Trust/fiduciary Law I - Test 2

Front 1

3 Assets you may not transfer into Trust:

Back 1

a.) National Service life insurance policy.
b.) Certain types of employee benefit accounts
c.) US Savings Bond - Series EE, etc.

Front 2

Why might a bank not accept a trust account?

ETN

Back 2

1.) Environmental Liability Issues

Ex. A →RE T, fbo of B ---2000 Acres.
2.) Too Small
3.) No Need for the Bank’s Services

Front 3

Direct Restraint Provision:

Back 3

Jeremy is disallowed by the trust from selling, and his creditors cannot reach his interest.

Jeremy tries to sell his interest to John for $2M. John is out of luck. The Creditor in this case can reach the trust property.

You can no longer use the Direct Restraint Provision.

Front 4

3 Alternatives to the Direct Restraint Provision:

DSP

Back 4

Discretionary Trust: The trustee may have the option to pay income at the trustee’s discretion, also to apply income for the benefit of Jeremy.

Support Trust: Trustee may pay or apply income to maintain living at the standard to which Jeremy is accustomed.

Protective Trust: If Jeremy attempts to assign his interest elsewhere, or if creditors try to reach, then the trust goes to Ethan. This is called Indirect Restraint Language.

Front 5

Who can be named as a Trustee? 3 Questions:

THA

Back 5

1.) Can they take title?
2.) Can they hold title?
3.) Can they administer the trust?

Front 6

Under Common Law, a married woman...

Back 6

could not serve as trustee.
If you attempted to transfer to the wife, the husband became the owner of the property. Husband would be entitled to any income.

Front 7

Why could a married woman not hold property under common law?

Back 7

She was NOT considered “sui juris”.

Front 8

Sui Juris: Define

Back 8

sui juris: having full capacity, in being, mentally competent.

Front 9

Does a person have to be declared mentally incompetent by a court?

Back 9

It’s important to note that it matters whether the person is incompetent, in fact. *They do not have to be declared incompetent by a court.

Front 10

5 Situations---Who can serve as a trustee, and under what circumstances?

ANCGF

Back 10

a.) An alien: Under common law, an alien could not serve as trustee. Today, they can.
b.) A non-resident: Yes. If I want a non-resident, there must be a registered agent in the state where the trust is formed.
c.) The Federal or State Government: Yes.
d.) A Corporation: Yes/Maybe. In the articles of incorporation, somewhere, it must state that the corporation has the ability to serve in a fiduciary capacity. Otherwise, it cannot serve, it would be acting Ultra Vires.
e.) A foreign corporation: Decided by the states and regulating it. NC is a reciprocal state. A foreign corp has to be chartered in VA, TN, GA, or SC.

Front 11

When can a Partnership serve as Trustee?

Back 11

If the law of the state allows the partnership to hold title in the name of the partnership, then the partnership can be trustee.

The same holds true for an unincorporated corporation

Front 12

What is the classic example of the unincorporated corporation?

Back 12

A Church.

Who is technically liable for debt? All of the members of the church. They are jointly and severally liable. They, in theory are responsible for the full amount of the claims.

Front 13

Under what instances would it be fine for a beneficiary to serve as trustee?

Back 13

In short, anytime B is not the only interest in the trust.

A→B, income to B, remainder to C?

B is fine to serve as a trustee.

A→B, income to C, remainder to B?

Yes.

A→B and C, fbo B&C?

Yes

Front 14

Under what instance is not OK for a beneficiary to serve as trustee?

Back 14

No, you cannot have B as the sole trustee.

If you were to attempt the last method, what would happen?

Legal and equitable title merge, and B holds in fee simple. The trust does not exist anymore.

Front 15

What do you need if you want the Creator to serve as trustee?

Back 15

If you want to do this, you had better get a good lawyer. If you retain any type of quirky, discretionary power, section 2036 will come back to bite you.

Front 16

In the case of A→B, fbo B..., what happens to the trust? How does B hold the property?

Back 16

a. The trust dissolves
b. B holds the title in fee simple.

Front 17

What happens if you have a trustee, and the trustee dies?

Back 17

The Trust does not fail. You should have a successor trustee listed in the document.

Front 18

In the case of a corporate merger, what should the trust have...

Back 18

language there that states “or any successor institution”.

If not, the court will appoint a successor. Technically, there are no FDIC protections for the trust account. The creditors of a bank cannot touch Trust property.

Front 19

Resignation of a trustee:

Old way:

When can you resign?

Back 19

1.) You can resign with court approval.
2.) You can resign if the document gives you the power to resign.

Front 20

Resignation: Modern Way

What makes this easier?

