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157 Cards in this Set
- Front
- Back
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What law governs trusts?
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common law of trusts
Uniform Trust Code (UTC) established in almost 1/2 states CA Probate Code |
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Define express trust
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fiduciary re/ship w/ respect to specific prop (res) in wh one or more persons(trustee) holds legal title subj to enforceable equitable rights of one or more beneficiaries. Creator of trust is settlor who must have had the intent to create the trust. Trust must have valid trust purpose. No consideration is required.
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Elements of a valid private trust
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Intent to create a trust
Trustee Trust prop (res) Definite beneficiary(ies) Valid trust purpose |
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Ways settlor can communicate intention to create a trust
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oral or written words or conduct unless SoF or SoW applies. Oral trust of personal prop is valid. Communication of intent to beneficiaries not necessary; delivery to trustee sufficient--unless settlor is trustee in wh cases he must segregate trust assets or otherwise show intent.
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Must settlor own prop at time he creates a trust?
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yes & settlor must intend immediate effect
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Issue: whether precatory expressions create a trust
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No--expressions of hope, wish or mere suggestion that prop will be used in a certain way do not create a trust
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How can trust overcome inference that precatory expressions do not create a trust?
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1. definite & precise instructions
2. directions addressed to fiduciary (e.g. executor of a will) 3. resulting "unnatural" dispostion of prop if no trust imposed 4. extrinsic evid the settlor previously supported intended beneficiary. |
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Will trust fail w/o trustee?
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No if trustee dies, refuses to accept appointment, resigns court will appoint successor unless settlor clearly intended for trust to last only as long as a particular trustee served. Absence of a trustee may cause inter vivos trust to fail for lack of delivery.
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Will trust fail if trustee has no duties?
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yes, void--beneficiaries take title
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What are qualifications of a trustee?
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capacity to acquire & hold prop & to administer prop. Minor & insane peo can hold prop but cannot administer. State stats limit. (e.g. foreign corps)
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How is a trustee removed?
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court. Basic consideration is whether continuation would be detrimental the the trust.
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Grounds for removal of a trustee include
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serious breach of trust, old age, serious alcohol abuse, conflict of interest.
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Can beneficiaries remove trustee?
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Absent grounds, no unless the power specifically granted to them by trust.
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Can trustee disclaim trust?
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Yes, before acceptance, trustee can refuse appointment. Cannot accept or disclaim only part of a trust.
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Resignation by trustee
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Once an appointment has been accepted, trustee cannot resign w/o court approval unless all beneficiaries consent or trust provided otherwise.
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What is relates back doctrine w/ testamentary trust
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Testamentary trust is treated as in existence as of settlor's death and trustee's acceptance is deemed as of that date.
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If sole trustee & sole beneficiary are same & hold precisely the same interests, what happens to trust?
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titles merge & trust terminates
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Does trust fail for lack of trust prop or res?
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yes
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Can future interest be held in a trust?
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yes but not a mere expectancy
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In order for prop to be valid trust res
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1. settlor must have power to convey
2. trust res must be identifiable & segregated from other prop |
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Can a debtor hold debt in trust?
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No but debtor can declare himself trustee of prop from wh debt is to be paid. Debt can be held in trust by another person.
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Can an unenforceable gratuitous promise be trust res?
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no
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Is a beneficiary necessary to the validity of a trust
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yes, because a trust cannot exist w/o someone to enforce it--except charitable & honorary trusts.
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Who has capacity to be a beneficiary of private express trust?
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anyone capable of taking & holding title to prop
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Are people who may benefit indirectly or incidentally from a trust beneficiaries?
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No
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Is notice to beneficiary necessary to validily of trust?
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No, but lack of lack of notice may indicate no trust was intended.
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Is acceptance by beneficiary necessary to the validity of a trust?
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Yes but it can take place after a valid trust is created.
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Acceptance by beneficiary may be
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express or implied & is generally presumed.
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Can beneficiary renounce his rights in a trust?
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yes w/in a reasonable time
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Under private trust, beneficiaries must be
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definite.
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Do beneficiaries have to be ascertained at time trust created?
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No but must be ascertainable by the time their interests come into enjoyment.
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Requirement for a class gift in a private trust
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reasonably definite. Broad power to choose beneficiaries may constitute a gift or a power of appointment.
