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134 Cards in this Set
- Front
- Back
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What are the three types of trusts?
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a. Three things using the name “trust”
i. Express trusts; ii. Resulting trusts; and iii. Constructive trusts. b. The Express Trust is the only real trust; the other two are just equitable remedies. |
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Express Trusts--
Define express trust |
a. Defined: a legal device that allows an owner of property to make transfers of property and to have those assets managed on behalf of someone else (rather than have the beneficiary manage the money by himself or herself).
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Express Trusts--
Explain how an express trust works. |
i. How it Works: The person who creates the trust, the settler, gives legal title to a trustee to manage the money and the beneficiaries have equitable title to enjoy the distributions from the trust.
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Express Trust--
What types of express trusts are there? |
b. Types: there are two kinds of express trusts:
i. Lifetime Trusts: set up during the lifetime of the person who created the trust, who we call the settler of the trust (this is also known as an inter vivos trust). ii. Testamentary Trusts: set up in the settlor’s will. |
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Express Trusts--
What are the eight requirements to form an express trust. Is consideration required to form an express trust. |
c. Eight Requirements for Valid Trust:
i. Requirements: 1. Settlor (also called creator) who makes a… 2. Delivery of legal title to… 3. Property (also called res, or corpus, or principal) to a.. 4. Trustee who holds legal title for the benefit of a… 5. Beneficiary (or beneficiaries) with… 6. Intent to create a trust for… 7. A lawful purpose… 8. In a validly executed document. ii. Note: No consideration is required to create a trust. This is a gift, not a contract! |
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Express Trust--
Who can be a settlor? |
1. The settlor can be anyone 18 or older, with the capacity to enter into contracts.
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Express Trust--
How is the delivery requirement with respect to trust formation? |
The mere expression of an intent to create a trust, without delivery of legal title in the trust assets to the trustee, has no legal consequences. A lifetime trust is valid only as to any assets transferred to the trust.
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Express Trust--
Explain the property requirement with respect to trust formation |
There must be specific assets to which trust duties relate. A debtor cannot hold his own debt in trust. However, a creditor can hold the debt of another in trust. Any property that the settlor has the power to convey can be the subject of a trust. Trust property must be adequately and specifically described. A designation of "all my property" or "all the rest, residue, and remainder of my estate" i setting up the testamentary trust is sufficient.
EXAM TIP: remember that res need not be tangible property, but the settlor must have an an assignable interest in the property. Property that the settlor expects to own in the future but has no present right to transfer (an "expectancy") cannot be the subject matter of a present matter of a present trust. |
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Express Trust--
Explain who can act as a trustee for a life trust. |
1. Lifetime Trusts: For a lifetime trust, almost any one can be a trustee since no court involvement is needed for such trusts.
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Express Trust--
Explain who can act as a trustee for a testamentary trust. |
2. Testamentary Trusts: for a testamentary trust created under court supervision, anyone except for those who cannot be, may be trustees.
a. Those prohibited from being Trustees of a Testamentary Trust: i. Those under 18 years old ii. Judicially declared incompetents iii. Convicted felons iv. Those incapable because of drunkenness, dishonesty, want of understanding, or improvidence 1. This last requirement is up to a court to determine. For the bar, just know that this is one category of people that aren’t allowed to be a trustee of a Testamentary Trust. b. A non-resident alien can serve as trustee ONLY IF: i. That person is related to decedent (either decedent’s spouse; the grandparent; r descendant of the grandparent of the decedent; or descendant decedent’s spouse; or the spouse of any of them), AND ii. A New York resident serves as co-fiduciary. |
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Express Trust--
Will a trust fail for want of a trustee? |
No. failure to name a trustee in the trust does not matter; the court can appoint someone. No trust will ever fail for lack of a named trustee.
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Express Trust--
What happens if the named trustee dies, resigns, or is removed for misfeasance, and the settlor has not designated a successor trustee? |
The court will appoint someone to serve as trustee.
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Express Trust--
What is the nature of the trustee's estate? |
A trustee's creditors cannot satisfy their claims from the trust assets.
On the death of the sole surviving trustee, the trust estate vests in the Surrogate's Court, which names a successor trustee. On the termination of a trust, the legal and beneficial estates vest in the person entitle thereto, and the trustee's authority to act on behalf of the trust is limited to actions to wind up the trust's affairs. Conveyance to two or more trustees create a joint tenancy. |
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Express Trust--
Once a trustee has accepted the trust, he cannot resign UNLESS |
1. the trust instrument expressly permits resignation, or
2. the court permits resignation for good cause shown. |
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Express Trust--
For what may a court remove a trustee? |
1. violating or threatening to violate the trust,
2. insolvency or imminent insolvency of the trust, 3. unsuitability to serve as a trustee. |
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Express Trust--
Can the beneficiaries compel removal of a trustee? |
No, UNLESS there are grounds for removal or the power is granted to them by the trust instrument.
