Trusts

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General Requirements for a Trust

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1.SETTLOR…
2.DELIVERS LEGAL TITLE to…
3.PROPERTY / RES…
4. TO A TRUSTEE who holds that title for the benefit of a…
5.DEFINITE & ASCERTAINABLE BENEFICIARY with a…
7.LAWFUL PURPOSE in a…
8.VALIDLY EXECUTED DOCUMENT

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SETTLOR

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Grantor of Trust

May be anyone with the capacity to enter a k (e.g. over 18, not incompetent)

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LEGAL TITLE

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i)Titled assets must be formally transferred (e.g. shares re-registered in Trustee’s name)

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PROPERTY / RES

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i)Settlor must own property, not mere expectancy of ownership

ii)Must be identified property, not subject to future determination (i.e. not a mere promise to contribute funds in the future)

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TRUSTEE

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i)Trustee may be almost anyone except in testamentary trusts, cannot be:
a)Under 18
b)Judicially declared incompetent
c)Convicted felon
d)Those incapable because of drunkenness, dishonesty, want of understanding, or improvidence
e)A non-NY resident unless a close relative to the decedent and a NY resident serves as co-fiduciary
ii)But failure to name a trustee does not make trust fail -> Court will appoint one

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DEFINITE & ASCERTAINABLE BENEFICIARY

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If ambiguous, trustee holds in a “resulting trust” for the residuary beneficiary of a will or intestate heirs

ii)“Family” & Next of kin” are ascertainable; “Friends” are not.

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LAWFUL PURPOSE

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i)Must not have a purpose of
a)committing a crime,
b)destruction of property (e.g. burn my diaries)
c)conditions against public police (e.g. promoting divorce or discouraging marriage)
But taking care of widow until remarriage and restrictions to religious or ethnic groups are allowed.

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VALIDLY EXECUTED DOCUMENT

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i)Writing signed by settler & trustee
ii)Acknowledge by a notary public or two witnesses

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EXCEPTIONS TO THE RES REQUIREMENT

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Pour-over gifts

Unfunded revocable trust as beneficiary for life insurance proceeds, savings accounts, or pension plans

Note: alternative method incl. testamentary trust where the beneficiary is “the trustee named in my will”

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IF TRUSTEE DOES NOT HAVE ANY DUTIES...

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the trust is a passive trust (no trust at all)

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INTENT to create a trust

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Precatory (non-binding) language is insufficient(e.g. “I wish” or “I request”)

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TYPES OF TRUSTS: EXPRESS TRUST

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A legal device that allows an owner of property to make transfers of property & have those assets managed on behalf of someone else.

May be a lifetime/inter-vivos trust or a testamentary trust set up in the settlor’s will.

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REVOCABLE LIFE-TIME TRUST - Benefits & Drawbacks

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i)Benefits – Avoid probate, guardianship
ii)Drawbacks – does not avoid taxes, and full amount will be included in gross estate for fed tax purposes if settler keeps any interest

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REVOCABLE LIFE-TIME TRUST - Requirements

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i)Settlor’s role
a)may be a trustee, income beneficiary, principal beneficiary (estate), and may retain power to terminate or amend trust
b)may not be the sole trustee & sole beneficiary (merges legal & equitable title)

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POUR OVER GIFTS: Defined

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gift made in a will to an existing revocable trust

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POUR OVER GIFTS: Benefits

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Avoids will formalities in the trust, can be changed during the lifetime of the settler (somewhat easier than changing will)

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POUR OVER GIFTS: Requirements

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Trust must be in existence or executed concurrently with the will

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TOTTEN TRUST: Defined

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Bank account named “Settlor X as trustee for Beneficiary Y”

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TOTTEN TRUST: Revocation

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a)Withdraw all money
b)Expressly revoke in a notarized writing that names the beneficiary & the financial institution delivered to the bank
If beneficiary is changed, must include new beneficiary’s name as well
c)Revoke in a will (revoke in a notarized writing that names the beneficiary & the financial institution)
d)Death of beneficiary

