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177 Cards in this Set

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What is a trust?
A trust is an arrangement for making gifts of property and for the management of assets under which the trustee holds legal title to the assets for the benefit of beneficiaries.
What does the trustee have?
The trustee has benefits and burdens of ownership (duty to manage, safeguard, invest, etc.).
What doe the beneficiaries have?
The beneficiaries have equitable title and all the benefits of ownership.
What are the two major types of trusts?
Express and implied.
What types of express trusts are there?
1) Private Trusts;
2) Charitable Trusts;
3) Lifetime Trusts;
4) Testamentary Trusts;
5) Honorary Trusts
What is a private trust?
A private trust is the most basic trust, established by the settlor (person who creates the trust) for named beneficiaries of the trust.
What is a charitable trust?
A charitable trust is a trust established for charitable purposes that does not benefit identifiable individuals (e.g., trust shall pay all trust income to Fordham Law School forever).
What are lifetime trusts?
Trusts created during the settlor's lifetime, i.e., inter-vivos trusts. Liftime trusts are "non-court trusts," which means that no court is involved in the trust's creation.
What are testamentary trusts?
Trusts created by Will. Testamentary trusts are "court trusts" which arise in probate proceedings in the Surrogate's Court.
What are honorary trusts?
Honorary trusts are trusts benefiting non-humans which are performed at the discretion of the trustee.
What types of implied trusts are there?
1) Constructive Trusts;
2) Resulting Trusts
What is a constructive trust?
A constructive trust is NOT a trust. "Constructive trust" is the name for an equitable remedy imposed in cases involving fraud or unconsciable conduct and unjust enrichment, designed to disgorge unjust enrichment that results from wrongful conduct.
What is a resulting trust?
A resulting trust is NOT a trust. It is the label for where an express trust fails for any reason - it's a passive trust in which trustee has no active duties to perform, and beneficiary holds legal and equitable title and can compel tansfer of the assets.
What are other possible trust arrangements?
1) Joint Bank Accounts with Right of Survivorship;
2) Totten Trusts;
3) Custodial Gifts to Minors
What are the requirements for a valid trust?
To have a valid trust, the settlor (also called the grantor or creator) delivers legal title to the res (trust property) to a trustee for the benefit of named beneficiaries with the intent to create a trust that is evidenced by a writing which is signed by the settlor and trustee and EITHER acknowledged before a notary public OR witnessed by two witnesses.
What is the intent requirement?
Mere desire to create a trust is not enough. Have to ask if the language is precatory, meaning a non-binding suggestion, or did hte settlor intend to impose an enforceable obligation?
What are precatory words?
Requests, hopes, wishes, desires, would like, etc.
What is the writing requirement?
By statute, NY requires inter vivos trusts to be created by a writing (a deed, declaration, or agreement) that is signed by the settlor and the trustee (unless the settlor is the only trustee AND either: 1) acknowledged before a notary public; or 2) witnessed by 2 witnesses.
What is the res?
The subject matter of the trust. To have a trust, there must be specific, identifiable property in the trust.
What is the delivery requiement?
1) For lifetime trusts, settlor must formallyl transfer legal title to the specific property.
2) In creating a lifetime trust, assets evidenced by a document of title (e.g., real estate, stocks), legal title must be formally transferred to the trustee (whether the trustee is a third party or the settlor himself).
3) For other assets, transfer must be by a written assinment to the trustee.
4) No title transfer requirements for testamentary trusts.
What requirements are there with resspect to beneficiaries?
For private, non-charitable trusts, beneficiaries must be definite and ascertainable.
Is oral evidence permitted to identify trust beneficiaries?
No. They have to be identifiable in the trust.
What is the result where an attempted trust creation fails for unascertainable beneficiaries?
The court will employ a resulting trust and order that the property be distributed to the person intended to receive the residuary estate.
Where beneficiary is "my best friends" is there a valid trust.
No. Too vauge - unascertainable beneficiaries.
Where beneficiary is "X's family" is there a valid trust.
Yes, becasue we can look to the intestacy statutes to see who family is. There's a distinction b/t friends and family and family is OK, but friends is too vague.
Is there a valid trust where to bequest is to T, "to use the income to train spiritualistic mediums"?