Mere friction or hostility between a trustee and a beneficiary is NOT a sufficient ground for removal, unless it interferes with the proper administration of the trust. |
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Express Trust--
Explain the beneficiary requirement with respect to the trust formation requirements. |
vii. Beneficiary
1. Rule: a. Beneficiaries must be definite and ascertainable with no ambiguity. i. Beneficiaries MUST be identifiable. b. If ambiguous, the trustee holds in a resulting trust for the residuary beneficiary of a will (or intestate heirs in absence of a valid will). i. Residuary Beneficiary: takes whatever hasn’t been taken by all of the other beneficiaries. ii. If trustee is named and a residual beneficiary is named, but the beneficiaries are not definite or ascertainable, the trustee does not have trustee duties but is nonetheless still required to turn the money over the residuary beneficiary in a resulting trust. |
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Express Trust--
A trust is left “To all my good friends” or to “my very best friend of all.” What results? |
The trust will fail because the beneficiaries are not definite or ascertainable.
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Express Trust--
A beneficiary for a trust is listed as someone’s “family” or “next of kin”. What results? |
3. Exception:
a. A beneficiary listed as someone’s “family” or “next of kin” IS considered definite and ascertainable and the trust will not fail; consult the intestacy statutes for the names of the persons who fit the description in the trust. i. Intestacy: when a decedent dies w/o a valid will and their estate property is distributed pursuant to a state statute. |
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Express Trust--
Explain the intent requirement with respect to the trust formation requirements. |
If precatory language (e.g., "I wish, hope, and desire") is used, no trust or enforceable gift is created. However, the mere fact that precatory language has been used does not preclude a court from finding that an enforceable obligation was intended. The central question is the settlor's probable intent. Expression of motive for a gift does not create an enforceable duty. No particular words are required to express intent to create a trust. But the intent cannot be a secret one; it must be expressed by some words or conduct.
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Express Trust--
List the two things that must be present to satisfy the intent requirement with respect to the requirements to form an express trust. |
1. Precatory Language not Enough: Settlor must intend to create an enforceable obligation; precatory (non-binding) language is not enough.
2. Trustee must be given duties to perform: if trustee has no duties to perform it is called a passive trust, which is no trust at all. a. Examples of precatory language: this language does not impose an enforceable obligation. i. “would like” trust income to be paid ii. “wish” trust income to be paid iii. “desire” trust income to be paid |
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Express Trust--
Does using the word "trust" show sufficient intent to create a trust? |
3. Note on circumstances—just using the word “trust” does not show intent to create a trust; look at all of the language and all of the facts to determine intent. If the circumstances show that settlor did not intend to create a trust, no dice.
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Express Trust--
a. Example: S purchased Whiteacre in 2005, and the deed was made to “S in trust for T.” At the time the deed was executed, S and T agreed in writing that T would live on Whiteacre and pay $1k per month to S. Is this a valid trust? Has the settlor show the requisite intent to create a trust? |
This is not a valid trust. All facts indicate that S really intended a LL/T relationship with T.
i. The facts are ambiguous and uncertain at best. Merely using the word “trust” does not mean that a trust is created! The language MUST be clear. |
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Express Trust--
Explain the lawful purpose requirement with respect to the trust formation requirements. |
1. A trust cannot:
a. call for commission of a crime b. call for the destruction of property c. have a condition against public policy a. Public Policy / Other Valid Purpose: BUT if a purpose can be found that is NOT offensive to public policy, then the trust is valid (e.g., a trust that gives income to a spouse until that spouse remarries is valid). |
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Express Trust--
R created a testamentary trust in his will, and he directed the trustee to pay the income to his daughter Mary Ann “until she divorced her worthless husband Archie, and upon her divorce the trust shall terminate and all principal shall be distributed to Mary Ann. If Mary Ann should not divorce Archie then on her death the trustee shall distribute the principal to the American Red Cross. Is this a valid trust? |
i. Result: this is NOT a valid trust because it promotes divorce, which is violative of public policy.
2. Exam Tip: major example to watch for on the bar exam are trust restricting marriage or promoting divorce. |
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Express Trust--
i. Hypo: In his will James set up a testamentary trust with income going to his wife for life or until she remarries, and upon his wife’s death or remarriage to his son Clyde. |
1. Result: this trust is valid because its purpose was to provide for his widow during her widowhood and that IS a valid purpose. Even though the provision seems to penalize remarriage, courts have interpreted these provisions as only for providing for a widow during her widowhood… and that has been found to be a valid purpose.