Back 20

Practically every modern trust will have a provision that allows the bank to resign under certain circumstances. Under the Uniform Trust Code is much easier for a trustee to resign.

Front 21

What is knowledge?

Back 21

fully disclosed terms not induced by fraud, duress, or under influence.

Ex. Fraud: This is a doc that grants you $1M, instead, you have to pay $1M.

Ex. Duress: You have to sign, or I will shoot you.

Ex. Undue Influence: Sharp businessperson and weak, timid, and/or mentally weak person.

Front 22

What are 4 ways a trustee might be removed?

IUUB

Back 22

1.) The trustee is mentally incompetent.
2.) The trustee is under 18.
3.) The trustee is totally unfit for the job.
4.) The trustee is in breach of his duties.

Front 23

Does the creator have the right to remove the trustee?

Back 23

Generally speaking, NO.

Front 24

What is the one exception where a Creator might have grounds to remove the trustee?

Back 24

You have a conflict of interest, but it does not come into being, until after the trust is formed.

A----> T, income to B, at the sole discretion of the trustee, remainder to the heirs of B.

Front 25

Can B sue if the trustee abuses discretion?

Back 25

Yes, he can sue for remedy.

Front 26

What is the primary qualification of the beneficiary of a trust?

Back 26

In order to have a trust, all beneficiaries must be ascertained, or at least ascertainable within the Rule Against Perpetuities.

W sets up a trust for persons who were employed by him, at his death.

Trust for the first child born to my daughter, Victoria.

Victoria is 2. This won’t violate the rule.

Front 27

2 Exceptions where we would not accumulate trust principal/income:

Back 27

1.) You have a Charitable Trust
2.) You have an Employee Benefit Plan

Front 28

Can you create a legacy for a pet?

Back 28

Honorary Trust: In the case of a pet, an honorary trust may be set up.

Front 29

A lapsed legacy:

Back 29

I hereby bequeath the sum of $20,000 to Spencer. Spencer is dead already.

Under the terms of a lapsed legacy, Spencer’s heirs would take.

***This is only if a lapsed legacy provision exists in that State.

Front 30

NC has a partial lapsed legacy law, what does this mean:

Back 30

Only if Spencer’s heirs were also W’s heirs, would they take. If there is no lapsed legacy statute, then Spencer’s heirs do not take.

A will should never leave this to chance. A good lawyer will make sure this doesn’t happen.

Front 31

Capacity to Be a Beneficiary

TH

Back 31

You must be able to take and hold title, but don’t have to be able to administer. Competency is a non-issue.

Front 32

What constitutes your family?

Back 32

Spouse and children

Front 33

What fraction of income should Ethan be entitled to? A ---> fbo E and his family? 7 people

Back 33

E gets 1/7th

Front 34

Trust fbo Relatives. (PROBLEM)

Back 34

1.) Did they mean “next of kin”?
2.) Did they mean “by blood”?

You’re in the clear, if you meant “next of kin” you’re good.

Front 35

Maurice v. Bishop of Durham - Issues

Back 35

Bequeathed all her property to the Bishop of Durham, for the benefit of such objects of benevolence and liberality that the Bishop of Durham shall approve of.

The Bishop of Durham is not limited to charitable purposes + so the trust fails.

He can appoint this to whomever.

Front 36

The interest of a beneficiary is in nature...

Back 36

a property right.

Front 37

5 Reasons a Trust may fail:

ID PD V

Back 37

1.) You cannot set up a trust, where the purpose of said trust is illegal. (e.g. Open a still...)

2.) You cannot set up a trust if it attempts to defraud creditors.
e.g. Corey transfers property into trust, because he has massive debts.

3.) Cannot be against public policy---

4.) The disposition of property is against public policy

5.) Violates the duties of the Trustee.

Trust fbo Taylor. The trustee is excused from liability for negligence and intentional breaches...

Front 38

Penlind v. Wells

Back 38

-- Father who had massive debts, attempted to transfer his property to his daughter, outright.

Front 39

6 Ways a Trust can be against Public Policy:

III MR PD

Back 39

a.) Enforcement would tend to induce the accomplishment of illegal acts..

Trust fbo Ash, if she steals a car w/in 10 years.

b.) Trust would tend to induce the completion of immoral acts...

A --->To B, fbo any illegitimate children who are yet to be born to B.

c.) Improper Motives...

Encourage divorce...

A--->T, fbo B, if she divorces her husband.

d.) Attempting to restrain marriage

A---->T, fbo B, provided she never marries.

e.) Restraining religious freedom:

A---->T, fbo B, provided B remains a member of the Catholic Faith.

f.) Restraining the performance of public duty..

