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222 Cards in this Set
- Front
- Back
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existence of property to create a trust
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must be existing, identifiable property
grantor must have present ownership trust cannot be created with property that has ceased to exist |
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trust created on future property
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will only be valid if the conditions necessary for a contract are met (i.e. consideration is given)
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when does a trust come into existence
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a trust does not exist until the property is transferred to the trustee
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commingled property
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Trustee must keep the property must be separate – can’t be commingled with other property and/or funds
If the property is not separate, then a debtor-creditor relationship exists AND NOT a trust |
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what type of property can be part of a trust
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Any kind of property capable of being transferred can be the subject matter of a trust
Life insurance, land, promissory notes, stock, mortgages, contingent interests in property, contract earnings, debt |
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debt as trust property
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Debts owed to grantor can also be trust property
1. A is in debt to B, THEN B can transfer debt to X to hold in trust for B’s kids 2. A is in debt to B, THEN A CANNOT hold debt in trust or B’s kids because A is both the debtor and the enforcer of the debt as trustee (can’t be both) |
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trust status without a trustee
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A trust will not fail for want of a trustee (not having trustee won’t invalidate a trust)
Court will appoint a trustee if not prohibited by the terms of the trust |
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assent of the trustee requirement
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The assent of the trustee is not necessary to validate a trust
If there is no assent by the appointed trustee, the court may determine that the grantor was the trustee until they died, and then it becomes the executor of the estate |
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who can be a trustee
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Trustee can be any person/legal entity capable of holding title to & administering property
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factors that may invalidate trustee
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1. Infancy
2. Mental incapacity 3. Physical incapacity 4. Convicted of moral crimes (fraud, etc) 5. Don’t meet trust instrument restrictions |
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how is title held with multiple trustees
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Co-trustees hold legal title as joint tenants w/rights to survivorship
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multiple beneficiaries title
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Co-beneficiaries hold equitable title as tenancy in common
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multiple trustees decisions requirements
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Decisions from a majority of the trustees is normally enough unless the trust specifies otherwise
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doctrine of merger
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i. There’s NO TRUST if the Trustee is also the SOLE beneficiary
When one person holds both the legal & equitable titles, then the titles merge and the person owns the property in fee simple absolute (no trust) a. There must be a separation of legal title & equitable title in a trust b. Trustee must owe fiduciary duties- enforceable obligations to beneficiaries (cannot owe a fiduciary duty to oneself) |
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situations merger does not apply when the trustee is also the beneficiary
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1. Trust has multiple trustees who are also the beneficiaries (they each owe fiduciary duties to each other)
OR 2. Trustee is a beneficiary along with other beneficiaries |
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trustee acceptance
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Trustee can ACCEPT or REJECT a trustee appointment (for cause or arbitrarily)
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method of acceptance or rejection by the trustee
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1. Expressly written acceptance/rejection
2. Implied acceptance/rejection by Taking/not taking title to trust property Taking or failing to take steps to administer & manage the trust 3. Statutory requirements Following or not following the statutory requirements may imply acceptance or rejection |
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effective date of trustee acceptance
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Acceptance relates back to date trust created
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trustee resignation
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Once a trustee has accepted, they can RESIGN ONLY if
1. The court gives permission 2. The terms of the trust allows resignation 3. All beneficiaries consent (if they have capacity to give consent) AND Releasing Trustee WILL NOT BE A DETRIMENT to the trust |
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trustee cannot resign if
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1. There’s no other suitable trustee available
2. Trustee has breached one of their duties a. Failed to account to the beneficiaries – can’t leave until they’ve rectified the breach, given an accounting |
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reinstatement of resigned trustee
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Once a trustee disclaims/resigns, they CANNOT come back by revoking the disclaimer/resignation
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trustee removal
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Removal of a trustee is controlled by statute
1. Trustee must have BREACHED a fiduciary duty OR 2. Refused to execute the terms of the Trust Beneficiaries can’t remove a trustee just because they dislike the trustee or are not happy with the way they are running the trust |
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when should removal of a trustee occur
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Removal should only occur when required to protect the trust property
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Uniform Gifts to Minors Act
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a. Title transferred to minor WITH power of title to a custodian who has fiduciary duties to the minor
b. Custodian holds power of title & manages property as fiduciary until the minor reaches 21 yrs old Essentially this is a statutory quasi-trust a. custodian manages and distributes property to minor in custodian’s judgment. Title to the property is in the minor, but power of the property is in the custodian. THEREFORE, the custodian is not a trustee because they don’t hold title. |
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Uniform Custodial Trust Act
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a. Used when a grantor is worried that in the future they will become incapacitated
b. Legal Title is transferred to the Custodian as trustee i. Grantor must have capacity BEFORE they establish the Custodial Trust c. Custodian has Power over property ONLY WHEN grantor becomes incapacitated i. Until incapacitated, grantor retains power over property |
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Durable Powers of Attorney
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1. Adult (principle) designates a person to act as their agent
