New York Bar Exam: Trusts

Front 1

Requirements for a Trust: What is an Express Trust?

Back 1

Allows an owner of property to make transfers of property and to have those assets managed on behalf of someone.

Two types of trust:

(1) Lifetime trust, set up during the lifetime of the person who created the trust, who we call the Settlor of the trust (also called inter vivos trust.),

(2) Testamentary Trust is a trust set up in S's will.

Front 2

Requirements for a Trust: What are the seven requirements for a valid trust?

Back 2

1. Settlor w/
2. Intent to create a trust
3. Delivers legal title to
4. Property (also called res, corpus, principal) to a
5. Trustee who holds legal title for the benefit of a
6. Beneficiary (B) (or Bs)
7. for a Lawful purpose.

Front 3

Requirements for a Trust: What are additional requirements for a valid trust?

Back 3

Must be in writing, signed by both S and T, and EITHER:
1. Acknowledged by a notary public or
2. signed by 2 Ws (NY Twist)

Front 4

Requirements for a Trust: Who can be S?

Back 4

S can be anyone over 18 w/ capacity to enter Ks.

Front 5

Requirements for a Trust: What is the delivery requirement?

Back 5

Title to assets msut be formally transferred for delivery to be valid. (Stock hypo, title to stock had to be formally transferred on books of corp)

Front 6

Requirements for a Trust: What can the property (res) of the trust be?

Back 6

Res can be almost anything, but must be property S then owns, not a mere expectancy of ownership. It must be identified property, not subject to future determination.

Front 7

Requirements for a Trust: Who can be T?

Back 7

For a lifetime trust, anyone can be a T since no court involvement is needed for lifetime trusts.

For a testamentary trust, created under court supervision, anyone can be a T except:
1. Those under 18,
2. incompetents,
3. convicted felons,
4. lying/drunk/stupid

Front 8

Requirements for a Trust: What are the requirements of Bs?

Back 8

Bs must be definite and ascertainable, no ambiguity. If ambiguous, T holds on a resulting trust for the residuary B.

Bs listed as someone's "family" or "next of kin" is considered definite and ascertainable and the trust does not fail, in this case consult the intestacy statutes for the names of the persons who fit the description in the trust.

Front 9

Requirements for a Trust: What is the intent requirement?

Back 9

S must intend to create an enforceable obligation. Precatory language is not enough. T must be given duties to perform, if T has no duties to perform, it is called a passive trust, which is no trust at all.

Front 10

Requirements for a Trust: What is the lawful purpose requirement?

Back 10

A trust cannot call for commission of a crime.

A trust cannot call for the destruction of property.

Trusts cannot have a condition against public policy. Major example on bar: trusts restricting marriage or promoting divorce.

But if a purpose can be found that is not offensive to public policy then it is valid. A trust that gives income to spouse until that spouse remarries OK. Marriage restrictions to members of a certain religion or ethnic group are valid.

Front 11

Types of Trusts: What's a revocable lifetime trust?

Back 11

The main req is that there be at least one B who is not the S. S can't be the only B. S can play many roles:
1. Settlor can be T.
2. S can be income B for life.
3. S's estate can be one of the Bs of the principal so long as there is at least one other B.
4. S can retain the power to terminate or amend the trust.

Front 12

Types of Trusts: What are reasons to have RLT? What are reasons not to have one?

Back 12

Reasons to have:
1. Manages assets efficiently, particularly using a professional T.
2. Helps plan for possible incapacity by avoiding guardianship.
3. Avoids probate: No part of the principal of a trust goes through S's estate in probate.
Reasons not to have:
RLT does not avoid taxes. If S keeps an income interest, or keeps a power to revoke the full trust assets will be included in S's gross estate for federal estate tax purposes.

Front 13

Types of Trusts: Are Testamentary gifts to an existing revocable trust OK?

Back 13

Yes. This is called a pour-over gift.
Such a gift avoids will formalities in the trust
Trust can be changed during lifetime somewhat easier than changing a will.
NY Key requirement for pour-over trust to be valid: trust must be in existence or executed concurrent w/ the will.
Two minor points:
1. Pour-over is not limited to trusts created by S, but can be to any existing trust, including those executed by other persons.
2. Pour-over gifst are valid even if the trust was unfunded, or only partially funded during S's lifetime.

Front 14

Types of Trusts: How can an insured make life insurance proceeds payable to a trust?

Back 14

1. Insured can create an unfunded revocable insurance trust and name the T of the trust as policy B.
2. Have the trust be a testamentary trust and name "the T named in my will" as B.
Note: Proceeds of savings accounts or pension plans can be handled the same way as life insurance proceeds.