Depends on whether the court finds this to be a valid, charitable purpose. These do not need ascertainable beneficiaries. If not, the gift fails.
Who can be a settlor?
Must be over age 18 and have capacity to enter into contracts and transfer title.
Who cannot be a trustee?
By statute, the following persons cannot serve as a testamentary trustee:
1) Infants;
2) Incompetents;
3) Convicted felons;
4) Persons incapable because of drunkenness, dishonesty, want of understanding, or improvidence; and
5) non-resident aliens
UNLESS, the non-resident alien:
1) is related to the decedent (including in-laws; and
2) a NY resident serves as a co-fiduciary.
Do these restrictions apply to lifetimhe trusts?
No.
What if the purported trust does not name anyone as trustee?
The trust will still be valid. A fundamental principle of trust law is that no trust will ever fail for lack of a trustee. If we have clear intent to create a trust, the court will appoint one.
What restrictions and limitations exist on trusts?
1) Lawful purpose;
2) RAP;
3) NY Suspension Rule
What is the lawful purpose restriction?
Trusts must have a lawful purpose. A trust will fail if its enforcement involves commission of a crime or tort, if it calls for destruction of property, or when its terms are against public policy.
What is the result where a condition is unlawful?
It is unenforceable.
What types of conditions are against public policy?
1) Encouraging divorce;
2) Total restraints on a final marriage
What is the result where a condition is the only reason for putting the property in trust, and the condition is void?
The beneficiary takes the property free of the condition and free of the trust.
Is a trust which provides income to a widow until she remarries void as agaisnt public policy?
No. Because the motive is not to encourage divorce; it's to provide for the widow during her widowhood, so this is OK.
Are partial restraints on marriage valid conditions?
Yes.
What is the RAP?
No estate in property shall be valid unless it must vest, if at all, not later than 21 years after one or more lives in being at the creation of the estate and any period of gestation involved.
When does the RAP clock start?
1) For dispositions under wills, at the time of the testator's death.
2) For dispositions in revocable trusts, at the time the power of revocation ceases (usually the settlor's death).
What is the three-step procedure for applying RAP?
1) Step 1: When does RAP clock start to tick?
2) Step 2: Identify the LIBs at the time the clock starts to tick who are connected, directly or indirectly, to the future interest being tested.
Step 3: Test - Will the interest I am testing vest on the death of a LIB or within 21 years thereof?
What are the common RAP Traps that have NY Statutory Saves?
1) The Unborn Widow;
2) The Fertile Octogenarian;
3) Age Contingency > 21
What is the NY rule with respect to the unborn widow problem?
NY, by statute saves a disposition that would otherwise be void because of the unborn widow prolem, by providing that a reference to a spouse presumptively refers to a person in being.
What is the NY rule with respect to the fertile octogenarian problem?
NY, by statute, saves dispositions that would otherwise be void because of the fertil otogenarian rule, by presuming that:
1) Males under the age of 14, and females under the age of 12 or over the age of 55 are infertile;
2) medical testimony about infertility is admissible; and
3) the possibility of adoption is disregarded.
What is the NY rule wiht respect to age contingencies that are greater than 21 years?
NY, by statute, saves dispositions that would otherwise be void because of an age contingency that is greater than 21 years, by reducing the age contingency t o21 if it will save the gift.
What is the NY Suspension Rule?
The Rule Agaisnt Suspension of the Absolute Power of Alienation (RASPA):
Every present or future interest shall be void in its creation if it "suspendsd the absolute power of alienation for a longer period than" LIB + 21 years. The absolute power of alienation is suspended when there are no persons in being by whom an absolute fee or estate in possession can be conveyed or transfererd.
So, what does RASPA require?
All RASPA requires is persons in being who could join in conveying a fee simple within LIB + 21 years. (You have to be able to account for all the pieces of the fee simple title in ascertainable persons within the LIB +21 years.)
How is RASPA tested?
As part of a RAP question.
When is RASPA always violated?
The statutory spendthrift protection provided by NY statute means that RASPA will always be violated whenever there is a life estate in trust in an unborn person (or in an open class that may possibly include unvborn persons).
What is the effect of NY statutes aimed at RAP violations on RASPA problems?
NY statutory law aimed at RAP violations may also save a disposition for RAPSA purposes.