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TOTTEN TRUST: Benefits & Drawbacks

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+ Control - Depositor makes deposits & withdrawals at will during lifetime, Beneficiary receives proceeds at Settlor’s death

- Creditors of the settlor may always reach the trust, before or after the Seettlor’s death

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JOINT BANK ACCOUNTS W/ RIGHT OF SURVIVORSHIP - How to challenge

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If clear & convincing evidence shows that a survivorship was not intended, but the accounts was opened as a mere matter of convenience, then survivorship language can be set aside
a)Hard to satisfy

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JOINT BANK ACCOUNTS W/ RIGHT OF SURVIVORSHIP - Description of Interests

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Each account holder owns half of the account; if one contributes > ½, considered a gift

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What is the UTMA?

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Uniform Transfers to Minors Act

Creates a trut-like instrument (not a trust)

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UTMA GIFTS - Benefits

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a)Avoid guardianship proceedings
b)Avoids establishing a trust
c)Qualifies for the $13K annual gift tax exemption
d)Avoids estate tax unless donor names himself as the custodian

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UTMA GIFTS -Requirements

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gift must be made to a custodian (not a trustee) and specify it is mae under the UTMA
a)A custodian must hold, manage & invest the property under a prudent person standard, pay over to the minor an amount the custodian deems advisable, and pay over the rest when the minor turns 21 (or 18 if gift is before 1997)

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CHARITABLE TRUSTS: Requirements

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a)Indefinite beneficiary of a reasonably large group

b)Charitable purpose

c)Perpetual life (no rap problem

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CHARITABLE TRUSTS: Requirements – Exception to Indefinite Class Requirement

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a trust for Masses for relatives or for a cemetery plot is OK

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CHARITABLE TRUSTS: How may a purpose be modified

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May be modified under cy pres doctrine if purpose can no longer be accomplished

AG and donor have standing to sue to enforce purpose (AG is indispensible party)

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HONORARY TRUSTS - Defined

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No human beneficiary

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HONORARY TRUSTS - Consequences

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*Not a real trust -> Falls into residuary estate

Exception: Pet trust for the lifetime of the pet

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CONSTRUCTIVE TRUSTS - Defined

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equitable remedy to disgorge unjust enrichment from wrongful conduct

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CONSTRUCTIVE TRUSTS - Examples

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formality lacking because of prior beneficiary intimidation

son kills father -> trust for grandchildren vs. father

See also Corporations

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PURCHASE MONEY RESULTING TRUST - Elements

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A buys property and puts it in B’s name
a)B is not a relative
b)No gift was intended
c)Title holder refuses to regrant title

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PURCHASE MONEY RESULTING TRUST - Consequences

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Not a trust but an equitable remedy

In NY, can only compel title if there is clear & convincing evidence that the grantee had expressly or impliedly promised to reconvey the land to the purchaser (fraud/deceit)

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WHICH "TRUSTS" ARE NOT REAL TRUSTS?

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1) UTMA Gifts
2) Honorary Trusts
3) Constructive Trusts
4) Purchase Money Resulting Trust

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CONTROLLING LAW: Trustee Rights & Responsibilities

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NY Fiduciary Powers Act (FPA)

UNIFORM PRUDENT INVESTOR ACT

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Trustee Rights

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NY Fiduciary Powers Act (FPA) allows trustees to do almost anything to manage the corpus of the trust, but NOT:

i)Engage in self-dealing

ii)Borrow money on behalf of the trust

iii)Continue a business

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Consequences of Continuing a Business as a Trustee

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trustee will be liable for any losses unless s/he had court permission to continue the business

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UNIFORM PRUDENT INVESTOR ACT

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Allows a trustee to pursue the “modern portfolio theory of investment,” by judging the risk and expected income/capital gain of the portfolio as a whole not each individual investment.

