Ls - Wills & Trusts - Trusts

Front 1

Trusts in General

Back 1

We have them in order to separate the benefits of ownership from the burdens of ownership. A trust must have some active duties to perform.

Front 2

Who are the three parties to the trust?

Back 2

"Settlor, Trustee and Beneficiary. One party can play more than one role, but there must be at least two parties involved. In order to have a valid trust, the trustee must owe equitable duties to someone other than herself. Merger can occur if you are the sole trustee and the sole beneficiary."

Front 3

What are the four types of “trust creation”

Back 3

"Intervivos trust, Declaration of trust (settlor is trustee, decl. can be oral), Deed of Trust (must be delivered), Testamentary Trust."

Front 4

Trustee

Back 4

"May have one or several, may be an individual or a corporation, No trust can fail for want of a trustee. Court will appoint in the absence of one. Trustee holds legal title to the trust property, beneficiaries have equitable interests. Trustee is held to a fiduciary standard of conduct. "

Front 5

Fiduciary Standard regarding trusts

Back 5

"Duty of loyalty, Duty of prudence, Duty of impartiality between classes of beneficiaries, Duty not to commingle the trust property, Duty to inform and account to the beneficiaries"

Front 6

Three roles of trusteeship

Back 6

"Investment, administration, distribution. (Roles can be combined or divided)"

Front 7

A Trust Compared with a Legal Life Estate

Back 7

"A trust is almost always preferable to a life estate because it is Out of reach of creditors, third parties only need to deal with trustee, broad power to act for the benefit of the trust, (power of sale, mortage, pay taxes)"

Front 8

Four elements to create a valid trust

Back 8

1) Intent to create a trust 2) Viable trustee 3) Trust Property (res) 4) Beneficiaries

Front 9

Intent to Create a Trust

Back 9

"A bear is a bear. Must be an intent to create a managerial relationship (legal title is held by one for the benefit of another) regarding the assets. No particular form of words is necessary to create a trust, can be oral, for real estate SOF applies. Compare w/ possible custodianship where there are no fiduciary duties. "

Front 10

A viable trustee

Back 10

1) Must have someone to manage the assets 2) Need to have someone hold fiduciary duties 3) Settlor can be the trustee.

Front 11

Trust Property

Back 11

"A res can a minimal amount or can be any interest in property. Must be an existing interest in an existing property right. Future profits do not serve as a res, but a “future interest” is an existing interest in an existing property right. Gratuitous promise to make a gift does not create a res. However, a gift of property whose profits are not in existence can be a res if the donor or trustee gives a present and irrevocable transfer of his interest in the property. Exception: UTATA, trusts can be funded by a pourover will."

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Necessity of Trust Beneficiaries

Back 12

"Someone to enforce the fiduciary duties, Can be unborn or unascertainable at the time of trust creation but they must be ascertainable within the RAP period. Can’t be too vague (friend). Can’t be an animal (impose an honorary trust instead)"

Front 13

Honorary trust

Back 13

Essentailly a trust for an animal. Has to be a specific animal. May have problems with RAP. California allows this for the animal’s life. Even when there is no beneficiary who can seek enforcement.

Front 14

Mandatory/Discretionary Trusts

Back 14

Mandatory: trustee MUST distribute all the income and principal in accordance with the terms of the trust. Discretionary: trustee has discretion over payment of either the income or the principal or both according to the terms of the trust.

Front 15

Types of Discretionary Trusts

Back 15

"1) Pure Discretionary: the trustee must distribute all income, but has discretion over who gets it and what amount. 2) Support Trust: trustee is obligated to make distributions as necessary for the beneficiary’s needs. 3) Discretionary Support Trust - Hybrid – A trust combines unfettered discretion with a distribution standard. 4) Spendthrift Provisions"

Front 16

Standards governing trustee discretion

Back 16

"1) Discretion not Absolute: prudence and reasonableness provide the standard of conduct, even when they have absolute discretion 2) Duty to Inquire: a trustee has a duty to inquire as to the beneficiary’s needs and circumstances. The trustee can’t just sit back 3) Beneficiary’s assets should not be included in deciding distribution (unless Trust says otherwise) "

