008 Lists Trusts

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01 Requirements

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(1) the settlor must be 18 years old and with proper contractual capacity

(2) trust property must be delivered, i.e. formally transferred

(3) property - a mere expectancy of ownership is insufficient

(4) trustee

(5) beneficiary - must be definite and ascertainable ("family" or "next of kin" are considered such). If the beneficiary is ambiguous, the trust fails and the trustee holds a resulting trust for the residual beneficiaries

(6) intent must be express ("I hope" or "I wish" are insufficient)

(7) any lawful purpose

(8) proper execution:
i. in writing
ii. signed by the settlor and trustee
iii. either acknowledged by a notary public

or signed by 2 witnesses

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02 Trustee

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(1) in a lifetime trust:
i. of legal age
ii. not incapacitated

(2) testamentary trust (created under court supervision - if the trust fails to name a trustee, a trustee will be appointed by the court):
i. 18 years old
ii. not judicially declared incompetent
iii. not a convicted felon
iv. not incapable because of alcohol or drug abuse, dishonesty, or lack of understanding

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03 Resignation of Trustee

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must be trustee unless:

(1) the trust expressly provides for resignation, OR
(2) the court permits for a good cause

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04 Removal of Trustee

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by a court:
(1) for violation (or threats to violate) the trust
(2) insolvency of the trustee
(3) becoming unfit

Mere contention between the trustee and a beneficiary is insufficient

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05 Types of Trusts

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(1) i. irrevocable - in NY, the presumed type, unless otherwise provided. Cannot be modified or terminated, BUT if all interested parties give their written, acknowledged consent, the settlor may revoke or amend (NOTE: no one can consent for a minor or incompetent beneficiary! An interest to "heirs" and "next of kin" are not beneficial and does not require consent)

ii. revocable - in NY, must be expressly provided. Can be revoked or amended in the trust or by a will (the will must specifically refer to the trust). Requirement - there must be at least one beneficiary who is not the settlor

(2) pourover trusts - must be revocable:
i. in writing
ii. executed by the testator (however, not limited to trusts created by the settlor)
iii. prior to or contemporaneously with the execution of the will
iv. identified in the will

It is valid even if the trust was not funded or was funded only partially

(3) charitable trusts (including trusts for perpetual care and maintenance of cemeteries and burial plots) - valid even if the beneficiary is indefinite or uncertain, not subject to RAP, cy pres doctrine applies, represented by AG

(4) life insurance - does not have to be funded during the settlor's lifetime. Proceeds must be claimed by the trustee within 18 months. Payable:

i. in case of an unfunded revocable insurance trust, by naming the trustee as the policy beneficiary
ii. in case of a testamentary trust, by referring to the trustee named in the will in the insurance contract

(5) totten trusts

(+6) joint bank accounts

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07 Totten Trusts

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is a testamentary substitute, revocable at any time. Created by creating an account in the maker's name as trustee for a named beneficiary (no particular words required)

Rights:
(1) the depositor has the exclusive power over the account - can deposit or withdraw funds at will
(2) the beneficiary does not have any rights until the depositor's death

Changing the beneficiary - requirements:
(1) in writing
(2) the former beneficiary, the new beneficiary, and the financial institution must be identified
(3) notarized
(4) delivered to the financial institution

Revocation:
(1) by withdrawing all the funds
(2) the death of the beneficiary (money goes back to the settlor)
(3) express revocation - by a writing:
i. naming the beneficiary
ii. the financial institution
iii. notarized
iv. delivered to the institution
(4) by a will:
i. must be described in the will as in trust for a named beneficiary in the named financial institution
ii. must name a new beneficiary and the financial institution

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08 Joint Bank Accounts

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Requirements:

(1) with a right of survivorship (specific words must be present)
(2) signed by both parties

Each holder is entitled to 1/2 of the account, regardless of who deposited how much money

The right of survivorship is destroyed if one holder withdraws more than 1/2 without consent - the other party can recover the excess withdrawn over 1/2

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09 Non-Trusts

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(1) honorary trusts - no private beneficiary, no charitable purpose. As a general rule - fails, except a trust to care for one's pet subject to RAP

(2) constructive trusts:
i. when a beneficiary kills the testator
ii. when a promise to keep a life insurance policy is breached
iii. when a beneficiary suppresses a subsequent will

(3) resulting trusts - an equitable remedy imposed when:
i. creation of an express trust fails for a minor formality, OR
ii. the settlor made an incomplete transfer of assets

A purchase money resulting trust is not recognized in NY - a disposition of property to another for valuable consideration by another is presumed fraudulent against the purchaser's creditors (the presumption is rebuttable)

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10 Spendthrift Trust Provision

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is included by default in NY. Exceptions - the spendthrift trust provision does not protect against:

(1) spousal support for an ex-spouse
(2) child support
(3) obligations for necessities
(4) excess income beyond that needed for support and education - only if all other possible remedies have been exhausted
(5) a 10% levy for all judgment creditors

The spendthrift provision does not apply to any interest retained by the settlor

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11 Trustee's Powers

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(under the NY Fiduciary Powers Act)

Unless otherwise provided, the trustee can:
(1) accept additions to the trust from other sources
(2) grant a mortgage
(3) grant options for the sale of property for not more than 6 months
(4) lease property for not more than 10 years
(5) make ordinary repairs
(6) contest, compromise, or settle any claims
(7) invest and reinvest

The trustee cannot:
(1) borrow money
(2) lend personal funds
(3) abandon or destroy real property
(4) continue business (otherwise, will be liable for losses unless had court approval)
(5) employ agents
(6) self-deal - any act of self-dealing is an automatic breach, unless otherwise agreed. Includes prohibitions:
i. to buy or sell trust assets
ii. borrow funds from the trust
iii. lend personal funds to the trust (and take a lien on the property for advances) - any interest earned on such a loan must be returned, any security is invalid
iv. profit from serving as trustee, except for trustee fees
v. take advantage of confidential information received while serving as a trustee
vi. a corporate trustee cannot buy stock as a trust investment (but can maintain stock)

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12 Trustee's Duties

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(1) not to commingle - to separate trust assets from personal assets
(2) to earmark trust assets - by titling them in the trustee's name "as fiduciary"
(3) duty of care - reasonable care and skill
(4) duty of loyalty - prohibition on self-dealing; good faith and reasonableness are no defense
(5) to perform periodic accountings
(6) to take possession of and preserve the trust property
(7) not to delegate fiduciary responsibilities
(8) to segregate property
(9) to prevent breach by a co-trustee
(1) to make trust property productive

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14 Remedies for Violation of Trustee's Duties

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Against the trustee - the beneficiary can:
(1) sue to remove the trustee
(2) ratify the transaction and waive the breach
(3) sue for any loss resulting from the breach

Against a third party - the beneficiary - cannot sue a bona fide purchaser. A purchaser is liable to the beneficiary if:
(1) he knew that he was dealing with a trustee, AND
(2) that the trustee was engaged in self-dealing

Any exculpatory clause is against public policy in testamentary trusts, but is valid in lifetime trusts

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13 Trustee's Liability

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(1) in contract:
i. if signed on behalf of the trust - no personal liability
ii. if signed personally and merely mentioned the trust - personally liable, but will be reimbursed if acted within the powers and in the course of proper administration of the trust

In torts - as a general rule, personally liable, but will be reimbursed if:
(1) acted within the powers, AND
(2) was not personally at fault

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16 Allocation of Receipts

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Income (principal):
(1) ordinary (non-ordinary) receipts from use or investment of trust property
(2) money (non-monetary receipts) received from an entity such as a corporation
(3) proceeds from a contract in which the trustee is insured against loss (a life insurance policy or other contract naming the trust or trustee as a beneficiary)
(4) 10% (90%) from a deferred compensation plan (like a pension plan)
(5) 10% (90%) of proceeds from a liquidated asset (whose value diminishes over time because the asset is only expected to produce receipts for a limited time)
(6) 10% (90%) of all proceeds received from mineral interests, oil and gas

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17 Allocation of Expenses

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Income (Principal):
(1) 1/3 (2/3) of expenses for investment advice or custodial services
(2) ordinary expenses for administration the trust property (the trustee's compensation)
(3) insurance premiums that cover loss of the principal
(4) expenses for proceedings primarily concerning the income (expenses, accountings, and judicial proceedings involving both the interest and remainder interests concerning primarily the principal)
((5) environmental matters)
((6) settling the decedent's estate)

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06 Judicial Modification

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appropriate when, if the trust is not modified:
(1) the objectives of the trust will be defeated or
(2) substantially impaired

The purpose of the trust overrides any specific directions!

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15 Powers of Invasion

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is the power to use the principal when the income is insufficient to satisfy the purpose of the trust. Cannot be invoked if the principal is to be used for a charitable purpose.

(1) by the trustee:
i. for the benefit of the income beneficiary liked to a certain purpose (if not linked so, the beneficiary cannot force the trustee to use the power)
ii. to make prudent investment decisions - look tat the investment portfolio in its entirety

(2) by the beneficiary:
i. an ascertainable standard power for health, support, maintenance or education, OR
ii. a $5,000 or 5% power (drawn in a year)

(3) by court - to any income beneficiary whose support or education is not sufficiently provided for, even if the trust does not provide for (will be counted in that beneficiary's share of the principal if he is entitled to such a share)