i)Prudence is not measured by hindsight

ii)Trustee may adjust CG & income if necessary to preserve interests of income vs. principal beneficiaries, with goal: fairness & maximum total return

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TRUSTEE SELF-DEALING PROHIBITIONS

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i) Cannot buy/sell trust assets

ii) Cannot borrow from/lend to the trust (includes loans to/from trustee’s relatives, businesses, partner, etc.)

iii)Cannot profit (except for appropriate trustee fees),

iv)Must segregate trust assets from personal assets & earmark trust assets

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COMMINGLING ASSETS - Remedy

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Any profits presumed to be made on trust funds, losses on personal funds

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EXAMPLE OF TRUSTEE PROFITS FROM TRUST

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e.g. by taking advantage of confidential communications or having trust buy its stock as an investment (if corporation is trustee)

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REMEDIES FOR BREACH OF TRUSTEE DUTIES

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i) Sue for loss (“surcharge action”)
*But may not sue BFP w/o notice

ii) Sue to remove

iii) Ratify transaction

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IS GOOD FAITH OR REASONABLENESS A DEFENSE TO TRUSTEE DUTIES?

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NO

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MAY EXCULPATORY CLAUSES BE USED IN TRUSTS re: TRUSTEE DUTIES?

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NOT IN TESTAMENTARY TRUSTS

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WHEN IS A TRUSTEE PERSONALLY LIABLE ON A CONTRACT?

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Did trustee sign personally or clearly on behalf of the trust?

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WHEN IS A TRUSTEE PERSONALLY LIABLE FOR A TORT?

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Trustee is personally liable for torts by the trustee or the trustee’s employees

HINT: Buy liability insurance & deduct as cost from the trust!

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WHEN MAY A TRUSTEE BE REIMBURSED BY A TRUST?

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Trustee may be reimbursed for

CONTRACTS - if k was in the power of the trustee & trustee was acting in the proper administration of the trust
TORTS - if trustee was acting w/in his/her powers and was not personally at fault (even if trustee’s employee was a tfault)

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WHEN MAY A TRUST BE REVOKED?

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i)Trusts are irrevocable & unamendable unless expressly reserved in trust instrument

ii)If irrevocable -> can still revoke if all beneficiaries consent

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HYPO: A wants to revoke an irrevocable trust "income to B for life, principal to B's heirs." May she revoke?

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If B consents. Heirs & next of kin are not considered beneficiaries

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HYPO: A wants to revoke an irrevocable trust "income to B for life, principal to B's children." May she revoke?

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Probably not. Revocation is impossible if any beneficiary is a minor or incompetent.

*But note: a child in gestation is not regarded as a person

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STATUTORY SPENDTHRIFT RULE – General Protection

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All income interests in irrevocable trusts are protected from creditors by preventing voluntary or involuntary transfers of a beneficiary’s interest (until the beneficiary actually receives the money)

Principal beneficiaries may also be protected if expressly stated in trust

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STATUTORY SPENDTHRIFT RULE – Exceptions:

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a)Creditors who furnish necessities

b)Child support & alimony

c)Federal taxes

d)Excess income beyond that needed for support (based on beneficiary’s lifestyle) and education
e)CPLR’s 10% levy – all creditors combined

f)Interests retained by settlor

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TRUST MODIFICATION: Test

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i)What is the primary purpose?

ii)Would the objectives of the trust be defeated or substantially impaired if the trust is not modified?

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RULE AGAINST SUSPENSION OF THE POWER OF ALIENATION: General Prohibition

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Any interest is void if it suspends the power of alienation for a period longer than lives in being + 21 years

*RAP reform (e.g. of age contingencies) applies here as well

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RULE AGAINST SUSPENSION OF THE POWER OF ALIENATION: Becomes a concern when:

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a)Spendthrift income interests are in the trust

b)Life estate created in an unborn person or open class