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Re: trust purpose, a trust is invalid if
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1. illegal
2. performance requires a crim or tortious act 3. contrary to pub policy |
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If an illegal cond/n in private trust is a cond/n subsequent,
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cond/n is invalidated but the trust is valid.
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If an illegal cond/n in private trust is a cond/n precedent,
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preferred view is to hold the interest valid unless there is evid the settlor's wish would be to void the interest all together if con/n is unenforceable.
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Ways express trust can be created
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1. inter vivos transfer
2. inter vivos declaration of trust 3. will (testimentary) |
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Requirement for inter vivos trust
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present declaration of trust or transfer of prop to another as trustee.
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Present intent to create a private express trust must be manifested by
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conduct (delivery) or words (declaring oneself trustee)
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Delivery means
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placing the trust prop out of the settlor's control (unless settlor serves as trustee)
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Failure to name a trustee may evid
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lack of present intent & prevent delivery of the res
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If present trust is not created b/e no trust res & settlor subsequently acquires the res, the trust is created when
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settlor remanifests trust intent.
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Must valid trust be in writing?
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1. usu.not for personal prop.
2. SoF requires writing for trust of land. 3. Otherwise invalid trust of land may be enforced by a constructive trust. 4. usu. extrinsic evid allowed If ambiguity appears on face of the writing |
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Testimentary trust is
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created by a will & takes effect when settlor dies.
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Formalities of a testimentary trust
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Trust intent & essential terms of trust (tres res, beneficiaries & trust purpose) must be ascertained from the will, writing incorporated by reference, from facts having ind legal significance &/or from the exercise of a power of appointment created by a will
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Secret trust
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absolute gift in will made in reliance on beneficiary's promise to hold the prop in trust for another. Generally disfavored; but to guard against unjust enrichment, courts will allow intended beneficiary to present extrinsic evid to prove existence. Constructive trust can be imposed in favor of intended beneficiary.
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Semi-secret trust
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will makes a gift in trust but fails to name the beneficiary--so no trust created Extrinsic evid not allowed. Named trustee holds on resulting trust for testator's legatees or heirs.
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How charitable trusts differ from private trusts
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1. MUST have indefinite beneficiaries
2. may be perpetual 3. cy pres doctrine applies |
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Charitable purpose means
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purposed considered to benefit the pub; includes relief of poverty, advancement of knowledge, promotion of health.
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May the class to be benefited in a charitable trust be narrow?
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Yes but not so narrow as to only benefit a few peo whom settlor wants to aid personally
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How is charitable trust enforced?
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In many states, settlor & beneficiaries do not have standing to enfore. Duty placed upon the state attorney gen. Under UTC, settlor & qualified beneficiaries do have standing to enforce.
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Whether RAP applies to charitable trusts
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Charitable trust may be perpetual. Also RAP does not apply to transfers in trust from one charity to another. RAP does apply to shifts b/n private & charitable uses. (RAP in PROP #64, 67-80)
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Cy Pres
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Equitable doc under wh court reforms a written doc w/ a gift to charity as closely to the donor's intention as possible, so gift does not fail. Cy pres means "as near as possible." Court must find a gen charitable intent on the part of the settlor & ascertain settlor's primary purpose.
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honorary trust
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legally invalid & unenforceable because of lack of proper beneficiary; typically for the benefit of pets or burial plots. Trustee is "on her honor" to carry out terms. CA authorized trusts for pets in 2009.
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Do courts uphold honorary trusts?
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yes, as long as trustee is willing. If not, resulting trust is imposed. Many juris/ns will void on basis of RAP.
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Under UTC, are honorary trusts enforceable?
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yes, up to 21 yrs by someone named in trust or appointed by court. If for care of animal alive during settlor's life, until animal dies.
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How do some courts use constructional outs to save an honorary trust wh is void under RAP?
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1. hold that trust is personal to the named trustee
2. b/e $ will be exhausted w/in the perpetuities period, it cannot last beyond the period so does not violate RAP |
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May a trust beneficiary transfer his interest in the trust?
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Yes unless restricted by stat or the trust instrument. Assigned interest remains subj to all previous cond/ns
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May an insolvent trust beneficiary's creditors levy on his beneficial interest?
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Yes unless restricted by stat or trust instrument. Interest is subj to judicial sale. To avoid this, a court ma order the trustee to pay the beneficiary's income to the creditors until the debt is paid.