2. Exam Tip: major example to watch for on the bar exam are trust restricting marriage or promoting divorce. |
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Express Trust--
Is a trust lawful if it imposes a partial restraint on marriage? (question concerns the lawful purpose requirement with respect to the formation requirements for trusts) |
b. Partial Restraints on Marriage: marriage restrictions to members of a certain religion or ethnic group are valid as permissible partial restraints on marriage.
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Express Trust--Requisite intent requirement
List situations in which no trust arises for lack of requisite intent. |
The fact that the words "trust" or "trustee" were used does not compel a finding that a trust was created.
No trust arises where there is: 1. a transfer "in trust" but with no trust terms, OR 2. a gift of income with no time limit and no disposition of principal. |
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Express Trust--Requisite intent requirement
Explain the 1997 statute that abrogated the merger doctrine with respect to trusts. |
A trust is not merged or invalid because a person (including the settlor) is the sole trustee adn sole current beneficiary, as long as at least one person holds a beneficial interest in the property, such as a vested or contingent remainder interest.
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Express Trust--
Is a trust calling for the destruction of property valid? |
No. A provision calling for the destruction of trust property is void as against public policy.
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Express Trust--
A trust must be validly executed. What is required? |
x. Validly Executed
1. Must be in writing, signed by both settlor and trustee, AND EITHER a. Acknowledged by a notary public, or b. Signed by two (2) witnesses. |
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Express Trust--
When is a lifetime trust revocable? |
A lifetime trust is irrevocable by the settlor UNLESS the power to amend or revoke the trust is expressly reserved in the trust instrument; any amendments or revocations must be in writing, signed, and witnessed by two people (unless the trust provides otherwise). A revocable lifetime trust can be amended or revoked by an express provision in the settlor's will. A contract to create a trust in the future must be in writing and signed by the settlor.
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Types of Trusts--
Are all trusts presumed to be irrevocable? If so, how is this presumption overcome? |
NOTE: All trusts are presumed to be irrevocable, unless the trust explicitly authorizes revocation.
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Revocable Trusts--
What are the main requirements for a revocable lifetime/inter vivios trust? |
a. Main Requirement: at least one (1) beneficiary who is not the settlor; settlor cannot be the sole beneficiary when also named the sole trustee.
i. These are key requirements— 1. We want to make sure that there is a true fiduciary duty. If settlor is named the sole trustee and sole beneficiary this will constitute a merger and settlor will not be deemed to have established a true trust. 2. This, instead, will construed as a fee simple absolute, not a trust. |
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Revocable Trusts--
What roles can a settlor play with respect to a revocable lifetime/inter vivos trust? |
b. The Settlor can play many roles:
i. Settlor can be a trustee ii. Settlor can be an income beneficiary for life iii. Settlor’s estate can be one of the beneficiaries of the principal so long as there is at least ONE other beneficiary. iv. Settlor can retain the power to terminate or amend the trust. |
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Revocable Trusts--
What are the reasons to have a revocable lifetime/inter vivos trust? |
c. Reason to have a revocable lifetime/inter-vivos trust:
i. Manages assets efficiently, particularly using a professional trustee ii. Helps plan for possible incapacity by avoiding guardianship proceedings, since the trustee has legal title to the assets in the trust, and not the guardian. iii. Avoids probate (proving a will) or need for a conservator to be appointed. 1. No part of the principal of a trust goes through the settlor’s estate in probate. a. Can help testator keep private affairs, private: wills are public documents—so if you want to avoid letting the public know that you are leaving money to your mistress… then a trust might be the best bet. |
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Define probate and explains the cons of having an estate probated.
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2. Probate Defined: the process of proving a will, or having it declared valid and effective following the death of the testator.
a. Cons of Probate: Takes extra time and money and the cost of the proceedings are deducted from that which is to be distributed. |
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Revocable Trusts--
What are some reasons not to have a revocable/inter vivos lifetime trust? |
d. Reasons NOT to have a revocable lifetime/inter-vivos trust:
i. Does not avoid taxes ii. If a settlor keeps an income interest, or keeps a power to revoke, the full trust assets will be included in the settlor’s gross estate for federal estate tax purposes. |
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What are pour-over gifts and what is required to make one?
