￼Elements of a Valid Trust - I know the PARTS of a valid trust.
INTENT to create a trust is manifest by conduct valid
PURPOSE (not contrary to public policy or illegal)
ASCERTAINABLE beneficiaries (directly capable of taking and holding title for their benefit)
RES must be a presently existing, identifiable property interest
named TRUSTEE with active duties who is capable of acquiring, holding and administering the trust res; legal & equitable titles merge if beneficiary and trustee are same person
SETTLOR with capacity to understand extent of property, natural objects of bounty and nature of disposition
Ways a Trust can be Created - It's WICKED smart to create a trust.
by WILL (testamentary trust)
INTER VIVOS trust created by transfer of property CONSTRUCTIVE or resulting trust created as a matter of law by K (contract)
EXERCISING power of appt.
DECLARATION of trust by property owner
Duties of Trustee - The trustee had a duty to make sure the beneficiary wasn't drinking SPOILED CAB.
refrain from SELF-DEALING (duty of loyalty)
PROTECT the corpus of the trust by preserving principal and diversifying the trust portfolio
not usurp OPPORTUNITIES available to trust (duty of loyalty)
INFORM settlor and beneficiaries of transactions involving more than 25% of trust assets and wait for objections prior to executing the transaction
LITIGATE on behalf of the trust when necessary EXERCISE degree of care, skill and prudence which would be exercised by a reasonably prudent person in managing his/her own property
not DELEGATE authority involving judgment, discretion or power of appointment (proper administration)
COMPLY with terms & duties under trust detailed ACCOUNTING, including earmarking and segregating trust assets separately from personal assets
refrain from BORROWING funds from the trust (duty of loyalty)
Trustee's Defenses for Breach of Duty - A trustee can KIL a suit against him for breach of duty.
KNOWING consent (or waiver) to breach of trustee's duties by beneficiary (implicitly applied to beneficiaries who benefited from wrongful act)
INSTRUMENT contains exculpatory or "hold harmless" provisions. These are enforceable ONLY if breach was merely negligent and trustee lacked bad faith.
LACHES or statute of limitations - failure by beneficiary to timely assert claims
When a "Charging Order" to Invade a Spendthrift, SupportorDiscretionaryisPermitted- Certain ANTICS let creditors invade the principal of protective trusts.
ALIMONY obligations due a former spouse
NECESSITIES - debts incurred for food, shelter, medical expenses, etc.
TAXES - income necessary to satisfy beneficiary's tax responsibility can usually be attached
INTENTIONAL hindrance, delay or defrauding of creditor's claims by transfering assets into a trust
CHILD SUPPORT owed to minor children
SELF-SETTLED asset protection trusts where settlor is also the beneficiary (minority rule: permitted if irrevocable and not created to defraud creditors)
Applicability of Rule Against Perpetuities - RAP music is ECO-friendly.
RULE AGAINST PERPETUITIES
OPEN class remainders
Allowed Restraints on Alienation - U F See fighters are good at restraining aliens.
USE restrictions (with reversionary interest) - "To A but if not used for church purposes, the land shall revert to me."
right of FIRST refusal - allows holder to match a third party's offer (if accepted) to buy the property within a reasonable time
"wait and SEE" - imposed by statute where operation of trust continues until last possible relevant time under the RAP (or 90 years) to see if the trust will survive.
Ways a Trust can be Terminated - When a trust wants to be terminated, it yells "Pour some ACID on ME!!!"
PETITION to court by beneficiary, spendthrift provision or settlor (if beneficiary is in agreement)
ACCOMPLISHED purpose illegal or impossible (such as if the sole beneficiary dies without heirs) CONSOLIDATION by the court where multiple trusts have same purpose, trustees, settlors and beneficiaries
INCOME interest terminates - corpus is distributed to remainder beneficiaries if all income beneficiaries die (doctrine of acceleration)
DONOR termination permitted if this right is specified in the instrument. This right is called a "grantor trust," so assets are included in grantor's estate for tax purposes.
MERGER of legal and equitable title when beneficiary and trustee are the same person
EXPIRATION of term specified in the trust instrument
PRIVATE EXPRESS TRUST: DEFINITION
A private express trust is a fiduciary relationship with respect to property, whereby a trustee holds legal title for the benefit of another (the beneficiary). One must manifest an intent to create the trust for a legal purpose.
Intent: The settlor must manifest a present intent for the formation of a trust.
o Although no specific words are required, mere words of hope or wishes must be coupled with parol evidence to establish the intent.
o Writings: A writing is not required for trusts of personal property, but is required for real property (in accordance with the statute of frauds).
Beneficiary: The beneficiary may be any ascertainable person or group of people (including a corporation). Class gifts are valid (as long as the class is not too large), but beware of the Rule of Perpetuities.
Trustee: Every trust must have a trustee.