How does the RAP analysis apply to powers of appointment?
There are two issues involved in a RAP analysis of a power of appointment:
1) Is the power itself (i.e., the creation of the power by the donor for the benefit of the donee of the power) valid?; and
2) Is the exercise of the power to create interests (i.e., the donee's determination of who should receive the appointive property) valid?
What is the rule with respect to whether the power itself is valid?
To be valid, a general testamentary power or special power of apointmnet (whether inter vivos or testamentary) must be certain to be exercised, if it is exercised, within a LIB + 21 years.
When will there not be a problem for meeting this requirement?
If the power of appointment is given to someone who is a life in being at the time the power is created, there is no problem.
When will there be a problem for meeting this requirement?
If a general testamentary power or a special power is given to an unborn beneficiary it is void.
When does the RAP clock start to tick for the exercise of power to create interests?
For interests created by the exercise of a general testamentary power or any special power of appointment, the RAP clcok starts to tick from the date of the instrument creating the power, NOT from the date of the power's exercise.
On what is this rule based?
On the common law theory that the donee of the power is merely the donor's agent, filling in the blanks in the donor's disposition of her property.
What is the second look doctrine?
Although the clock starts to tick at the time the power was created, the second look doctrine permits courts to take into account facts that exist when the donee "fills in the blanks" (exercises the power).
What is the effect of the second look doctrine?
This eliminates the need to take into account hypothetical events that could have happened, but in fact did not happen, after the date the RAP clock began to run.
What are the special types of private express trusts?
1) Spendthrift trusts;
2) Lifetime trust funded by will pour over;
3) Life insurance trusts
What is a spendthrift trust?
A spendthrift trust protects a trust beneficiary's interest from creditors by prohibiting voluntary or involuntary transfers of beneficiaries' interest.
What does a spendthrift clause look like?
"No beneficiary of this trust shall have the power to assin his or her income interest, nor shall such interest be reachable by t he beneficiary's creditors by attachment, garnishment, or other legal process."
What is the NY Statutory Spendthrift Rule?
In most states, the settlor must insert a spendthrift clause to create a spendthrift trust. BUT, in NY, by statute, all INCOME interests in trust are given spendthrift protection.
What are the exceptions to the statutory spendthrift rule?
JANET:
1) J - 10% levy available to Judgmenet creditors in all cases;
2) A - Alimony or child support;
3) N - creditor who provides Necessaries;
4) E - Excess income beyond that needed for support and education;
5) T - federal Tax liens.
What is the rule with resepct to Judgment creditors reaching 10% of the income assets?
1) Creditor need not show that other remedies have been exhuasted;
2) This is NOT 10% per creditor; all judgment creditors share the 10%.
What are considered necessaries?
1) Medical care;
2) Food;
3) Rent;
4) Clothing
How is excess income beyond that needed for support and education determined and what is the rule?
1) Needs are based on the beneficiary's station in life and income from other sources.
2) This is a last resort remedy - creditor must show that he has exhausted all other remedies.
Do the exceptions to the statutory spendthrift rule apply where the trust contains an EXPRESS spendthrift clase?
Yes.
Does the NY spendthrift statute extend automatic protection to the remainder interest?
No. Remainder interests in trust property need EXPRESS spendthrift clause for principal protection. But, creditors do have to wait until the principal is distributed.
What is the rule with respect to self-settled spendthrift trusts?
No self-settled spendthrift trusts are allowed. In other words, interests retained by the settlor do NOT get spendthrift protection.
Can the settlor's creditors reach assets that the settlor has transfered irrevocably to the trust?
No, with the only exception being that a creditor can always defeat spendthrift provisions if they show that it was a fraudulent conveyance.
Can the settlor's creditors reach assets that the settlor has transfered via a revocable trust?
Yes. If the settlor can revoke the trust, she is considered the owner for creditor purposes.
What is a pour over will?
A pour over will is one which devises all or a portion of the testator's estate to a lifetime trust.
How does the no incorporation by reference rule apply?
A statutory exception to the "no incorporation by reference" rule of Wills law validates pour over devises in wills so long as the lifetime trust receiving the devise is:
1) in existence before, or
2) executed concurrently with the will.