a. DPA endures even if the principle becomes incapacity b. DPA does not endure past the principle’s death |
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lack of a beneficiary
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A private trust will fail for lack of beneficiaries to enforce the trust
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individual to enforce a charitable trust
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attorney general of the state the trust is created in
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beneficiary's interest
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Beneficiary must have an immediate equitable interest and thus a legally enforceable right to the trust
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incidental beneficiaries
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Even though a party may benefit from a trust, they must be specified as a trust beneficiary in order to enforce the trust
Must be an actual beneficiary to the trust in order to compel a trustee to take action and exercise discretion |
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beneficiary notice
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a valid trust can be established without the beneficiary being aware that they are the beneficiary of a trust
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beneficiary acceptance
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acceptance is presumed by the court unless the burden on the beneficiary is great
If the burden is great then the court will require express acceptance |
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effective time of beneficiary acceptance/disclaimer
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relates back to the date trust was created
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disclaiming a beneficiary interest
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Individual can fully or partially disclaim their beneficiary interest (it is not all or nothing)
a. Only if they have not received any benefits of the trust b. By renouncing trust benefits or clear/unequivocal rejection |
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distribution of trust property when the beneficiary has disclaimed
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Trust property will be distributed as though disclaiment never existed
Disclaiment can’t disclaim and assign their interest to someone else |
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rescinding an acceptance/disclaimer
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Beneficiary can’t rescind an acceptance or a disclaimer that they’ve made
Some court will allow if no one has relied on beneficiary’s original decision |
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private trust beneficiary requirements
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i. Must have identifiable beneficiary that is ascertainable at trust’s creation & within the rule of perpetuities
ii. Beneficiary must exist at the time the trust is created iii. Beneficiaries must be identifiable (definite class) by the time their interests are to vest/upon settlor’s death iv. Grantor’s intent for the beneficiary must be definite v. Must be able to hold equitable title (same requirements for holding legal title) |
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definite class v. indefinite class of beneficiaries
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1. Definite class – relatives, nieces, nephews, cousins, children
2. Indefinite class – friends, widow, heirs (need to exist WHEN trust was created – they don’t exist until settlor has died) |
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lack definite intent for the beneficiary
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1. If the instruction is too vague, then a trust is not created
2. Benevolence is held to mean charitable- charitable trust is created |
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charitable trust requirements
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i. Beneficiaries can be the general public or a specified class with an indefinite number of people
ii. Must have specific charitable Purpose (education, public welfare, medical care, defined by statute, etc.) iii. Attorney General enforces the trust benefits against trustee |
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honorary trust
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Trust with no charitable purpose and no identifiable beneficiaries- is not valid
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reasons for a valid honorary trust under common law
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1. Creating monuments
2. Saying “masses” in testator’s behalf 3. Caring for a specific animal |
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beneficiary's interest in the trust
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Equitable interest in the trust property- corpus of the trust (in rem – real or personal property)
AND Enforceable interest against the Trustee (in personam) |
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notice required when a beneficiary transfers their interest
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notice to the trustee is not required (can't transfer to A, then later transfer to B giving notice to the trustee about the B transfer. Transfer to A is valid, transfer to B is invalid)
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ii. A (1st assignee) will always get beneficial interest before B (2nd assignee) UNLESS
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B inquired about the interests to A, and A led B to believe A didn’t own the property
OR B inquired about the interests to the Trustee and the trustee had lied |
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Creditors can access beneficiary’s interest in trust property IF
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Legal judgment has been rendered against the beneficiary
AND All legal avenues of collection have been exhausted (equity allows taking from trust) Unless it is a spendthrift trust |
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validity of trust springing into existence when the property does come into existence
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Trust will not spring into existence
Trust may arise after property exists if the grantor reaffirms his intention to create a trust. |
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what are the beneficiary's rights
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the beneficiary has the right to enforce fiduciary obligations the trustee has in regards to the trust property
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trust ability to spring into existence when the property comes into existence
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Trust will not spring into existence when the property does come into existence.
Trust may arise after property exists if the grantor reaffirms his intention to create a trust. |
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result when the recipient of the funds/property is entitled to use them as his own
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commingling- a debtor/creditor relationship arises- not a trust
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characterization of money deposited in a bank
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Money deposited in bank is presumed to create debtor-creditor relationship
To constitute a deposit in trust,there must be an agreement, express or implied |
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bank commingling requirement
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Banks are not required to keep separate accounts for each trust, the property can be comingled because of the heavy regulations that banks are already under
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reason why lack of trustee will not invalidate a trust
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“the fact that the grantor had two purposes in mind, one of which must fail (chosen trustee), is no reason why the other should fail (creation of trust) when it is expressed with sufficient definiteness and can be legally carried out.”
