Bar Prep - Trusts

Front 1

Trust

Back 1

Arises from the expressed intention of the owner of property to create a trust with respect to the property. Trustee holds legal title to specific property under a fiduciary duty to manage, invest, and safeguard the trust assets for the benefit of designated beneficiaries, who hold equitable title.

Front 2

Express Trust

Back 2

There must be settlor who delivers legal title to the trust res to a trustee with the intention to create a trust, whereupon the trustee holds, manages, and administers the res for the benefit of the designated beneficiaries. No consideration is required.

Front 3

Private Trusts

Back 3

One or more ascertainable persons are beneficiaries. Subject to the Rule Against Perpetuities.

Front 4

Want of Trustee

Back 4

A trust does not fail for want of a trustee. If the named trustee dies, resigns, or is removed for misfeasance, and the settlor has not designated a successor trustee, the court will appoint someone to serve as trustee, unless the court finds that trust powers were intended to be personal to that particular trustee (in which case the trust is terminated).

Front 5

Resignation of Trustee

Back 5

A trustee cannot resign unless the trust instrument expressly permits it or the court permits it for good cause shown.

Front 6

Removal of Trustee

Back 6

A court may remove a trustee for (1) violating or threatening to violate the trust, (2) insolvency or imminent insolvency of the trustee, or (3) unsuitability to serve as trustee. Beneficiaries cannot compel removal unless there are grounds for removal or the power is granted to them by the trust instrument.

Front 7

Intent to Create Trust

Back 7

Intent must be expressed by some words or conduct. In general, precatory language ("I wish/hope/desire…") does not create a trust. No trust arises where there is a transfer "in trust" but with no trust terms or a gift of income with no time limit and no disposition of principal.

Front 8

Merger

Back 8

A trust is not merged or invalid because a person (including the settlor) is the sole trustee and sole current beneficiary, as long as at least one other person holds a beneficial interest in the property, such as a vested or contingent remainder.

Front 9

Res

Back 9

Any property that the settlor has the power to convey can be the subject of a trust; an expectancy in certain property is insufficient. The res must be adequately described.

Front 10

Beneficiaries

Back 10

A trust may be validly created without notice to or acceptance by beneficiaries. If no beneficiary is designated, the trust fails. A definite class of beneficiaries may be designated. The settlor can also be a beneficiary.

Front 11

Trust Purposes

Back 11

A trust will fail if (1) its enforcement requires commission of a crime or tort, (2) it violates public policy, (3) it was created to defeat the settlor's creditors, or (4) it was based on illegal consideration. A total restrain on marriage is void, and the beneficiary takes the interest free of the restriction if the condition is intended to compel the beneficiary to remain unmarried and serves no reasonable purpose. Partial restraints on marriage and total restraints on a spouse's remarriage are permissible.

Front 12

Trust Creation

Back 12

All lifetime trusts must be in writing, signed by the person establishing the trust and (unless such person is the sole trustee) by at least one trustee, and either acknowledged before a notary or executed in the presence of two witnesses who also sign.

Front 13

Trust Revocation

Back 13

A lifetime trust is irrevocable by the settlor unless the power to amend or revoke is expressly reserved in the trust instrument. Any amendments or revocations must be in writing, signed, and witnessed by two people, unless the trust provides otherwise. A revocable lifetime trust can be amended or revoked by an express provision in the settlor's will.

Front 14

Revocable Lifetime Trust

Back 14

The interest in a revocable lifetime trust passes to the beneficiary during the settlor's lifetime and becomes possessory on the settlor's death.

Front 15

Pour-Over Gift from Will to Revocable Lifetime Trust

Back 15

A pour-over gift from a will to a revocable lifetime trust is valid. The trust instrument must be executed prior to or contemporaneously with the will and be identified in the will. The trust to which a pour-over gift is made may be unfunded. A revocation or termination of the trust before the testator's death will cause the disposition to fail, unless the testator has made an alternate disposition.

