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Flashcards in Trusts-End of Semester Deck (80)
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1

Legal Effect of a Trust

Legal effect: Provides benefit to worthy individual or charity but stops short of making unrestrictive gift.

•Divides title to property

–Legal title

»Imposes fiduciary duties on trustee

»Manages property pursuant to grantor’s wishes and state law

–Equitable title

»Right to receive benefit from property.

2

Trust Termination

•When property exhausted or grantor’s instructions completed •If property remains, title to property reunited and passes as grantor instructs.

3

Trust Purposes & Uses

Purposes and uses:

  • Provide and protect beneficiaries
    • Minors, spendthrifts
  • Flexible distribution of assets
  • Provides degree of control over gift
  • Protect Settlor
  • Professional Management of Property
  • Utilize expertise and resources of financial professionals
  • Probate avoidance
  • Provides successive enjoyment of property over generations
  • Tax benefits

Irrevocable trusts only:

  • Insulate property from creditors
  • Avoid conflicts of interest
    • Blind trust (a financial arrangement in which a person in public office gives the administration of private business interests to an independent trust in order to prevent conflict of interest)

4

Trust Elements

1)Settlor with capacity

2) Settlor with donative intent

–Split of title (Legal Equitable ??)

3) Beneficiary

4) Duties imposed on trustee

5) Same person is not sole trustee and sole beneficiary.

5

Actions Giving Rise to Trusts

  • Transfer of property to trustee
    • During settlor’s life or at settlor’s death
  • Settlor executes a “Deed of trust”
    • Settlor’s declaration that settlor holds the property as trustee for another’s benefit
  • Settlor executes a “Declaration of trust”
  • Exercise of a power of appointment in favor of a trustee
    • Need not be in writing
    • Clear and convincing evidence required to establish that transfer has taken place

6

Settlor's Capacity: Revocable Trust

S must “understand in a general way”:

  • the nature and extent of the property to be disposed
  • the settlor's relation to those who would naturally claim a substantial benefit from his will, and
  • a general understanding of the practical effect of the trust as executed.

(Same capacity as required for will.)

7

Settlor's Capacity: Irrevocable Trust

  • S must appreciate that S is relinquishing all rights in the property and the future impact of the irrevocable transfer on S’s property and on those who depend upon S
  • Same capacity as needed for gift –Restatement (3d) of Trusts Section 11–Restatement (3d) of Property Chapter 8

8

Settlor's Intent:

Settlor must indicate an intent to create trust UTC 402(a)(2)

  • Present, unequivocal desire/purpose to divide title,
  • imposing fiduciary duties on trustee (legal title) and
  • providing benefits to beneficiary (equitable title)
    • Need not use trust language, but effect must be the division of title
  • Intent must be “definite and particular”; should not use precatory language
  • Must be present intent to transfer, not future
  • Generally need not inform beneficiary of trust to establish trust intent
  • Title division sufficient as long as same individual is not the sole trustee and sole beneficiary

9

Settlor's Intent: Factors that May Determine Intention to Form a Trust

Factors that may determine whether property owner intended to create a trust :

  • Writing that completely and unambiguously communicates S’s present intent to impose duties on T and benefits on B
    • Ambiguity arises when text is subject to two different meaning
      • “I hereby direct my son to give this money to the charity of his choice”
    • Ambiguity arises when S fails to impose clear directive or obligation
      • “I hereby direct my son to use this money for the benefit of himself and his children.”
  • If complete and unambiguous no extrinsic evidence permitted to contradict
  • If not complete and/or ambiguous, extrinsic evidence may be permitted.

10

Trust Element: Property

•Trust relationship must involve property interest.

•Settlor must transfer property interest into trust.

11

Pour-Over Provision

Pour over provision •UPC 2-511–Trust created inter vivos but not funded until death is valid

12

Oral Trusts

  • Oral trusts for personal property are generally enforceable under UTC (407)
    • Clear and convincing evidence
  • While the UTC does not proscribe oral trusts for real property, generally, the statute of frauds requires such trusts to be in writing and signed by S or T
  • If not in writing, not void, but also not enforceable
  • Transferee can voluntarily carry out trust terms
    • If Settlor disputes, Settlor cannot argue lack of writing should terminate trust
  • Transferee can refuse to carry out trust terms
    • lack of writing is a defense; trust unenforceable.
  • If transferee begins performance but then stops, doctrine of part performance can compel complete performance.
    • Court may, in equity, chose to impose constructive trust