If the trust receiving the devise is subject to revocation and amendment and is later amended, is the pour over devise still valid?
Yes. But, if the receptacle trust were created by another person, amendments made at the testator's death are disregarded.
What are life insurance trusts?
Trustees of both inter vivos and testamentary trusts can be designated as beneficiaries of life insurance policies. This is a valid, lifetime trust, even though there is no res in the trust until the insured settlor dies and tehh trust is funded with the insurance proceeds.
To what other types of benefits can this type of procedure apply?
To payment of any savings and thrift accounts, and death benefits under empoyee retirement plans.
What is required to qualify as a charitable trust?
1) The trust must be established for a charitable purpose (e.g., health, education, religion, anti-poverty, accomplishment of a government purposes, etc.);
2) The trust must be in favor of a reasonably large class of unidentifiable members of the public at large and CANNOT have ascertainable beneficiaries.
Who can enforce a charitable trust?
1) The donor/settlor;
2) By statute in every state, the attorney general.
What is the cy pres rule?
An equitable rule meaning "as near as possible."
If circumstances have so changed since the execution of the trust instrument suchh that the trust's specific direction is rendered either impractical or it has been accomplished, the court may redirect the benefit in a manner that will most effectively serve the general charitable intent.
Does cy pres apply to outright gifts as well as dispositions in trust?
Yes.
Are charitable trusts subject to RAP?
No. They may be perpetual.
What is the general rule for honorary trusts?
Trust beneficiaries must be either:
1) Unidentifiable members of the public at large (in the case of a charitable trust); or
2) Definite and identifiable (in the case of a private express trust)
What is the rule with respect to trusts benefitting non-humans?
A private express trust cannot benefit non-humans in NY because the trustee would owe no fiduciary duties to anyone with legal standing to sue. This type of trust is valid in several states in the sense that the trustee will be allowed to perform if he chooses to do so. BUT, in NY, honorary trusts are UNENFORCEABLE.
What are the exceptions to this rule?
1) By statute, trusts for the perpetual care and maintenance of cemeteries and bural plots are classified as charitable trusts, and thus are valid notwithstanding the indefiniteness of beneficiaries;
2) By statute, trusts for pets are valid for 21 years.
Who can enforce a trust for a pet?
1) Someone designated in the will; or
2) Someone appointed by the court.
How may a revocable trust be revoked?
A settlor may revoke a recovable trust at any time if the revocation is in writing, signed, and either acknowledged or witnessed by 2 people. The trust can provide other mechanisms of termination, and revocable trusts can also be amended or revoked by the settlor's will.
What notice is requied?
Written notice of the revocation must be delivered to the trustee within a reasonable time.
What is the result of failure to give notice?
Failure to give notice does not affect the validity or effective date of hte revocation.
When is a trust irrevocable?
All NY trusts are irrevocable and unamendable unless hte power to revoke and amend is expressly reserved in the trust instrument.
Can a settlor ever terminate an irrevocable trust?
The settlor can terminate an irrevocable trust if all of the beneficiaries in being consent.
May a guardian for a minor give consent for this purpose?
No. Thus, if any trust beneficiary even with only a contingent interest, is a minor or incompetent, the trust cannot be terminated.
When is a child regarded as a person for purposes of the trust termination statute?
Not until he sees the light of day. (different standard from RAP)
What is the doctrine of worthier title?
In a lifetime conveyance, a grantor cannot create a remainder in his own heirs. Instead, it is a reversion.
What is the result of an attempt to create a remainder in the settlor's heirs?
It is void - it violates the doctrine of worthier title.
Does NY abide by the doctrine of worthier title?
No. NY has abolished theh doctrine of worthier title. Where a remainder is limited to the heirs or distributees of hte creator of an estate, such heirs or distributees take the remainder interest.
What does NY's Trust Termiantion Staute say about beneficiaries required to give consent?
For purposes of the rule authorizing the settlor to terminate a trust with the consent of all beneficiaries, a disposition in favor of heirs, next of kin, etc. of the settlor DOES NOT create a beneficial interest in the trust.
So, if on a NY bar exam question, a lifetime trust purports to create a remainder in the settlor's heirs, and the question is whether the settlor can terminate the trust with consent of all persons beneficially interested in the trust, whose consent is required?