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when court will not appoint a trustee for a trust lacking a trustee
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when the trust provisions specifically prohibit it
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what do the words relative mean in a trust instrument
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Unless the will discloses a plain purpose to the contrary, the words “relatives” or “relations” are commonly construed to mean those who would take under statutes of distribution or descent
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vazar
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to leak
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who is the trustee when there is not trustee until the court appoints another trustee
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the grantor is the trustee
if the grantor is dead then the executor of the estate is the trustee |
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trustee standard of care
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prudent investor
Traditionally: the trustee has a duty to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property. Trend: the trustee has a duty to exercise such care and skill as a man of ordinary prudence would exercise in dealing with the property of another |
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Trustee that possess special skills or expertise
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Will be held to that higher skill/care standard
They must use their higher level of skill or they will be liable |
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professional vs. non-professional trustee
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Professional trustees will be held to a higher standard of care than a nonprofessional trustee
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trustees advertisement of higher skills
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If Trustee advertises that they have high skills, even if they actually lack them, they will be held to that higher skill level they professed to have
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time of determining whether an investment was prudent
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The prudence of the trustee is tested at the time of the investment decision, not from the vantage point of hindsight
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the test of investment prudence
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The test of prudence is one of conduct (at time the decision is made) rather than performance of the investment
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new trustee liability for former trustee investments
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When a new trustee is appointed they must see to it that the former trustees are held to account for the exercise of their fiduciary duties during the time the former trustees were trustees
If they don’t the new trustee will be held liable for any breach of the old trustee |
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trustee duty regarding improper investments that it receives from the grantor or because of change in law
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If the settlor conveys property to the trustee that is not a proper trust investment, or if an investment later becomes improper through changes in the law or in economic conditions, the trustee is under an immediate duty to dispose of the property
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result of absolute discretion for a trustee
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Absolute discretion opens up the type of investments the trustee can make, but the prudent investor standard for each individual investment still exists
Trustee can’t act arbitrarily, in bad faith, or with reckless disregard for the beneficiaries |
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conscience investing duties of the trustee
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Trustees have ability to evaluate the purpose of the trust, and invest in certain investments that coincide with trust ideals or social concerns
Ex) Cancer fund not investing in Phillip Morris tobacco companies Must still be able to meet the primary duties as trustee to preserve trust principal and maintain a steady income |
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trustee administrative fiduciary duties
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Trustee has fiduciary duty to act according to terms of the trust AND in the best interest of the beneficiaries
Can’t exercise an express/implied power that violates this duty to trust/beneficiaries |
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sources of trustee power
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Express – Trustee only has administrative, dispositive, and discretionary powers expressed by the trust, statute, or court
Implied – When trust is silent, the trustee has implied power to do what’s necessary to accomplish trusts purpose |
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implied power for stocks that are trust corpus
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implied power to buy and sell
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implied power for real estate that is trust corpus
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implied power to lease if it is necessary to accomplish the purpose of the trust
Lease can run beyond terms of trusts if necessary to make money/accomplish trust purpose Lease time period can’t be longer than the trust’s duration w/o court order/approval |
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passing discretionary powers to successive trustees
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Discretionary powers can pass from one trustee to another UNLESS the trust makes the power personal to a specific trustee
Discretionary powers granted to the trustee are generally not personal and successive trustees usually obtain the discretionary power |
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court's ability to force a trustee to use discretionary powers
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court can't force the trustee to use discretionary powers
The trustee must exercise honest, reasonable, and good faith discretion (no ABSOLUTE discretion)- court can step in if not using good faith discretion |
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using a discretionary power that defeats the purpose of the trust
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Trustee cannot exercise discretionary power in a manner that defeats the purpose of the trust- bad faith
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notification to beneficiaries of trust transactions
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Trustee normally doesn’t have duty to notify beneficiaries of trust transactions except in standard accounting procedures (must give regular accountings)
The trustee must inform beneficiaries of all material facts in connection with a nonroutine transaction that significantly affects the trust estate and the interest of the beneficiaries prior to the transaction taking place. When trustee sells all of the trust assets, trustee IS OBLIGATED to inform beneficiaries |
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courts ability to change terms of the trust
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Normally courts don’t have power to change trust restrictions
Court has “inherent power” to modify terms of trust when necessary to accomplish the fundamental purposes of the trust. Do what the grantor would have done in the unforeseen circumstances to safeguard the beneficiaries |
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mistakes in payments to a trust beneficiary
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Trustees are under an absolute and unqualified duty to make payments and distributions to the correct beneficiary, rather than merely to use good faith.
If a trustee pays trust income or principal to the wrong person, he will be required to make good the amount from his own property (regardless of fraud, confusion of trust terms, etc.) |
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restrictions on court modifying the trust
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1. Exigency must be one not anticipated by the testator
2. No other beneficiaries interest can be impacted by the distribution- court will not save one beneficiary if it will hurt or subtract from the rights of another beneficiary- easy if there is only one beneficiary If all of the beneficiaries are in existence and agree to modify the trust along with the grantor, the court will usually modify the trust. |
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payment form to the beneficiary
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Obligated to make the payment in the form directed by the trust document (cash/kind)
Any deviation from instructions would have to be done under the shelter of a court order |
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powers of courts to modify trusts
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Administrative deviation
Dispositive deviation Cy pres |
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courts ability to use cy pres to make valid an intended charitable gift that fails for charitable purposes
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When a donor thinks a gift she is making is for a charitable purposes, but the court construes it to be non-charitable, the cy pres power does NOT enable the court to change the gift in such a way as to make it charitable.
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order the court will use its modifying powers
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1. administrative deviation
2. cy pres/ dispositive deviation It is less disruptive to what the grantor had in mind |
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what conditions must be met in order to apply the cy pres powers
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(a) The gift must be to a charitable organization for a charitable purpose.