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a. Pour-Over Gifts: Testamentary gifs (gifts made in a will) to an existing revocable trust are valid.
i. This is called a pour-over gift. ii. Such a gift avoids will formalities in the trust. iii. Trusts can be changed during the lifetime of the settlor in ways that are somewhat easier than changing a will. iv. Key requirements: (tested on Feb. 2012 exam) 1. The trust must be in existence, OR 2. Executed concurrently with the will. |
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What is a revocable lifetime trust?
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The interest in a revocable lifetime trust passes to the beneficiary during the settlor's lifetime and becomes possessory on the settlor's death.
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When are revocable trusts often used?
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1. as an effective way for a person to manage his assets;
2. as a means to avoid the necessity of a guardianship or conservatorship administration in the event a person (the settlor) becomes incapacitated. 3. to avoid probate (trust assets are not subject to probate administration). EXAM TIP: don't be fooled into believing a pour-over gift will fail because the trust is amended after the will creating the gift is executed. The gift is to the trust as it exists at the testator's death, including amendments subsequent to the execution of the will. |
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How can a revocable trust be amended or revoked?
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by an express direction in the testator's will.
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Revocable Lifetime Trusts--
Explain how life insurance proceeds, savings accounts, and pension benefits are treated under trust law. |
Unfunded revocable life insurance trusts are valid. The trust must be in existence when the beneficiary designation is made. The insured may name the trustee of a lifetime trust OR the trustee of a testamentary trust as beneficiary of the insurance proceeds.
The testamentary trustee must qualify within 18 months after the testator's death; otherwise the proceeds are payable to the designated secondary beneficiary or (if none) to the insured's personal representative. Insurance proceeds payable to an inter vivos or testamentary trustee are not subject to the insured's debts to any greater extent than if such proceeds were payable to beneficiaries name in the trust. Savings account proceeds and pension benefits may also be payable to a lifetime or testamentary trustee. |
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Pour-Over Gifts
Are pour-over gifts limited to trusts created by the settlor? |
No. they can be made to any existing trust, including those executed by other persons.
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Pour-Over Gifts
Are pour-over gifts valid even if the trust was unfunded, or only partially funded during the settlor's lifetime? |
Yes.
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Life Insurance Proceeds are pour-over gifts from a life insurance policy, instead of an outright gift from the settlor.
List two ways an insured can make life insurance proceeds payable to a trust. Note-- Proceeds of savings accounts or pension plans can be handled the same way as life insurance proceeds. |
1. Insured can create an unfunded revocable insurance trust and name the trustee of the trust as policy beneficiary.
a. Even though there is no identifiable trust property until settlor dies, the New York statutes allow this type of trust to be created during the life of the settlor. 2. Have the trust be a testamentary trust and have the life insurance policy contract name “the trustee named in my will” as the life insurance policy beneficiary. |
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Totten Trust--
What is a Totten Trust? |
i. This is also called a bank account trust or a poor person’s trust.
ii. The Totten Trust is a bank account in the depositor’s name “as trustee for” a named beneficiary. 1. Ex: Mary Smith opened a bank account at First National Bank and the account name is “Mary Smith as Trustee for John Smith.” This is a Totten Trust account. |
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Totten Trust--
What are the two key things you need to remember about Totten Trusts? |
iii. Two key things to remember about Totten Trust Accounts:
1. Depositor makes deposits & withdrawals as he or she wishes during the depositor’s lifetime. 2. Beneficiary has not beneficial interest during the depositor’s lifetime, but gets whatever is in the account when the depositor dis. Bar Exam Tip: This is the most important type of trust. It is the most heavily tested on the bar exam. |
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Totten Trust--
Are any particular words required to create a Totten Trust? |
i. No particular words are required to create a Totten Trust account.
1. Ex: Depositor opened an account which was entitled “Joan Cohen ITF Rose Cohen.” This is enough to create a Totten Trust account. ITF is enough to indicate “In Trust For” and thereby create a Totten Trust account. |
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Totten Trust--
How can you revoke a Totten Trust? |
c. Four ways to revoke a Totten Trust Account:
i. Withdraw all the money in the account 1. Technically this does not revoke the trust account, but it effectively revokes the trust. ii. Express revocation during the lifetime by depositor making a writing naming the beneficiary and the financial institution AND having the revocation notarized and delivered to the bank. 1. This is an absolute requirement—you need all of these elements to make the revocation valid. Any missing elements make the whole attempted revocation invalid. iii. Revocation in a will; must comply with same requirements for revocation during lifetime. 1. Ex: saying “I revoke all “in trust for” bank accounts that I have at FN Bank and I give the amounts on deposit to my new and very close friend Fifi La Rue.” Will not constitute a valid revocation. The old beneficiaries of the Totten Trust were not named in the will. iv. Death of a beneficiary also results in having the Totten Trust revoked and the money in the account goes free and clear to the depositor. 1. When the beneficiary dies, the money in the account goes free and clear to the depositor and the beneficiary’s heirs get nothing! |
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Totten Trust--
How can a change of beneficiary be accomplished? |
d. Change of beneficiary can be made by depositor, BUT it must be done the same way as a revocation:
i. Notarized statement sent to the financial institution, naming the old beneficiary and the new one. |
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Totten Trust--
Can creditors of the depositor reach the Totten Trust before or after the depositor's death? |
e. Creditors of the depositor can always reach the Totten Trust account balance, EITHER before or after the depositor’s death, since it is a form of revocable trust revoked partially each time a withdrawal is made.