PRIVATE EXPRESS TRUST: PURPOSE
A trust may be established for any legal purpose.
ILLEGAL PURPOSE OR VIOLATION OF PUBLIC POLICY
o Trust illegal in creation: Try to eliminate the illegality from the trust if possible, so the trust can still exist.
o If this is not possible, a court will either invalidate or not recognize the trust, and the trust property will go back to the settlor, or the court will allow the trustee to keep the property.
o Trust becomes illegal after creation: If this occurs, a resulting trust will be created, which is an implied in fact trust based on the presumed intent of the parties.
PRIVATE EXPRESS TRUST: CREATION
TRUST TAKING EFFECT AT SETTLOR’S DEATH: A trust can take effect at the settlor’s death. Thus the settlor is like a testator, and the trust must comply with the statute of wills (probate code).
TRUST TAKING EFFECT DURING SETTLOR’S LIFETIME:
o Transfer in Trust: A third person is a trustee.
• Real property: Settlor must execute and deliver a deed transferring title to the trustee.
• Personal property: The settlor must deliver the trust property to the trustee at the time the settlor manifests intent to create a trust (can be actual, symbolic, constructive). No delivery = no trust.
o Declaration in Trust: Settlor is the trustee.
• Real property: Must be a writing to satisfy Statute of Frauds.
• Personal property: No issue of delivery (because settlor is trustee).
A charitable trust is one that confers a substantial benefit on society. This trust is derived from the Statute of Elizabeth, which allowed trusts to improve education, eliminate poverty, alleviate sickness, and help orphans.
1. A manifestation of intent to form a trust;
2. Either through a settlor’s death or will, or during testator’s lifetime by declaration of trust or transfer of trust;
3. Of a presently exiting interest in property that can be transferred; and
4. For a legal charitable purpose.
BENEFICIARIES: There is no ascertainable person or group; however, individuals may receive incidental benefits.
CY PRES: Settlor has a general charitable intent and only the mechanism for effectuating that intent is not practicable or possible. A court will attempt to modify the mechanism in order to effectuate this settlor’s general intent.
A trust that has no ascertainable beneficiary and confers no substantial benefit on society. It is simply a goal of the settlor, which a trustee may (but is not required) to carry out.
a. The trust may fail if the trustee refuses to carry it out.
b. The Rule of Perpetuities applies and the trust language may invalidate the trust (which would create a Resulting Trust).
The named beneficiary takes whatever is left in a tentative bank account trust at the death of the owner of the bank account.
This is not akin to a real trust, as the beneficiaries will only receive the remaining funds in a savings account from a financial institution, and the trustee does not owe the beneficiary any fiduciary duties.
Beneficiary cannot transfer his or her right to future payments of income or principal, and creditors cannot attach rights to future payments.
o Settlor Creation: A settlor cannot create a spendthrift trust with an involuntary alienation clause for himself (the trust may be valid, but the alienation provision will not be), and courts are split on whether a voluntary alienation clause is valid.
• Voluntary alienation: Not allowed, unless the beneficiary is instructing the trustee to pay the beneficiary’s agent or representative.
• Involuntary alienation: Generally not allowed, but a creditor can attach any surplus to the trust.
o Common law exception: Preferred creditors can attach future rights of payment. These include: Government creditors; a tort judgment creditor; Those who provide necessities of life to the beneficiary; A child for child support or a spouse for spousal support; or an ex-spouse for alimony.
The trustee is required to use only so much of the income or principal as necessary for the beneficiaries’ health, support, maintenance, or education, and the terms of the trust must be specifically stated.
o Settlor Creation: A settlor may create a support trust for himself or herself but cannot do so with an involuntary alienation clause (the trust will be valid, but the involuntary alienation provision will be stricken) and courts are split regarding voluntary alienation.
o Voluntary alienation: A beneficiary cannot transfer his future rights here because it would violate the settlor’s intent.
o Involuntary alienation: Rules are the same as the spendthrift trust.
The trustee is given sole and absolute discretion to determine how much and when to pay the beneficiary. The terms must be included in the trust.
o Settlor Creation: A settlor may create a support trust for himself/herself but cannot do so with an involuntary alienation clause (the trust will be valid, but the involuntary alienation provision will be stricken) and courts are split regarding voluntary alienation.
• Voluntary alienation: Depends – courts may not allow because the beneficiary may never receive anything, but if there is an assignee, then that person will step into the shoes of the beneficiary and should still receive some payment.
• Involuntary alienation: Depends – there may not be anything for a creditor to attach, but if the trustee is on notice of a debt and decides to pay, s/he must also pay the creditors (or is personally liable).
An implied-in-fact trust decreed by a court that is based on the presumed intent of the parties. The trust property is transferred to the settlor or settlor’s heirs.
