Trusts

Front 1

Trust Defined

Back 1

Distinctive feature of a trust being the separation of legal title and beneficial enjoyment.
-The trustee holds legal title to specific property under a fiduciary duty to care for the property.
-The trustee does so for the benefit of designated beneficiaries who hold equitable title.

Front 2

Types of Trusts

Back 2

Classified according to the method of their creation
(1) Express trusts: Arise from the expressed intention of the owner of property
(2) Resulting trusts: Arise from the the presumed intention of the owner of property
(3) Constructive Trust: Arise in cases involving wrongful conduct and unjust enrichment.

Front 3

Express Private Trusts
-Requirements for creating Trust

Back 3

In VA, governed by the Uniform Trust Code. Five elements:
(1) a settlor with capacity to convey title to the trustee
(2) An intention to create a trust
(3) One or more definite beneficiaries
(4) A trustee with active duties to perform
(5) the same person is not the sole trustee or the sole beneficiary

Front 4

Express Private Trusts
-Requirements for creating Trust
---Settlor must have capacity

Back 4

The settlor is the person who contributes the property to the trust
-Same capacity as required to execute a will

Front 5

Express Private Trusts
-Requirements for creating Trust
---Intent to create a trust

Back 5

No magic words are required. Court will look at the particular language in the total contest of the instrument to determine whether a trust has been created

Front 6

Express Private Trusts
-Requirements for creating Trust
---Definite beneficiaries

Back 6

A beneficiary is necessary to the validity of every trust except charitable and honorary trusts.
-Private express trusts must be for the benefit of ascertainable beneficiaries.

Front 7

Express Private Trusts
-Requirements for creating Trust
---"Qualified Beneficiary"

Back 7

A qualified beneficiary is a beneficiary is one who, on the relevant date:
(i) is currently eligible to receive a distribution from the trust
(ii) Would be eligible to receive a distribution if the trust terminated on that date

Front 8

Express Private Trusts
-Requirements for creating Trust
---Qualifications of a Trustee

Back 8

(1) Legal age
(2) competent
(3) Capacity to enter into contracts

Front 9

Express Private Trusts
-Requirements for creating Trust
---Trustee dies

Back 9

Once established a trust will not fail because a trustee dies, becomes incapacitated, resigns, or is removed.
-Court appoints successor trustee

Front 10

Express Private Trusts
-Requirements for creating Trust
---Acceptance of Trusteeship

Back 10

Person accepts trusteeship by: (i) substantially complying with the acceptance terms in the trust instrument; (ii) accepting delivery of trust property, exercising trust powers, or indicating acceptance

Front 11

Express Private Trusts
-Requirements for creating Trust
---Bond requirement

Back 11

A trustee is not required to post a bond unless the court finds that a bond is:
(i) needed to protect the beneficiaries interest
(ii) required by the terms of the trust

Front 12

Express Private Trusts
-Requirements for creating Trust
---Compensation

Back 12

Trustee is entitled to reimbursement for expense incurred in the trust's administration.
Trustee is entitled to reasonable compensation, or compensation as designated in the trust instrument.

Front 13

Express Private Trusts
-Requirements for creating Trust
---Trustee Resignation

Back 13

Once a trust has been accepted, a trustee may resign by either (i) giving 30 days notice to the settlor, all co-trustees, and all qualified beneficiaries; or (ii) Obtaining court approval

Front 14

Express Private Trusts
-Requirements for creating Trust
---Removal of a trustee

Back 14

The court may remove a trustee on its own motion or upon request by the settlor, a co-trustee, a beneficiary, or the attorney general. Grounds for removal include: (i) a serious breach of trust, (ii) lack of cooperation among trustees, (iii) unfitness, unwillingness, or persistent failure to administer the trust effectively, (iv) a substantial change change of circumstances.

Front 15

Express Private Trusts
-Requirements for creating Trust
---Trust Property

Back 15

Any property that the settlor has power to convey can be a trust asset.
-Property must be adequately described.
-A debtor cannot hold their own debt in trust
-Property cannot be an expectancy, such as an inheritance not yet inherited, but a person can create an unfunded trust during his lifetime to receive a pour-over gift by will

Front 16

Express Private Trusts
-Requirements for creating Trust
---Trust Purposes

Back 16

A trust may be established for any purpose that is not unlawful, contrary to public policy, or impossible to achieve.
-Total restraint on marriage is generally void. BUT partial restraint is valid, as is a condition changing the beneficiary upon the original beneficiary's remarriage.
-Trust provision calling for the destruction of policy is void.