(b) It must be impossible, impractical or illegal to carry out the donor’s stated charitable purpose. (c) It must appear that the donor had a more general charitable intent. |
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is inefficient or ineffective sufficient to use cy pres power
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no, it must be impossible, impractical, or illegal
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can cy pres power be used when the trustee's own deliberate act has prevented the fulfillment of the trust purpose
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no
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what happens to trust when there is not general charitable intent by the trustee and the trust becomes impossible, impractical, or illegal
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if the gift vests in another beneficiary subject to a divestment that fails, then residue to the first beneficiary
if the property did not vest in a beneficary, then there is a resulting trust |
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is a gift to a charitable entity sufficient to make a general charitable intent
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no, the grantor must specify a general chartable intent
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why will the court choose administrative deviation over dispositive deviation or cy pres
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It is presumed grantor is more concerned with who gets the property rather than how the property is managed and maintained
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cy pres power
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Cy pres only applies to charitable trusts, not private trusts.
Cy pres allows the court to change the dispositive terms of the trust. |
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requirements for administrative deviation
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1. compliance is impossible or illegal or impracticable
2. circumstances not known to the grantor and not anticipated by him 3. compliance would defeat or substantially impair the purposes of the trust |
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result of revoking a trust under undue influence
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Undue influence is not applicable when revoking a trust because all of the trust property is returned to the settlor—it is not given to someone else
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situations the power of revocation is voidable
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The exercise of a power of revocation is voidable only for fraud or mental incapacity.
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situations an irrevocable will can be revoked
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fraud
undue influence mistake |
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what happens if the power of revocation was omitted by mistake
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the instrument may be reformed so as to include such a power, so long as the evidence is clear, precise, and convincing
If a power of revocation would defeat the trust’s fundamental purpose, the court will not presume that the omission of that power was a mistake |
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result of revoking a trust under undue influence
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Undue influence is not applicable when revoking a trust because all of the trust property is returned to the settlor—it is not given to someone else
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situations the power of revocation is voidable
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The exercise of a power of revocation is voidable only for fraud or mental incapacity.
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situations an irrevocable will can be revoked
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fraud
undue influence mistake |
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what happens if the power of revocation was omitted by mistake
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the instrument may be reformed so as to include such a power, so long as the evidence is clear, precise, and convincing
If a power of revocation would defeat the trust’s fundamental purpose, the court will not presume that the omission of that power was a mistake |
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Powers of a grantor who has reserved the power to revoke, but not to amend
and vice versa |
the power or revocation includes the power to amend and vice versa
a power of amendment includes the power of revocation The power to amend ordinarily includes power to revoke UNLESS the trust instrument restricts power to amend. The power to revoke ALWAYS includes power to amend. |
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revocability of a trust instrument that reserves the power to amend, but expressly makes the trust irrevocable
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you cannot revoke the trust—the trust cannot be amended to give a power of revocation
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default revocability of a trust
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Irrevocable unless the trust reserves that it is revocable
UTC presumption that trust is revocable and amendable unless the trust itself says it is irrevocable |
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effect of revocation or ammendment on the trust
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Revocation = actual destruction of the trust – return of the property to the settler
Amendment = everything else/any other change |
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i) Even though a trust’s prescribed duration has not passed, the beneficiaries can require a court to decree the termination of a trust where:
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(1) all beneficiaries consent,
(2) no beneficiary is under an incapacity, and (3) the continuance of the trust is not necessary to carry out a material purpose of the trust if the grantor (must be alive) and all the beneficiaries consent then can revoke the trust even though there is a still a material purpose to be carried out if there was a material purpose not yet accomplished AND the settler is dead then you cannot terminate trust |
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what constitutes beneficiary consent
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actual consent
silence or any other position is not consent |
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beneficiaries ability to terminate a trust with a spendthrift provision
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Spendthrift provisions are usually material purposes and therefore beneficiaries cannot terminate the trust.
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can a family agreement (all of the beneficiaries) change the terms of a testamentary trust
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i) Family agreements looking to the advantageous settlement of estates or to the adjustment of family differences, disputes, or controversies, when approved by the court, are valid and binding.
there must be an actual threat that litigation will deplete the trust assets |
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where the grantor is the sole beneficiary, can he terminate the trust
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yes
even if a material purpose of the trust is not completed |
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4 Remedies for enforcing a trust against the trustee personally:
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A. A decree ordering the trustee to carry out the provisions of the trust
B. An injunction against or a decree setting aside wrongful acts of the trustee C. A judgment against the trustee for damages D. A decree removing the trustee |
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who has power to enforce the trust against the trustee
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i. A trust is enforceable only by the beneficiaries
1. A settlor has no power to enforce a trust once he has established it- unless he retains certain powers |
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If the trustee commits a breach of trust, he is chargeable with
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i. Any loss or depreciation in value of the trust estate resulting from the breach of trust, or
ii. Any profit made by him through the breach of trust; or iii. Any profit which would have accrued to the trust estate if there had been no breach of trust |
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offsetting losses by the trustee with gains
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Courts will no allow a trustee to reduce his liability for losses from breach by showing hat he has made a profit on other trust business.