SITUATIONS WHEN A RESULTING TRUST IS CREATED:
1. A private trust fails for lack of a beneficiary;
2. A charitable trust ends because of impracticability or impossibility and Cy Pres cannot be used;
3. A private express trust fails because its purpose becomes illegal after creation;
4. There is excess corpus in a private express trust (more than needed to accomplish the trust’s purpose);
• Semi-secret trusts: A will makes a gift to a person to hold as trustee but fails to state the beneficiary.
A remedy to prevent fraud or unjust enrichment – the trustee’s sole obligation is to deliver the property to the intended beneficiary.
SITUATIONS WHERE A CONSTRUCTIVE TRUST WILL RESULT:
1. Self-dealing: The trustee of a private express or constructive trust makes a profit from self-dealing.
2. Fraud in the inducement or undue influence.
3. Secret trust: A will makes a gift on its face outright to one person, but is given on the condition that the property will be used for the benefit of another person.
4. Oral real estate trusts where there is a fiduciary relationship, fraud in the inducement, or detrimental reliance.
OBLIGATIONS OF TRUSTEES
Duty of loyalty: The trustee must administer the trust for the benefit of the beneficiaries, not taking into account any other consideration
Duty to invest: There are three different rules that courts can follow: Common Law Prudent Person Test, Uniform Prudent Investor Act and State lists. All three rules encompass a duty to diversify and a remedy.
Duty to earmark: Requires the trustee to label trust property as such.
Duty to segregate: Trustee cannot commingle his or her own person funds with the trust fund nor commingle two trust funds together.
Duty not to delegate: Trustee can rely on professional advisors to make decisions but cannot delegate decision making authority to these advisors or to other trustees.
Duty to account: Requires the trustee to give the beneficiaries a statement of income and expenses of the trust on a regular basis.
Duty of care: Trustee must act as a reasonably prudent person would in dealing with his or her own affairs.
Remedies For Duties: Damages; Remove trustee; Constructive trust remedy; Tracing and equitable liens; and Ratify the transaction if good for the beneficiary.
TRUSTEE DUTIES TO THIRD PERSONS
o Common Law: Trustee can be sued personally and his personal assets are vulnerable to suit, but s/he can get indemnification from trust assets if not personally at fault.
o Modern Law: If the other contracting party knows that the trustee is entering into the contract in his or her representative capacity, then the trustee can only be sued in his or her representative capacity.
LIABILITY IN TORT:
o Common law: Trustee can be sued in personal capacity, but if s/he is not at personal fault if s/he can receive indemnification from trust assets.
o Modern law: Trustee can be sued in individual capacity only if the trustee is personally at fault.
MODIFICATION OF TRUSTS
MODIFICATION BY SETTLOR: The settlor can modify the trust if the settlor expressly reserves the power to do so.
o Revoking Power: Settlor also has the power to modify if the settlor has the power to revoke.
MODIFICATION BY THE COURT: Courts can modify a charitable trust under the Cy Pres doctrine.
o Doctrine of Changed Circumstances: A court can change the administrative or management provisions of the trust (but not the beneficiaries).
o Requirements: Unforeseen circumstances on the part of the settlor and the change must be necessary to preserve the trust.
TERMINATION OF TRUSTS
TERMINATION OF THE REVOCABLE TRUST.
Settlor’s Power To Revoke:
o Majority: The power must be expressly reserved in the trust instrument.
o Minority: Settlor has the power to revoke unless the trust is expressly made irrevocable.
TERMINATION OF THE IRREVOCABLE TRUST. Methods:
1. Naturally, if time for termination is set in the trust instrument;
2. If the settlor and all beneficiaries agree to terminate;
3. If all beneficiaries agree to terminate and all the material purposes have been accomplished; or
4. By operation of law: Passive trusts and statute of uses (if there is a private express trust where the trustee has no legal duties and the corpus is real property – results in the beneficiary being given legal title by law).
UNIFORM PRINCIPAL AND INCOME ACT
determine how income and expenses are calculated.
LIFE TENANT INCOME AND EXPENSES
o INCOME: Cash dividends, any interest income, and any net business income.
o INTEREST PAYS FOR: Interest on loan indebtedness, taxes, and minor repairs.
REMAINDERMAN INCOME AND EXPENSES
o INCOME: Stock dividends and stock splits, plus any net proceeds on the sale of a trust asset
o INTEREST PAYS FOR: Principal part of the loan indebtedness plus major repairs or improvements.
ABILITY TO ADJUST ADJUSTMENT POWER OF TRUSTEE
o The trustee has the power to adjust the income and expenses for the life tenant and remainderman if doing so is necessary to allocate the trust fairly.
Duty to Invest
Duty to invest
A trustee has a duty to manage income as a reasonable prudent investor under the old common law, this meant that each individual investment had to be relatively safe. Under the modern standard, risky investments are permissible as long as the portfolio as a whole has a relatively low level of risk. The trustee will not necessary be liable for investment losses as long as the investment had an acceptable low risk.