A--->T, fbo B, provided B never joins the military.

Front 40

The Rule Against Accumulation

Back 40

You can’t accumulate income indefinitely. It must eventually be paid out. Is regulated by the NUNS rule.

Front 41

Charitable Trust

Back 41

Instead of fbo a person, it is for the benefit of a charitable purpose

Front 42

*1891 - Commission for Special Purposes of Income Tax v. Pimsel

Back 42

In this case, a court defined what a Charitable Trust is...

Front 43

A charitable trust can be for the following 4 things:

PERA

Back 43

1.) For the relief of poverty
2.) For the advancement of education
3.) For the advancement of religion
4.) For any other purpose, beneficial to the community.

Front 44

A charitable trust is for the benefit of:

Back 44

a class of people, not a specific person.

Front 45

Joanna SouthCoate

Back 45

lived in the 1800’s, and claimed to be the daughter of the Holy Ghost, and that she would birth the Messiah.

A trust made for the benefit of the dissemination of her literature did not violate any of the rules.

Any other purpose beneficial to the community--- A trust for the promotion of temperance, relief of animals, to promote vegetarianism, rights of women, or change an existing law, are all fine.

Front 46

A trust FBO the Republican party would fail:

Back 46

because it is purely political.

Front 47

Why would a Trust to purchase a statue of Gabe vs. George Washington fail?

Back 47

Because George Washington is a public figure and Gabe is not.

Front 48

Trust for Humanitarian purposes: Example:

Back 48

Help rehabilitate former prisoners.

Front 49

Obvious Non-Tax reason for setting up a Charitable trust.

Back 49

A cause that you genuinely believe in.

Ex. A trust fbo Campbell.

Front 50

Resulting Trust

Back 50

An implied intention, not necessarily manifest.

Front 51

What is the one duty the trustee has in the case of a Resulting Trust?

Back 51

Return the property to its rightful owner.

Front 52

What is the presumption of law, in a Resulting Trust?

Back 52

You did not intend to make a gift of the property.

If there is no taker in default, the property returns to the Creator, or his heirs.

Front 53

In what case is the Presumption of Law Rebuttable (Resulting Trust)?

Back 53

The presumption can be overcome with clear, strong evidence.

W---> Grayson, in trust for Antonio.
W writes a note to Grayson, stating that, at the death of Antonio, he wants Grayson to keep the property.

The letter that W wrote is not part of the trust document. You could not incorporate the letter by reference.

It still is clear, strong evidence.

Front 54

NC Case: Mims v. Mims: Significance of the Case:

Back 54

The legal significance is that after Mims, the presumption is a gift. The presumption applies when someone uses their own funds to buy something.

It leveled the presumption, between man and woman. The presumption is still rebuttable, and that was how Allen Mims won the case.

Front 55

What was the old presumption, if you had a Purchase Money Resulting Trust, in the case of the wife?

Back 55

If the wife paid the purchase price, the presumption was a resulting trust.

The presumption on the wife, was that she was economically disadvantaged, and that she did not intend to make a gift.

Front 56

What was the old presumption, if you had a Purchase Money Resulting Trust, in the case of the husband?

Back 56

The old, historic rule, was that A(the husband) intended to make a gift.

Front 57

What was the main issue in Mim v. Mims, according to the Court? What did Allen Mims say it was?

Back 57

The court said "Mutual Mistake." Allen Mims said it was a Constitutional issue of Equal Protection.

Front 58

What are the 3 types of Trust?

Back 58

.) Express - Manifestation of intention
2.) Resulting Trust -A presumed intention
3.) Constructive Trust - A device to prevent unjust enrichment.

Front 59

W embezzles $100K from Dennis, and takes out a $2M life insurance policy on Gary. Gary dies... W collects $2M.

What is the end result?

Back 59

There is a Constructive Trust in the amount of $2M for Dennis.

Front 60

Connor inherited land from his bride.

Connor murdered his wife. What is the end result?

Back 60

The land could be demanded back by other heirs, from a Constructive trust.

Front 61

Rebecca embezzled $20K. The stock she bought w/it appreciated What happens next?

Back 61

W can demand the stock. This is a constructive trust.

Front 62

Rebecca embezzled $20K. The stock she bought w/it dropped in value by half. What is the result?

Back 62

Witherspoon may demand reimbursement of the cash. IN THIS EXAMPLE, IT IS NOT...NOT...NOT a CONSTRUCTIVE TRUST.

Front 63

What if Rebecca stole the money, and bought land?

Back 63

The thieves may still ask for reimbursement for any expenses to be reimbursed from the profits.