Barbri Trusts 2011 Preferred

Front 1

Express Trust

Back 1

A legal device that allows an owner of property to make transfers of property and have those assets managed on behalf of someone else

Front 2

Title to Trust Property

Back 2

The creator of the trust, the settlor, has legal title to manage the money and transfers that legal title to the trustee.

The beneficiaries have equitable title to enjoy distributions from the trust

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Lifetime Trust

Back 3

An express trust set up during the lifetime of the settlor

AKA inter vivos trust

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Testamentary Trust

Back 4

A trust set up in the settlor's will

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Requirements for a Valid Trust

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1. Settlor who makes a
2. Delivery of legal title to
3. Property to a
4. Trustee who holds legal title for the benefit of a
5. Beneficiary with
6. Intent to creat a trust for
7. A lawful purpose
8. In a validly executed document

No consideration is necessary

Front 6

Settlor

Back 6

The settlor can be anyone 18 yrs or older, with the capacity to enter into contracts

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Delivery

Back 7

Assets must be placed out of the control of the settlor for delivery to be valid (unless the settlor is the trustee)

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Trust Property

Back 8

AKA res, corpus, or principal

The property can be almost anything, but must be property that the settlor owns, not just a mere expectancy of ownership in the future

It must be identified property, not subject to future determination

Front 9

Trustee

Back 9

Anyone who has capacity to acquire or hold title to property for his own benefit can be a trustee

Failure to name a trustee does not cause the trust to fail. The court can appoint someone as the trustee

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Beneficiaries

Back 10

Must be definite and ascertainable; no ambiguity

If ambiguous, the trustee holds in a resulting trust for the residuary beneficiary of a will (or intestate heirs in the absence of a valid will)

Exception: a beneficiary listed as the unborn descendant of a named individual is considered definite and ascertainable and the trust will not fail

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Intent

Back 11

Settlor must intend to create an enforceable obligation; precatory (non-binding) language is not enough

The trustee must be given duties to perform; if the trustee doesn't have any duties to perform it is called a passive trust, which is not a trust at all.

Front 12

Lawful Purpose

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A trust cannot call for the commission of a crime, the destruction of property, and cannot have a condition against public policy (trusts restricting marriage or promoting divorce)

BUT if a purpose can be found that does not violate public policy then it is valid.

Also, partial restraints on marriage are okay (restrictions on marriage to members of certain religious or ethnic groups)

Front 13

Trust Execution

Back 13

Trusts of land must be in writing, and signed by the settlor

Front 14

Revocable Trusts

Back 14

All trusts are presumed to be irrevocable unless the trust explicitly states it may be revoked

Front 15

Requirements for Lifetime Trust

Back 15

There must be at least one beneficiary who is not the settlor;

Settlor cannot be the sole beneficiary when also the sole trustee

Front 16

Roles of the Settlor

Back 16

1. Settlor can be a trustee
2. Settlor can be an income beneficiary for life
3. Settlor's estate can be one of the beneficiaries of the principal so long as there is at least one other beneficiary
4. Settlor can retain the power to terminate or amend the trust

Front 17

Reasons to Have a Revocable Lifetime Trust

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1. Manages assets efficiently, particularly using a professional trustee
2. Helps plan for possible incapacity by avoiding guardianship
3. Avoids probate

Front 18

Tax Consequences of a Revocable Trust

Back 18

If a settlor keeps an income interest or keeps a power to revoke, the full trust assets will be included in the settlor's gross estate for federal estate tax purposes

Front 19

Pour-Over Gifts

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A testamentary gift to an existing revocable trust

Requirements for a valid pour-over gift to a trust:
1. The trust must be in existence, OR
2. Executed concurrently with the will

A pour-over gift can be made by anybody, not just the settlor

Pour-over gifts are valid even if the trust was unfunded or only partially funded during the settlor's lifetime

Front 20

Life Insurance Proceeds Payable to a Trust

Back 20

Can be created in 2 ways:
1. The insured can create an unfunded revocable insurance trust and name the trustee of the existing trust as the policy beneficiary
2. The creator can create a testamentary trust and then have the life insurance policy name "the trustee named in my will" as the policy beneficiary

IL permits directing insurance proceeds to a testamentary trustee, whether or not the will is in existence at the time of the designation

Proceeds of a savings account or pension plan can be handled the same way

Front 21

Totten Trust

Back 21

Bank account trust; it is a bank account in the depositor's name "as trustee for" a named beneficiary

Key things to remember:
1. Depositor makes deposits and withdrawals as he or she wishes during the depositor's lifetime
2. Beneficiary has no beneficial interest during the depositor's lifetime, but gets whatever is in the account when the depositor dies

A change in beneficiary can be made by the depositor but it must be done through a notarized statement sent to the financial institution naming the old beneficiary and the new one

