7) partition and subdivide the property.
85
When are trust beneficiaries entitled to an accounting?
Trust beneficiaries are entitled to an account no SOONER than 12 months after trust was created; and to successive accounting on demand at same intervals.
86
What is a primary beneficiary?
Beneficiaries who, at the time of the demand:
1) Are entitled or permitted to receive distributions from the trust, or
2) Would receive a distribution if the trust terminated then.
87
Can a settlor restrict or eliminate the right to demand an accounting by primary beneficiaries?
NO. But the right of any other beneficiary to demand an accounting can be restricted or eliminated.
88
What is a trustee's decanting power? Limitations?
A limited power to transfer trust assets to a new trust with different provisions.
Decanting power cannot be exercised so as to impair beneficiaries' interests or name new beneficiaries.
New trust must have same beneficiaries and same distribution powers.
Cannot modify the RAP period set out in original trust.
Only TRUSTEE's administration powers can be changed.
89
Is court approval required for a trustee's exercise of the decanting powers?
No, as long as notice is given to current beneficiaries and remainderman.
90
FIDUCIARY HYPO:
Trust names friend Hubie Gates as trustee. Hobie borrows $100,000 from the trust, giving the trust a six-month note at 6% interest. Hobie uses the borrowed funds to buy an oil well. Six months later Hobie sells the oil well to Hazel for $1 million. He repays the $100,000 (plus interest) to the trust. What action, if any, can the beneficiary bring against Hobie?
GUILTY OF SELF-DEALING
He's wearing two hats in the same transaction, his personal interest and trust interest. I may affect his judgment if he has skin in the game.
91
What acts are considered "self-dealing" as a general rule?
1) Trustee cannot borrow trust funds, use trust assets for personal benefit, or as collateral for a personal loan.
2) Trustee cannot buy or sell trust assets to itself
3) Trustee cannot loan funds to the trust, and any interest earned on such a loan must be returned to the trust. Any SECURITY INTEREST received in connection with such a loan is invalid.
4) Trustee cannot profit from serving as a trustee (except for being compensated) as by taking advantage of the confidential information received in his capacity as trustee, or accepting a commission for selling real estate owned by the trust.
5) Corporate trustee cannot buy its own stock as trust asset
92
Can a settlor waive the self-dealing rule?
YES
93
What are a beneficiary's remedies if trustee breaches ANY fiduciary duty?
1) Ratify and waive the breach of trust
2) Bring surcharge action for resulting loss
3) If trustee still has possession of the property, beneficiary can petition for the imposition of a constructive trust
94
What is the "no further inquiry" rule for self-dealing?
If a case involves self-dealing, then it is an automatic wrong that requires "no further inquiry"
Good faith reasonableness is no defense.
95
What is the only issue in question for self-dealing cases?
Measure of damages
96
When does the 4-year SOL begin to run on an action against a fiduciary? (trustee. executor, guardian)
Not until he:
1) Repudiates the trust (denies its existence)
2) Dies or resigns
3) Gives an accounting that makes full disclosure of the facts upon which the action is based
97
Does the beneficiary have an action against a third party if a trustee makes an improper sale of trust assets to the third party, when that third party knew that person was a trustee?
Not if that third party is a BFP. The third party is protected unless she knew or should have known that the trustee was acting improperly.
98
In what cases do self-dealing rules apply indirectly?
1) Loans or sales of trust assets to a relative, or
2) To a business entity in which the trustee is an officer, director, partner, employee, or principal shareholder.
("Indirect self-dealing")
99
What is the rule for a trustee's investment power?
Under the Uniform Prudent Investor Act, performance of an investment is based on the "modern portfolio theory" of investing that looks to TOTAL RETURN (appreciation and capital gain, as well as ordinary income).
100
How is "prudence" measured for a trustee's investment decisions?
Prudence is measured by CONDUCT when investment decisions is made, not outcome at performance.
101
What is required of a trustee's investment strategy under the UPIA?
Under the UPIA, trustee must establish and maintain a "custom-tailored investment strategy" that will effectuate settlor's intent as to the purposes of the particular trust, taking into account such factors as:
1) economic conditions
2) inflation/deflation
3) tax consequences
4) ***the role that each investment plays within the overall trust portfolio'
5) ***the expected total return from income and capital gain
102
Does an investment sharp decline in value create a res ipsa case that the investment was imprudent, leading to liability?
NO. Prudence is not measured by hindsight.
We look to the conduct in making the investment decisions, not outcome or performance.