Front 15

Types of Trusts: What's a Totten trust?

Back 15

AKA a bank acct trust. Totten trust is a bank acct in the depositor's name "as T for" a named B.
Key things to remember:
1. Depositor makes deposits and withdrawals as he or she wishes during the depositor's lifetime.
2. B has no beneficial interest during the depositor's lifetime but get whatever is in the acct when the depositor dies.
Other Totten Trust issues:
1. No particular words are required to create a Totten Trust account. (ITF)

Front 16

Types of Trusts: How can TT be revoked? Change of B possible? Can creditors reach a TT?

Back 16

Four ways to revoke a TT acct:
1. Withdraw all money from the acct.
2. Express revocation during lifetime by depositor making a writing naming the B and the financial institution and having the revocation notarized and delivered to the bank.
3. Revocation in a will, must comply with same requirements for revocation during lifetime.
4. Death of B, money in acct goes free and clear to depositor.
Change of B can be made by depositor, but it must be done the same way as a revocation: notarized statement, sent to the financial institution, naming the old B and the new one.
Creditors of the depositor can always reach TT 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 17

Types of Trusts: What are joint bank accts that are not Totten Trusts?

Back 17

WROS. Most popular issue is: After one of the parties to the account died can anyone block the money from going to survivor?
If C&CE shows that a survivorship was not intended when the acct was established and that the acct was opened only as a matter of convenience to the depositor, then the survivorship language can be set aside. Hard req to satisfy.
Each jt acct holder owns one-half of the jt acct, no matter who deposits the money, and if one person makes the entire deposit it is considered a gift of one-half to the other acct holder.

Front 18

Types of Trusts: What is Uniform Transfers to Minors Act?

Back 18

UTMA does not creat a trust, it is a special statutory conservatorship, where the conservator does not hold legal title (minor holds that).

Front 19

Types of Trusts: Why make a gift under UTMA?

Back 19

3 reasons:
1. It avoids a guardianship.
2. It avoids a trust.
3. It qualifies for the 12k per donee annual exclusion from federal and state gift tax.

Front 20

Types of Trusts: How must gifts under UTMA be made?

What are the duties of the custodian?

Back 20

Gifts under UTMA msut be made to a custodian and it must specify that it is made under the NY UTMA.

Duties of custodian:

1. Hold, manage and invest the property under a provident person standard.

2. Pay over to the minor or for the minor's needs what part of the property that the custodian believes is advisable.

3. Pay what is left of the property to the minor when the minor turns 21.

Front 21

Types of Trusts: What determines whether UTMA gift is includible in custodian's gross estate for state/fed estate taxes?

Back 21

If donor names self as custodian then the amount of the gift is includible in the custodian's gross estate for federal and state estate taxes, if donor names someone else as custodian then the amount of the gift is not includible.

Front 22

Types of Trusts: Can UTMA gifts be made in a will?

Back 22

Yes, so long as the necessary language is used.

Front 23

Types of Trusts: What are 5 key things to remember with charitable trusts?

Back 23

1. Charitable trusts must have indefinite beneficiaries, and they must be a reasonably large group. Cannot have specific, named Bs.
2. CT must be for a charitable purpose. Health, education, religion most common.
3. CT may be perpetual. It is not subject to RAP.
4. Cy Pres can be used to change the trust. If the stated purpose of the CT can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust be as near as possible to what S intended.
5. ***Only one ever tested in a NY Essay*** The attorney general has the duty of representing the Bs of charitable trusts in the state. The AG is an indispensable party to any suit on construction or enforcement of a CT. The AG and the donor have standing to sue to enforce the trust's LOOK UP.

Front 24

Types of Trusts: What non-trusts?

Back 24

1. Honorary trusts: Where no human being is the B of a private (i.e., non-charitable) trust. A private trust must have a human B.
Exception: Pet trusts/cemetery trusts
2. Constructive Trusts.
3. Resulting Trusts.

Front 25

Types of Trusts: What are Constructive Trusts?

Back 25

It's just a flexible equitable remedy designed to disgorge (1) unjust enrichment that results from (2) wrongful conduct. The "T's" only duty is to convey the property to the person who, in equity, should have the property.
The "oral" trust: Where there is a deed of land by grantor to grantee, but someone claims that grantee orally promised grantor that grantee would hold the land in trust for certain purposes of the grantor. The general rule on oral trusts is that no constructive trust will be imposed to give effect to any alleged oral trust.
EXCEPTIONS:
1. Where there is a fraud in the inducement: Need C&CE that oral trust was created and at time of creation Gee had no intent to carry out trust

2. Where there is a confidential relationship between Gor and Gee. Need C&CE of oral trust

Front 26

Types of Trusts: What's a resulting trust?

