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89 Cards in this Set
- Front
- Back
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Private Express Trust Defined
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A fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose
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Valid Trust requires:
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i. 1) Settlor; 2) res; 3) trustee; 4) beneficiary; 5) intention to create the trust; 6) valid/legal trust purpose;
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Property of the Trust (Res)
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a. Rule: any presently existing interest in property that can be transferred can be the corpus of a trust
b. Examples: fee simple; future interest like a contingent remainder; life insurance policy; bonds; stocks c. Illusory Interests cannot be the subject matter of a trust |
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Beneficiary (Rule) (4 notes)
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Rule: Any Ascertainable person or group of people can be the beneficiary of a private express trust. Person includes legal person.
i. Corporations can be beneficiaries. ii. Unincorporated assn: not under CL; yes under modern law iii. Class gifts are valid (but can’t be too big…but this might be a charitable trust) iv. A child conceived (in the womb) when the interest was created and later born is deemed ascertainable. |
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Trusts and RAP
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RAP can be a problem for all except charitable trusts
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Trustee (and what happens in absence of one)
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a. Rule: trust must have a trustee, but the court will not allow the trust to fail solely because there is no trustee or a trustee refuses to serve
i. The court, in such case, will appoint a trustee ii. Until the trustee is appointed, the settlor or the settlor’s estate will hold legal title |
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Manifestation of Trust Inent
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Must have present manifestation
No need for magic words But precatory words not enough BUT precatory words PLUS parol evidence may equal a trust! |
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Writing Requirement for Trusts
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Trusts of personal property do not have to be in writing.
SOF only applies to real property |
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Creation: Trust to create effect at settlor’s death
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Only if S complies with statute of wills. Thus, our S is really a testator.
Thus, a part of testator’s will has a provision for a testamentary trust, a trust which will take effect at testator’s death. |
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Creation of trust during lifetime (2 ways)
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Transfer in Trust
Declaration in Trust |
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Transfer in trust (real property & personal property)
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3rd person is the trustee
Real: S must execute and deliver a written deed transferring title to the trustee, due to SOF. Personal: must be delivery to the trustee of the trust property at the time S manifests intent to create the trust. The delivery can be actual, symbolic, or constructive. If no delivery, no trust. Promise to deliver corpus in the future is not a delivery. |
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Declaration in trust:
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S himself is the trustee
a. Real property: must be some writing to satisfy SOF indicating the S is also the trustee b. Personal Property: because the S is the trustee, there is no delivery issue. Just need present manifestation of trust. |
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Legal Purpose
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Rule: can be established for any legal purpose
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What if trust is for an illegal purpose or violative of public policy?
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Must distinguish b/w illegality at creation from illegality subsequent to creation.
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Illegality at creation
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try to excise the bad from the good. If you can, the trust will stand. (e.g. O→A on condition he divorces spouse…just give trust to A free of condition)
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Illegality at creation if not possible to sever: 2 options
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1. Invalidate at its inception, and settlor remains owner.
2. Allow trustee to keep the property for himself or herself, as punishment to the settlor, who does not have clean hands |
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Illegality after creation
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1. Resulting trust is decreed. This is an implied in fact trust based on presumed intent of parties→back to S (residue, heirs, etc.)
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Charitable Trust (definition and examples)
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a. Statute of Elizabeth: trusts for education, alleviation of poverty, alleviation of sickness, to help orphans
b. Any trust which confers a substantial benefit upon society c. Examples: i. Help the poor; advance education; help the sick; promote religion |
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Creation of a Charitable Trust (4)
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This is created in the same way you create a PET: (i) manifestation of trust intent, which can be done (ii) at testator’s death by will or (iii) during settlor’s lifetime by declaration of trust or transfer in trust of a presently existing property that can be transferred (iv) for a legal charitable purpose.
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Beneficiary of a Charitable Trust
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In a charitable trust, there is no ascertainable person or group who are the beneficiaries, as in a private express trust, because society is the beneficiary of the charitable trust.
Note that while an individual may receive an incidental benefit, the focus is on society (e.g. endowed professor chair→benefits society) |
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Where beneficiary is of a small group of people, is this a charitable trust, or a private express trust?