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Explain how joint bank accounts work.
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A deposit into a right of survivorship joint bank account is irrevocable to the extent of one-half.
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How can the right of survivorship of a joint bank account be destroyed?
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Withdrawal of more than one-half by one depositor without the other depositor's consent destroys the right of survivorship, and the notwithstanding party can recover the amount of the withdrawal in excess of one-half to teh account.
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How do you create the right of survivorship in a joint bank account?
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To create the right of survivorship in a joint bank account, SPECIFIC WORDS OF SURVIVORSHIP must appear on the signature card signed by both parties.
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How can the presumption that a right of survivorship was created be rebutted?
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The statutory presumption that a survivorship was intended can be rebutted only by clear and convincing evidence that teh account was opened as a matter of convenience.
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Give an example of language that would create a joint bank account with right of survivorship?
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i. “John and Jane with Right of Survivorship”
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Most popular Issue: After one of the parties to the account dies, can anyone block the money from going to the survivor of the joint tenancy?
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Sometimes
i. Rule: If clear and convincing evidence shows that a survivorship was not intended when the account was established, and that the account was opened only as a matter of convenience to the depositor, then the survivorship language can be set aside. 1. Note—this is a hard requirement to satisfy. |
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if A&B have a joint bank account and A is very sick and B expects A to die soon… if B withdraws all the money from the account before A actually dies, what results?
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B must pay A’s estate ½ of the balance withdrawn. B’s actions will sever the joint tenancy.
c. Each joint account holder owns one-half of the joint account, no matter who deposits the money, and if one person makes the entire deposit it is considered a gift of one-half to the other account holder. |
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Custodial Gifts--
What is the purpose of the Uniform Transfers to Minors Act? |
UTMA does not create a trust; it is a special statutory conservatorship, where the custodian does not hold legal title (minor holds the legal title).
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Custodial Gifts--
What are the requirements to make a custodial gift? |
b. Requirements: Gifts under UTMA must be made to a custodian (not a trustee) and it must specify that it is made under the New York Uniform Transfers to Minors Act.
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Custodial Gift--
Can a custodial gift be made by will? |
Yes.
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Custodial Gifts--
What are the duties of an UTMA custodian? |
d. Duties of an UTMA Custodian:
i. Hold, manage and invest the property under a prudent person standard; ii. Pay over to the minor or for the minor’s needs what part of the property that the custodian deems advisable; AND iii. Pay what is left of the property to the minor when the minor turns 21 (with a post-Jan. 1, 1997 gift) or 18 (with a pre-Jan. 1, 1997 gift). |
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Custodial Gifts--
Is a custodial gift a trust? |
UTMA does not create a trust; it is a special statutory conservatorship, where the custodian does not hold legal title (minor holds the legal title).
Under UTMA, custodianship terminates when the donee attains age 21 unless the donor in making the gift specifies otherwise. |
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Custodial Gifts--
What are the tax consequence of a UTMA custodial gift? |
f. UTMA Tax Consequences:
i. If donor names himself or herself as custodian then the amount of the gift is includable in the custodian’s gross estate for federal and state estate taxes. ii. If donor names someone else as custodian, then the amount of the gift is NOT includable. |
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Custodial Gift--
Does the UTMA custodial gift qualify for the $13000 per donee annual exclusion under the federal tax gift? |
Yes.
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Custodial Gifts--
Can executor, trustee, or guardian make a distribution to UTMA custodian? |
Yes. They may do so out of an estate or trust for a minor beneficiary.
If teh will does not specifically authorize such distributions, the distribution must be in the minor's best interest, and distributions in excess of $50k require court approval. |
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What is the difference between a springing, special, and general power of attorney?
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A springing power of attorney is one where the power to act arises only on the happening of a specified future event.