Front 17

Express Private Trusts
-Requirements for creating Trust
-CONCLUSION (6 Characteristics of a valid trust)

Back 17

(1) Settlor with capacity
(2) Intent to create a trust
(3) Definite beneficiaries (Same person cannot be sole trustee and sole beneficiary)
(4) Trustee (inter vivos trust only; testamentary trust will not fail for lack of a named trustee)
(5) Trust Property
(6) Valid Trust Purpose (not unlawful, against public policy, or impossible to achieve)

Front 18

Creation of Express Trusts
-Formalities of Creation

Back 18

VA recognizes oral trusts of real and personal property.
-Must be established by clear and convincing evidence
-Need not be supported by consideration, but a promise to create a trust in the future must be supported by consideration

Front 19

Duration of Trusts
-The Rule Against Perpetuities

Back 19

In VA, the rule against perpetuities is a default rule that applies contrary any provision in the trust. Perpetual trust is possible in VA
-This applies only to trusts!

Front 20

Duration of Trusts
-Uniform Statutory Rule Against Perpetuities

Back 20

VA has enacted the Uniform Statutory Rule Against Perpetuities, which provides that an interest is valid if:
(i) it is valid under the common law rule against perpetuities (i.e., the interest is certain to vest, if at all, no later than 21 years after the death of some life in being at the interest's creation); OR
(ii) the interest actually vests or terminates within 90 years after the interest's creation.

Front 21

Will Substitutes

Back 21

A settlor may make certain inter vivos transfers without the formalities.

Front 22

Will Substitutes
-Revocable trusts

Back 22

An inter vivos trust created on or after July 1, 2006 is revocable and amendable by the settlor unless the trust terms expressly provide that the trust is irrevocable and cannot be amended.
For trust created before this date, the rule is the opposite.

Front 23

Will Substitutes
-Life Insurance Proceeds Held as a trust asset.

Back 23

When life insurance policies are held as trust assets, the trustee has no duty to:
(i) determine the appropriateness of any particular policy as a trust investment
(ii) dispose of any policy in order to diversify the trust assets
(iii) exercise any policy options
-Statute provides that trustees can be beneficiaries under life insurance policies.
-Statute also provides that any spendthrift provision protection provided in the insurance contract is retained

Front 24

Will Substitutes
-Joint Bank Account

Back 24

Right to survivorship is presumed unless the depositor plainly excludes a right of survivorship - even if account does not mention right of survivorship.
-Presumption can only be rebutted with clear/convincing evidence

Front 25

Will Substitutes
-Totten Trust Bank Accounts

Back 25

In a Totten Trust, a bank account depositor declares herself trustee of the account for a person who is to receive the money in the account at the time of the depositor's death.
-This is not really a trust (legal and equitable title are not separate)

Front 26

Will Substitutes
-Durable Power of Attorney

Back 26

Power of attorney creates an agency relationship.
-In VA, power of attorney doe snot terminate upon the disability or incapacity of the principal if the instrument provides for survival of power.

Front 27

Will Substitutes
-Durable Power of Attorney
---When can holder of durable power make gifts?

Back 27

Unless restricted by the instrument, holder of a durable power can make gifts to individuals or charity on behalf of the principal (if the principal had a history of making such gifts)

Front 28

Will Substitutes
-Durable Power of Attorney
---Duty to account

Back 28

Duty to account to conservator: If a conservator is appointed to manage an incapacitated principal's estate, Durable power holder must account to him. Conservator can revoke the durable power
If no Conservator: Often a holder of a durable power can obviate the need to appoint a conservator. In that case, someone interested in the welfare of the a principal can demand an accounting

Front 29

Will Substitutes
-Durable Power of Attorney
---Death of Principal

Back 29

A durable power automatically terminates on the principal's death.
-If the power holder does not have actual knowledge of the death his authority is unchanged. Third party who acts in reliance on the power is protected.