Front 16

Life Insurance Proceeds

Back 16

Unfunded revocable lifetime trusts are valid. The trust must be in existence when the beneficiary designation is made. The insured may name the trustee of a lifetime trust or of a testamentary trust as beneficiary of the insurance proceeds. The testamentary trustee must qualify within 18 months after the testator's death, otherwise the proceeds are payable to the designated secondary beneficiary or, if none, to the insured's personal representative.

Front 17

Totten Trust

Back 17

The depositor deposits funds in a bank account in his name as trustee for another. The depositor reserves the right to withdraw funds at any time and on his death, the account passes to the named beneficiary. No particular words are required to create a Totten trust.

Front 18

Totten Trust [Revocation]

Back 18

A bank account trust is revoked to the extent of withdrawals made by the depositor. If the beneficiary predecease the depositor, the trust is revoked. A bank account trust can be revoked by an acknowledged writing delivered to a financial institution. Revocation by the depositor's will requires an express reference to the account.

Front 19

Totten Trust [Funds Belong to Beneficiary]

Back 19

The depositor's creditors can reach the amount on deposit in the bank account trust, both before and after the depositor's death. A Totten trust is a testamentary substitute and is subject to the surviving spouse's elective share.

Front 20

Totten Trust [Payment of Accounts of $10,000 or Less]

Back 20

If the beneficiary is under 18 and the amount on the deposit is $10,000 or less on the depositor's death, payment can be made to the beneficiary's parents/guardian for the beneficiary's benefit. If the amount on deposit is more than $10,000, payment must be made to the legal guardian.

Front 21

Joint Bank Accounts

Back 21

A deposit into a right of survivorship joint bank account is irrevocable to the extent of one-half. Withdrawal of more than one-half without the other depositor's consent destroys the right of survivorship and the non-withdrawing party can recover the amount of the withdrawal in excess of one-half of the account.

Front 22

Uniform Transfers to Minors Act

Back 22

A custodial gift is made by transferring property by deed, will, or power of appointment to a custodian for a minor. The custodian has statutory powers to (1) collect, hold, manage, invest, and reinvest the custodial property, (2) to pay to or on the minor's behalf so much or all of the custodial property as the custodian deems advisable, and (3) to the extent not expended, to pay over the property when the minor turns 21. A custodianship is not a trust. The custodian does not hold legal title, legal title is in the minor. Custodianship terminates when the minor turns 21, unless the donor specifies 18.

Front 23

Powers of Attorney

Back 23

A springing power of attorney is one where the power to act arises on the happening of a specified future event. A special power of attorney is limited to specific transactions. A general power of attorney covers all legal acts. A power of attorney is durable unless it provides that it is to terminate o the incapacity of the principal. A durable power ends on the death of the principal. A gift of the principal's property by the agent to himself raises a presumption of improper self-dealing, which can be overcome by a clear showing of the principal's intent.

Front 24

Accumulation Trusts

Back 24

Directions to accumulate trust income within the perpetuities period are permissible. Accumulations may be reached for the support and education of the beneficiary.

Front 25

Supplemental Needs Trust

Back 25

A discretionary trust for the benefit of a person with a severe and chronic disability. The trust must prohibit the trustee from spending or distributing trust assets that in any way may supplant, impair, or diminish Medicaid or other government benefits for which the beneficiary is eligible.

Front 26

Charitable Trusts

Back 26

Cannot benefit individual beneficiaries; must be for a charitable purpose. Charitable trusts may be perpetual. The AG is charged with the duty to supervise and enforce charitable trusts. The donor has standing to enforce the terms. The AG represents all beneficiaries and has standing to sue. The only time the beneficiaries may sue is when there is a small, identifiable class who have a special interest in the trust distinguishable from the pubic interest and the situation involves a fundamental change in the nature of a charitable institution.

