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34 Cards in this Set
- Front
- Back
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Express trust
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• Express trust: legal device that allows owner of property to transfer property and have those assets managed on behalf of someone else
○ Life-time trust or inter vivos trust: set up during lifetime of person who created trust, settlor ○ Testamentary trust: set up in settlor's will |
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Requirements for trust
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• Requirements for valid trust (no consideration): settlor who makes delivery of legal title to property to trustee who holds legal title for benefit of beneficiary with intent to create trust for a lawful purpose in validly executed document.
○ Settlor: any person 18 or older with capacity to enter into contracts ○ Delivery of legal title: titled assets must be FORMALLY transferred for delivery to be valid. ○ Property: must be property that settlor owns, NOT mere expectancy of ownership in future. Must be identified property NOT subject to future determination. |
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Trustee requirements for trust
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○ Trustee
§ For lifetime trust: almost anyone can be named trustee since no court involvement is needed for such trusts § For testamentary trust created under court supervision, anyone except: under 18, judicially declared incompetents, convicted felons, incapable because of drunkenness/dishonesty/want of understanding/improvidence. § Non-resident alien can serve as trustee, ONLY IF related to decedent AND NY resident must be co-fiduciary. Related is either decedent spouse, grandparent, descendant of grandparent of decedent or descendent of decedent's spouse or spouse of any of them. § Failure to name trustee: trust does not fail, court appoints trustee |
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Beneficiary requirements for trust
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○ Beneficiary: must be definite and ascertainable, no ambiguity. If ambiguous, trustee holds in resulting trust for residuary beneficiary of will (or intestate heirs in absence of valid will)]
§ Exception: beneficiary list as someone's FAMILY or NEXT OF KIN is considered definite and ascertainable and trust does not fail. Consult intestacy statutes for names of persons who fit description in trust |
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Intent requirement for trust
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○ Intent to create trust: must intend to create ENFORCEABLE obligation. Precatory (non-binding) language is not enough.
§ Trustee must be given DUTIES to perform; if trustee has no DUTIES to perform it is called passive trust which is not trust at all. § Just using trust does not show intent to create trust: need ALL of language AND ALL facts to determine intent. |
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Lawful purpose
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○ Lawful purpose: cannot call for commission of crime or destruction of property or
§ Cannot condition against public policy (marriage or divorce) BUT if purpose can be found that is NOT offensive to public policy then valid (e.g., trust that gives income to spouse until spouse remarries is ok). Marriage restrictions to members of certain RELIGIOUS or ETHNIC GROUP are valid as permissible partial restraints on marriage. |
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Validly executed document requirement
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○ In validly executed document: must either in writing, signed by both settlor and trustee AND either acknowledged by notary public OR signed by 2 witnesses.
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Revocable lifetime trust
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• Revocable lifetime trust: at least 1 beneficiary who is not settlor. Settlor cannot be sole beneficiary when also name sole trustee.
○ Settlor can play many roles: a trustee; income beneficiary, estate can be one of beneficiaries of principal so long as at least one other beneficiary. Settlor has power to amend or revoke trust ○ Reason to have trust: § Manage assets efficiently, using professional trustee § Helps plan for possible incapacity by avoiding guardianship § Avoids probate ○ Reasons NOT to have revocable lifetime/inter vivos trust: § does not avoid estates taxes: If settlor keeps income interest, or keeps power to revoke, FULL trust assets will be included in settlor's gross estate for federal estate tax purposes. |
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Pour over gifts
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• Pour over gifts: testamentary gifts to existing revocable trusts are ok.
○ Avoids will formalities in trust. Trusts can be changed during life time of settlor in ways that are somewhat easier than changing will. ○ Requirement: trust must be in existence OR executed concurrently with will. § Not limited to trusts created by Settlor but it can be to any existing trust, including those executed by other persons. § Pour over gifts are valid even if trust was unfunded or only partially funded during settlor's lifetime. ○ Life insurance proceeds: 2 ways insured can make life insurance proceeds payable to trust--created unfunded revocable insurance trust and name trustee of trust as policy beneficiary OR have trust be testamentary trust and make "trustee named in my will" as beneficiary in life insurance policy contract. § Applies to proceeds of savings accounts or pension plans as well. |
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Totten trust
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• Totten trust (bank account trust): bank account in depositor's name "as trustee for" named beneficiary.