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3 types of trusts based on transfer of the beneficiary's interest
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spendthrift trusts
discretionary trusts support trusts |
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What are spendthrift trusts?
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Trusts which preclude beneficiary from voluntarily or involuntarily transferring his interest in the trust. His creditors are precluded from reaching the trust.
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Issue: spendthrift trusts & restraint on alienation.
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Restraints on alienation (provisions in deeds, wills & mortgages that restrict the grantee's power to convey the prop) usually invalid (See Prop #82-89). However, most courts uphold spendthrift trusts.
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Can beneficiary's creditors reach his interest in a spend thrift trust?
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No until the interest is paid to him
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Is a restraint which denies a beneficiary's creditors right to reach interest yet permits beneficiary to voluntarily alientate his interest valid?
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Probably not.
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Can a beneficiary's assignees force the trustee to pay them?
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no
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Is a spendthrist trust in which settlor is the beneficiary valid?
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no
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What classes of creditors do many states allow to reach beneficiary's interests in spite of a spendthrift trust?
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dependents, furnishers of necessities
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Discretionary trust
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trust in wh the trustee alone decides whether or how to distribute the trust prop or its income to the beneficiary
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Support trust
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trust in wh the trustee pays to the beneficiary only as much trust income or principal (or both) as the trustee believes is needed for the beneficiary's support. As w/ spendthrift trust, the beneficiary's interest cannot be reached by creditors.
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Whether the beneficiary's other resources should be considered in determining the amount payable to him depends on
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the intent of the settlor
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Ways trust can be terminated
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1. by terms of trust
2. by settlor 3. by beneficiaries 4. by judicial termination |
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Termination of trust by its own terms occurs
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authomatically upon the expiration of the time specified in the instument or when all of the purposes of the trust have been accomplished.
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Issue: Can settlor revoke (or modify) trust?
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In many states, settlor may not revoke or amend unless he has expressly retained right. Under UTA & CA probate code, a trust is presumed revocable unless instrument expressly provides that it is irrevocable.
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Beneficiaries may compel modification or termination when
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1. all consent
2. modification or termination will not frustrate any material trust purpose |
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If beneficiaries agree to termination, will trustee have liability?
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Not if ALL beneficiaries agree and he accommodates them by distributing trust assets.
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In an inter vivos trust, what is role of settlor in termination?
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If beneficiaries have right to terminate, the settlor's objection not a bar--but settlor may have evid that trust purpose not yet fulfilled. Joinder of settlor may be deemed a waiver of a material purpose wh could otherwise block termination.
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When may a court prematurely terminate a trust?
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when trust's purpose has become impossible or illegal or has been completed
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Doctrine of changed circumstances w/ regard to trusts
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A court may authorize, due to changed circumstances not anticipated, by the settlor a deviation from the administraive terms when necessary to achieve the trust purpose. such changes may not deprive the beneficiaries of their interests in income or corpus.
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Sources of trustee's power
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1. granted expressly by trust instrument, state law & court decree
2. implied are those necessary to accomplish trust purposes--e.g. power to incur necessary & ordinary expenses. No implied power to borrow $ but power of sale unless trust directs not to sell 3. UTC broader powers |
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Issue: joint trustee powers & agreement
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Traditional view--joint trustee must exercise power through unanimous agreement. Today, in almost 1/2 state, if 3 or more trustees, power may be exercised by a majority.
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Diff b/n trustee's imperative & discretionary powers
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Power is imperative if the trust instrument requires its exercise. Discretionary powers are ones that the trustee may or may not perform. Both are subj to review for abuse of discretion. Trustee is not immune from review even if given "uncontrolled" discretion
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Trustee's implied powers
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include things necessary to operte the trust (e.g. power of sale, to invest, to meet expenses, to lease land) Normally a trustee has NO implied power to borrow money or to mortgage otherwise encumbered trust prop. However such powers are expressly conferred by UTC.
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Duties of the trustee
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1. care
2. loyalty 3. separate & earmark trust prop--no co-mingling 4. perform personally 5. defend trust from attack 6. preserve trust prop & make it productive |
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Duty of care of trustee means
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trustee must exercise the degree of care, skill & caution that a reasonably prudent person would exercise in managing her own prop. If trustee has greater skill, will be held to that higher standard.
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Duty of loyalty means trustee
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owes a duty of undivided loyalty to the trust & its beneficiaries; no self dealing. Duty to account insures trustee is meeting her obligation of loyalty.
