South Carolina Bar Exam - Trusts And Estates

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2 kinds of trusts

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(1) Lifetime/Intervivos

(2) Testamentary (set up in settlor's will)

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Requirements of a Trust

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1. SETTLOR (creator) who makes a
2. DELIVERY of legal title to
3. PROPERTY (the trust "res") to
4. one or more TRUSTEE(S) who holds legal title for the benefit of
5. one or more BENEFICIARY/BENEFICIARIES with
6. INTENT to create a trust for
7. a LAWFUL PURPOSE.
8. Must be IN WRITING (Statute of Frauds) and
9. SIGNED by the settlor.

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Requirements for Settlor

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1. Over 18
2. Capacity to hold and deal with property
3. Of sound mind

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Delivery of Trust Property

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Titled assets must be formally transferred to the trust. The exception if for a testamentary trust. In a testamentary trust, you do not have to transfer over property before you die.

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Requirements of Trust Property

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1. Must be presently owned by the Settlor, not a mere expectancy of ownership. However, legal future interests in real property are NOT considered mere expectancies.

2. Must be identified property, not subject to future determination

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Who can be a Trustee?

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1. In a Lifetime Trust, anyone, bc no ct involvement

2. In a Testamentary Trust:
a. Over 18
b. Capacity to hold and deal with property
c. of sound mind
d. of good moral character

3. Banks and trust companies have general authority to serve as trustees. Business corporations can act as trustees if the trust purposes are germane to the business.

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Effect of failure to name trustee

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Trust does not fail for reasons of equity/fairness. The court will appoint one.

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Who can be a Beneficiary?

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Must be

1. Definite
2. Ascertainable
3. Within the Rule of Perpetuities

If the beneficiary is ambiguous, the trustee holds a "resulting trust" (trust implied by law) for the residuary beneficiary (other rightful beneficiaries or the settlor's estate). NOTE: "Family" and "Kin" are NOT considered ambiguous terms!

If beneficiary dies before settlor, beneficiary's estate will inherit.

Divorce severs any beneficiary interest of beneficiary's ex-spouse.

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Necessary Intent

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1. Settlor must intend to create an enforceable obligation. Precatory (non-binding) language is not enough (cannot give trustee option to be obey settlor's wishes).

2. Trustee must be given duties to perform. If not, it is a passive trust which is no trust at all (title will go to the beneficiary directly instead of the trust).

3. Use of words "trust" or "trustee" are not dispositive - look at entire language and facts to determine intent.

4. Must have intent to split legal title and equitable title. Trustee holds the legal title for the benefit of the beneficiary (who has equitable title). If trust gives legal title and equitable title to the same person, it is not valid. Thus one person cannot be a sole trustee and a sole beneficiary.

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Lawful Purpose of Trust

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Cannot:
1. call for commission of a crime
2. call for destruction of property
3. have a condition against public policy (restricting marriage, promoting divorce, promoting child neglect, promoting change of religion)

EXCEPTION: if a purpose can be found that is NOT offensive to public policy, the trust is valid (income to spouse until they remarry; marriage restrictions to members of certain religious or ethnic groups)

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General Types of Trusts

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1. Express Trusts - Created in express terms by transferring legal title to a trustee.

2. Implied Trusts - Implied by the law based on the conduct of the parties. Resulting Trusts are created when people have the intent to create a trust but fail in the execution. It is created to effectuate an intention. Constructive Trusts are created when someone gets legal title by some fraud or wrongdoing and the court imposes a trust on the property to benefit whoever should be enjoying it. It is created to prevent unjust enrichment. Sole duty of the trustee is to turn over property plus any interest to rightful person. No writing is necessary for implied trusts because they are created by the law.

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Revocable Lifetime Trusts

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Requires at least one beneficiary who is not the Settlor

Settlor can be a trustee, income beneficiary for life, a beneficiary of principal, and/or retain the power to terminate or amend the trust.

Beneficial for managing assets efficiently with a professional trustee, planning for possible incapacity by avoiding guardianship, and avoiding probate.

Does not help you avoid taxes. If Settlor has an income interest in a trust or can revoke a trust, all trust assets are considered part of his estate for federal tax purposes.

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Pour-Over Provisions

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Settlor "pours over" all the assets from his estate into an existing trust. People use this method to avoid formalities and because trusts can be changed more easily than wills.

Items MUST be in existence before settlor dies and the items can go to any existing trust (doesn't have to be the one created by settlor).

Remember trust does not have to have any pre-existing property (exception to the general rule).

This is considered an inter vivos trust, NOT a testamentary trust.

