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Flashcards in Trusts MBE Deck (43)
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1

Oral trusts

generally ok unless subject to SOF (e.g. real property) or devise (a will)

Minority rule: no oral trusts

2

Precatory language

Language wishing or hoping. Not sufficient to create trust

e.g. K transfers $10,000 to H saying “My wish being that he will use the money to support his children’s educational pursuits.” This likely does not create a trust.

Must say "in trust" "for benefit of "

3

Trust must have property?

Yes; trust is not valid until there's property in it; property doesn't have to be substantial

Only exception is a pour-over trust

4

Debt vs trust

Trust:

Debt: A debt is an obligation to pay a sum of money. The source you use to pay the money usually does not matter.

5

How to Create Private Express Trust?

Clearly state settlor's intention to transfer property to trustee for benefit of beneficiary

1. INtent
2. Res (there must be property)
3. Trust purpose
-can't be illegal or violate public policy
4. Beneficiaries
-Must be an ascertained beneficiary (specific person or a criteria 2 determine a person e.g. trust to benefit kids in a marching band- kids in marching band is ascertained)
5. settlor with capacity

6

Private Express Trust:
Exception to rule that beneficiaries have to be ascertained

1. Unborn Children: trusts for the benefit of unborn kids are valid ,even though beneficiaries aren't yet ascertainable when trust is created

2. Class Gift: the class must be reasonably definite in order to be upheld (must have criteria to determine who'll be in the class) e..g "my grandchildren" suffices

3. Charitable trusts

7

Charitable Trusts

Must have a charitable purpose (e.g. relieve poverty, promote good health, education, governmental or municipal purposes, or purposes of benefiting community at large or segment of community)

8

RAP

Applies to trusts

Except Charitable trusts

9

Cy Pres

Court can modify a trust if the trust’s charitable purpose is no longer possible and no alternate charity is named

Must have:
1. General charitable purpose (not purpose to help one specific charity)
2. Uniform Trust Code presume a general charitable purpose

e.g. Charitable trust to support pottery closes due to low enrollment. Court can modify trust to support a painting program using cy pres.


If there is no general charitable purpose (trust has a specific purpose) the property becomes a resulting trust!!!!

ask- what was settlor's intent was?

10

Charitable Trust- Standing

Attorney General and Settlor have standing to enforce charitable trust

11

Types of Private Express Trusts

1. During life (inter vivos trust- property transfer during settlor's life) or

2. by will (testamentary transfer) must meet valid will requirements and takes effect at settlor's death


Inter vivos Trust:
a. declaration of trust- (settlor declares herself as holder of property in trust for beneficiaries and serves as trustee)

b. Deed of trust- settlor conveys property to a trustee

12

How to Avoid a resulting trust?

Create gift-saving clause
"To A in trust for B and B's kids."
If B dies with no kids trust fails. Gift-over clause saves trust from failing.
e.g. "If B dies with no kids, trust property goes to C and C's heirs"

13

Resulting trust occurs when?

A trust fails in some way or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to the settlor’s estate.


The purpose of a resulting trust is to achieve the settlor’s likely intent in attempting to create the trust

14

Constructive Trust

A remedy used to prevent unjust enrichment if 3rd party takes advantage of the settlor

Causation requirement: Wrongful conduct must be conduct directed towards the settlor that caused the settlor to create the trust.

As a remedy, court creates constructive trust and transfers property back to testator's estate.

15

Situations that give rise to Constructive Trust

a. fraud
b. durress
c. undue influence
d. breach of duty
e. detrimental reliance

16

Alienability of Trust Property

1. A beneficiary’s equitable interest in trust property is freely alienable except

a.Trust instrument limits alienation or
b. statute limits this right

2. A creditor can't reach trust principal or income until amounts become payable to beneficiary or until the beneficiary demands the payments.

17

Asset Protection:
Spendthrift Trust

Trust expressly restricts the beneficiary’s power to alienate her interest.

b.Creditors can't reach trust property until the trustee makes a payment

Exceptions: (following creditor can reach trust property)
-Spousal & child support
-Creditors providing basic necessities to beneficiary
- holders of fed. or state tax liens

18

What happens when Settlor is dead, beneficiary wants to terminate trust prematurely, but trustee opposes

A trustee can block premature termination if the trust is still serving some material purpose

applies:
- discretionary trusts
-support trusts
-age-dependent trusts

19

How to determine a Trustee's powers?

1. Always look to trust doc. first
2. if doc is silent, look to statutory and common-law principles


Modern trend:
a. grant the trustee all those powers necessary to act as a reasonably prudent person (or investor), including power to (sell, lease trust property, pay taxes, consolidate trust property)

20

Trustee's Duties

1. loyalty and care
Duty of loyalty is objective: did the trustee act reasonably?

Duty of Care is subjective: did the trustee act in good faith?