103
What is a trustee's adjustment power?
Under the UPIA, a trustee can reallocate investment resents under the adjustment power.
The adjustment power authorizes the trustee to characterize items such as capital gains and stock dividends as income if the trustee deems it appropriate or necessary to carry out the trust purposes.
(This allows the gains and dividends to be given to an income beneficiary)
104
What are the factors to be considered when exercising the adjustment power?
1) Intent of the settlor as to respective interests of the beneficiaries
2) Any increase or decrease in value of the trust assets
3) Whether the trust gives the trustee a power to distribute principal
105
Does a trustee have the power to distribute the principal of a trust to the beneficiaries?
No, only the income, unless the trust provides otherwise.
106
What are common receipts under a trust that are allocated to INCOME?
Interest, rental income, cash dividends on stock, delay rentals for oil & gas leases.
107
What are common receipts under a trust that are allocated to PRINCIPAL?
Eminent domain condemnation rewards, insurance proceeds from trust property destroyed, etc.
108
When is an allocation presumed to be equitable?
An allocation is presumed to be equitable if it follow the federal income tax depletion allowance rules.
109
For pension plans, annuities, and IRAs that name a trust as beneficiary, what distributions are allocated to income?
Distributions made in any year are allocated to income until payments equal FOUR PERCENT of the plan's or IRA's value at the beginning of the accounting period.
Any excess over 4% is allocated to the trust principal.
110
For receipts from "liquidating assets" (patents, copyrights, book royalties) that will decline in value over time, how much is allocated to income? Principal?
Allocate 10% to income
Allocate 90% to principal
111
How is money received from an entity (corporation, partnership, etc) allocated in a trust?
ALL money received from an entity is allocated to income.
112
How are receipts from an entity OTHER THAN MONEY allocated in a trust?
All receipts from an entity OTHER THAN MONEY are allocated to principal.
113
How are expenses charged against a trust?
Expenses: Trustee's commissions accountings, judicial proceedings, etc.
HALF & HALF RULE:
Ordinary expenses (that come up every year) charged against INCOME: property taxes, casualty insurance premiums, ordinary repairs, mortgage interest payments
Capital expenditures are charged against PRINCIPAL: capital improvements, expenses relating to environmental matters, estate taxes, mortgage principal payments
114
What is a trustee's duty to diversify investments?
Under the prudent investor rule, a trustee can't keep or put all investment eggs in one basket (absent contrary provision).
Settlor can waive this duty to diversify
115
What rules under the Texas Trust Code CANNOT be waived by the Settlor?
1) Cannot limit requirement that a trust cannot be created for an illegal purpose
2) Cannot exculpate trustee form liability for breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of the beneficiary
3) Cannot limit the statute of limitations for commencing judicial proceeding
4) Cannot limit a trustee's duty to respond to a demand for an accounting
5) Cannot limit court's power to exercise its jurisdiction to modify or terminate a trust, to remove a trustee, to require a fiduciary bond, or deny a trustee's compensation
116
Can a beneficiary bring direct action against a third party who causes injury to trust property?
NO. Trustee holds legal title. Beneficiary cannot bring an action for injury to trust asset. This is the job of the trustee.
EXCEPTION: Trustee is unable or unwilling to bring the action, or if the third party participated with trustee in committed breach of trust.
117
Briefly state the conditions that cause a trust to terminate:
1) A trust terminates automatically according to its terms (e.g., to X for life, then principal to Y)
2) Upon petition of a trustee or beneficiary, a court may order that the trustee be changed, or that the trust terms be modified, if ONE of the following tests is met:
- -- a) Purposes of the trust have been fulfilled, have become illegal, or are impossible to fulfill
- -- b) Changed circumstances causing modification or termination to further the purposes of the trust
- -- c) Achievement of tax purposes
3) Termination of uneconomic trust: After giving notice to beneficiaries, the trustee of a trustee having a value of less then $50k may terminate without court approval if the trustee determine that the cost of administration does not justify continuation of the trust.
118
If termination of a trust by a beneficiary is at issue, what questions must be asked?
1) Has that purpose been fulfilled, become illegal, or become impossible to fulfill?
2) Do we have changed circumstances?
3) Would termination of the trust further the accomplishment of Settlor's trust purpose?
119
How long can the trustee continue to exercise trust powers after termination of the trust, and for what purpose?
After a trust terminates, the trustee may continue to exercise trust powers for the reasonable time needed to:
1) Wind-up trust affairs
2) Make distributions to the beneficiaries