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Split of authority
i. One view: private trust because only a few people benefit ii. Other view: society benefits even if small evil is cured. |
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PET vs. Charitable (why does it matter)
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because of the RAP and Cy Pres doctrine.
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RAP and charitable Trusts
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CL RAP still applies in many jurisdictions, but the rule does NOT apply to charitable trusts→can endure forever
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Cy Pres
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If settlor manifests a general charitable intent (e.g. free hospital for poor) but the mechanism for effectuating that intent is not possible or practicable (e.g. not enough trust money), the court can modify the mechanism cy pres—“As nearly as possible”—to effectuate S’s general charitable intent.
c. Only the Court can invoke Cy pres, not the trustee on his own i. Trustee may petition, but court alone has power. |
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Deciding on General vs. Specific Intent (for cy pres etc.)
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i. Introduce BOTH extrinsic and intrinsic evidence.
ii. If S has specific charitable intent, cy pres CANNOT be used (Syracuse med school case). In this case, resulting trust. |
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Pour Over Wills
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S creates intervivos trust with a provision in her will devising part or all of the estate to the trustee of the trust
b. Pour-over provisions are validated in three ways i. Incorporation by reference ii. Fact of Independent Significance iii. UTATTA (Uniform Testementary Additions to Trust Act. c. See wills lecture |
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Honorary Trusts
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Defined: A trust which has no ascertainable beneficiary and confers no substantial benefit upon society. (e.g. trust for fox hunting)
i. Because B is not ascertainable → not a PET ii. Because B is not society → not a charitable trust iii. Honorary trust is merely the goal of the S: trustee is NOT required to carry out S’s goal, but has the power to carry it out. Thus, trustee is on his honor to carry out S’s intent. |
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Problems with Honorary Trusts (2)
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Trustee may, in an honorary trust, refuse to carry out S’s wishes, and then the trust fails → becomes a resulting trust.
1. This failure never happens with a PET or charitable trust; if it does, court will just appoint a new trustee. RAP problems: no measuring life, and they virtually always fail. Strike the RAP violation→becomes a resulting trust. 2. Some states allow to exist for 21 years |
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Totten Trust
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Also referred to as a Totten Bank Account Trust, whereby the named beneficiary takes whatever is left in the account at the death of the owner of the account.
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Totten Trust--why a misnomer?
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It’s not a true trust. The settlor/trustee owns the account during the depositor’s lifetime and owes the named beneficiary no fiduciary duties whatsoever. Thus, it’s really just a will substitute, and it’s always some type of savings account.
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Restraints on Alienation (types)
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Spendthrift Trusts
Support Trusts Discretionary Trusts |
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Restraint on alienation (overview)
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a. Voluntary Alienation: B can alienate his property interest in the trust (e.g. take out a loan with the annual trust funds as collateral
b. Involuntary Alienation: Creditors can attach the trust funds if B is in their debt. c. The S can include mechanisms that interfere with these normal alienation mechanisms. |
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Spendthrift Trusts (provision on a PET) (defined and how to recognize)
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Defined: Beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attach all the beneficiary’s rights to future payments of income or principal.
Terms of the trust must include the language in the definition above. |
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Voluntary Alienation under spendthrift trusts (and exception)
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Beneficiary cannot generally alienate or transfer his rights to future payments, BUT some courts will recognize the assignment on the ground that the beneficiary merely has given the trustee a direction or order to pay the beneficiary’s agent or representative. In such case, prior to time of payment, beneficiary would have the right to revoke the order or direction
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Involuntary Alienation under spendthrift trusts
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Generally, creditors cannot attach the beneficiary’s right to payment, BUT
i. Common law exception: Preferred creditors CAN attach. E.g.: government creditors (IRS), those who provide necessities to beneficiary, child support, alimony, spousal support; a tort judgment creditor ii. In Addition: in many jurisdictions, ordinary creditors can also attach “surplus” as measured by the beneficiary’s “station in life” (subjective test) |
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Can S create a Spendthrift trust for himself?