What's the only time NY will recognize a PMRT?

Back 26

Not a trust, but an equitable remedy.
Purchase Money Resulting Trust, recognized in the vast majority of states, but NOT NY.
PMRT only arises when a purchaser buys property but has title put in someone else's name (not a relation). Later purchaser claims no gift was intended and asks title holder for title to the property and title holder refuses to give it up.
Most states would find this situation to create a PMRT which allows the purchaser to compel the title holder to give up title. Not NY.
NY EXCEPTION to the no-PMRT rule: If there is C&CE that the grantee had expressly or impliedly promised to reconvey the land to the purchaser, then a constructive trust can be imposed.

Front 27

Types of Trusts: What's a spendthrift trust?

What protection does NY provide by statute?

What is the requirement for providing spendthrift protection to the residuary B?

Back 27

Statutory spendthrift rule protects a trust B's interest from creditors by prohibiting voluntary or involuntary transfer of the B's interest.

NY has a special statutory rule that protects all income interests in trusts w/ spendthrift protection even if the trust instrument doesn't contain ST clause. Applies to income from the trust, not principal.

To provide spendthrift protection to the residuary B (i.e., the one who gets the principal) the spendthrift clause must be expressly stated in the trust.

Front 28

Types of Trusts: What is typical spendthrift clause language?

Back 28

"No B of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the B's creditors by attachment, garnishment, or other legal process." The effect of this clause is to keep creditors at bay.

Front 29

Types of Trusts: What are the five ways to be able to reach the income of a STT?

Back 29

1. Creditors who furnish necessities - food, clothing, shelter, health care.
2. Child support, and alimony.
3. Federal tax liens.
4. Excess income beyond that needed for support and education. A remedy of last resort, msut show that all other possible remedies have been exhausted. What is need for support is based on the lifestyle of the B.
5. The 10% levy provided by CPLR 5205(e). All creditors together share the levy, it is not 10% per creditor. Is not used much in real life, but is often on the exam.

Front 30

Types of Trusts: What's the other big limitation on the protection that ST clauses offer?

Back 30

Big limitation, Spendthrift Clauses don't apply to any interest retained by the S. Ss can't hide out from their own creditors, but they can protect other Bs.

Note: all revocable trusts are fair game for S's creditors, if S can revoke a trust then it offers no protection at all against creditors of the S.

Front 31

Modification and Termination of Trusts: When may Ts or Bs modify a trust?

Back 31

Only when the objectives of the trust would be defeated or substantially impaired if the trust were not modified.

The overriding concern of the trust comes first, overriding any specific directions of the trust.

Front 32

Modification and Termination of Trusts: What is the 2 level test for modification?

Back 32

1. Find out the primary intent of the S regarding trust purposes.
2. Look at specific directions in the trust instrument to determine whether, b/c of changes in circumstances, those specific directions would now frustrate the primary intent of the trust. If so, then those directions can be changed by the court.
The court can authorize the invasion of principal if the income is not enough to carry out the S's purpose of the trust.

Front 33

Modification and Termination of Trusts: When can a trust be terminated by S?

Back 33

NY trusts are irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust instrument.

EXCEPTION:

A S can terminate an irrevocable trust if all Bs in being consent. This is often impossible b/c no one can give consent for any B who is a minor or who is incompetent.

Bs must be born alive to count here. For purposes of trust termination, a child in gestation is not regarded as a person.

If a trust gives property to heirs or next of kin that interest is not considered a beneficial interest and thus no consent need be obtained from them.

Front 34

Trust Administration: What are T's powers?

Back 34

T CAN:

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 amnage the corpus of the trust
***T CANNOT:

1. ***Engage in self dealing***
2. Borrow money on behalf of a trust
3. Continue a business. Also, T is liable for losses incurred by the business unless T has court approval to continue the business.

Front 35

Trust Administration: What are the five prohibitions on self-dealing?

Back 35

1. T can't buy or sell trust assets to himself. An absolute rule, no wiggle room.
2. T can't borrow trust funds.
3. T can't lend money to trust. Another absolute rule. Any interest on such a loan must be returned to the trust, and any security given for the loan is invalid.
4. T can't profit from serving as T (except for appropriate T fees). T can't take advantage of confidential information received while T.
5. Corporate T can't buy its own stock as a trust investment.

Front 36

Trust Administration: What are the two affirmative duties on self-dealing?

Back 36

1. Duty to segregate trust assets from personal assets. Remedy for violation of this duty:
(i) 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.
(ii) If the asset goes up in value there is a conclusive presumption that trust funds were used.
2. Duty to earmark trust assets by titling them in T's name.