A power of attorney can also be special-- limited to specific transactions. A general power of attorney covers all legal acts on behalf of the principal. |
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Does a power of attorney survive the disability of the principle?
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A power of attorney is durable UNLESS it expressly provides that it is to terminate on the incapacity of the principal. If a guardian is appointed, the agent (the holder of the power) must account to the guardian.
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What type of presumption is raised when there is a gift of the principal's property made by the agent to himself?
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This raises a presumption of self-dealing, which can be overcome only by a clear showing of the principal's intent to make the gift.
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When are directions to accumulate trust income valid?
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Directions to accumulate trust w/in the perpetuities period are permissible. Accumulations may be reached for the support and education of the beneficiary.
When income is NOT disposed of and no valid direction is given for its accumulation, it passes to the person presumptively entitled to the next eventual estate. |
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What is a supplemental needs trust for a disabled person?
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This is a discretionary trust for the benefit of a person with a severe and chronic disability. In addition to other specified terms, the trust must prohibit the trustee from spending or distributing trust assets in any way that may supplant, impair, or diminish Medicaid or other government benefits for which the beneficiary is eligible.
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What are five key things to remember about charitable trusts?
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i. Charitable trusts must have indefinite beneficiaries, and they must be a reasonably large group.
1. There cannot be specific, named persons as beneficiaries: 2. Purpose: Charitable trust must be for a charitable purpose a. e.g., for health, education, and religion are the most common. 3. Charitable trusts may be perpetual: it is allowed to extend indefinitely into the future. a. These types of trusts are not subject to the Rule Against Perpetuities (RAP) which indirectly limits the duration of trusts. 4. Cy Pres: Cy Pres can be used to change the trust a. If the stated purpose of the charitable trust can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust as near as possible to what the settlor wanted. 5. Attorney General: the AG has the duty of representing the beneficiaries of charitable trusts in the estate. a. AG is an indispensible party to any suit on construction or enforcement of a charitable trust. b. The AG and the donor have standing to sue to enforce the trust’s terms. |
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i. Charitable trusts must have indefinite beneficiaries, and they must be a reasonably large group.
1. There cannot be specific, named persons as beneficiaries. What results with the following examples? a. Examples: i. “all my children” for life ii. “to provide scholarships for the benefit of the descendants of the settlor” iii. “to benefit all orphans in Syracuse” iv. “to benefit all orphans attending Syracuse University” v. “to benefit all orphans living next door to me at 815 Albany Avenue, Syracuse” |
i. “all my children” for life
1. not valid charitable trust because the beneficiaries are a small group of identifiable beneficiaries ii. “to provide scholarships for the benefit of the descendants of the settlor” 1. not valid charitable trust because the beneficiaries are a small group of identifiable beneficiaries iii. “to benefit all orphans in Syracuse” 1. large enough to qualify iv. “to benefit all orphans attending Syracuse University” 1. unclear v. “to benefit all orphans living next door to me at 815 Albany Avenue, Syracuse” 1. not valid charitable trust because the beneficiaries are a small group of identifiable beneficiaries. |
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i. Charitable trusts must have indefinite beneficiaries, and they must be a reasonably large group.
1. There cannot be specific, named persons as beneficiaries. Thus, are trusts for the masses valid? |
b. Trust for the masses: a trust for Masses for relatives is valid.
i. Ex: settlor created a trust “to pay for the costs of Masses for the repose of souls of the testator, his deceased parents, and other relatives.” This trust is valid charitable trust under the Masses exception. |
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What is the Cy Press Doctrine?
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a. If the stated purpose of the charitable trust can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust as near as possible to what the settlor wanted.
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What is an honorary trust?
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An "honorary" trust is a trust taht is not for charitable purposes and has no individual beneficiaries (e.g., $25k to Fred as trustee, "to use the trust income to maintain my rose garden").
In many states, although in many states the disposition is not enforceable as a trust, it is not wholly invalid. Although the "trustee" cannot be compelled to perform, the courts will permit him to carry out the specified purpose if he is WILLING to do so. Note-- these dispositions also raise a problem under RAP unless limited in duration to 21 years, because the "measuring lives" that can be used for perpetuities purposes must be human lives (not rose gardens). |
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Do NY Courts recognize honorary trusts?
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No. NY courts refuse to recognize honorary trusts, but the legislature has validated trusts for certain purposes once considered "honorary" and, in the statutes, has addressed the RAP problem.
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Explain honorary trusts and the rationale why NY courts do not recognize them.