Front 17

Spendthrift Provisions

Back 17

"A type of discretionary trust that imposes a disabling a restraint upon beneficiaries and their creditors. Most JN require specific language to create a spendthift, some JNs are deemed to be spendthrift unless they are deemed otherwise. Creditors cannot reach this type of trust. Exceptions: fraudulent transfer or self-settled. Furnishers of necessaries can pierce the spendthrift. A tort judgment cannot be enforced against the assets of a spendthrift, but the veil may be pierced for child support, tax debt and in some JNs for alimony."

Front 18

Rights of Beneficiary’s Creditors

Back 18

"Both the discretionary trust and the spendthrift provisions provide a means of making property available to the beneficiary, but not their creditors. Creditors can get an order to order them dispersing to the beneficiary. This does not force a trustee to disperse any assets, but when they exercise their discretion, the creditors seize trust property before it reaches the beneficiary. Exception: Child support, taxes, alimony."

Front 19

What acts constitute an exercise of discretion by a trustee that would place make assets subject to seizing by creditors?

Back 19

1) Crediting the beneficiary’s account on the trustee’s books 2) Making an oral or written declaration to the beneficiary.

Front 20

Protective trust

Back 20

Allows for a Mandatory trust to change to a discretionary trust if a creditor attempts to take those assets.

Front 21

Self-Settled Asset Protection Trusts

Back 21

"Self-settled trusts are available in some jurisdictions—offshore & in some states. Self-settled trusts should be reachable by tortfeasors, creditors, etc. FTC v. Affordable Media – court ordered payment from self-settled trust in Caribbean, provision removed settlor as trustee when court compelled distribution. Defendants claimed inability to comply w/ court order. Court found defendants in contempt because they still had some control over the trust as trust protectors. Courts will look to whether the inability to comply is a result of the person’s actions. Also a fraudulent transfer made while claim is pending or expected can be pierced. Self Settled APTs can still be valuable for settlement leverage."

Front 22

Supplemental Needs Trust

Back 22

"A trust that provides for only those needs that the state can’t/won’t provide, the state cannot reach it. For special needs people so that the government pays the basic cost for the care of the individual but has funds available to them for their special needs. Some states allow for the remainder of such trusts to escheat to the state."

Front 23

Six Principles/Rules of Charitable Trusts

Back 23

"No definite beneficiaries , No one to enforce the duties (therefore AG usually does), Not subject to RAP, More easily modified by Cy Pres, Taxation is favorable, must be for a Charitable purposes"

Front 24

What constitutes a charitable purpose?

Back 24

"1) The relief of poverty 2) The advancement of education 3) The advancement of religion 4) The promotion of health 5) Governmental or municipal interest 6) Other purposes, the accomplishment of which, is beneficial to the community"

Front 25

How will the court determine whether a charitable trust actually exists?

Back 25

"1) Look at the purpose, doesn’t have be called charitable trust but has to have a charitable purpose 2) can be charitable even if the number of recipients is small (scholarships) 3) No political party trusts, can promote ideologies 4) No illegal trusts 5) Need a direct application to the social good"

Front 26

Modification of Charitable Trusts

Back 26

"Under the cy pres doctrine, if the settlor’s exact charitable purpose can’t be carried out, for one of the following reasons: Impossible, Impractical, Illegal AND Many JNs have now allowed reformation for Waste. The court may direct the trust property to another charitable purpose that closely approximates the initial purpose that so long as the donor had a general charitable intent. UTC says all charitable trusts are presumed to have a general charitable intent."

Front 27

Cy pres should not be followed if

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1) There is a specific charitable intent 2) If the settlor anticipated possible failure of the trust 3) If the settlor made an alternate disposition of the property

Front 28

Three rules regarding Termination

Back 28

1) If the settlor & beneficiaries consent can terminate w/out consent of trustee 2) English Rule: beneficiaries are allowed to modified the trust. Settlor’s intent is irrelevant. No dead hand control. 3) American Rule (Claflin Doctrine) a trust cannot be terminated or modified prior to the time fixed for termination by beneficiaries if it would be contrary to a material purpose of the settlor.