Creditors of the depositor can always reach the Totten Trust account balance either before or after the depositor's death, since it is a form of revocable trust, revoked partially each time a withdrawal is made

Front 22

Revocation of a Totten Trust

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1. Withdraw all the money in the account
2. Manifest an intention to revoke during lifetime
3. Revoke in a will
4. Death of a beneficiary also results in having the Totten Trust revoked and the money in the account goes free and clear to the depositor

Front 23

Joint Bank Accounts

Back 23

These are not Totten Trusts

If there is clear and convincing evidence that a survivorship was not intended when the account was established and that the account was opened only as a matter of convenience to the depositor, then the survivorship language can be set aside and the assets in the account will go through probate upon the death of the depositor

Each joint account holder owns 1/2 of the joint account, no matter who deposits the money, and, if one party makes the entire deposit, it is considered a gift of one-half to the other account holder

Front 24

Uniform Transfers to Minors Act

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Reasons to make a gift to a minor:
1. Avoids guardianship proceedings
2. Avoids a trust and courts supervision of the trust
3. It qualifies for the $13,000 per donee annual exclusion from federal and state gift tax

Gifts under UTMA must be made to a custodian and it must specify that it is made under the state UTMA. They may be made in a will

Front 25

Duties of a UTMA Custodian

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1. Hold, manage and invest the property under a prudent person standard
2. Pay over to the minor or for the minor's need what part of the property that the custodian deems advisable; AND
3. Pay what is left of the property to the minor when the minor turns 21

Front 26

UTMA Tax Consequences

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1. If donor names himself or herself as custodian, then the amount of the gift is includible in the custodian's gross estate for federal and state estate taxes
2. If donor names someone else as custodian then then amount of the gift is not includible

Front 27

Charitable Trusts

Back 27

1. Must have indefinite beneficiaries, and they must be a reasonably large group. The beneficiaries cannot be specifically named persons
2. Must be for a charitable purpose
3. May be perpetual (not subject to RAP)
4. Cy pres can be used to change the trust. If the stated purpose of the charitable trust can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust as near as possible to what the settlor wanted
5. The attorney general has the duty of representing the beneficiaries of charitable trusts in the state (AG is an indispensable party and has standing to sue to enforce the trusts terms)

Front 28

Honorary Trusts

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Not really trusts

Where no human being is the beneficiary of a private (non-charitable) trust. The property meant for the honorary trust falls into the residuary estate

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Pet Trusts

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Exception from Honorary Trust general rules

In IL a valid pet trust can be created and will be exempt from the RAP

When the pet dies, the trust ends, and the balance of the trust property is distributed to either the residuary beneficiary, if there is one, or if none, to the settlor's heirs

Someone designated in the will or appointed by the court. can enforce the trust and make sure the trust's purposes are carried out

Front 30

Cemetery Trusts

Back 30

In IL, trusts for perpetual care and maintenance of municipal cemetaries and burial plots are classified as charitable trusts and are ok even though they have no human beneficiaries

Since they are considered charitable trusts, the RAP doesn't apply

Front 31

Constructive Trusts

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An equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct

The trustees only duty is to convey the property to the person who, in equity, should have the property

Front 32

Resulting Trust

Back 32

An equitable remedy that arises when:
1. An express trust fails
2. A Purchase Money Resulting Trust (PMRT) is created

PMRT only arises when a purchaser buys property but has title put in someone else's name (who is not a relatiive); later purchaser claims no gift was intended and asks the title holder for the title to the property and the title holder refuses. This creates a PMRT which allows the purchaser to compel the title holder to give up title

Front 33

Statutory Spendthrift Rule

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Protects a trust beneficiary's interest from creditors by prohibiting voluntary or involuntary transfer of the beneficiary's interest

To provide spendthrift protection to a beneficiary, the spendthrift clause must be expressly stated in the trust

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Typical Spendthrift Language

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No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary's creditors by attachment, garnishment, or other legal process

Front 35

Exceptions to Spendthrift Clauses

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1. Creditors who furnish necessities
2. Child support and alimony (In IL only arrears, no future child support payments)
3. Federal tax liens

Front 36

Self-Settled Trust Rule

Back 36

Spendthrift protection does not apply to any interest retained by the settlor

All revocable trusts are fair game for settlor's creditors; even if the settlor has no immediate financial interest in the trust, but settlor retained the power to revoke, then the trust offers no protection at all against creditors of the settlor

Front 37

Trust Modification by Trustee and/or Beneficiaries

Back 37

Appropriate only when all the beneficiaries consent and the objectives of the trust would be defeated or substantially impaired if the trust is not modified

Klaflin Doctrine: The material purpose of the trust comes first, overriding any specific directions in the trust

