Trusts February 2006 Flashcards
(4 cards)
Summary
Settlor did not create a valid trust when he made a declaration of trust because the trust lacked assets. The trust became valid when Settlor deposited funds in the First Bank account and re-manifested his intention to create a trust by opening the account in the name of Settlor, as Trustee of the Settlor’s Family Trust. In-Law’s pour-over bequest was valid because the trust was clearly identified in In-Law’s will and its terms were incorporated in a writing that predated that will. Victim can reach trust assets in the First Bank account because the spendthrift provision is ineffective, both because the trust was self-settled and, in some states, because it would be deemed revocable.
Settlor’s Family Trust became a valid trust when the First Bank account was opened in the name of Settlor, as trustee. The trust had both a trustee and beneficiaries and, once the account was opened, trust assets.
A trust of personal property is valid if it has a trustee, a beneficiary, and trust property. See, e.g., UNIF.TRUST CODE§ 407;RESTATEMENT (THIRD)OFTRUSTS § 20 (writing not necessary to create an enforceable inter vivos trust). After Settlor made his announcement and signed the napkin memorializing his intentions, the Settlor Family Trust had a trustee, Settlor, and two named beneficiaries, Settlor and Dawn. But it lacked assets because the stock sale proceeds that Settlor declared as trust assets did not yet exist. The announcement and napkin thus evidenced nothing more than the intent to create a trust in the future, and a promise to create a trust in the future is typically unenforceable without consideration. However, the $100,000 deposit into the FirstBank account three years laterwas sufficient to create a valid trust at that time. If a trust that is invalid for lack of assets is later funded, a trust arises at that time if the settlor re-manifests the intention to create the trust. By depositing $100,000 into an account at FirstBank in the name of Settlor, as Trustee of the Settlor’s Family Trust, Settlor re-manifested an intention to create a trust with the terms described in Settlor’s original declaration. See RESTATEMENT (SECOND)OFTRUSTS §§ 26 & cmt. e, 86 cmt. c. Thus, while the trust was not valid when Settlor made his announcement, it was valid after the deposit into the First Bank account.
The pour-over bequest is valid because the trust was clearly identified in In-Law’s will and the trust’s terms were incorporated in a writing antedating that will.
Under theUNIFORM TESTAMENTARY ADDITIONSTO TRUST ACTand UNIFORM PROBATE CODE, a person may bequeath assets to a trust created during the testator’s lifetime, by the testator or another, so long as the trust is identified in the testator’s will and its terms are incorporated in a writing executed before or concurrently with the execution of the testator’s will. Under these acts, such a bequest is valid even if the trust is unfunded, revocable, andamendable. See UNIF. TESTAMENTARY ADDITIONSTO TRUST ACT§ 1(a);UNIF. PROBATE CODE§ 2-511(a). In-Law clearly identified the “Settlor’s Family Trust” in her will, and its terms were incorporated in a writing, the cocktail napkin, predating the execution of that will. As the acts do not require a formal document, the napkin satisfies the writing requirement. One of the uniform acts or a like statute has been enacted in all states. Therefore, In-law could pour her estate over to the Settlor’s Family Trust.
The common law incorporation-by-reference doctrine, under which a testator may direct the distribution of his probate assets in accordance with the terms of another instrument that exists when the testator’s will was executed and which is specifically referred to in the will, would also permit a court to distribute In-Law’s estate in accordance with the provisions of the Settlor’s Family Trust. See William H. McGovern & Sheldon F. Kurtz, WILLS,TRUSTSAND ESTATES § 6.2. Thus, under either the common law or modern uniform acts, Settlor, as trustee, would take In-Law’s estate.
The judgment creditor can reach trust assets to the extent the assets of this self-settled trust could be reached by Settlor.
Because the Settlor’s Family Trust is a self-settled trust, its spendthrift provisions are not enforceable on behalf of the trust settlor. See UNIF. TRUST CODE § 505 (a)(2); RESTATEMENT (THIRD)OFTRUSTS § 58(2) & cmt. e (Tent. Draft No. 2);RESTATEMENT (SECOND)OFTRUSTS§ 156.The fact that Settlor’s right of withdrawal is limited to funds “for my support” makes no difference; when the settlor of a trust is also a trust beneficiary, his creditors are entitled to the maximum amount that could be distributed from the trust to the settlor, even when withdrawals are discretionary or limited by a support standard. Settlor’s creditors might also argue that trust assets can be reached because the Settlor’s Family Trust is revocable. Many states provide that creditors of thesettlor of a revocable trust can reach trust assets in satisfaction of their claims. See UNIF. TRUST CODE § 505(a); RESTATEMENT (THIRD)OF TRUSTS § 25 cmt. e. Contrary to the common law, some states now presume that a self-settled inter vivos trust is revocable. See UNIF.TRUST CODE§ 602;RESTATEMENT (THIRD) OF TRUSTS § 63 cmt. c. In other states, the creditors might argue that Settlor’s retained power to distribute income and principal to himself is effectively a power of revocation. See RESTATEMENT (SECOND)OFTRUSTS § 330.
[NOTE: Applicants should not receive credit for the conclusion that the spendthrift provision is invalid because the creditor is a tort victim. A few state courts have refused, on public policy grounds, to enforce spendthrift provisions against the claims of tort victims who can show gross negligence or intentional misconduct. See, e.g., Sligh v. First Nat’l Bank, 704 So. 2d 1020 (Miss. 1997). But the facts here do not show gross negligence or an intentional tort and only a handful of courts have adopted this position. See RESTATEMENT (THIRD)OFTRUSTS § 59 Reporters’ Notes; UNIF. TRUST CODE § 504 cmt.]