ii. The beneficiary gets all gains, proper and improper. iii. The trustee is liable for improper losses. |
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what are the damages when the breaches are not separate and distinct, but are regarded as a single breach
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the trustee is liable only for the net loss
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removal of trustee is only proper to
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i. Protect the best interests of the trust – its purpose, assets & operation are in danger
ii. Protect the best interests of the beneficiaries Not enough for there to be hostility between trustee & beneficiaries Not enough for trustee to commit some errors, as long as they weren’t made in bad faith |
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three remedies for trust property
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A. Tracing
B. Subrogation C. Marshalling |
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The bona fide purchase rule
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A bona fide who obtains legal title to property and pays value without notice of the trust’s existence or of the beneficiary’s consequent equitable interest cuts off the beneficiary’s equitable interest
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tracing
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Tracing is used to recover the actual trust property or its product provided it could be traced to and identified in the hands of the trustee or an assignee who is not a bona fide purchaser
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beneficiaries ability to choose tracing and damages as a remedy
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Must choose either tracing or damages – can’t have both (double-dipping)
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tracing when trust funds were commingled with other funds in purchasing property
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1. Majority view: The beneficiary is entitled to be made whole out of the purchased property, including paying for attorneys fees
2. Minority view: The beneficiary’s recovery is limited to the amount of the property that was paid with their money |
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If trustee is commingling trust money in THEIR PERSONAL ACCOUNT
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i. Deposits to that personal account are considered PERSONAL MONEY (favor individual’s creditors)
1. Does not replace the trust money ii. Withdraws from that account are considered PERSONAL MONEY |
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If trustee is commingling personal money in THE TRUST’S ACCOUNT
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i. Deposits to that trust account are considered TRUST MONEY (favor trust beneficiaries)
1. Does replace trust money ii. Withdraws from that account are considered PERSONAL MONEY |
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overcoming the commingling default rules
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D. This rules are only presumptions
i. If there is a consistent pattern of bad behavior by the trustee, the presumption will not apply if there would be injustice to the beneficiary and no other parties would be hurt if justice was done for the beneficiary |
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Subrogation
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a) When the trust funds have been traced to assets that are not recoverable or the trustee has used trust funds to pay a debt not owed by the trust, subrogation is available
b) Subrogation gives the trust a secured claim against property or the trustee |
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Marshalling
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a) Marshalling is a rule that courts of equity sometimes invoke to compel a creditor who has the right to make his debt out of either of two funds to resort to the that will not interfere with or defeat the rights of another creditor who has recourse to only one of these funds.
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how can an inter vivos trust be created
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Can be created by declaration (grantor becomes trustee) or a conveyance/transfer of property (someone else becomes trustee)
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when must a conveyance be made to create a valid trust
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Conveyances must be made during the grantor’s lifetime
Conveyances made after death are not valid (must be a part of a will to be valid testamentary trust) |
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if a trust is invalid what happens to the property when the grantor dies
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the property will fall to the settlor’s estate
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delivery definition
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Delivery means to vest legal and equitable title in the trustee and beneficiaries
Not necessarily hand over the deed Must show a clear present intention to transfer legal and equitable title |
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retaining trust corpus
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Retaining the trust corpus and collecting income on that property as if it is your own shows no delivery or lack of manifestation to show intent
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delivery through power of attorney expiration
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Delivery through power of attorney ceases at grantor’s death- agent cannot transfer additional property to the trust on behalf of the grantor after the death of the grantor
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delivery of real property
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If Settlor giving to Trustee – Should deliver deed/some writing transferring title to Trustee
Delivery does not have to be done in person or actually If Settlor also Trustee – Show sufficient acts by the grantor to create the trust & establish an interest in the property |
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validity of transferring real property without transferring the deed
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Any acts or words which clearly manifest an intention on the part of the grantor to consummate and complete his deed and to part absolutely and unconditionally with it, and with control over it, are sufficient to give legal existence to it as a deed and to constitute a sufficient delivery from which an acceptance may be implied
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delivery of personal property
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actual delivery is necessary
b. Personal Property Conveyance requires delivery of the personal property in order for trust to be ENFORCED – DOESN’T VOID trust outright |
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who can create a writing to satisfy the SofF for a real property transfer to a trust
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settlor or trustee (not the beneficiary)
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Oral agreement for Real Property is enforceable ONLY IF
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1. Part performance can be proven
AND 2. Party will be irreparably injured unless equity intervenes and enforces oral trust conveyance |
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SofF effect on a trust
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The SOF only makes a trust unenforceable, NOT void.