The settlor's heirs do not have a beneficial interest for purposes of the trust termination statute. Thus, the settlor can terminate the trust if all beneficiaris in being are adults and consent to the termination.
What if above the question concerns who takes n the settlor's death?
The settlor's heirs (determined at the settlor's death) take by remainder because the doctrine of worthier title has been abolished in NY.
What is the Claflin doctrine?
The court may terminate a testamentary trust only if:
1) All the beneficiaries consent; and
2) Termination would not be contrary to the purposes of the trust.
What testamentary trusts can be terminated in NY?
In NY, testators can only terminate testimantary trusts that were NOT spendthrift trusts.
What is the equitable deviation doctrine?
Courts will permit deviations if due to circumstances not known to the trust settlor, compliance with the trust would impair or frustrate the trust purpose.
Where the settlor assumes that the income will be sufficient for the beneficiary's support and does not give the trustee the power to invade principal, may the principal ever be invaded if such income in fact proves insufficient?
At common law, the life beneficiary was out of luck.
In NY, the court MAY exercise discretion to allow a principal distribution to the life income beneficiary IF:
1) It's consistent with the primary purpose of the trust; and
2) There's no remainder to charity.
What is the rule of passive or "dry" trusts?
If a named trustee has no powers or active duties to perform, then no trust arises. A trust requires a trustee who owes fiduciary duties. If there are no duties, a passive trust is created which is not a true trust. The outcome is that the beneficiary has full legal title, not just equitable title that beneficiary interests typically have. The beneficiary becomes the owner.
Where you have a passive trust, but a spendthrift clause was included in the instrument purporting to create the trust, what is the result?
There is no spendthrift protection. Creditors can reach the assets b/c to have a spendthrift trust, you have to have a trust.
What is the rule with respect to powers granted to trustees?
Trustee's powers given by the NY Fiduciary Powers Act can be exercised by a trustee (and by an executor or administrator of a decedent's estate) without court order, and without express authorization in a trust or a will. The Fiduciary Powers Act automatically applies to all trusts and estates (except as enlarged or limited by the trust or will).
What is the rule of thumb with respect to the statutory powers that are possessed by trustees?
If the question is "Can the trustee do this?" the answer is "YES, expressly authorized by the Fiduciary Powers Act" UNLESS it involves:
1) Self-dealing; or
2) It's on the "Can't do" list.
What are the most important or unusual powers granted to trustees, executors, and administrators under the Fiduciary Powers Act?
The power (without court order) to:
1) Sell real or personal property at public sale (auction) or private sale, unless the property was specifically devised by will;
2) Mortgage property;
3) *Lease property for up to 10 years (10 year rule is for trustees; executors and administrators may lease for up to three years);
4) Make ordinary repairs;
5) Contest, compromise, and settle claims;
6) Distribute, on behalf of a minor, to a parent or adult who has custody, where the amount distributable does not exceed $10,000;
7) Make distributions on behalf of a minor beneficiary to a custodian for the minor under the NY Uniform Transfers to Minors Act.
What are the major powers denied to trustees?
The most important prohibition on trustees (as well as on executors and administrators) is the ban on self-dealing). Additionally, trustees (as well as executors and administrators), in the absence of either court approval or express authorization in the will or trust instrument CANNOT:
1) *Borrow money;
2) *Continue a business;
3) Make extraordinary repairs or improvements;
4) Abandon, demolish real property;
5) Employ agents, delegate authority;
6) Keep funds uninvested;
7) Pay debts barred by statute of limitations or discharged in bankruptcy;
8) Lend personal funds to the estate or advance funds to a beneficiary.
What duties does the trustee owe?
The trustee owes an undivided duty of loyalty and fiduciary obligation to the trust and its beneficiaries.
What does this mean?
Means that trustee cannot represent the trust and trustee's own interests in the same transaction.
What are the major self-dealing rules?
Bad Boys Like Cheating Proper People:

1) B - trustee cannot Buy or sell trust assets to himself;
2) B - trustee cannot Borrow trust funds;
3) L - trustee cannot Loan funds to the trust, and any interest earned on such a loan must be returned to the trust. Also, a security interest received in connection with such a loan is invalid;
4) C - trustee cannot Commingle trust funds with her own.