Front 29

What is a material purpose under Claflin Doctrine/American Rule regarding termination of trusts?

Back 29

"Essentially any provision that take discretion out of the hands of the beneficiary including: Spendthrift provisions Discretionary trusts, Age provisions, Support trusts, “for and during remainder of their natural lives.”"

Front 30

List the four approaches to the modification of trust

Back 30

"CL rule, Equitable Deviation Doctrine, Restatement 2nd, Restatement 3rd, you can avoid the modification problem by giving someone the power of appointment to modify the trust after your death."

Front 31

CL Rule regarding modification of trust

Back 31

3 requirements 1) All B’s consent 2) No B’s under legal disability 3) Would not frustrate Settlor’s intent

Front 32

Equitable deviation doctrine

Back 32

Will permit the trustee to deviate from the terms of the trust. Deviation must be necessary to accomplish the purpose of the trust.

Front 33

Restatement 2nd regarding modification of trust

Back 33

says you can’t simply modify b/c it would be advantageous to Bs. No trust modification unless you have both 1) Unforeseen circumstances 2) Compliance with the original trust would defeat or substantially impair the trust purposes.

Front 34

Restatement 3rd or UTC regarding modification of trust

Back 34

More easily modified than the 2nd restatement. Two factors are now: 1) Circumstances not anticipated by the settlor 2) Modification will further the purposes of the trust.

Front 35

Changing trustees under the Restatement

Back 35

"Court will not change the Trustee b/c Beneficiaries want to, the behavior must be particularly showing or the trustee must have breach a duty. "

Front 36

UTA – Removal of a trustee

Back 36

"By the Court, by the Settlor, by a Co-trustee, or by Beneficiaries if 1) material breach of trust 2) Lack of cooperation among co-trustee impairs administration of trust 3) Investment decisions have resulted in performance substantially below those of comparable trusts 4) Changed circumstance, unfitness or inability to administer the trust make removal in B’s best interests."

Front 37

Questions regarding will substitutes?

Back 37

1) Do they have to meet the formalities of the wills act? 2) Should we apply the rules of law of wills to the will substitute?

Front 38

Revocable Trusts as Will Substitutes

Back 38

"If the settlor retained control over the subject matter of the trust such as then the trust is revocable. Even in a revocable trust, the settler-trustee has to conduct himself in accordance with fiduciary standards. A revocable trust is a testamentary doc. A beneficiary’s interest in a revocable trust is a contingent interest that has not yet vested. So, beneficiaries lack standing to challenge a settlor’s lifetime amendments. However, you can challenge the settlor’s capacity to make such amendments."

Front 39

Advantages of using a revocable trust during your life

Back 39

1) Trustee manages for you 2) you can change the trustee 3) Keeping Title Clear (keeps SP as SP) 4) planning for incompetency

Front 40

Advantages/Disadvantages of using a revocable trust upon your death

Back 40

Adv: 1) Reduces costs by avoiding probate 2) Avoids delays of probate 3) Avoid publicity of probate 4) Avoid probate in other state 4) Choice of law. Disads: 1) No SOL in a trust.

Front 41

PODs/TODs

Back 41

"CL approach: The words “Payable on Death” are testamentary in nature. Therefore, an instrument that contains those words and does not meet the testamentary formalities is invalid. Modern Rule: UPC 6101 – authorized POD designations, doesn’t have to meet formalities, doesn’t go through probate. Contracts w/ POD provisions cannot be invalidated as a testamentary disposition. TODs – for property but creates no current interest in the beneficiary and is not a completed gift for property or tax purposes."

Front 42

Do the formalities required for wills apply to will substitutes?