Front 30

Will Substitutes
-Durable Power of Attorney
---Springing durable power of attorney

Back 30

A durable power may be created so that it is effective only upon:
(i) a specified future date
(ii) the occurrence of a specified future event
(iii) the existence of a specified condition that may occur in the future.

Front 31

Will Substitutes
-Durable Power of Attorney
---Transaction that Benefits Agent Presumptively Fraudulent

Back 31

A transaction that benefits the durable power holder is presumptively fraudulent.
-Presumption can be overcome by clear/convincing evidence

Front 32

Charitable and Honorary Trusts
-Distinctive Rules with Charitable Trusts

Back 32

A charitable trust must have a charitable purpose. It differs from a private trust in three important ways:
(i)it must not benefit identifiable individuals,
(ii) it may be perpetual, and
(iii) the cy pres doctrine applies.

Front 33

Charitable and Honorary Trusts
-Trust must be for charitable purpose

Back 33

Charitable purposes include: relief of poverty, advancement of education/religion, promotion of health, and the accomplishment of governmental or municipal purposes.
-Can narrow the beneficiaries, but not so narrow as to only benefit a few people
-Can be stated in general terms. Trustee can be given discretion to choose the beneficiary or even the purpose.

Front 34

Charitable and Honorary Trust
-Enforcement of Charitable Trusts

Back 34

Suit to enforce a charitable trust can be brought by the settlor, a qualified beneficiary, or the Attorney General.

Front 35

Charitable and Honorary Trust
-Rule against perpetuities

Back 35

Does not apply! A charitable trust may be perpetual.

Front 36

Charitable and Honorary Trust
-Cy Pres

Back 36

When a charitable purpose selected by the settlor is unlawful, impracticable, impossible to achieve, or wasteful, the court will select an alternative under the doctrine of cy pres or "as near as possible" by ascertaining the settlor's primary purpose.

Front 37

Charitable and Honorary Trust
-Can a charitable trust revert to noncharitable beneficiaries?

Back 37

Yes. A provision that reverts the trust property to noncharitable beneficiaries prevails over the court's power to apply cy pres only if
(i) the property is to revert to the settlor and the settlor is still living; OR
(ii) fewer than 21 years have elapsed since the trust was created.

Front 38

Charitable and Honorary Trust
-Honorary Trust Definition

Back 38

Honorary trusts are commonly established for the maintenance of pets or burial places.
-No human beneficiaries
-The trust is enforceable by someone named in the trust instrument or appointed by the court

Front 39

Charitable and Honorary Trust
-Honorary trust time limit

Back 39

The duration of an honorary trust is limited to 21 years.

Front 40

Charitable and Honorary Trust
-Cemetery trusts

Back 40

VA has a special statute exempting cemetery trusts, perpetual care funds, and employee pension and profit sharing trusts from the Rule Against Perpetuities

Front 41

Charitable and Honorary Trust
-Trust for care of animals

Back 41

A trust for the care of an animal alive during the settlor's lifetime is valid. It terminates when the animal (or last surviving animal) dies.

Front 42

Resulting Trusts
-Definition

Back 42

A resulting trust arise where the court implies a trust and declares the settlor or his heirs to be the beneficiary.

Front 43

Resulting Trusts
-Where express trust fails

Back 43

If an express trust fails (e.g. because it fails to name beneficiaries), and the settlor has not declared her intent, the beneficial interest in the trust property is in the settlor, or if she is dead, it passes to her successor

Front 44

Resulting Trusts
-Implied from Incomplete Disposition

Back 44

If the trust purpose is fully satisfied and there is some trust property remaining.
-The settlor has made an incomplete disposition and the remaining trust property reverts to the settlor or successors

Front 45

Resulting Trusts
-Purchase Money Resulting Trust

Back 45

If a person pays the full purchase price and causes title to be taken in another's name, it is not presumed to be a gift (unless the two parties are related). It is presumed that the person intended for the grantee to hold the property in trust for him

Front 46

Constructive Trust
-Definition

Back 46

This is not a trust. It's a flexible equitable remedy imposed to prevent unjust enrichment as a result of fraud, undue influence, breach of fiduciary duty, mistake, and the like.
-The constructive trustee's only duty is to convey the property to the person who would have owned it but for the wrongful conduct.