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Under the duty of loyalty, a trustee cannot
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buy or sell trust assets
borrow trust funds loan personal funds to trust personally gain through position as trustee |
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Under the duty of loyalty, a corporate trustee
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cannot invest in its own stock as a trust investment--but it can retain its own stock if it was part of the original res
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If trustee breaches duty of loyalty, remedies include benefiicary
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1. recovering any profit from the trustee
2. setting aside the transaction or affirming the transaction 3. AFFIRM TRANSACTION |
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Issue: trustee co-mingles trust assets
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1. If some prop is lost or destroyed, it is presumed that the prop lost was the trustee's & prop still on hand belongs to the trust.
2. If a portion increases in value, it is presumed that the trust's assets increased & the trustee's assets declined. |
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May trustee delegate acts required in the adm of the trust
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only those wh would be unreasonable for trustee to perform personally. Trustee may never delegate the entire adm of a trust.
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May trustee delegate investment & managmt decisions?
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Traditionally not but under Uniform Prudent Investor Act (UPIA) yes if prudent trustee of comparable skill could properly delegate under the circumstances.
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Remedy if trustee improperly surrenders control
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trustee becomes a guarantor of the fund & is responsible for actual losses--no matter the cause.
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What is trustee's duty to defend trust from attack?
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A trustee owes a duty to defend the trust from legal attack unless exam reveals that the challenge is well founded
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Remedy for trustee's breach of duty to preserve trust prop & make it productive
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the amt of income which would normally accrue from proper investments.
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2 statutory schemes from wh most states chose to govern trustee's investment responsibilities
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1. UPIA in part or whole (includes CA)
2. statutory "legal lists" |
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UPIA includes
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1. reasonable stand of care, skill & caution. A trustee w/ special skills held to a higher standard
2. loyalty & impartiality 3. prudence evaluated as to overall investment strategy 4. any kind of investment permitted as long as prudent 5. trustee must diversify investment of assets unless trust is better served w/o |
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UPIA lists facts for trustee to consider in making investment decisions. These include
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1. gen ec cond/ns
2. possible effect of inflation & deflation 3. expected tax consequences 4. role ea investment plays w/in the portfolio 5. other resources of beneficiaries |
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Under UPIA, delegation of investment & management functions permitted if trustee
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1. uses prudence in selecting agent
2. establishes scope & terms of the delegation & 3. periodically reviews agent's actions. |
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What is standard for reviewing compliance w/ Uniform Prudent Investor Act?
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reviewed in light of the facts & circumstances existing at the time of the trustee's decision or ac/n. A trustee who acts in substantial compliance w/ act will not be held liable.
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Statutory lists
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set forth approved investments for trust assets. May be permissive or mandatory. (Under either, trustee must still exercise reasonable care, skill & caution in investing trust assets).
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In a statutory list, are unsecured loans & second mortgages considered proper trust investments?
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No
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In a statutory list, are corporate stocks considered proper trust investments?
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Yes, most include preferred & common stocks.
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In a statutory list, is land considered a proper trust investment?
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Courts are divided. Unproductive land is not.
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Under statutory legal lists, are mortgage participation, commont rust funds & mutual funds permitted?
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Yes, increasingly so
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Can a trustee carry on the testator's bus?
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No not unless expressly authorized by the trust.
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Summary of fiduciary obligation & ?s to ask
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Standard imposed on trustee are harsh & designedf to deter wrongful conduct & to ease burden of proving a breach of duty. Ask:
1. was the act one that the trustee was authorized to perform by the instrument, state law or implication? 2. If act was proper, did trustee do so w/ appropriate care, skill & caution? |
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Who may sue trustee for breach of duty?
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beneficiaries may seek damages or removal of trustee for breach of duty. Settlor may sue if he is a beneficiary, but outsiders cannot enforce the trust.
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For what can trustee be liable?
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losses resulting from breach, lost profits to the trust and interest on her liability from the time of breach.
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What can court of equity do prior to actual breach of the trust?
YOU SHOULD EXPAND THE RULE ON EQUITABLE ENFORCEMENT - MY CONVISOR HAS A NUMBER OF ASPECTS THAT YOU DID NOT COVER |
compel the trustee to perform her duties & enjoin her from committing breach
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Equitable defenses
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beneficiary consent
laches--beneficiary must sue w/in a reasonable time (mere failure to object at time of breach does not constitute consent |
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Can the losses due to breach be offset by gain which resulted from another breach?