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Life Insurance Proceeds payable to a Trust

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Created by:

1. Creating an unfunded revocable insurance trust and naming the trustee as policy beneficiary, OR

2. Creating a testamentary trust and naming the "trustee named in my will" as policy beneficiary

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Totten Trust

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Bank account in settlor's name "as trustee for" (ITF) a named beneficiary.

The settlor makes deposits and withdrawals as they wish during lifetime. The beneficiary has no beneficial interest during settlor's lifetime, but gets the account when settlor dies.

A settlor's creditors can reach into Totten Trust and take funds.

Settlor can also just open a joint bank account with beneficiary (automatic right of survivorship unless you prove otherwise by clear and convincing evidence), but then both have equal access at all times.

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Revoking a Totten Trust

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1. Withdraw all money from the account,
2. Express revocation during depositor's lifetime (any notarized writing that names the bank and the beneficiary and is delivered to the bank),
3. Revocation in a will (notarized will that states intention, names bank and beneficiary, and is delivered to the bank), OR
4. Death of beneficiary

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Uniform Transfers to Minors Act (UTMA)

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This is NOT a trust. You put the property under the control of a custodian (they don't have legal title), specify you are doing so under the UTMA, and the custodian holds and manages the property as a prudent person would for the minor's benefit until the minor turns 21 (at which time they are given the property).

People use this to avoid getting a guardian, avoid having to create a trust, or to avoid federal gift tax.

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Charitable Trusts

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These are trusts created for an uncertain class of people or for the public in general (indefinite, reasonably large group of beneficiaries). Must be for a charitable purpose. If purpose terminates, court can reform trust under doctrine of cy pres (ex. trust for cancer cure research and then cancer is cured) or terminate trust entirely.

The Attorney General has a duty to represent beneficiaries to enforce the terms of the trust, and thus has standing to sue if necessary.

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Honorary Trusts

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These are trusts where no human being is the beneficiary of the trust.

1. Pet Trusts - For the care of one or more animals that were alive during settlor's lifetime. Court can appoint someone to enforce. These are specifically forbidden in South Carolina.

2. Cemetery Trusts - For the perpetual care and maintenance of cemeteries and burial plots. These are also charitable trusts.

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Transferability of Beneficiary Interest

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Beneficiary may transfer or mortgage his interest in the trust unless:
1. Trust includes a valid restraint on transfer (spendthrift clause),
2. Interest is inherently incapable of being transferred (ex. trust that provides for "whatever is necessary" for a beneficiary's support)

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Spendthrift Clauses

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These are provisions that state that if a prospective beneficiary pledges to turn over any part of proceeds from the trust to a 3rd party, the trustee should not honor the pledge. (Ex. A tells developer that she will pay him $50k she expects to inherit from her aunt's trust and signs over an assignment for $50k. Aunt dies and developer presents assignment and wants the money. Trustee must tell developer to pound sand, but may also give the money to A directly.)

Purpose is to keep creditors away from trust property and protect other beneficiaries. Creditor can access the money if trust directly pays the beneficiary. Govt can dip into trust for child support, alimony, or federal tax liens, except South Carolina bars dipping into trust for alimony.

These clauses must be expressly stated.

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When can a trust be modified?

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General rule is that when the objectives of the trust would be defeated or substantially impaired if not modified, trust can be modified. In such cases, the purpose of the trust is controlling over any specific directions in it.

Under SC Trust Code, a private trust (trusts other than charitable trusts) can be modified with court approval if settlor and all beneficiaries consent (material purpose of the trust is irrelevant). If all do not consent, court can modify if it would further the trust's purpose.

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Can the court authorize invasion of the trust principal?

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Yes, if the trust income is not sufficient to carry out the trust's purpose.

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Trust Revocation by Settlor

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General rule under Uniform Trust Code is that trusts created as of January 1, 2006 are revocable and amendable unless the power to revoke and amend is EXPRESSLY DENIED in the trust instrument. For trusts created before that date, trust is only revocable if settlor EXPRESSLY RESERVES the right to do so.

If trust is an irrevocable trust, settlor must get the consent of all beneficiaries unless the trust of property would have gone to heirs or next of kin. If a beneficiary is a minor, unborn, or incompetent, court must appoint a Guardian Ad Litem.

Person with Power of Atty for settlor can also revoke trust.

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Method of Trust Revocation

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1. If trust specifies how it is to be revoked, must do that.

2. If trust doesn't specify, settlor must (a) expressly revoke in a will with clear and convincing evidence of intent, or (b) deliver a written statement to the trustee that clearly and convincingly sets forth intent to revoke.

Note that before South Carolina Trust Code created, any act evidencing an intent to revoke was sufficient if the trust was silent on the method.