Front 27

Charitable Trusts [Cy Pres]

Back 27

If the charitable purpose is accomplished or the charity no longer exists, the court may redirect the trust to a purpose as near as possible to the charitable endeavor designated by the settlor, creating a resulting trust.

Front 28

Charitable Trusts [Termination If Less than $100,000]

Back 28

The AG, a trustee, or a beneficiary may petition for termination if the market value of the trust assets is less than $100,000 and the expense of administering the trust is too high in relation to the income. If terminated, the assets are distributed to the beneficiary; if no beneficiary is designated, the court orders a distribution that accomplishes the trust's charitable purposes. Termination action requires settlor's consent if she is alive.

Front 29

Honorary Trust

Back 29

A trust that is not for charitable purposes and has no individual beneficiaries. NY courts have refused to recognize honorary trusts. Trusts for care and maintenance of cemetery lots are charitable and valid and are exempt from the Rule Against Perpetuities. A trust for the care of a pet is valid; the trust terminates on the death of the pet.

Front 30

Resulting and Constructive Trusts vs. Express Trusts

Back 30

Resulting and constructive trusts are passive trusts in which the trustee has no active duties to perform. The beneficiary holds legal and equitable title and can compel transfer of the assets.

Front 31

Resulting Trusts

Back 31

A resulting trust is imposed when an express trust fails for any reason and when the settlor has made an incomplete disposition of the assets transferred in an express trust.

Front 32

Purchase Money Resulting Trust ("PMRT")

Back 32

No resulting trust arises in favor of a party who provides the purchase price for property taken in the name of another party. Exceptions are recognized if (1) the transferee takes title in her own name without the payor's consent or knowledge or (2) the transferee bought the property with someone else's money in violation of a trust.

Front 33

Constructive Trusts

Back 33

An equitable remedy imposed in cases involving fraud or unconscionable conduct and unjust enrichment. The trustee's sole duty is to transfer title and possession of the property to the person who would have owned it but for the wrongful conduct. Proof of facts necessary to establish must be by clear and convincing evidence. Unjust enrichment results when (1) a beneficiary kills the testator, (2) a beneficiary suppresses a later will, and (3) a promise to keep a life insurance policy in force is breached.

Front 34

Constructive Trusts [Oral Trusts of Land]

Back 34

If a deed is absolute on its face and an oral agreement to hold land in trust is alleged, the general rule is that no constructive trust will be imposed. Exceptions include: (1) fraud in the inducement and (2) where the grantee who orally promises to hold property in trust is in a confidential relationship with the grantor and the grantee's promise is proved by clear and convincing evidence.

Front 35

Constructive Trusts [Where Imposed]

Back 35

When consideration is paid by one party and title taken by another, a constructive trust will be imposed when there is (1) a confidential or fiduciary relationship, (2) a promise to reconvey, (3) a transfer in reliance thereon, (4) a breach of the promise, and (5) unjust enrichment. A constructive trust may be imposed to prevent unjust enrichment, regardless of the presence of the other factors.

Front 36

Constructive Trusts [Secret Trusts]

Back 36

If a will makes an absolute gift but a trust is intended, the trust may be enforced to prevent unjust enrichment of the named beneficiary (who promised to hold gift property in trust for another). The court allows the beneficiary to present extrinsic evidence. If the agreement can be proved by clear and convincing evidence, a constructive trust will be imposed on the beneficiary.

Front 37

Constructive Trusts [Semi-Secret Trusts]

Back 37

If a will makes a gift "in trust" without specifying beneficiaries, no trust is created. The legatee holds on a resulting trust for the testator's heirs.

Front 38

Spendthrift Rule

Back 38

Prohibits voluntary and involuntary transfers of a beneficiary's interest. All income (not remainder) interests are automatically given spendthrift protection, which means income interests cannot be reached by the beneficiary's creditors unless a provision in the trust instrument expressly authorizes such transfers.