○ Depositor makes deposits and withdrawals as he wishes during depositor's lifetime; Beneficiary has no beneficial interest during depositor's lifetime, but gets whatever is in account when depositor dies. ○ No particular words are required to create Totten Trust account (ITF, in trust for) ○ Creditors of depositor can always reach Totten Trust account balance EITHER before OR after depositor's death, since it is form of revocable trust partially revoked each time withdrawal is made. |
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Revoking a Totten trust
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○ Ways to revoke:
§ Withdraw all money in account § Express revocation during lifetime by depositor making writing naming beneficiary and institution AND having revocation notarized AND delivered to bank. (any missing elements make whole attempted revocation invalid). § Revocation in will. Must comply with same require with same requirements for revocation during lifetime. § Death of beneficiary revokes Totten trust and money goes free and clear to depositor. ○ Change of beneficiary can be made by depositor BUT it must be done in same way as revocation: notarized statement sent to financial institution, name old beneficiary and new beneficiary. |
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• Uniform transfers to Minors Act:
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• Uniform transfers to Minors Act:
○ Reasons: avoids guardianship proceeding, avoids trust (with court supervision of trust) and qualifies for $13,000 per donee annual exclusion from federal and state gift tax. ○ UTMA gifts must be made to CUSTODIAN and it must specify that it is made under NY UTMA ○ UTMA gifts can be made in will so long as same required statutory language is used. ○ Duties of UTMA custodian: hold, manage and invest property under prudent person standard; can pay over to minor or for minor's need what part of property that custodian deems advisable; pay what is left of property when minor turns 18. § Custodian is special statutory conservatorship, custodian does not hold title. ○ Tax consequences: if donor names himself or herself as custodian then amount of gift is includable in custodian's gross estate for federal estate taxes. |
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Charitable trusts
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• Charitable trust:
○ Must have indefinite beneficiaries and must be reasonably large group. Cannot have specific, named persons as beneficiaries. § Children/grandchildren/descendents are too small/identifiable. § Trust for Masses for relatives ok. ○ Must be for charitable purpose: health, education, and religion most common ○ May be perpetual (RAP does not apply). ○ Cy Pres can be used to change trust--if stated purpose of charitable trust can no longer be accomplished, or designated charity goes out of existence, court may change trust to be as near as possible to what settlor wanted. AG has duty of representing beneficiaries of charitable trusts in state. Indispensable party to suit on construction or enforcement of charitable trust and AG and Donor have standing to sue to enforce trusts terms. |
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Honorary trusts
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• Honorary trusts: where no human being is beneficiary of private (non-charitable trust). Gift passes into residuary estate or intestacy.
○ Exceptions: § Pet trusts: valid pet trust can last no more than lifetime of pet. Someone designated in will or appointed by court, can enforce trust and make sure trust's purposes are carried out. § Cemetery trusts: trusts for perpetual care and maintenance of cemeteries and burial plots are classified as charitable trusts and are OK even though they have no human beneficiaries. No RAP problem. |
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Constructive trusts
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• Constructive trusts: just flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.
○ Trustee's only duty is to convey property to person who, in equity, should have property. If Son murdered Father (who died intestate), treat as though Son predeceased. |
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Resulting trust
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• Resulting Trust: equitable remedy.
○ Purchase money resulting trust: NOT recognized in NY (one of only 5 states). Arises only when purchaser buys property and has title put in someone else's name who is not relative. Then later purchaser claims no gift was intended and asks title holder for title to property and title holder refuses. § Most states would find situation to create PMRT which allows purchaser to compel title holder to give up title, but NOT NY. § Exception: NY does find if there is clear and convincing evidence that grantee expressly or implied promised to re-convey land to purchaser then constructive trust can be imposed because of fraud or deceit to benefit purchaser. |
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Spendthrift trust
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• Statutory spendthrift rule and protection from creditors: protects trust beneficiary's interest from creditors by prohibiting voluntary or involuntary transfer of beneficiary's interest.