5) P - trustee cannot Profit from serving as trustee (except for being compensated), as by taking advantage of confidential information received in his capacity as trustee;
6) P - corporate trustee cannot Purchase its own stock as a trust investment (but it can retain its stock if a part of the estate received by it as trustee - provided it is a permissible investment - must meet the prudent person standard)
What duty does the trustee have with respect to avoiding commingling of funds?
Duty to segregate trust assets from personal assets and duty to earmark trust assets by titling them in teh trustee's name.
What is the result if commingled funds are used to buy an asset?
1) If the asset goes down in value, there is a conclusive presumption that (to the extent available) personal funds were used.
2) If the asset goes up in value, there is a conclusive presumption that (to the extent available) trust funds were used.
Where a trustee borrows money from the trust, what action can the trust beneficiaries bring against the trustee?
They can bring an action for self-dealing.
Can self-dealing rules be waived?
Yes, by the settlor.
To what else do self-dealing rules apply?
Self-dealing rules also apply to loans or sales to a relative or to a business entity of which the trustee is an officer, employee, partner or principal shareholder ("indirect self-dealing")
What is the no further inquiry rule?
If the trustee engages in self-dealing and the beneficiary sues for breach of fiduciary duty, the breach is automatic (good faith or reasonableness is no defense). The ONLY issue in a self-dealing case is the measure of damages.
What are the trustees main duties?
1) Duty of loyoalty and fiduciary obligation;
2) Duty to make the proeprty productive
What is the duty of loyalty and fiduciary obligation?
The trustee has a duty to exercise reasonable care in hte performance of her duties.
What is the duty to make the property productive?
The trustee's power to invest is governed by the Prudent Investor Rule.
What is the Prudent Investor Rule?
The trustee may make investments "as would be acquired by prudent men of discretion and intelligence seeking reasonable income and preservation of their capital.
What is the key to this rule?
Prodence is measured by conduct, when the investment decision is made - NOT by outcome, not by performance, and not by hindsight. Also, look at the whole portfolio, and not just individual investments in isolation.
How are investment returns measured and what is this called?
Investment returns are measured by total returns (including growth and capital gain as well as dividends and income). This is called modern portfolio theory.
What is required with respect to the trustee's investment strategy
The trustee must have established a custom tailored investment strategy for the trust, taking into account such factors as:
1) *The role that each investmnet plays within the overall trust portfolio;
2) *The expected total return from income and KG;
3) Size of the portfolio;
4) Nature and estimated duration of the fiduciary relationship;
5) General economic conditions;
6) The possible effect of inflation or deflation;
7) The expected tax consequences of investment decisions or strategies;
8) Needs for liquidity and distribution requirements;
9) Needs of the beneficiaries;
10) Assets special relationship or value to the purposes of hte trust or a beneficiary;
11) Any differing interests of the income beneficiaries and the remaindermen.
Where do KGs go?
Usually, KGs go to principal BUT under the Uniform Principal and Income Act, the trustee can exercise an adjustment power to adjust total return between income and principal and to allocate KG to income.
What is the starting point?
Trustee distributes "income" items (interest income, rental income, dividends on common stocks, etc.) to tne income beneficiary; and adds KG (part of the proceeds of the sale fo a principal asset) to the corpus of the trust.
What flexibility is there in this assumption?
The KG can be allocated to the income, where appropriate, and distributed to the income beneficiary
What factors are to be considered in exercising the adjustment power?
1) *Intent of the settlor as to respective interests of the beneficiaries;
2) *Any increase or decreatse in value of the trust assets;
3) *Whether the trust gives the trustee a poweer to distribute trust principal;
4) Purpose and expected duration of the trust;
5) The net amount of ordinary income and KG available for allocations;
6) Circumstances of the beneficiaries;
7) The need for liquidity, regularity of income, and preservation and appreciation of capital;
8) Effect of economic conditions and effects of inflation and deflaion; and
9) Anticipated tax consequences of an adjustment.
What remedies are available for breach of trust?
If the trustee breaches any fiduciary duty ("breach of trust") - self-dealing, speculative investment or exercise of a power not given to the trustee, in addition to bringing an action to remove the trustee, the beneficiary has an option to:
1) Ratify the transaction and waive the breach of trust (e.g., if trustee invests in stock that goes up in value);
2) Sue the trustee for any resulting loss
What is the action called where beneficiary sues the trustee for resulting loss?