Front 47

Creditors' Rights and Transferability of Beneficiary's Interest
-Spendthrift Trusts

Back 47

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring her interest in the trust, and her creditors are precluded from reaching it to satisfy their claims.

Front 48

Creditors' Rights and Transferability of Beneficiary's Interest
-Spendthrift Trust: When can income/principal be reached by creditors?

Back 48

After distribution from the trust.
-Once it has been distributed to the beneficiary, it is no longer protected by a spendthrift provision.
-But a creditor would have to file a fresh lawsuit every time there was a disbursement.

Front 49

Creditors' Rights and Transferability of Beneficiary's Interest
-Spendthrift Trust: Exceptions

Back 49

A spendthrift clause cannot be used to shield the beneficiary from
(i) his own creditors where the beneficiary is the settlor;
(ii) Claims for child support;
(iii) Claims by the government
(iv) Creditor can reach a mandatory distribution of income if the trustee did not make it in a reasonable time.
-VA courts CANNOT recognize any other exceptions to spendthrift provisions

Front 50

Creditors' Rights and Transferability of Beneficiary's Interest
-Revocable Trusts

Back 50

If a trust is revocable by the settlor, his creditors can reach the entire trust property even if the trust contains a spendthrift provision.
-After the settlor's death, assets in a revocable trust can be reached in satisfaction of creditor's claims, funeral expenses, and costs of administration of the settlor's estate if the probate estate is inadequate.

Front 51

Creditors' Rights and Transferability of Beneficiary's Interest
-Discretionary Trusts

Back 51

If the trustee has discretion to pay, accumulate, or appoint the income among several beneficiaries.
-The beneficiary's creditors cannot compel payment from the trustee even in the absence of a spendthrift clause unless the claims are:
(i) for the support or maintenance of the beneficiary's child;
(ii) for necessities furnished by a creditor of a support trust beneficiary; OR
(iii) Against a settlor-beneficiary of a discretionary trust

Front 52

Creditors' Rights and Transferability of Beneficiary's Interest
-Creditors of a trustee

Back 52

Creditors of a trustee cannot reach trust property to satisfy their claims; they only have a personal claim against the trustee.

Front 53

Modification or Termination of Trusts

Back 53

A trust will terminate automatically upon the expiration of the term specified in the trust instrument or when all the purposes of the trust have accomplished (or have become unlawful, contrary to public policy, or impossible to achieve).

Front 54

Modification or Termination of Trusts
-By the court

Back 54

A trust may be terminated by the court in the following circumstances
(1) Unanticipated Circumstances: A court may terminate a trust if (i) unanticipated circumstances threaten the purpose of the trust OR (ii) continuation of the trust on existing terms is impracticable or wasteful.
(2) Where all Beneficiaries do not consent: If the trust was modifiable if all beneficiaries had consented; and the interests of any nonconsenting beneficiaries will be adequately protected.
(3) Tax Purpose: A court can modify a trust to achieve a settlor's tax objectives
(4) Reformation to correct a mistake: Mistake must be shown by clear and convincing evidence.

Front 55

Modification or Termination of Trusts
-By the trustee

Back 55

(1) Uneconomic trust: A trustee may terminate a trust if the trust property is less than $100K and the amount is insufficient to justify the cost of administration. Notice must be given
(2) Combination and division of trusts: Absent contrary term in trust agreement, trustee can combine several trusts into one. Notice must be given.

Front 56

Trustee Powers
-Sources

Back 56

Trustee can exercise only such powers as are conferred upon her, including:
(i) Expressly conferred upon her by terms of the trust (controlling)
(ii) That an unmarried individual has over her own property
(iii) That are appropriate to achieve the proper investment/distribution of trust assets
(iv) conferred by the UTC

Front 57

Trustee Powers
-UTC Powers

Back 57

Broad powers to the trustee:
-Operate a business; invest, insure, encumber, buy, sell a trust asset; enter into leases; vote securities; pay taxes; make distributions; prosecute and defend actions; etc.