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i. Involuntary alienations → most JX find trust valid, but not the spendthrift provision (can’t protect self from creditors). Some do allow though
ii. Voluntary → JX split. Most will ignore and allow alienations, some will not. |
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Support Trusts
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a. Definition: The trustee is required to use only so much of the income or principal as is necessary for the beneficiary’s health, support, maintenance or education.
i. On the BAR: the terms of the trust must include this definition |
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Voluntary Alienation under support trusts
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B cannot voluntarily alienate or transfer his right to future payments. This would defeat the purpose and violate S’s intent.
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Involuntary Alienation under support trusts
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Same rules as Spendthrift trusts. Generally no attachment. But preferred creditors can attach.
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Can S create Support trust for self?
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Same rules as Spendthrift trusts
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Discretionary Trusts
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Definition: Trustee is given sole and absolute discretion in determining how much to pay the B, if anything, and when to pay the B, if ever.
ON THE BAR: Terms will include this definition |
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Voluntary Alienation under discretionary trusts—Can B do it?
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i. On the one hand, no: B cannot voluntarily transfer future interests b/c they are at T’s discretion, and not clear that B has anything at all to assign
ii. On the other hand, yes: B can transfer his interest to Asignee. A might not get anything, but if T decides to pay, then he must pay A or be held personally liable. |
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Involuntary Alienation under discretionary trusts—Can creditors attach?
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i. On one hand, no: since there is nothing to attach. The trustee may never allocate anything to the B, so there’s nothing to attach.
ii. On the other hand, yes: if the T has notice of the debt and decides to pay, he must pay creditor or be held personally liable. |
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Resulting Trust
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A resulting trust is an implied in fact trust and is based upon the presumed intent of the parties. If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the S or his estate (if S dead), i.e., his residuary devisees if any, and if none, to the intestate takers (heirs).
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7 Ways a Resulting Trust Can Arise
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Trust Babies Ignore Inordinately Excessive Princess Sapphires!
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Purchase Money Resulting Trust
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i. A pays consideration to B to have title transferred to C
ii. If A & C are not closely related, there is a rebuttable presumption that C is holding as a purchase money resulting trustee for the benefit of A. iii. If A & C closely related, rebuttable presumption that it’s a gift to C. |
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Semi-secret trusts
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Arise when the will (always a will) makes a gift to a person to hold as trustee, but does not name the beneficiary→ “I devise $100K to Abel as trustee”
1. Shows trust intention, but no B ascertainable. To admit evidence will violate statute of wills. Court typically decree a resulting trust. ii. DISTINGUISH from Secret trusts where the courts allow in parol evidence to establish the identity of the B |
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Constructive Trusts (defined)
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Not really a trust. Rather, a remedy to prevent fraud or unjust enrichment.
When a court decrees a constructive trust, the wrongdoer will have only one obligation: to transfer the property to the intended B as determined by the court. It is a means to disgorge the wrongdoer of ill-gotten gains. Watchout for remedies crossovers! |
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4 scenarios for Constructive Trusts
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Where the trustee of a PET or charitable trust profits because of self dealing
Wills. Where there is fraud in the inducement or undue influence Secret Trusts in the law of wills Oral Real estate trusts (breach of promise) |
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Where the trustee of a PET or charitable trust profits because of self dealing
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i. With respect to those unjust gains, T will become a Contructive T
ii. As such, the T will have to turn those profits over to intended Bs, as decreed by courts. |
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Wills. Where there is fraud in the inducement or undue influence...
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Refer to wills lecture. Court can deny the will probate and make the heir a constructive trustee who will have only one obligation: to transfer the property to intended B, as decreed by court.
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Secret Trust in the law of wills (defined)
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The will (always a will) on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B.
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Secret trust--result
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Constructive Trust
When testator dies, the 4 corners of the will make it look like A owns the property free of any trust. 2. Parol evidence IS admissible to show that the beneficiary was B. 3. A thus becomes a constructive trustee→only job is to give property to B. ii. NOTE: for semi-secret trusts, courts will NOT impose a constructive trust. Rather, they will impose a resulting trust (back to testator’s estate). iii. ON THE BAR: Always analyze as BOTH Secret and semi-secret. |
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Oral Real Estate Trusts (AKA breach of Promise)
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“If I transfer Blackacre to you by deed, will you hold it for the benefit of B?” A agrees; S delivers a deed to B.