Surcharge.
What is the remedy where the trustee borrows funds and invests or purchases an asset with the proceeds?
1) If the trustee borrows funds and invests the proceeds, if the value of the purchased property goes up, the beneficiary can "trace" and claim the proceeds for the trust;
2) If the trustee purchases an asset with borrowed funds and the asset goes up in value, the beneficiary can demand that the asset be restored to the trust.
What if the trustee borrows funds, buys a rental property and then sells the property to a third party? What claims can the beneficiaries bring against the third parties?
None because conveyance to a bona fide purchases cuts off equitable title.
When will the purchaser NOT qualify as a bona fide purchaser?
If he knows the trustee was acting improperly.
What if the purchaser was the trustee's relative?
Then the beneficiaries have a claim against him regardless of whether or not he knew of the impropriety. Self dealing rules also apply to loans or sales to a relative.
When does the statute of limitations begin to run on an action agaisnt a fiduciary?
Not until:
1) Trustee repudiates the trust by denying its existence with regard to particular assets;
2) The trust relationship ends;
3) The trustee gives an accounting showing facts on which an action would be based (has to be specific)
When could the trust relationship end?
If the trustee dies or resigns or if the trust ends by its own terms.
What is an exculpatory clause?
It exempts a trustee from liability.
What are the rules with respect to exculpatory clauses?
1) An exculpatory clause that removes liability for ordinary negligence (or a clause that modifies the trustee's duty to file accountings) is not valid in a testamentary trust.
2) An exculpatory clause that removes liability for ordinary negligence (or a clause that modifies the trustee's duty to file accountings) is valid in a lifetime trust, but such clauses will be strictly construed.
What is the trustee's personal liability on Ks?
Trustee is personally liable on contracts entered into on behalf of the trust - unless a provision in the contract relieves him of personal liability
What type of language will not give rise to liability for the trustee?
1) "X, as trustee and not individually"
2) "Y Trust, by X, trustee"
What type of launguage will give rise to liability for the trustee?
"X, trustee of the Y trust"
What is the trustee's liability for torts?
Trustee is personally liable on all torts of itself and its employees
When can the trustee be reimbursed by the estate?
If:
1) Trustee was acting within its powers when the tort was committed, and
2) The trustee was not personally at fault.
What should a prudent trustee do with respect to tort liability?
Immediately obtain liability insurance and charge the cost to the trust.
What is a constructive trust?
A constructive trust is an equitable remedy designed to disgorge unjust enrichment resulting from wrongful conduct. NOT a true trust.
What are the trustee's duties in a constructive trust?
The trustee has no duties except to convey the property to the person who, in equity, should have the property.
What is the standard of proof for establishing a constructive trust?
Proof of facts necessary to establish a constructive trust must be by clear and convincing evidence.
What is the formula for determining whether a constructive trust is available?
Wrongful conduct + Unjust enrichment = Constructive trust
Where an attempt to make an express trust fails because, for instance, it was oral, can a constructive trust be imposed?
Yes, where:
1) fraud in the inducement occurred; or
2) grantee-trustee served in a confidential relationship to the grantor-settlor.
What is a resulting trust?
A resulting trust is a label that courts employ when a trust fails for some reason.
What is a purchase money resulting trust?
A purchase money resulting trust arises when A pays purchase price for lan,d but takes title in B's name. B holds in a purchase money resulting trust (PMRT) for A, meaning that at atny time, A can go to B and say, "give me the property." *A and B must not be related.
Are PMRT's recognized?
In most state, yes, but NY does NOT recognize purchahse money resulting trusts.
Why?
In NY, testimony contradicting a deed is banned or barred. The deed controls.
In NY, what if there is clear and convincing evidence that B expressly or impliedly promised to reconvey the land to A?
The court will impose a constructive trust to prevent unjust enrichment.
What are other trust-like mechanisms?
1) Bnak accounts - joint tenancy with right of survivorship;
2) Totten trusts;
3) Uniform Transfers to Minors Acts (UTMA) Accounts
How can you create a joint account?
The depositor must use the words "as joint tenants with right of survivorship" (JWROS) or payable to either or to the survivor of them.