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a. Honorary Trusts:
i. Definition: Where no human being is the beneficiary of a private (i.e., not charitable) trust. 1. Explanation: This is an attempt to create a private trust w/o an actual human being beneficiary, but ALSO without the intent of making a charitable trust. Therefore, an honorary trust fails because no human is a named beneficiary (a human being needs to be named as a beneficiary for a private trust to be valid). 2. Rationale: the reason this is called an honorary trust is because there is no beneficiary to enforce the terms of the trust. Settlor is asking the trustee to carry out the terms of the trust as a matter of honor. a. Ex: if someone attempts a testamentary trust by giving $10k to a friend as trustee “to use the trust income to take care of settlor’s beautiful rose garden.” i. Result: a valid trust will not be created because gardens are not humans. The $10k will fall into a residuary estate. |
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If someone attempts to create an honorary trust in their will in NY, what results?
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It falls into the residuary estate
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What is a residuary estate and why do proceeds fall into this estate when a testator attempts to create an honorary trust?
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ii. Residuary Estate: whatever remains in the probate estate after the payment of specifically designated gifts of items or cash.
1. Rule: A private trust MUST have a human beneficiary. |
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In NY, A private trust MUST have a human beneficiary.
Are there any exceptions? |
2. Pet Trust Exception—
a. Permissible Duration: A valid pet trust can last for no longer than the duration of the pet’s lifetime. b. Who can enforce a Pet Trust?—Someone designated in the will or appointed by the court, can enforce the trust and make sure the trust’s purposes are carried out. 3. Cemetery Trusts: a. What are they?—these are trusts for perpetual care and maintenance of cemeteries and burial plots are classified as charitable trusts and are valid even though they have no human beneficiaries and even though they aren’t charitable trusts. b. No RAP Problems: Because these trusts are called charitable trusts, there are no RAP problems. i. Note—these aren’t true charitable trusts. They obtain the designation as a matter of law—they are so designated to avoid RAP problems. |
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What is a constructive trust?
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i. A constructive trust is just a flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.
ii. The “trustee’s” only duty is to convey the property to the person who, in equity, should have the property. |
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Constructive trust in a will context hypo:
Testator tried to change her will to change the devisee. The named devisees of her old will prevent testator from executing a new will before she dies. |
a. Result:
i. Cannot probate the new will leaving the property to the new devisee because the will was not properly signed and witnessed. ii. Old will was not validly revoked because it was not signed and witnessed. iii. However, devisees of old will will not win as beneficiaries of the unrevoked old will. Old devisees will hold title on a constructive trust and they will have a duty to transfer title to the constructive trust to the devisee of the new will, otherwise they would be unjustly enriched by their wrongful conduct. |
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Constructive trust in an intestacy hypo:
Jack has two children, R1 and R2. R2 has two children M1 and M2. In a fit of anger R2 kills J. J died intestate (w/o a will). W/o a will, the intestacy Statute would give J’s property to his two children in equal shares. |
a. Result:
i. Since R2 killed J, which is wrongful conduct, R2 would be unjustly enriched if he were allowed to inherit ½ of J’s property. ii. Thus, a constructive trust is imposed and the property would go as if wrongdoer, R2, had predeceased J, and R2’s ½ would go to his two children, M1 & M2. |
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What is a resulting trust?
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c. Resulting Trust: Not a trust, but is an equitable remedy
It is a passive trust in which the trustee has no active duties to perform, and the beneficiary holds legal and equitable title and can compel transfer of the assets. |
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Give an example of a resulting trust.
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i. Purchase Money Resulting Trusts (PMRT): recognized in the vast majority of states, but NOT in New York (NY is one of 5 states that does not recognize the PMRT).
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When does a Purchase Money Resulting Trusts (PMRT) arise?
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1. PMRT only arises when: a purchaser buys property and has title put in someone else’s name (who is not a relative); later, purchaser claims no gift was intended and asks title holder for title to the property and the title holder refuses.
a. The question arises in these situations: can grantor sue if grantee refuses to return the land when asked. Note-- this is not recognized in NY. |
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How does NY handle situations that other states would resolve by creating a PMRT?
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2. New York: most states would find this situation to create a PMRT which allows the purchaser to compel the title holder to give up title; NOT in New York, though!
a. Parol Evidence Rule Carries the Day: In New York, the parol evidence rule carries the day and the grantor will lose every time the grantee refuses to re-convey the property when asked, unless the exception applies. b. New York exception to the no-PMRT rule: if there is clear and convincing evidence that the grantee had expressly or impliedly promised to re-convey the land to the purchaser, then a constructive trust can be imposed to benefit the purchaser (this results bc of the fraud or deceit. c. Model Exam Answer: if there is no fraud or deceit i. In New York, Mary cannot sue to force Blance to transfer title because there is no PMRT in New York, and because there is no clear and convincing evidence of a promise to re-convey the title to the property. |
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When will a resulting trust arise?