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application of SofF for real property converted to personal property
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the SofF does not apply and the trust is enforceable even if there was no declaration of trust subsequent to the conversion
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application of SofF for personal property converted to real property
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ii. If the property was originally personal and is converted to real then the SofF doesn’t apply (the trust is enforceable) because the property was personal at inception
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SofF application to express, resulting, and constructive trusts
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Statute of Frauds applies to an express trust
Statute of Fraud doesn’t apply to court created trusts (resulting or constructive trusts) |
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testamentary trust
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A trust is testamentary if beneficiary interest transfers only at the death of the grantor
1. Where no interest in the trust property is created in a beneficiary other than the settlor before the death of the settlor, the disposition is testamentary and is invalid unless the requirements of the Statute of Wills are complied with. |
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testamentary trust formalities
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Testamentary Compliance with the Wills Act requires:
1. Document is in writing 2. Signed by the testator 3. Signed by 2 witnesses |
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purpose of testamentary trust complying with the Wills Act
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Purpose is to require formalities to ensure no fraud, undue influence, or mistake
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main aspect determining the validity of an intervivos trust
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Validity of an inter vivos trust during the lifetime of the grantor depends upon whether it is funded with property interest
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ways a testamentary trust is created
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1.Terms of the will itself
2. Incorporation by reference 1. Effect is to be given to the will and to the provisions of the trust instrument, as they existed when the will was executed. 2. No effect can be given to the subsequent modification of the trust instrument if it is not executed in accordance with the will act. 3. Act of independent significance 4. Power of appointment |
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type of trust comprised of life insurance policy
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Inter Vivos Trusts
Even though proceeds aren’t accessible until after death of insurance settlor, THE RIGHT TO RECEIVE PROCEEDS of the life insurance is enough to be a valid, present, beneficiary interest (contractual right) |
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parties of a trust
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grantor
trustee beneficiary |
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three types of non-testamentary trusts
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Express
Resulting – Implied from circumstances Constructive – Device used by courts in the interest of justice to prevent fraud or unjust enrichment |
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capacity to create a trust
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Irrevocable inter vivos trust → Contractual capacity (understand consequence of establishing a trust)
Revocable inter vivos trust → Testamentary capacity (low standard/same as wills) |
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who has the burden of proof for capacity
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Party alleging incompetence has burden to prove by clear & convincing evidence that the grantor lacked the capacity necessary at the time of the instrument’s execution
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grantor intention
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must manifest by some external expression the final and definite intention that a trust should arise
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how to manifest intention
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Can be manifest by words or acts
Words of wish or desire are not sufficient Formal words are not necessary Must demonstrate the intent that a trust (not a gift) be created |
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rights the grantor can retain
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right to income
right to revoke |
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when must the intent to create the trust arise
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before the property is conveyed (can’t make trust after the fact)
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must the beneficiary know of the trust to make it valid
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no
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no beneficiary knowledge of the trust may imply
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no intent existed to presently create a trust
grantor had intent to reserve power to revoke the trust- making it a revocable instead of an irrevocable trust |
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a valid trust must create enforceable...
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trustee- enforceable fiduciary duties on the trustee
beneficiary- enforceable present interest in the beneficiary |
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trustee fiduciary duty requirement
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1. There have to be specific/enforceable fiduciary duties placed upon the trustee to act in beneficiary’s best interest
2. There can be no trust where the trustee has absolute and unconditional discretion of the control of the property. |
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beneficiary's interest requirements in an inter vivos trust
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Beneficiary’s interest must start at the creation of the trust (not when grantor dies)
Settlor must divest presently themselves of equitable title/interest in the property Beneficiary interest can’t be left up to the settlor/trustee to determine later |
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Imperfect inter vivos gift creation of fiduciary duties
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An intent to give a gift is not sufficient to obligate another person and impose fiduciary duties on that person
a. Fails as a gift if no delivery was made – must show divesting of possession and title b. Fails as a trust if no title was passed – must show divesting of title- both equitable and legal (could declare holding property in trust for some) |
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increases in trust property value go to whom
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A trust is for the benefit of the beneficiary
1. If the property becomes more valuable, then the beneficiary should benefit. 2. A fixed sum goes against the idea that the beneficiary is benefiting from the increase of value- looks more like a bailment |
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Totten Trust
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grantor sets up a savings account that they “hold in trust” for the benefit of another only upon grantor’s death
Grantor still has access to trust funds for own use and can revoke at anytime |
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Totten trust is valid even though...