Front 38

Modification Test

Back 38

1. Determine the material purpose of the settlor regarding the trust purposes
2. Look at specific directions in the trust instrument to determine whether, because of changes in circumstances, those specific directions in the trust would now frustrate the primary intent that is the material purpose of the trust; If so, then those directions can be changed by the court

Front 39

Trust Termination by the Settlor

Back 39

Trusts are difficult to terminate. They are irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust instrument

Front 40

Trustee's Powers

Back 40

Powers can be exercised by a trustee pursuant to:
1. The terms of the trust
2. The terms of a statute
3. By court decree

These fiduciary powers also encompass what an executor or administrator of a decedent's estate can do

Front 41

Trustee Can:

Back 41

1. sell any real or personal property
2. Mortgage property
3. Lease property
4. Make ordinary repairs
5. Contest compromise or settle claims
6. Do almost anything to manage the corpus of the trust

Front 42

Trustee Cannot:

Back 42

1. Engage in self-dealing
2. Borrow money
3. Continue a business without court authorization

The trustee is liable for losses incurred by the business unless the trustee has court approval to continue the business

When there are 3 or more trustees, trustees who dissent from the decisions of the majority of trustees will not be liable

Front 43

Prohibition on Self-Dealing

Back 43

1. Cannot buy or sell trust assets to himself
2. Cannot borrow trust funds
3. Cannot lend money to the trust. Any interest earned on such a loan must be returned to the trust, and any security given for the loan is invalid
4. Cannot profit from serving as trustee (except for appropriate trustee fees). Trustee cannot take advantage of confidential information received while trustee
5. Corporate trustee cannot buy its own stock as a trust investment

Front 44

Affirmative Duties on Self-Dealing

Back 44

1. Must segregate trust assets from personal assets. If commingled funds are used to buy an asset and the asset goes down in value there is a conclusive presumption that personal funds were used and vice versa
2. Duty to earmark trust assets by tilting them in trustee's name

Front 45

Remedies for Breach of Fiduciary Responsibilities

Back 45

1. Beneficiary can sue to remove the trsutee
2. Beneficiary can ratify the transaction and waive the breach
3. Beneficiary can sue for any loss
4. An action to recover losses to the trust is called a surcharge

Front 46

No Further Inquiry Rule

Back 46

Breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made

Good faith and reasonableness are not defenses

Front 47

Actions Against a 3rd Party when the Trustee Engages in Self-Dealing

Back 47

If a trustee engages in a prohibited transaction, such as self-dealing, and sells trust property to a 3rd party, the beneficiary cannot sue the purchaser if that purchaser was a BFP

For the purchaser to be liable to the beneficiary, the purchaser not only has to know that she was dealing with a trustee, but also that the trustee was engaged in self-dealing

Front 48

Indirect Self-Dealing

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Self-dealing rules also apply to loans or sales to a relative of the trustee or to a business of which the trustee is an officer, employee, partner, or principal shareholder

Front 49

Exculpatory Clauses

Back 49

These are clauses that attempt to relieve a trustee of liability for a breach of a fiduciary duty

They can't be used to shield the trustee from all liability (void as against public policy) or for liability from:
1. Bad faith
2. Intentional breach of trust
3. Recklessness
5. An abuse of a confidential relationship

Front 50

Personal Liability of Trustee in Contract

Back 50

Unless the contract explicitly shields the trustee from liability, the trustee is personally liable to 3rd parties on contracts the trustee entered into related to the trust property

If there is personal liability, the trustee can get reimbursed if:
1. The contract was within the powers of the trustee, AND
2. The trustee was acting in the course of proper administration of the trust

Front 51

Personal Liability of Trustee in Tort

Back 51

Trustee is personally liable for all torts he commits as well as those committed by his employees

Trustee can buy liability insurance and charge the cost to the trust

Trustee can get reimbursed if:
1. He was acting within his powers as trustee, AND
2. He was not personally at fault

Front 52

Trustee's Investment Power

Back 52

Must manage the trust property of behalf of the beneficiary which means investment of the corpus of the trust

The Uniform Prudent Investor Act (UPIA) gives trustees broad latitude to choose investments

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"Modern Portfolio" Theory of Investment

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Trustee creates a custom-tailored investment strategy for the particular trust (UPIA)

Trustee must consider the role each investment plays within the overall trust portfolio

Trustee must consider the expected total return from income and capital gain

Front 54

Things to Remember about the Investment Power

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1. Prudence is determined at the time the decision to invest was made
2. Trustee can exercise adjustment power and allocate capital gains to income. The end goal is fairness to all beneficiaries
3. The key to the UPIA is flexibility to shape the investment strategy for maximum total return, along with the flexibility to adjust income between the income and remainder beneficiaries to be fair to each of them