13

Trust Elements: Beneficiary

  • Role
    • Enjoy benefits of property; enforce trust purposes
    • Definite beneficiary” UTC 402(a)(3)
      • Ascertained now or in future, subject to applicable rule against perpetuities UTC 402(b)
      • Consider conditions placed on vesting of interests
        • “As long as the property is used as a farm, then to Bob.”
      • Consider class closing rules
        • “Then to my grandchildren”
    • Trustee’s power to select beneficiary from an indefinite class is valid UTC 402(c)

14

Definite Beneficiary

Rule: must have “definite” beneficiary

Common law “Friends” not definite enough

Reason: B must be able to claim benefit (enforce trust)

Remedy: resulting trust; property passes with residue

 

UTC 402(c) = OK, as long as Trustees can find at least one friend.

15

Random Facts you should know about Trustees

  • Trust MUST impose duties on a trustee:
  • As to trustee –Capacity to serve if “Person” can take and hold property as a true owner
  • Service as trustee is voluntary
  • Upon acceptance of a trusteeship, however, a trustee may only resign by complying with the terms of trust, obtaining consent of all beneficiaries, or obtaining court approval.
  • Trustee compensation must be reasonable
  • The trust may expressly state the terms of trustee compensation.
  • Trust commissions are often expressed as a percentage of the value of property held in trust.
    • Typically, the commission rate decreases as the size of the trust increases.
    • Trust must impose duties on trustee UTC 402(a)(4)
      • Trust will not fail for want of a trustee
        • Court will appoint pursuant to priority order
          • Note that if there were Co-Trustees and at least one remains in office, needed not be filled

16

Trustee Duties & Powers

Trustee’s duties:

  • Duty of good faith (AKA “obedience”)
  • Duty to inform and report
  • Duty of care (prudence)
  • Duty of loyalty (avoid conflict of interest)
  • Duty of impartiality (d/n favor one B over other Bs) •

Trustee’s powers:

  • Trust terms AND, except as limited by trust,
  • All power that an unmarried, competent owner has over her property
  • Powers necessary to achieve trust purposes

17

Trust Purposes

  • Valid Purpose UTC 404
    • Lawful
    • Not contrary to public policy
    • Possible to achieve
    • Trust must be for benefit of beneficiaries •Common Law
  • Unacceptable purposes
    • (B takes property free of trust)
    • Total restraint on marriage voids trust
    • Conditioned upon divorce
  • Acceptable purposes
    • Restricting B to specific religion
    • Supporting B as long as B stays married
    • Supporting B in the event of divorce or death of other spouse

*Regardless of approach, a trust that defrauds creditor will fail

*Trusts that discriminate are troublesome

18

Types of Trusts

•Inter vivos

–Funded during life

–Pour over

–Revocable/irrevocable

–Private/charitable

•Testamentary

–Exist within four corners of will

•Rise and fall with the will

•Revocable until death

–Private/charitable

19

Revocable v. Irrevocable Trusts

Revocable:

  • S may modify/terminate at will
  • Default rule under UTC 602
  • Creditors, IRS can essentially ignore trusts and reach property within it
  • Intent to create is same as will
  • Capacity to create is same as will

Irrevocable:

  • S’s ability to modify/terminate severely limited
  • If S is alive, S and all beneficiaries must agree
  • If S is dead, beneficiaries can modify/terminate as long as modification/termination does not conflict with material purpose of trust
    • Need court approval
  • S’s creditors/IRS reach severely limited
  • Must declare trust as irrevocable
  • Intent to create is same as intent to give gift
    • Present intent to relinquish all rights in property
  • Capacity to create is same as gift
    • S must have capacity required for wills AND understand the effect that creating a trust has on S’s future financial security and ability to support S’s dependents.

20

Pros & Cons of Revocable Trusts

Why you would want one:

  • S maintains access to property during life
  • S has prescribed plan for who will manage S’s property in the event S become incapacitated.
  • S seeks to distribute property outside of probate
    • Privacy
    • Speed of distributions
    • Real property located out of state
    • Avoid elective share
  • Capacity to create is same as that for will (low)
  • During S’s life T owes duties ONLY to S who is life B
    • No duty of impartiality to Bs who take after S’s death

Why you would not want one:

  • S needs creditor/IRS protection
  • During S’s life, income in revocable trust is taxable
  • At S’s death, assets exposed to estate tax
  • Durable power of attorney can suffice
    • Less expensive

21

Perpetual Trusts

Under the common law Rule Against Perpetuities a contingent future interest must vest, if at all, within 21 years after the expiration of some life in being in existence upon the creation of the interest.