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1. Grantor doesn’t separate legal title – can take from account or revoke account w/o approval
2. Beneficiary has no interest at the time the trust is made – only receives upon grantor’s death 3. Grantor (as trustee) owes no fiduciary duties to beneficiary May be rebutted by other evidence showing that the grantor did not intend to establish a trust (i.e., fraud, undue influence, breach of fiduciary duty) |
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advantages of creating a trust
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i. Management of property and wealth
ii. Protection in the event of incapacity iii. Asset protection iv. Estate and income tax benefits v. Avoid Probate |
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name of trust property
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corpus or res
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rights able to be retained by grantor
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income
life estate revocation |
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must be transferred to trustee to make an effective trust
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legal title
document or possession of the property |
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trust statute of limitations
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none
ongoing fiduciary duties if trust is effective |
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level of proof needed to show intent
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Must manifest intent with reasonable certainty
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spendthrift trust
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Grantor gives beneficiary an incomplete equitable interest in trust that is: non-transferable, non-assignable, with no direct access by creditors
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purpose of a spendthrift trust
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to ensure beneficiary doesn’t squander away their trust inheritance
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how creditors can acquire spendthrift trust assets
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Have to wait for funds to be dispersed to beneficiary, THEN try to attach to and acquire the funds
Spendthrift clause does not prevent creditors from attaching to property once it has been disbursed to the beneficiary |
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spendthrift trusts for the grantor as the beneficiary
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Trust is void
Grantor CANNOT create a spendthrift trust when the GRANTOR IS THE BENEFICIARY in an effort to shield assets from creditors |
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requirements for an asset protection trust in states that allow them
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The trust cannot be set up at time when grantor is bankrupt
The trustee has to be a resident of the jurisdiction of the grantor The trust has to be irrevocable |
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language required for a spendthrift provision
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No special language is required
Can be accomplished by any language sufficient to manifest the grantor’s intent that the beneficiary shall not be able to transfer their interest and that the beneficiary’s creditors shall not be able to take the property |
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support trust
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Trustee is obligated to use trust assets as necessary only for education and support of the beneficiary
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charitable trust beneficiaries
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Must be for the public benefit, either for the general public or for some particular class of persons, indefinite in number, who constitute a part of the general public
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requirements of limiting the number of beneficiaries in a charitable trust
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The trust may be restricted to an indefinite class within the community so long as the class is large enough to make the enforcement of the gift beneficial to the community- trust can benefit one person if that person is a vehicle to benefit the public
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a trust with a charitable purpose and with a limited number a beneficiaries that does not benefit the community
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When the beneficiaries of the trust are limited to such a small class of persons that the enforcement of the trust is not of benefit to the community, the trust is not a charitable trust even though the purpose of the trust is charitable
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a devise for blood relatives classification
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not a valid trust
not a charitable trust because the class is too narrow not a private trust because it violates the rule against perpetuities |
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how a grantor can create a valid charitable trust that his descendants could benefit from
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In order to validly provide for relatives, testators should establish a charitable trust with no limit on the class of persons who could receive from the trust, and instruct the trustee, in his discretion of choosing beneficiaries, to give preference to the descendants of the settlor.
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charitable trust for the construction of a tomb or monument
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must be for someone who is a notable public or historic figure
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upkeep for a gravesite or cemetery type of trust
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valid charitable trust
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common charitable purposes
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Providing/supporting
1. Education 2. Medicine/health 3. The poor/elderly 4. Recognized religions |
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determining a charitable trust
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Courts, not the grantor, have the duty to determine whether a purpose is charitable
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charitable trust trustee and beneficiary restrictions
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A gift made to a charitable entity must be used in the way that the grantor instructed
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doctrine of cy pres
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Doctrine of cy pres- courts have power to alter a trust in order to achieve its original purpose if it has become impossible, impracticable, illegal, etc.
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Private parties can enforce a charitable trust IF:
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1. Co-trustee can enforce provisions against their co-trustee if they default
2. If charitable trust requires benefits to be distributed to other charitable organizations (trust→ university), the other charitable organization (university) has a legal right to enforce 3. Party has specific interest in enforcing charitable trust a. Show you have a substantial, direct & immediate interest in litigation’s outcome |
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benefits of a charitable trust
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Rules against perpetuities don’t apply to charitable trusts
Tax benefits/exemptions |
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resulting trust
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The grantor passes legal title BUT does not manifest the intent to pass equitable title
i. Courts infer a resulting trust and enforce the settlor’s presumed intent unless the presumed intent can be rebutted ii. The behavior of the settlor suggests that he intended to create a trust with the settlor retaining a life interest |
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remedy for a resulting trust
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The remedy is to return the property to the grantor
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Situations where court infers taking legal title doesn’t take an equitable title/beneficial interest (resulting trust)
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1. Excessive trust property
2. Failure of Express Trust 3. Purchase-Money- most common |
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excessive trust property result
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1. Trust property is more than what’s needed to accomplish trust purpose
2. When there’s no other purposes for trust, return excess to grantor/grantor’s estate b. Presume grantor intended to keep what he didn’t have to give away to accomplish his goal |
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failure of an express trust result
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Presume that Grantor intended to keep the property if the trust failed
Whenever a trust is void for any reason, the court will find a resulting trust for the grantor (or his successors if he is dead), unless the grantor has made an alternative disposition of his beneficial interest |
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to whom does the property of a resulting trust go when the grantor is dead
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Most courts hold that a trust will result for the benefit of the grantor’s heirs if the settlor died intestate, and for the benefit of the residuary devisees if the grantor left a will with a valid residuary clause.
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purchase money resulting trust
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Person pays the purchase price for property, but directs the seller to convey property to another person (title in that person’s name)
Person holding title has burden to rebut the presumption that they are holding property in trust |
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amount of resulting trust in a purchase money situation
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Fractional Shares- person has a resulting interest in property for the portion that they paid for
Value of the property is divided at the time property is acquired- if you pay on the note after, it does not count |
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adding to a resulting trust value by paying on a note after the property was acquired
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if you pay on the note after, it does not count
UNLESS There was an enforceable agreement between a H and W that he would pay the mortgage. Under that agreement he would be entitled to credit the portion paid on the mortgage |
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exceptions to a purchase money resulting trust
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1. If A & B are related, presumption is that the property was a gift – NO RESULTING TRUST
2. If person paying consideration is legally/morally obligated to care for the person holding legal title, there is a presumption that payment is a gift/advance – NO RESULTING TRUST 3. If purchaser intended to be reimbursed for money spent to purchase property, then there’s not a resulting trust with interest in property |
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overcoming a purchase money resulting trust
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Presumption of resulting trust can be overcome (by clear and convincing evidence) that A intended to make a gift to B.