Front 39

Spendthrift Rule [Exceptions]

Back 39

A beneficiary's income can be reached: (1) by creditors who furnish necessaries, (2) in a suit to enforce child support or an alimony obligation, (3) by the federal government asserting a tax lien, and (4) by creditors to the extent of income beyond that needed for education and support. The burden of proof is on the creditor to show the beneficiary has excess income. In addition, judgment creditors may levy upon 10% of income due a debtor-beneficiary from a spendthrift trust.

Front 40

Gratuitous Assignment of Income in Excess of $10,000

Back 40

The beneficiary may assign her right to any amount in excess of $10,000 of the annual income. This power is not available if the trust contains a spendthrift clause. The right and amount of assignment is not limited if the trust authorizes assignment. Assignment must be made by written instrument, signed, acknowledged, and delivered to the trustee accompanied by an affidavit that the beneficiary has not and will not receive consideration for the transfer. Permissible transferees include a spouse, grandparents, or issue of grandparents.

Front 41

Discretionary Trusts

Back 41

Distributions of income are in the trustee's discretion. A creditor cannot reach a beneficiary's interest in a discretionary trust until the trustee exercises discretion to distribute income to the beneficiary.

Front 42

Settlor as Beneficiary

Back 42

The settlor-beneficiary can transfer his interest even if the trust that he created contains a spendthrift clause prohibiting transfer. A revocable trust is reachable by creditors. If the trust is irrevocable and the settlor retains some but not all of the interest in the trust, his creditors can reach the full amount of the interest retained by the settlor, but no more.

Front 43

Invasion Power of Trustee

Back 43

If an invasion power is given to the trustee, a standard is often inserted to give the trustee guidance as to when to exercise the power. With a support invasion power, the trustee must consider the beneficiary's other sources of income. The beneficiary may enforce this standard. If the invasion power is not governed by a standard, the beneficiary cannot compel a distribution.

Front 44

Invasion Power of Trustee-Beneficiary

Back 44

A trustee-beneficiary cannot make a discretionary distribution of income or principal to himself or allocate receipts and expenses between principal and income unless (1) the trust instrument provides otherwise, (2) the distribution power is limited by an ascertainable standard relating to health, education, maintenance, or support, or (3) the trust is a revocable trust and the grantor is serving as trustee. If the power is conferred on two more more trustees, it may be executed by the disinterested trustees. If conferred on one trustee, the court may exercise the power.

Front 45

Invasion Power of Beneficiary

Back 45

In most cases, an invasion power given to a beneficiary is either an ascertainable standard and/or a "$5,000 or 5%" power.

Front 46

Invasion Power of Court

Back 46

Upon petition, the court can authorize distribution where the beneficiary's support is not sufficiently provided for, whether or not she is entitled to the principal of the trust or any part thereof.

Front 47

Termination by Trust Terms

Back 47

A trust terminates automatically at the expiration of the time specified in the instrument. If there is no direction that the corpus be paid out to designated persons, the trustee holds on a resulting trust for the settlor or her successors in title.

Front 48

Termination by Settlor

Back 48

A revocable trust can be terminated by the settlor at any time. An irrevocable trust can be revoked or amended by the settlor if all beneficiaries consent. If any beneficiary is incompetent or is a minor, the trust cannot be revoked. Consent of unborn or unascertained beneficiaries is not required.

Front 49

Termination by Beneficiaries

Back 49

Even if all beneficiaries consent, a trust cannot be terminated if termination would be contrary to the purposes of the settlor. Spendthrift trusts cannot be terminated.

Front 50

Fiduciary Powers Act

Back 50

Gives a fiduciary most of the powers a fee simple owner would have. A fiduciary is prohibited from self-dealing and making imprudent investments. Grants the power to: accept additions to the trust from sources other than the settlor; grant a lease for a period of 10 years or less; grant a mortgage; make ordinary repairs; grant options for the sale of property not to exceed 6 months; contest, compromise, and settle claims; and vote securities in person or by proxy.