21

standing to enforce Trustee's duties

2. ANY beneficiary has standing to enforce trustee's duties EXCEPT beneficiaries of fully discretionary trusts

22

Under Trustee's Duty of Loyalty is rule against self-dealing

no self-dealing generally;

1. When a trustee personally engages in a transaction involving the trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and her own personal interest

2. if trust docs allow it, transaction must be reasonable and fair in order for trustee to avoid liability

e.g. K serves as the trustee of a trust. K sells stock from the trust to himself for fair market value. K breached duty of loyalty b/c he engage in self-dealing.

the court does NOT inquire into the reasonableness or good faith of the self-dealing (doesn't matter if business done in good faith); this rule is like strict liability

23

A valid trust has:

a trustee, beneficiary and trust property

-a trust will NOT fail for lack of trustee
-trust property must be identifiable

24

Beneficiary

Person who receives benefit of the trust;
Holds equitable title has power to enforce the trust instrument

25

Trustee

holds legal title to trust property; manages trust

Cannot be sole trustee and sole beneficiary

26

Beneficiary

Person who receives benefit of the trust;

Holds equitable title has power to enforce the trust instrument

income beneficiaries: receive income from trust (present beneficiaries)

Remainder Beneficiaries: entitled to trust principal upon termination of the trust

27

Trust revocability

Generally, irrevocable trust cannot be revoked.

Majority: trust is presumed irrevocable unless trust doc says otherwise

UTC (Uniform Trust Code): Trust is revocable unless trust doc says otherwise (RiRi)

Revocable trust can be terminated by settlor @ any time

28

Termination of a trust

1. Expiration: expires @ end of stated term

2. Purpose accomplished: A trust terminates automatically only when the trust purpose has been accomplished
BUT trustee can block

3. Premature termination if material purpose is met and settlor is dead; (ALL beneficiaries future and present must consent)
but Trustee can block

4. Settlor can terminate
a. can unilaterally terminate if settlor expressly reserved right in trust docs
b. if settlor didn't reserve the right to terminate in docs, settlor can still terminate if settlor and ALL beneficiaries (future and present) must consent

5. unforeseen circumstances

Trustee has NO power to terminate unilaterally

29

Removal of Trustee

1. If the purpose of the trust would be frustrated by the trustee’s continuance in office or

2. If the trustee violated a duty

30

Support Trust

A support trust directs the trustee to pay income or principal as necessary to support the trust
beneficiary. Creditors cannot reach the assets of a support trust Unless:

-creditors who provided basic necessities

31

Pour-Over Provision

A pour-over is a provision in a will that directs the distribution of property to an already existing trust upon the happening of an event, so that the property passes
according to the terms of the trust without the necessity of the will reciting the entire
trust.

e.g. T executes both a will and an inter vivos trust. The will provides that upon T’s death, assets of the estate “pour over” into the trust.

32

Class Gifts

When a future interest in a trust is in the form of a gift to a group of individuals (i.e., a class gift),

Remains open: class remains open and may admit new members until (i) at least one class member is entitled to obtain possession of the gift, or (ii) the preceding interest terminates (e.g., the holder of the present life interest dies)

33

How to execute a pour-over trust

The pour-over trust must be identified in the will and the terms incorporated into a writing executed before or during the execution of the will.

Modern Approach: later-made amendments to trust are valid

Common Law: amendments after will's execution are invalid

34

Private express trusts: testamentary trust

A testamentary trust is created in writing in a will or in a document incorporated by reference into a will. The will containing the trust must meet the attested or holographic
will requirements

35

Private express trusts: testamentary trust

A testamentary trust is created in writing in a will or in a document incorporated by
reference into a will. The will containing the trust must meet the attested or holographic
will requirements

36

Ascertainable beneficiaries

The beneficiaries must be identifiable so that the equitable interest can be transferred automatically by operation of law and directly benefit the person.

Exceptions:


a. Class gifts: Trusts for a reasonably definite class (such as “my brothers”, or “my grandchildren”) will be upheld

b. Unborn children

c. Charitable Trusts: MUST NOT have individual ascertainable beneficiaries

d. Indefinite Class: A trustee can select a beneficiary from an indefinite class (such as
“my friends”)

37

Lapse of a class gift

Most jurisdictions: On the death of a class member, that member’s share is automatically re-divided among the surviving class members.

Restatement 3rd: The share of a deceased class member goes to the class member’s surviving issue

38

Prudent Investor

Requires Trustee must act as if he is investing his own property. Trustee must exercise reasonable care, caution, and skill when investing and managing trust assets unless the trustee has special skills/expertise, in which he has duty to utilize such skills (heightened standard)

39

Duty to diversify

Trustee must adequately diversify trust investments to spread risk of loss

40

Trust marriage provision

Provisions that restrain first marriage are generally held invalid as violating public policy. However a restraint might be upheld if trustee's motive was to provide support for a beneficiary while the beneficiary is single

41

A trust that instructs the trustee to “make payments for the health and care of beneficiary” is most likely which kind of trust

Discretionary Trust

42

Facts: Testator creates a trust that says, “Trustee shall distribute support to Son for his life,
then to my grandchildren, with the children of any deceased grandchild taking in their
parent’s place.”

When does the future interest become possessory?

When Son dies

43

Facts: Testator creates a trust that says, “Trustee shall distribute support to Son for his life,
then to my grandchildren, with the children of any deceased grandchild taking in their
parent’s place.”


What if the grandchild dies without issue before the son? Does the interest vest in the predeceasing grandchild’s estate, or does it fail?

Two approaches:

Common Law:
• The survival of a child is not essential
• The deceased grandchild’s estate takes the interest.

Uniform Probate Code (UPC):
• Future interests under a trust are contingent on the beneficiary surviving until the distribution (gift fails and issue takes nothing)