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Trust Termination

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If not earlier revoked, trust terminates at the end of the period created by the trust or when something happens that effects a termination by the terms of the trust (ex. trust to fund research for cancer cure and cancer is now cured).

South Carolina Trust Code says a private trust (trusts other than charitable trusts) can be terminated early with court approval if settlor and all beneficiaries consent. Court can terminate a trust even if all do not consent if it will further the trust's purposes.

Trust also terminates if one person has legal and equitable title (merger).

Trustee can terminate a trust with less than $100k without court approval if value of the trust does not justify the cost of its administration.

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Trustee's Powers

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Can do almost anything necessary and lawful to manage trust, including selling, leasing, mortgaging, making repairs, contesting claims, settling claims, and winding up a trust after termination. Can also delegate.

Trustee CANNOT engage in self-dealing (ex. comingling trust funds with personal funds, buy/sell trust assets to himself or his relatives, borrow trust funds, lend money to trust that is not absolutely necessary, or profit from serving as a trustee other than receiving appropriate fees/compensation)

Trusted can resign with 30 days' notice to settlor, beneficiaries, and any other co-trustees or with court approval.

Duty of reasonable care, duty of loyalty, fiduciary duty, duty to keep records, and duty to try to make profit for trust.

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Remedies if Trustee comingles trust funds with personal funds

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1. If the value of co-mingled funds goes down, you can make up the shortfall from trustee's personal assets

2. If the value of co-mingled funds goes up, you can presume the overage is the result of trust funds appreciating in value

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Remedies for Beneficiaries

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Beneficiary can:

1. Sue to remove Trustee
2. Ratify the transaction and waive the breach
3. Sue for any losses (a "surcharge" is an action to recover trust losses)
4. Get an injunction that trustee not breach trust
5. Get an accounting
6. Deny trustee's compensation
7. Any other appropriate relief

Beneficiary claims are barred 1 year after receiving adequate accounting or 3 years after (a) death, removal, or resignation of trustee; (b) termination of beneficiary's interest, or termination of the trust.

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Actions against a third-party when trustee engages in self-dealing

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Cannot sue third party unless the third party knew they were dealing with a trustee and knew the trustee was self-dealing.

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Personal Liability of Trustee in contracts involving the trust

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1. If Trustee signed "on behalf" of trust, then NO personal liability
2. If Trustee signed personally and merely mentioned trust, then personal liability

Trustee can be reimbursed from the trust for and personal contract liability if making the contract was within the power of the trustee AND trustee was acting in the proper administration of the trust

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Personal Liability of Trustee in Tort

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Personally liable for all torts by Trustee or his employees

Can get around this by buying liability insurance and charging premium to the trust.

Trustee can be reimbursed from trust for tort liability if he was acting within his powers as a trustee and not personally at fault.

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Uniform Prudent Investor Act

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Trustee has duty to invest/manage trust assets as a prudent investor would considering the purpose, terms, and distribution requirements of the trust. However, if trust specifies that certain kinds of investments must be made, trustee must carry that out!

In making investments, Trustee must consider:
1. the role each investment plays within the overall trust portfolio
2. the expected total return from income and capital gain.

NOTE: can balance safe/conservative investments with risky ones - looking at overall balance

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Mandatory v. Discretionary Payments

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1. Mandatory trusts are ones that require a trustee to pay described amounts to a particular beneficiary at set intervals. If the trustee doesn't make those payments, beneficiary can sue to enforce.

2. Discretionary trusts are ones that give the trustee discretion to determine how much income or principal will be paid to a beneficiary. Cannot sue to compel.

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Creditors' reach on Settlor

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1. If trust is revocable, creditors can get their hands on any trust assets during the settlor's life. Creditor can also reach into the trust after settlor's death to the extent the settlor's estate is not sufficient to satisfy the payment. HOWEVER, if settlor is also a beneficiary, follow the beneficiary creditors' rule instead (can't reach trust assets but can get anything paid directly to beneficiary).

2. If trust is irrevocable, creditors cannot reach trust assets. General rule is that if settlor can't reach the assets, neither can creditors.

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Creditors' reach on Trustee

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A trustee's creditors CANNOT reach trust assets to settle trustee's debts.

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Method for Computing Principal and Income

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Uniform Act applies unless trust provides a method for computing.

Interest received, rent, and cash dividends are income.

Insurance proceeds, stock splits, and stock dividends are principal.

Other corporate distributions are generally income.

Timber proceeds are split between principal and income under statutory formula.

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Jurisdiction and Choice of Law

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Probate court has exclusive jurisdiction over internal trust matters.

Probate court and circuit court have concurrent jurisdiction over external trust matters (ex. creditors' claims).

Settlor may select applicable state law that will govern the trust.