Front 51

Fiduciary Powers Act [Prohibited Powers]

Back 51

Include the power to: continue a business; abandon, alter, or demolish real property; borrow; lend personal funds to the estate; employ agents; make extraordinary repairs or alterations; and keep funds invested.

Front 52

Duties of Trustee

Back 52

Include the duty to: (1) take possession of and preserve trust property, (2) not delegate fiduciary responsibilities; (3) make periodic accountings; (4) exercise reasonable care and skill; (5) segregate trust property; (6) prevent breach by a co-trustee; and (7) make trust property productive. Exculpatory causes in testamentary trusts are void.

Front 53

Prudent Investor Rule

Back 53

Applied to a trustee's investment decisions. Requires the trustee to invest and manage property in accordance with a standard of prudence-reasonable care, skill, and caution-in making investment decisions as a prudent investor would. Prudence is determined with respect to the entire investment portfolio. Requires the trustee to evaluate investment decisions in the context of the entire trust portfolio and as part of an overall investment strategy. A trustee with special skills are held to a higher standard.

Front 54

Factors Considered in Making Investment Decisions

Back 54

Include: (1) size of the portfolio; (2) nature and estimated duration of the fiduciary relationship; (3) liquidity and distribution requirements of the trust instrument; (4) general economic conditions; (5) possible effect of inflation or deflation; (6) expected tax consequences; (7) role that each investment plays within the overall portfolio; (8) expected total return; and (9) beneficiaries' needs.

Front 55

Delegation of Investment Functions

Back 55

A trustee may delegate management and investment functions but the trustee must exercise reasonable care in selecting the agent.

Front 56

Prohibited Transactions

Back 56

A trustee owes a duty of undivided loyalty to the trust and the beneficiaries. Unless expressly authorized by the trust, a trustee may not (1) purchase property owned by the trust or sell assets to the trust or (2) borrow trust funds, make loans to the trust, or use trust assets to secure a personal loan.

Front 57

"No Further Inquiry" Rule

Back 57

All the beneficiary must show is that the trustee engaged in self-dealing, no further inquiry is made. Self-dealing is an automatic wrong. There is no defense; the only issue is damages. The beneficiaries may ratify the transaction (and waive the breach) or sue for damages or to recover the property.

Front 58

Breach of Trust Statute of Limitations

Back 58

In general, it does not begin to run until the trustee repudiates the trust, the trustee gives an accounting that reports the conduct in question, or the trust relationship comes to an end. (There is a 6-year statute of limitations on the proceeding to compel an accounting.)

Front 59

Trustee's Contract Liability

Back 59

A trustee is personally liable on all contracts with third persons entered into on behalf of the trust unless the contract relieves her of liability. A trustee is entitled to indemnification from the trust estate if (1) the contract was within her powers and (2) she acted in the course of proper administration of the trust.

Front 60

Trustee's Tort Liability

Back 60

If a trustee or her agent commits a tort against a third person in the course of administration, she is personally liable to the victim. Prudent trustees purchase liability insurance. A trustee's personal fault is material only on the issue of her right to indemnification. A trustee is entitled to reimbursement from the trust estate if (1) liability was incurred in the course of proper administration of the trust and (2) the trustee was not personally at fault.

Front 61

Uniform Principal and Income Act

Back 61

Applies to all New York trusts and estates unless the governing instrument provides otherwise. Gives the trustee an adjustment power to reallocate investment portfolio returns. The trustee is under a duty to administer the trust impartially.

Front 62

Factors Considered in Making Adjustment Decisions

Back 62

Include: (1) the nature, purpose, and expected duration of the trust, (2) the intent of the settlor, (3) the circumstances of the beneficiaries, (4) the needs for liquidity, regularity of income, and preservation and appreciation of capital, and (5) the nature of the trust's assets.