–Most states, however, have repealed or abrogated the Rule Against Perpetuities.

90-year wait-and-see provisions

•Reformation

22

Charitable Trusts

Beneficiary:

  • Sufficiently indefinite/uncertain/unascertainable
  • General public or segment of public
  • May confer an incidental benefit on a private individual if the individual beneficiary is not selected solely by the settlor and the charitable purpose is advanced by conferring the private benefit.
    • Example: A charitable trust providing scholarships for students demonstrating financial need.

Purpose:

  • Purpose must be lawful, not contrary to public policy, and possible to achieve
    • Same as private trust
    • For favorable tax treatment, a charity must be:
      • “operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . or for the prevention of cruelty to children or animals.” IRC 501(c)(3).52

Duration:

  • Exempt from the Rule Against Perpetuities

23

Doctrine of Cy Pres

Permits a court to change the purposes of a charitable trust if the settlor’s stated purposes are (or become) illegal/impossible/impracticable to accomplish. May alter as close to the donor’s stated purpose as possible.

24

Doctrine of Equitable Deviation

If, because of circumstances unforeseen by the settlor, the means by which the settlor’s charitable purposes are to be accomplished are (or become) illegal/impossible/impracticable the court may alter the administrative terms of the trust to facilitate accomplishment of the donor’s charitable purposes by other means. No change in charitable purpose but in how the purposes are accomplished.

25

Trust Distribution (Types)

•Mandatory •Discretionary •Support •Spendthrift

26

Mandatory Distribution

•Mandatory Provision

  • Trustee’s duty
    • Must distribute property to beneficiary within a reasonable time.

 

  • Benificiary'’s rights
    • B may assign right to distribution to Creditor
    • B may compel Trustee to distribute, if trustee fails to do so within reasonable time

 

  • Creditor’s access
    • Creditor may attach and compel distributions if T fails to distribute within reasonable time

27

Discretionary Distribution

Discretionary Provision

  • Trustee’s duty
    • Grants trustee discretion regarding distributions
    • Which property? How much? When and/or To whom
    • Discretion can be narrow, broad, specific, or general
  • Beneficiary’s right
    •  B may sue T for breach of duty—bad faith
    • B may assign right to distribution to Creditor, though “right” of distribution is severely limited
  • Creditor’s access
    • Creditor may attach, but may not compel distribution, even if Trustee breaches duty in failing to distribute
    •  Unless, Creditor = Super Creditor
    • B’s child, spouse, or former spouse, judgment or court order against the beneficiary for support or maintenance
      • “equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion”
  • Governing Law: UTC 814(a) •“Trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”
  • In determining whether a trustee should make a distribution, the trustee should consider:
    • Trust terms
    • Trust purposes
    • Beneficiaries’ interests
    • Needs?
    • Other available resources?

28

Support Provision

Trustee’s duty:

  • Distribute to Beneficiary pursuant to an ascertainable standard

Beneficiary’s right:

  • Compel distribution if Trustee refuses to comply with standard
  • May not assign to Creditor

Creditor’s access:

  • Creditor may not attach, UNLESS
    • Creditor = Super Creditor or
    • Creditor = Supplier of Beneficiary’s necessities

29

Spendthrift Provision

Spendthrift Provision:

  • Protects Settlor’s interest in making sure trust property goes to Beneficiary and not Beneficiary’s creditors
  • Language of provision must restrain voluntary AND involuntary transfers of beneficiary’s interest in trust
    • Voluntary = Beneficiary may not assign his right to his interest to another.
    • Involuntary = Creditor may not access beneficiary’s interest in property.
  • Magic words: “spendthrift trust”

30

Spendthrift Provision & Mandatory Distribution

Spendthrift provision Impact on mandatory provision:

  • Precludes Beneficiary or Beneficiary’s Creditor from accessing property until Trustee has made a distribution
  • If Trustee fails to make a distribution within a reasonable time, Beneficiary OR
  • Beneficiary’s Creditor can obtain a court order compelling distribution