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constructive trust
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Constructive trusts are fraud rectifying trusts established by the Court
i. A constructive trust arises when a person who holds title to property has an equitable duty to convey it to another because they would be unjustly enriched if permitted to retain it- really more of a remedy that the courts implement |
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complainant must do what to obtain a constructive trust
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To obtain a constructive trust, the complainant must identify particular property as the corpus of the trust.
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obligation of the constructive trust trustee
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The sole obligation of the constructive trust trustee is to convey the property to the beneficiary.
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secret constructive trust
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Will doesn’t say on its face that the testator intended for a trust BUT there is proof of a promise to hold property in trust
Beneficiary must be known The important element is that the grantor’s reliance on the promise induced him to act or refrain from acting |
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oral evidence must show what in a secret constructive trust
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1. What the promise was
2. Who the beneficiaries are |
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If beneficiary is unknown in a secret constructive trust
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Remedy: resulting trust to grantor’s heirs because this in an ineffective transfer
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semi-secret constructive trust
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an express trust that failed- no beneficiaries named
Will does say on its face an intent to create a trust, but doesn’t reveal any beneficiaries |
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types of testamentary constructive trusts- trust created through a will
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secret trust
semi-secret trust |
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later trust that declares beneficiaries affect on a semi-secret trust
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If the face of the will expressly designated a trustee, but the beneficiaries were not declared, no trust afterwards declared by a paper not executed as a will could be binding
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remedy semi-secret constructive trust
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Remedy: Order a Resulting trust to grantor’s heirs (since trustee can’t just keep it), NOT a constructive trust (don’t know who grantor intended the beneficiaries to be)
There’s no threat of unjust enrichment because the will dictates giving money to person as Trustee – there’s no threat that someone is wrongfully receiving property outright |
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SofF prohibits introduction of oral promises on transfers of real property to a trust UNLESS
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1. Person didn’t intend to keep the promise when the promise was made (fraud)
Fraud means fraud in the inducement, not a change of mind later. |
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how is fraud in the inducement shown in a transfer of real property
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Usually shown by bad behavior after making the promise
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Minority of courts (growing trend) will allow oral evidence to show there is a constructive trust and not a gift of real property if
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1. The transfer was procured by fraud, misrepresentation, duress, undue influence, or mistake
2. The transferee at the time of the transfer was in a confidential relation to the transferor 3. The transfer was made as security for an indebtedness of the transferor |
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Factors causing a court to find a confidential relation
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i. Entrustment of business affairs to another over a long period
ii. Disparity of position because of ill health, age, ignorance, or inexperience iii. Close kinships such as that of husband, and wife or parent and child- mere existence of a close family relationship does not, of itself, constitute proof of a confidential relation |
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when must a confidential relationship exist for the admittance of oral evidence in a transfer of real property
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Confidential relationship should exist prior to and independent of the transaction in question
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validity and enforceability of trust for illegal purposes
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invalid and unenforceable
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what determines the legality of a trust
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It’s the purpose for which the trust property is to be used, not the motives of the testator, that determine whether a trust is illegal
If the natural consequence of the performance of the trust induces people to commit crimes then it is illegal. |
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a trust is invalid if it
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i. Promotes illegal activities
ii. Is against public policy (discourages marriage/takes away spouse’s elective share) iii. Violates constitutional rights (discrimination/14th Amd) iv. Violates the rule against perpetuities v. Its purpose is to defraud creditors |
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clean hands doctrine
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i. In order for a party to claim an equitable remedy to enforce/void a trust, a party must come to Courts w/Clean Hands
1. Majority: The test of whether someone has clean hands is the moral intent/purpose, not the actual injury done. 2. Minority: The test of whether someone has clean hands is not the intention of the party, but whether his intended fraud actually succeeded in harming another. ii. Court won’t intervene IF when the party has unclean hands |
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Totten Trust can’t be used to
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reduce a spouse of their elective share or defraud creditors
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Court can find Totten trust illegal using 2 Tests
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1. Intent Test
a. Examine whether intent was to deprive spouse of elective share or creditors their payment creditors b. If yes, then it is an illegal trust 2. Illusory Transfer Test a. Examine whether testator retained too much power and rights or created no beneficiary interest in others. b. If yes, then it is an illegal trust |
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charitable trust discrimination
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Charitable trusts cannot discriminate upon the basis of race, color, national origin, sex, or religion
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how to rectify a discriminatory charitable trust
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The court can use the cy pres doctrine to reform discriminatory charitable trusts
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remedy for an illegal trust
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If illegality can be eliminated by striking a particular provision, the court will strike that provision
If charitable trust, court can use cy pres administrative deviation If none of these apply, trust is dissolved, creating resulting trust to grantor/grantor’s estate |