○ NY allows spendthrift clauses in trusts: special statutory rule that protects all INCOME interests in trusts with spendthrift protection even if trust does not contain spendthrift clause. To provide spendthrift protect to remainder beneficiary (gets principal) spendthrift clause must be expressly stated in trust. ○ Typical spendthrift clause language: no beneficiary of this trust shall have power to assign his or her interest, nor shall such interest be reachable by beneficiary's creditors by attachment, garnishment, or other legal process. ○ Effect of spendthrift clause (statutory or expressly stated in trust): keeps creditors at bay. Cannot get anything until paid to income in beneficiary. |
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Exceptions to spendthrift trust
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○ Exceptions:
§ Creditors who furnish necessities (food, clothing, shelter) § Child support and alimony § Federal tax liens § Excess Income beyond that needed for support and education. □ Last resort remedy, have to show all other possible remedies have been exhausted. What is needed for support is based on life style of beneficiary. 10% Levy provided by CPLR 5205(e). All creditors share levy, not 10% per creditor. |
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Self-settled trust spendthrift
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○ Self-settled trust: does not apply to any interest retained by settlor. Any trust created by settlor to benefit himself are self-settled.
§ Settlors cannot hide out from their own creditors, but can protect other interests. (i.e., settlor get income, but principal goes to X, creditors can get income but not principal). All revocable trusts are fair game for settlor's creditors, even if settlor has no immediate financial interest in trust but settlor retained power to revoke, then trust offers no protection at all against creditor of settlor. |
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Trust modification by trustee or beneficiary
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• Trust modification by trustee and/or beneficiaries: appropriate only when objective of trust would be impaired or frustrated if trust is not modified. Purpose of trust comes first overriding any specific direction in trust.
○ Two level modification test: 1) primary purpose of settlor regarding trust purposes; 2) look at specific direction in trust instrument to determine whether, because of changes in circumstance, those specific directions in trust would now frustrate primary intent. IF SO, court can change direction. ○ Invasion of principal: Court can authorize of invasion of principal if income is not enough to carry out of settlor's purpose of trust. |
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Trust termination by settlor
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• Trust termination by settlor: trust difficult to terminate, all irrevocable are unamendable and unless power to revoke and amend is expressly reserved in trust instrument
○ Exception: settlor can terminate irrevocable trust if ALL beneficiaries in being consent, often impossible because no one can give consent for any beneficiary who is minor or incompetent. § Beneficiaries must be born alive to count--child in gestation is NOT regarded a person. ○ If trust gives property to HEIRS or NEXT OF KIN that interest is not considered beneficial interest and thus no consent need be obtained from them (as they cannot be ascertained until decedent's death). |
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Trustee's powers
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• Trustee's powers: NY Fiduciary powers Act controls--sets out powers that can be exercised by trustee WITHOUT court order and WITHOUT express authorization in trust or will. Applies automatically applies to all trustees and executors and administrators.
○ Trustees can do almost anything: sell any real or personal property; mortgage property; lease property; make ordinary repairs; contest, compromise or settle claims OR do almost anything needed to manage corpus of trust. ○ Beneficiary has right to demand accounting from trustee, executor or administrator--receipts and expenditures. Beneficiary can either ratify or challenge wrongdoing. |
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Trustee's cannot
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§ Borrow money on behalf of trust
§ Continue business--trustee is liable for losses incurred by business unless trustee has court approval to continue business. § Engage in self-dealing □ Trustee cannot buy or sell trust assets to himself (absolute rule, no wiggle room) □ Trustee cannot borrow trust funds (absolute rule). □ Trustee cannot lend to trust ® Any interest earned on such loan must be returned to trust and any given for loan is invalid. □ Trustee cannot profit from serving as trustee (except for appropriate trustee fees). ® Cannot take advantage of confidential information received in capacity as trustee □ Corporate trustee cannot buy its own stock as trust investment § Affirmative duty: must segregate trust assets from person assets. If comingled funds used to purchase asset and asset depreciates, conclusive presumption that personal funds were used and if appreciates then conclusive presumption that trust funds were used □ Trust assets must be titled in trustee's name. |
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Remedies against trustee for breach
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○ Remedies for breach:
§ beneficiary can sue to remove trustee; § beneficiary can ratify transaction and waive breach. § Surcharge action: Beneficiary can sue for any losses § No further inquiry rule: breach of fiduciary duty bye engaging in self-dealing is automatic wrong and no further inquiry need be made. □ NOT defense: good faith and reasonableness. |
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Action against third part for trustee breach
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• Actions against third party when trustee engage in self-dealing: if trustee engages in prohibited transaction, such as self-dealing, and sells trust property to Bona fide purchaser for value without notice, beneficiary cannot sue purchaser.