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No
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A trustee will be liable for the acts of agents if she
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1. directed, permitted or acquiesced to improper act; concealed or failed to compel the agent to redress his wrong
2. made improper selections of agents or delegations to them. 3. failed to exercise reasonable supervision. |
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A co-trustee will be liable for acts of a co-trustee if she
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1. approved, acquiesced or participated in the breach
2. concealed breach or failed to compel redress 3. improperly delegated authority to co-trustee |
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A trusee will be liable for a predecessor trustee's breach if she
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1. knew about breach & failed to compel redress
2. was neg in determining what prop should be delivered to her |
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Effect of exculpatory clauses
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1. strictly construed
2. enforceable if no bad faith, intentional breach or recklessness or 3. was not inserted b/e trustee abused confidential re/ship w/settlor. 4. Clauses absolving trustee from all liabiltiy are void. |
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Is trustee personally liable to 3rd parties on Ks made in the course of trust adm?
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Yes, though trustee is entitled to indemnification from trust if K was w/in powers & she acted w/ reasonable prudence.
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Does trustee have personal liablity for torts committed in the course of trust adm?
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Yes. Indemnification ONLY IF trustee was not personally at fault & tort occurred as a normal incident to activity in wh trustee was properly engaged. If trustee is entitled to indemnification, creditors to whom she is liable can reach trust assets to satisfy claims.
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If trust prop is improperly transferred to party who is not a BFP
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beneficiary or successor trustee can set aside transac/n
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Transfer of trust prop to BFP results in
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cutting off beneficiaries' interest. BFP is a 3rd party who acquires prop for value w/o notice of trust.
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If trust prop transferred to an innocent donee
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the donee must restore the prp, its value or its substitute to the trust.
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If 3rd party knowingly participates in a breach of trust,
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he is liable for the resulting loss to the trust estate.
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Direct suits by beneficiaries against 3rd parties are permitted only where trustee
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1. has participated in the breach
2. has left the juris/n & no successor trustee is appointed or 3. fails to sue a 3rd person in tort or K. |
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Uniform Principal & Income Act (UPAIA)
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1. enacted in maj of states
2. applies to all trusts & estates 3. emphasizes trustee's duty to adm the trust impartially except if intent is to favor one. 3. gives trustee or personal rep adjustment power to reallocate investment profolio return. 4. looks to total return from the overall portfolio |
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Under UPAIA, factors trustee is to consider in exercising adjustment power include
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1. nature, purpose, duration of trust
2. intent of settlor 3. ID & circumstances of beneficiaries 4. need for liquidity, income, preservation & capital appreciation 5. nature of trust's assets 6. whether or not trustee has power to invade principal 7. market cond/ns 8. tax consequences |
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Under UPAIA, allocation of receipts and expenses generally follow
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traditional accounting rules e.g. rent or interest from trust prop is income. Sale of a trust asset is considered principal.
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Ten percent default rule
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If no part of a payment (e.g. receipt from a pension plan, sale of asset such as patent or mineral rights) is designated as income or dividend, 10% is income & balance is principal.
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Generally the regular expenses of the trustee are charged
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1/2 to income &
1/2 to principal |
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Whether an instrument is a will or a trust depends on
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whether the transfer creates some present gift
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Will a trust in wh the settlor retains powers over trust prop (i.e. life estate & the power to revoke) be upheld
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yes
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Will a trust in wh the settlor is the trustee as well as the life tenant with power to revoke be upheld?
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yes if settlor notified 3rd parties or took some ac/n that made his intention to est a trust clear.
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Advantages of revocable trust
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convenient mgmt of assets, estate planning, avoid probate (delays, costs, publicity); savings on estate taxes, secure $ management, maintain control; flexibility.
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Can a settlor make gifts by will go to a trust?
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yes even an amendable & revocable trust--established during settlor's lifetime. May remain unfunded & must be clearly IDed in will.
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Are inter vivos life insurance trusts upheld?
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yes
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Totten trusts
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a bank account depositor declares himself trustee of the account for a person who is to receive the money in the account at time of depositor's death.
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Totten trusts are revocable by
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1. w/drawal of $
2. any lifetime act manifesting intent to revoke 3. specific contradictory provision in a will. |
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Uniform Transfer to Minors Act
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allows gifts to minors to be transferred to a person as a custodian for a minor. Not a trust, because minor still hold legal title subj to custodian's statutory power. Qualified for the $13,000 per donee annual federal gift tax exclusion.