From the 4 corners, it looks like A owns blackacre. If B claims property, A can raise SOF to keep property to himself 3 situations where A cannot Invoke SOF, and will become constructive trustee (and thereby have to give property to B) 1. Fiduciary relationship b/w S and A. 2. Fraud in the inducement by A 3. Detrimental reliance by B, the intended beneficiary |
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Trustee Powers
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Express: all enumerated, but must follow instructions
Implied: Sell/Lease/Borrow/Incur expenses |
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Trustee Duties
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DAD LIES (plust 2)
Due Care Account Not to Delegate Loyalty Invest Earmark Segregate (diversity) (preserve res) |
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Duty of Loyalty (definition and corrollary)
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Definition: requires that the trustee administer the trust for the benefit of the beneficiaries (implicitly, trustee must be impartial), having no other consideration in mind.
Corollary: no self dealing by the trustee |
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Consequences of DOL breach
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If there is a loss, the trustee is “surcharged,” meaning that the trustee has to make good the loss. And must be disgorged of any ill-gotten personal profit.
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Duty to Invest--3 alternative rules
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1. State lists
2. Common law prudent person 3. Uniform prudent investor Act |
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State Lists
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Lists of investing mechanisms which T must follow in the absence of direction by the trust. Good Instruments:
1. Federal gov’t bonds 2. Federally insured certificates of deposit 3. First deeds of trust in real estate 4. Sometimes, stocks of publicly traded corps. 5. Never invest in a new business 6. Never invest in second deeds of real estate. |
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Common law prudent person test
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Duty to invest requires T to invest like a reasonably prudent person would invest his own money, trying to maximize income while preserving corpus. If T holds himself out as highly skilled, he’ll be held to a higher standard. Key: Each individual instrument is scrutinized.
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Good investments under Common law prudent person test (7)
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1. Federal gov’t bonds
2. Federally insured certificates of deposit 3. First deeds of trust in real estate 4. Blue chip stocks 5. Mutual funds may be OK, depends on jurisdiction 6. Never invest in a new business 7. Never invest in second deeds of real estate. |
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Uniform Prudent Investor Act:
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Adopted by most states: simply provides that the trustee must invest as a “prudent investor”
1. Unlike the rules above, each individual investment is NOT scrutinized. Rather, performance is measured by the entire portfolio. Consequently, even derivatives or futures contracts may be ok in context of whole portfolio. |
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Duty to Diversify
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Part of the duty to invest
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Speculating allowed by T
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Not under state lists or prudent person test,
but maybe ok under Uniform Prudent investor act |
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Result of breach of duty to invest (3)
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If trustee breaches this duty to invest, trustee must make good on the loss.
If there is a profit, beneficiaries affirm the transaction. If trustee makes 2 investments, one one which wins and one that loses, trustee is surcharged for the loss while the beneficiaries affirm the profit-making transaction. NO netting allowed by T. |
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Duty to Earmark (defined)
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Requires the trustee to label trust property as trust property. (e.g. register a stock to “john smith, as trustee of ABC trust)
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Consequence of breach of duty to earmark
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Common law: if T breaches duty to earmark and there is a loss, the T is held personally liable. No causal relationship required b/w failure to earmark and the loss.
Modern Approach: T only personally liable if failure to earmark actually caused the loss (e.g. if T’s personal creditors attach). |
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Duty to Segregate (Defined and consequences)
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i. Defined: T cannot comingle personal funds with trust funds
ii. Duty also requires that T not mingle Trust A funds with Trust B funds iii. If breach, T can be removed and held liable for loss. |
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Duty not to Delegate
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Defined: T can only rely on professional advisors in reaching decision, but cannot delegate decisionmaking authority.
Modernly: T can delegate investment to a professional money manager Also cannot delegate to another trustee. Under CL, trustees needed to act unanimously. Now, can act by majority rule. |
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Duty to Account
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i. Requires the trustee on a regular basis to give the beneficiaries a statement of income and expenses of the trust.
ii. If breach, Bs can file an action for accounting. |
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Duty of Due Care
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i. Trustee must act as a reasonably prudent person dealing with his own affairs.