Front 37

Trust Administration: What remedies for breach of fiduciary responsibilities?

Back 37

1. B can sue to remove the T.
2. B can ratify the transaction and waive the breach.
3. B can sue for any loss. An action to recover losses to the trust is called [look up]

Front 38

Trust Administration: What is the no further inquiry rule?

Back 38

Breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made. Good faith is not a D. Reasonableness is not a D.

Front 39

Trust Administration: What actions against a 3P when T engages in self-dealing?

Back 39

If T engages in a prohibited transaction, such as self-dealing, and sells trust property to a 3P, the B can't sue the purchase of property from the T if that purchases was a BFP for value w/o notice.
To keep purchaser from being a BFP and thus making the purchaser liable to the B, purchaser not only has to know that she was dealing with a T, but that the T was engaged in self-dealing.

Front 40

Trust Administration: What's indirect self-dealing?

Back 40

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

Front 41

Trust Administration: When is T personally liable in K?

Back 41

How T signed K is key to determining liability:
1. If T signed only on behalf of trust, no personal liability.
2. If T signed personally and merely mentioned trust, then T has personal liability.
3. Even if there is personal liability the T will be re-imbursed by the trust if 2 things are satisfied:
(i) The K was w/in the powers of the T, and
(ii) T was acting in the course of proper administration of the trust.
Examples: T signs K as "T, trustee of the J trust." Personally liable. T signs K as "J Trust, by T, trustee." Not personally liable. T signs K as "T, as trustee of J trust and not individually." Not personally liable.

Front 42

Trust Administration: When is T personally liable in tort?

Back 42

T is personally liable for all torts by T or T's Ees. An absolute rule, no exceptions. To deal with this liability, T can buy insurance and charge the cost of the insurance to the trust.
T can get re-imbursement from the trust for any tort claim if 2 requirements are satisfied:
(i) T must have been acting w/in T's powers AND
(ii) T was not personally at fault.

Front 43

Trust Administration: What is T's investment power?

Back 43

T must manage the property of the trust on behalf of the B, and this means the investment of the corpus of the trust. Modern portfolio theory
2 key factors:
(i) T must consider the role each investment plays w/in the overall trust portfolio.
(ii) T must consider the expected total return from income and capital gain. T can balance risky w/ conservative
Things to remember:
(i) Prudence is not measured by hindsight
(ii) T can exercise adjustment power and reallocate between capital gains to income and vice versa. End goal is fairness to all Bs.

Front 44

Rules Against Perpetuities and Suspension Rule: What's the definition of the RAP rule?

Back 44

No interest is valid if it could vest later than any life in being at the time of the creation of the trust, plus 21 years.
If there is any possibility, no matter how remote, that an interest could vest later than lives in being plus 21 years, it is void.
An interest is vested when there is no condition that has to be satisfied and the exact identity of the taker is known.
NY has a perpetuities reform statute that automatically reduces all age contigencies to 21 years, thus saving the gift.

Front 45

Rules Against Perpetuities and Suspension Rule: How does RAP apply to trusts?

Back 45

1. RAP doesn't apply to charitable trusts.
2. NY does not follow the "wait and see" reform EXCEPT for powers of appointment.
"Wait and see" takes into account the events happening after a grant is made to see if there actually was remote vesting or not.
"Power of appointment" is a provision often found in trusts allowing the holder of the power the right to later determine who gets the property in the trust.
In NY, you look at the facts to see if the power was exercised during the time period of the Rule, if so, no RAP violation.

Front 46

Rules Against Perpetuities and Suspension Rule: What's the NY suspension rule?

Back 46

Any interest is void if is suspends the power of alienation for a period longer than lives in being pluse 21 years, that is, when there are no persons who could, together, transfer fee simple title.

Hint: Look for a contingent remainder for life in a class of persons for possible violation of the NY suspension rule.

Front 47

Rules Against Perpetuities and Suspension Rule: Recap on RAP and suspension rule.

Back 47

RAP: Deals w/ vesting only. Just says for an interest to be valid it must vest w/in lives in being at time of grant, plus 21 years. Look at facts to make sure there is no way the vesting (failure to vest) could come outside the time period of the rule. If any chance of that then the interest is void. RAP doesn't apply to CTs. No "wait and see" reform in NY, except for powers of appointment.

Suspension Rule: Does not deal with vesting. It is only concerned w/ the possible suspension of the ability to transfer a fee simple. Look for facts to make sure there are persons identified and alive who could, together, convey a fee simple. If you can't find such person who could do this during lives in being pluse 21 years, then the interest is void.