Front 58

Trustee Powers
-Two or more trustees

Back 58

Majority rule!

Front 59

Trustee Powers
-Imperative v. discretionary powers

Back 59

Imperative: if the trust instrument requires its exercise
Discretionary: those that the trustee may or may not perform
-Trustees discretion should not be overruled unless the trustee has acted arbitrarily and in such a way as to impair the trust purposes

Front 60

Trustee Powers
-Delegation

Back 60

Trustee may delegate powers if it would not be imprudent to do so.
Trustee is not liable for any actions taken by the agent if the trustee exercised reasonable care, skill and caution in:
(i) selecting the agent
(ii) establishing the scope and terms of the delegation; AND
(iii) periodically reviewing the agent's actions in order to monitor the agent's performance.

Front 61

Investment Powers
-"Legal list" investments

Back 61

Trustees may invest in a legal list of investments prescribed by statute (e.g. state and federal bonds, federally insured deposits; etc), and cannot be held liable for any resulting loss from these investments.

Front 62

Investment Powers
-Investments Subject to UPIA (Uniform Prudent Investor Act)

Back 62

Under UPIA, a trustee must exercise reasonable care in investing and managing the assets of a trust.
-Prudence is assessed by looking at the entire investment portfolio.
-Looks to conduct at the time the investment decision is made, not outcome or performance.
-Fiduciaries with special skills (e.g. banks, trust companies, professional investment advisors) held to higher standards
-Applies to all fiduciaries though

Front 63

Investment Powers
-UPIA as a default rule

Back 63

These rules apply absent term in a trust or a court order.
However, waiver may only be effectuated through:
(i) Express reference to UPIA
(ii) an express authorization to make speculative investments
(iii) an express authorization to acquire or retain a specific asset.

Front 64

Allocation of Receipts and Expenses between Income and Principal
-Generally

Back 64

Uniform Principal and Income Act ("UPAIA") applies to all VA trusts unless instrument specifies otherwise. Gives trustee an adjustment power to reallocate investment returns.
(1) Duty of fairness to all beneficiaries
(2) If trustee determines that by ONLY distributing the trust income, she is unable to comply with the trust terms, she may adjust between principal and income to the extent.

Front 65

Allocation of Receipts and Expenses between Income and Principal
-Factors to be consider in exercise of adjustment power

Back 65

Factors to be considered:
(1) Nature, purpose and expected duration of trust
(2) Intent of the settlor
(3) The circumstances of the beneficiaries
(4) the needs for liquidity, regularity of income, preservation of capital
(5) words of the trust instrument
(6) tax considerations

Front 66

Allocation of Receipts and Expenses between Income and Principal
-Allocation of Receipts

Back 66

Usually follows general accounting rules: e.g. net rental income is income, proceeds of sale of a trust asset are principal.
Specifics
(1) Receipts from an entity: Money is income, unless it is a capital gain for tax purposes. Any other property is principal.
(2) Deferred compensation: Default rule; 10% income, 90% principal
(3) Liquidating patents, copyrights: 10% income, 90% principal
(4) Mineral interests: 10% income, 90% principal

Front 67

Allocation of Receipts and Expenses between Income and Principal
-Expenses charged to income

Back 67

The following expenses are charged to income:
-50% of trustees commission
-50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
-Ordinary expenses

Front 68

Allocation of Receipts and Expenses between Income and Principal
-Expenses charged to principal

Back 68

The following expenses are charged to principal:
-50% of trustees commission
-50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
-Payments on mortgage principal
-Estate Taxes
-Disbursements related to environmental matters

Front 69

Duties of a Trustee
-Duty to administer trust

Back 69

Duty to administer trust in good faith and in a prudent manner, in accordance with the trust's purposes, and in the interest of the beneficiaries. Must act impartially between the interests of the several beneficiaries

Front 70

Duties of a Trustee
-Duty of loyalty

Back 70

No self dealing.
-Absent an authorizing trust provision, trustee may not enter into any transaction in which he is dealing with the trust in his individual capacity.
(i) trustee may not buy or sell trusts assets even at a fair price
(ii) A trustee may not borrow trust funds nor loan his personal funds to the trust (except to protect the trust)
(iii) A trustee may not use trust assets to secure a personal loan
(iv) A trustee cannot personally gain through his position as a trustee
(v) A corporate trustee cannot invest in its own stock as a trust investment, but it can retain its own stock if it was part of the original trust property

Front 71

Duties of a Trustee
-Indirect Self-Dealing

Back 71

Trustee presumably violates her duty of loyalty when she enters into a transaction with her spouse, certain relatives, attorney, or corporation in which she owns a significant share.