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Types of trusts imposed by law
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resulting
constructive |
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resulting trust
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trust imposed by law when prop is transferred under circumstances suggesting that the transferor did not intend for the transferee to have the beneficial interest in the prop. Involve reversionary interests & are based on the presumed intent of the settlor.
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3 types of resulting trust
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1. purchase $
2. resulting from failure of an express trust 3. resulting trusts arise from an incomplete disposi/n of trust assets. |
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purchase $ resulting trust arises
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when one person buys prop but directs the seller to transfer the prop & title to another. The buyer is the beneficiary & the holder is the trustee
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Does $ paid for taxes or impovements give rise to a purchase $ resulting trust?
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No
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What is the burden of proof on one claiming to be beneficiary of a purchase $ resulting trust?
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clear & convincing evid he supplied the consideration
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After X proves he supplied consideration, a resulting trust is presumed, It is rebuttable by
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showing no trust was intended or the $ was a gift or paymt to satisfy a debt.
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Exceptions to presumption of purchase $ resulting trust
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1. no trust presumption where parties closely related; there, a gift is presumed
2. unlawful purpose 3. transferee obtained title wrongfully--(here constructive trust may be imposed) |
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When x supplies only part of the consideration, the resulting trust in his favor is
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for a pro rata portion of the prop.
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What circumstances give rise to a resulting trust on failure of an express trust?
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1. trust is void or voidable
2. beneficiary is dead & cannot be located 3. failure of charitable trust when cy pres inapplicable. |
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What circumstances DO NOT give rise to a resulting trust on failure of an express trust?
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1. trust specifically or implicity provides for dispostion if trust fails
2. settlor was given consideration for his original transfer in trust 3. settlor created trust for an illegal purpose 4. cy pres is applicable in charitable trusts. |
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constructive trust
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trust imposed on equitable grounds against one who has obtained prop by wrongdoing, thereby preventing unjust enrichment. Arises either where there is no valid express trust or frequently when no trust was even intended. SoF is inapplicable. Does not create a fiduciary re/ship.
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Will resulting trust be implied when a trust purpose is fully satisfied & some trust prop remains?
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yes
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Burden of proof of facts needs to establish constructive trust
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clear & convincing evid
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Constructive trustee only duty is
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to convey prop to person who would have owned it but for wrongful conduct. (must also account for profits taken or fair rental value of use--but not duty to invest trust prop)
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Constructive trust may arise from
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1. theft or conversion
2. fraud, duress, mistake, etc 3. breach of fiduciary duty 4. homicide |
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Do constructive trusts generally arise from mere breach of promise?
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No. General rule is that a mere breach of a promise will not raise a constructive trust.
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What are exceptions to the gen rule that constructive trusts are not imposed for breach of promise?
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1. fraudulent promise (i.e. promisor never intended to keep)
2. breach in a confidential re/ship. 3. breach by Dec's devisee or heir to hold prop for benefit of 3rd person. 4. breach by Dec to devise prop to one rendering services in reliance therone (but not if damages adequate) 5. breach to debtor by the buyer at the foreclosure sale to hold the prop for the debtor, causing the dbtor to forgo bidding at the sale (many juris/ns not if damages adequate) |
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Obligations of trustee of constructive or resulting trusts
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They are apssive. once the court has declared such a trust to exist, the trustee's sole duty is to convey legal title to the beneficiary. Trustee may also account for profits taken from prop or fair rental value of his use. No duty to invest.
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Do equitable principles & defenses apply to constructive & resulting trusts?
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Yes except for the rule than an adequate remedy at law bars equitable relief (except adequate remedy at law will bar equitable relief for breach of an oral promise to make a will or to hold prop purchased at foreclosure sale for the benefit of the promisee).
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How do some courts use constructional outs to save an honorary trust wh is void under RAP?
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1. hold that trust is personal to the named trustee
2. b/e $ will be exhausted w/in the perpetuities period, it cannot last beyond the period so does not violate RAP |
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How do some courts use constructional outs to save an honorary trust wh is void under RAP?
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1. hold that trust is personal to the named trustee
2. b/e $ will be exhausted w/in the perpetuities period, it cannot last beyond the period so does not violate RAP |