Back 42

"Will substitutes do not need the formalities. Trust documents that have gone missing are not deemed revoked by physical act. (To allow physical revocation, this would increase the liability of trustees.) Assets placed in a revocable intervivos trust can be reached upon death of the settlor to pay the settlors debt. JN spit on how divorce affects will substitutes. Some states divorce does not revoke trust. UPC divorce revokes any governing instrument."

Front 43

Pour-Over Wills

Back 43

"Seller designates the trustee of her revocable trust as beneficiary of her will. Generally this is used for residuary assets. To change the estate plan, the settlor only needs to amend the revocable trust. Two Theories Validating Pour-Over Wills: Incorporation by reference (but can’t include trust amendments made after will is executed) 2) Doctrine of Act of Independent Significance."

Front 44

UPC (1990): Testamentary Additions to Trusts

Back 44

"1) Does not require that the trust be in existence at the time of forming the will (just the intention of doing so) 2) Accepts amendments made after the will 3) Unless provided otherwise, a trust becomes mandatory. Termination of a trust causes any devise to the trust in a pour over to lapse."

Front 45

UTATA original version

Back 45

Validated a pour-over of probate assets into an Intervivos trust only if the trust was executed before or concurrently with the will.

Front 46

UTATA as amended

Back 46

"Deleted the requirement that the trust be executed before or concurrently with the will. Also, there doesn’t need to be a res in the trust b/c the willed property become the res. This an exception to the “res” rule."

Front 47

Fiduciary duties of trustees

Back 47

"Duty of Loyalty, Duty to inform and account, duty of care, duty of prudence, duty of impartiality"

Front 48

Duty of Loyalty & Self Dealing Transactions

Back 48

"No further inquiry rule: if the trustee is involved in self dealing, then good faith or fairness to the beneficiaries are not enough to save the trustee from liability. A trustee cannot purchase from himself at his own sale, and his wife is subject to the same disability, unless leave to do so has been previously obtained from the court. Trust Pursuit Rule: improperly channeled trust property can be brought back into the trust unless it is acquired by a bonafide purchaser for value. Exceptions – Authorized self dealing, Settlor authorized it in the trust instrument or Beneficiaries consent after full disclosure – must be fair and in good faith or judicial approval. A conflict of interest is not self dealing and good faith and fairness are defenses."

Front 49

Duty of Loyalty and Co-trustees

Back 49

Trustees must act as a group and with unanimity unless the trust instrument provides otherwise. Co-trustee is liable for the wrongful acts of another co-trustee to which she has consented or enabled. UTC allows majority to act if there are three or more trust partners. Still a duty to prevent breach.

Front 50

Duty of Loyalty and Delegation

Back 50

"Trustee can delegate ministerial functions, but not discretionary functions (purchasing, selling, investing, allocating funds, making discretionary payments)"

Front 51

Duty to Inform and Account

Back 51

"Trustee must provide sufficient information reasonably related to the beneficiary’s interest in the trust. UTC requires an annual statement of trust assets, more if requested by B’s. Trust can regulate amount of information but beneficiary is always entitled to reasonable information. Doctrine of Constructive/Technical Fraud: If you represent you have knowledge and your affirmation is false."

Front 52

Duty of Care

Back 52

"Includes: Duty to earmark, Duty not to commingle, Duty to collect and protect trust property without unnecessary delay"

Front 53

Duty of Prudence

Back 53

"1) CL England – Prudent Man Rule – a list of proper investments, emphasis on preserving principal, no portfolio theory. 2) Prudent Investor Rule (Modern Rule) observe how men of prudence, discretion and intelligence manage their own affairs in regard to the permanent disposition of their funds. Reflects modern portfolio theory. 3) Uniform Prudent Investor Act: a) Diversify trust investments b) Look to the risk of tolerance of the particular trust – seek investments suited to the trust. C) Reverses the non-delegation rule – encourages trustees to delegate investment responsibilities to professionals."

Front 54

Duty of Impartiality

Back 54

"Implicated when there are two or more beneficiaries. Must strike a balance between the beneficiaries, giving due regard to their respective interests and the terms of the trust document. This doesn’t mean equal treatment."