What is the status of a deposit of funds into a joint account?
A deposit of funds into a joint account is a gift of one half of hte amount deposited.
What is the effect of withdrawal of more than one-half wihtout the other joint tenant's consent?
1) Severs the joint tenancy; and
2) Allows the non-withdrawing depositor to recover their half.
What is a convenience account?
Convenience account is the label given to an account that is titled JWROS but in reality is intended by theh depositor to remain her sole property, with the "joint tenant" merely having the right to act as the agent of the depositor.
What rights does the agent have in this case?
The agent only has the right to withdraw on teh depositor's behalf.
Who has the burden of proof of demonstrating that an account was merely a convenience account?
The person challenging the survivorship right, i.e., arguing it was only a convenience account, has the burden of proof.
What is a Totten trust?
A Totten trust is a bank account titled "[Depositor], in trust for [Beneficiary]" ("ITF" is often used in place of "in trust for"). A Totten trust is NOT a real trust because the depositor (the "trustee") continues to have all rights over the account.
When is a Totten trust partially revoked?
The Totten trust is partially revoked when the depositor makes withdrawals and the beneficiary succeeds only to the amounts on deposit at the depositor's death.
Can the beneficiary make withdrawals?
Not during the depositor's lifetime.
What if hte beneficiary survives the depositor?
The amount on deposit belongs to him (subject to the claims of depositor's creditors and subject to the surviving spouse's elective share).
What if the beneficiary predeceases the depositor?
The Totten trust is automatically revoked. It does not pass through the deceased beneficiary's estate. The funds are the depositors - free and clear.
How can one make a lifetime gift of a Totten trust account?
Delivering the account passbook does NOT constitute a gift of the Totten Trust account. To make a gift, the depositor must withdraw the funds and turn them over to the beneficiary.
How can Totten trust beneficiaries be changed?
Account beneficaires can only be changed by a written, signed, and acknowledged before a notary instrument that:
1) names the bank, names the current beneficiary, and names the new beneficiary; and
2) delivers that written instrument to the bank.
How can a Totten Trust account be revoked?
By statute, a Totten Trust account can be revoked by Will, and the funds on deposit can be bequeathed to another person.
What is required to revoke a Totten Trust account by Will?
The rules are very specific. The Will must make express reference to the account, naming the institution and the beneficiary of the account.
What are Uniform Transfers to Minors Acts (UTMA) Accounts?
UTMA accounts are a convenient means of making gifts to minors that avoid court appointed guardians (or the need for creating a trust), and that qualify for the $11,000 per donee annual exclusion under teh federal (and NY) gift tax.
How is a UTMA gift made?
By transferring property to (or taking title in the name of), an adult, as "custodian for [minor child] under the New York Uniform Transfers to Minors Act."
When does a UTMA custodianship terminate?
When the donee attains age 21 unless the gift is made in the following form: "A, custodian for B until age 18."
Is a UTMA account a trust?
No. Althoughg the custodian is a fiduciary, a custodianship is NOT a trust because the custodian does NOT hold legal title to the custodial property. Legal title is in the minor donee, subject to the custodian's statutory powers.
What are the custodian's statutory powers?
They include:
1)the power to collect, manage, invest, the property, and
2) to pay to or on behalf of the minor within discretion, and
3) to pay the balance when the minor turns 21.
What is the result where a beneficiary of an estate or trust is a minor?
The UTMA statute authorizes distribution by the executor or trustee to a UTMA custodianship on the minor's behalf to avoid a court guardianship.
What are the rules wiht respect to when such a custodianship terminates and what distributions can be made?
1) If the will or trust expressly authorizes such distributions, custodianships established by a fiduciary terminate at age 21, and there is no dollar limit on the amount that can be distributed.
2) If there is no such authorization, custodianships established by a fiducairy terminate at age 18, and court approval is requied for distributions over $50,000.
What if the donor is also custodian?
The amount in the account on the donor's death will be included in the donor's estate for federal estate tax purposes. Beacuse the UTMA authorizes custodians to pay to or on behalf of the donee so much or all of the property as is deemed advisable for the donee's benefit, that discretionary power is considered by the IRS as a power to alter or amend, nad also a power to terminate.