Front 72

Duties of a Trustee
-Duty extends to all beneficiaries

Back 72

The duty of loyalty extends equally to all beneficiaries, unless the trust instrument specifies otherwise

Front 73

Duties of a Trustee
-When is self-dealing permitted?

Back 73

A transaction involving a trustee self-dealing is voidable by the beneficiary affected by the transaction unless:
(1) a court or the terms of the trust approved it
(2) the beneficiary failed to bring suit withing the prescribed time period
(3) the beneficiary gave her consent, ratification or release
(4) it involves a contract or claim arising before the trustee became trustee.

Front 74

Duties of a Trustee
-"No further Inquiry Rule"

Back 74

If the beneficiary shows that the trustee engaged in self-dealing, they win!
Nothing else is required, not negligence, good faith is no defense.
-Only damages remain in issue

Front 75

Duties of a Trustee
-Duty to Account and Infirm

Back 75

Trustee must:
(i) provide qualified beneficiaries with name address, telephone # within 60 days of accepting trust
(ii) Respond to beneficiary requests for information about the trust's administration and provide the trust instrument if asked;
(iii) Furnish as annual accounting of the trust.

Front 76

Duties of a Trustee
-Duty to separate trust property

Back 76

No commingling trust property with personal property or that of another trust.

Front 77

Duties of a Trustee
-Duty to preserve trust property and make it productive

Back 77

Trustee is expected to take actions to make trust property profitable

Front 78

Liabilities of a trustee
-Remedies for breach of trust

Back 78

If the trustee commits or is about to commit, a breach of trust duties, the court may:
(i) enforce specific performance of the trustee's duties
(ii) enjoin the trustee from committing a breach of trust
(iii) compel the trustee to pay money or restore property
(iv) suspend the trustee

Front 79

Liabilities of a trustee
-Damages for breach of trust

Back 79

If a trustee commits a breach of trust, he is liable to the beneficiaries for the greater of:
(i) the amount necessary to restore the trust property and distributions to what they would have been absent the breach;
(ii) the trustee's profit from the breach. Even if there was no loss from the breach

Front 80

Liabilities of a trustee
-Statute of limitations

Back 80

Beneficiary must bring her action within one year after she receives any report disclosing the breach.
In absence of such a report, beneficiary must bring action within 5 years of any of the following:
(i) the removal, resignation, or death of a trustee;
(ii) termination of the beneficiary's interest; OR
(iii) termination of the trust

Front 81

Liabilities of a Trustee
-When is a trustee not liable for breach of trust

Back 81

A trustee is not liable for a breach of trust if:
(i) he acted in reasonable reliance on the terms of the trust
(ii) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, as long as not improperly induced

Front 82

Liabilities of a trustee
-Effect of exculpatory clauses

Back 82

They are VOID if:
(i) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference; or (ii) appear in the trust instrument because of trustee's abuse of a confidential relationship with the settlor

Front 83

Liabilities of co-trustees

Back 83

Generally a trustee is not liable for the acts of co-trustees if he did not join in the action and he exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach

Front 84

Liability of Trustees to Third Parties

Back 84

A trustee may be sued in contract or tort in his representative capacity.
-He may be sued personally on a contract only if, in entering into the contract, he failed to reveal his representative capacity and identify the trust.
-He may be sued personally in tort only if he was personally at fault

Front 85

Liability of Third Parties to Trusts

Back 85

A person who in good faith and for value deals with a trustee without knowledge that the trustee exceeds his powers is fully protected.
-A person who knowingly participates in a breach of trust by the trustee is liable for the resulting loss to the trust estate
-Beneficiaries cannot sue a third party who damages the trust unless the trustee: (i) participates in the breach of trust; (ii) fails to sue the third party; (iii) abandons his office.