1. You will ALWAYS be able to discuss this duty on the BAR. |
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Remedy for Breach of Duty/ies
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i. Damages
ii. Constructive trust remedy iii. Tracing and equitable lien on property (remedies outline) iv. Ratify the transaction if good for beneficiary v. Remove trustee |
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Liability of Trustee to Third Persons (K--Common Law)
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If T is sued personally, T can get indemnification from trust assets IF the trustee acted within her powers AND was not personally at fault.
The only time trustee would be sued in his representative capacity (i.e., trustee’s personal assets are not at risk) is if the contract itself provided that in the event of a breach by T, the T is to be sued in his representative capacity. Not enough under CL that T signed the trust “John as ABC trustee” |
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Liability of Trustee to Third Persons (K--Modern)
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If the other person to the K, the promisee, knows that the trustee is entering into the K in his representative capacity, then the trustee must be sued in his represenatitve capacity. Thus, T’s personal assets not at stake. “John as ABC trustee” would be enough to clear T from personal liability.
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Liability of Trustee to Third Persons (Tort--Common Law)
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Trustee is sued in his personal capacity. If the trustee was without personal fault, however, the T can get indemnification from trust assets. Thus, if an agent committed the negligent act, or if this is a strict liability case, then trustee can obtain indemnification.
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Liability of Trustee to Third Persons (Tort--Modern)
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T is sued in his individual capacity and is personally liable for torts only if the trustee is personally at fault. Otherwise, representative capacity.
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Innocent Donee
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Innocent donee of trust property must restore the property to the trust but cannot be held liable for damages.
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Modification by the Settlor
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a. Settlor can modify the trust if the S expressly reserves the power to modify
b. S also has power to modify if the S has the power to revoke (because revocation is broader and encompasses modification) |
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Modification by the Court
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a. There can be modification by the court regarding charitable trusts and the cy pres power: changing the mechanism to effectuate S intent.
b. Also can be modification of charitable trusts or private express trusts regarding the court’s Deviation Power. |
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Deviation Power: (Also known as Doctrine of Changed Circumstances) (2 notes and 2 requirements)
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1. When court exercises its deviation power, the court changes the administrative or mgmt provisions of the trust.
2. With deviation the court is NOT changing beneficiaries! 2 Elements must be established for court to use deviation power: a. Unforeseen Circumstances on S’s part (e.g. stock market crash) b. Necessity (deviation needed to preserve trust) |
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Termination of Revocable Trusts
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To retain the power to revoke, S must expressly reserve the power in the trust instrument
Minority rule: S has the power to revoke, unless the trust is expressly made irrevocable. |
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Termination of Revocable Trusts→3 ways it can terminate prematurely
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Settlor and ALL the beneficiaries agree to terminate
i. This includes contingent remainterman; guardian ad litem is appointed to represent them. All the beneficiaries agree to terminate and all the material purposes have been accomplished By operation of law: passive trusts and the statute of uses |
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Passive trusts and the statute of uses
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A way for a revocable trust to terminate
i. Statute of Uses comes into play when you have a PET with a corpus of real property, and the trust is passive (T has no active duties; just holds bare title) ii. Under this statute, the beneficiaries get title by operation of law, and the trust terminates iii. Not all JX recognize; and not applicable to personal property (except by analogy) |
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Income Allocated to the Life Tenant
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The life tenant gets the following income
i. Cash dividends ii. Interest income iii. Net business income |
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Expenses Allocated to the Life Tenant
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Life tenant’s interest pays for the following expenses
i. Interest on loan indebtedness ii. Taxes iii. Minor repairs |
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Income Allocated to the Remaindermen
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Remainderman gets the following income
i. Stock dividends ii. Stock Splits iii. Net proceeds on the sale of a trust asset |
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Expenses Allocated to the Remaindermen
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Remainderman’s interest pays for the following expenses
i. Principal part of loan indebtedness ii. Major repairs and improvements |
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Adjustment Power of Trustee
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T can disregard rules regarding allocation of income to life tenant and Remainderman if a different allocation is necessary to administer the trust fairly.
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