§ Notice: purchaser not only has to know that was dealing with trustee but that trustee was engaged in self-dealing. |
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Indirect self dealing
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• Indirect self-dealing: rules also apply to loan or sales to relative of trustee or to business of which trustee is officer, employee, partner, or principal shareholder.
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Exculpatory clauses
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• Exculpatory clauses: cannot be used to shield trustees from liability for breach of fiduciary duty in TESTAMENTARY TRUST because relieving executor or testamentary trustee from liability for negligence is void as against public policy
§ But exculpatory clauses can be used in lifetime trust. |
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Trustee liability for contracts
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• Trustee personal liability on contracts: depends on how trustee signed contract--if signed on behalf of trustee, unless provision in contract relieves him of personal liability.
○ Examples: Mary Jones, Trustee of JJ Trust--trustee liable; JJ Trust, by Mary Jones, Trustee. ○ Even if there is personal liability trustee will be reimbursed from trust if: contract was within his powers AND he was acting in course of proper administration of trust. |
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Trustee liability for torts
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• Trustee personal liability for torts: Trustee is personally liable on ALL TORT by trustee or trustee's employees.
○ Trustee should buy liability insurance and charge is as expense to trust ○ Trustee can get reimbursement from trust for tort claims if: trustee was acting within it powers when tort was committed AND trustee was not personally at fault. |
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Trustee's investment power
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• Trustee's investment power: trustee must manage property of trust on behalf of beneficiary, meaning investment of corpus of trust. NY adopted Uniform Prudent Investor Act, gives broad latitude to trustees to choose investments
○ Trustee can pursue what UPIA modern portfolio theory of investment, where trustee creates custom tailored investment strategy for this trust. § Factors: role each investment plays within overall trust portfolio; expected total return. § Trustee does not have to justify prudence of each investment by itself, can balance risky speculative investments against safe conservative investments ○ Prudence is not measured by hindsight, when decision was made ○ Trustee can exercise adjustment power and allocate capital gains to income § Trustee can switch capital gains into income category if necessary to protect income beneficiary. Goal is fairness to all beneficiaries. ○ Key is flexibility to shape investment strategy. |
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RAP
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• RAP: no interest is valid if could vest later than any life in being at time of creation of interest, plus 21 years.
○ An interest is vested when there is no condition that has to be satisfied and exact identity of taker is known. ○ If there is any possibility, no matter how remote, that interest could vest later than lives in being + 21, then void. ○ NY has perpetuities reform statute that automatically reduces all age contingencies to 21 years, thus saving gift. |
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RAP Recap
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• RAP recap:
○ Deals with vesting only ○ For interest to be valid it must vest within lives in being at time of grant plus 21 years. ○ Look at facts to make sure no way vesting could come outside time period of rule. |
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Suspension rule
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• NY Rule against suspension of power of alienation: any interest is void if suspends power of alienation for period longer than lives in being plus 21 years,
○ Suspension of alienation is concern when either: § Spendthrift income interests are in trust (quite considerable given NY's automatic spendthrift protection when trust is silent about income alienation) OR § Life estate is created in unborn person or in open class that may possibly include unborn persons. |
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Suspension rule recap
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• Suspension Rule recap:
○ Does not deal with vesting, only concerned with possible suspension of ability to transfer fee simple. ○ Look for facts to make sure there are persons identified and alive who could, together, convey full fee simple; if cannot find persons who can convey fee simple during lives in being plus 21 years, then interest is void. ○ Remember perpetuities reform statute provision reducing age contingencies to 21 years apply to suspension rule problems also. |