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1. Failure of an express trust (for any reason)
2. Resulting Trust by Reversion (situations where the settlor has made an incomplete disposition of the assets transferred in an express trust). 3. Purchase Money Resulting Trust |
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What is the statutory spendthrift rule?
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H. Statutory Spendthrift Rule and Protection From Creditors
a. Purpose: Protects a trust beneficiary’s interest from creditors by prohibiting voluntary or involuntary transfer of the beneficiary’s interest. i. It is a way that the settlor can keep the money secure for the beneficiary to enjoy and it avoids the creditors of the beneficiary from getting access to the money. ii. It also prevents the beneficiary from giving away, assigning away or encumbering the interest in the trust. 1. This means that the beneficiary cannot touch the trust money nor can the beneficiary’s creditors get to the money. |
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What is protected by statute and what must be expressly protected in NY with respect to the spendthrift rules?
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b. New York Spendthrift Clauses: New York allows spendthrift clauses in trusts.
i. Automatic Protection of Trust Income: New York has a special statutory rule that protects all income interests in trusts with spendthrift protection even if the trust instrument does not contain a spendthrift clause, 1. BUT this just applies to income from the trust, not principal. If you want spendthrift for the principal, then you have to explicitly state this in the trust instrument. ii. No Automatic Protection of Principal: To provide spendthrift protection to the Remainder Beneficiary (i.e., the one who gets the principal) the spendthrift clause must be expressly stated in the trust. |
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What is the typical language of a spendthrift clause?
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i. “No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary’s creditors by attachment, garnishment, or other legal process.”
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What is the effect of a statutory OR an express spendthrift clause?
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d. Effect of the Spendthrift Clause—Statutory or Expressly Stated in Trust
i. It keeps the creditors at bay—this is true until the money from the trust is paid to the beneficiary. |
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What are exceptions to the statutory spendthrift rule?
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e. Five major exceptions to spendthrift clauses to remember: when creditors can go after the money in the trust to get repaid.
i. Creditors who furnish necessities 1. Food, clothing, or shelter ii. Child support and alimony iii. Federal tax liens iv. **Excess income beyond that needed for support and education 1. This is a last resort remedy; have to show that all other possible remedies have been exhausted. 2. What is needed for support is based on the lifestyle of the beneficiary. a. **This subjective test makes it difficult for creditors to establish this and it is the reason why this provision is never used by creditors. v. The ten percent levy provided by CPLR 5205(e) 1. Note—all creditors together share the levy; it is NOT a ten percent per creditor levy. Creditors can jointly obtain a judgment against a beneficiary of trust income to obtain a 10% levy against trust income subject to a spendthrift clause. vi. Exam Tip: this is not used much in real life, but is often on the exam! |
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Under the statutory spendthrift rule, a beneficiary may assign her right to "any amount of income in excess of $10k of the annual income to which the beneficiary is entitle from such trust."
What is the purpose of this provision and when is it not available to income beneficiaries? |
The purpose of this is to shift income and income tax liability to other family members.
This limited power to assign the right to future income is not available if the trust contains an express spendthrift clause prohibiting transfers. The right and amount of assignment is not limited if the trust authorizes assignment of income interests. |
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How must the assignment of income interest from a trust be made?
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It must be made by written instrument, signed, acknowledged, and delivered to the trustee accompanied by an affidavit that the beneficiary has not and will not receive consideration for the transfer.
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To whom may an income beneficiary transfer his/her income interest?
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A spouse, grandparent, or issue of grandparents.
Assignment may be made to a trustee, committee, conservator, or curator of the transferee or to the custodian for a minor under the UTMA. |
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What is a discretionary trust?
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Under a discretionary trust, distributions of income are in the trustee's discretion. A creditor cannot reach a beneficiary's interest in a discretionary trust until the trustee exercises discretion to distribute income to the beneficiary.
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What is a big limitation on spendthrift clauses? (i.e., what is the self-settled trust rule)?
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f. Self-Settled Trust Rule: big limitation on spendthrift clauses
i. Rule: Spendthrift protection does NOT apply to any interest retained by the settlor, regardless of whether the spendthrift clause is a statutory spendthrift clause or an express clause. 1. Rationale: If this were allowed, settlors could hide out from their own creditors by creating trusts with spendthrift clauses. a. Result: settlors cannot hide out from their creditors, but they can protect other beneficiaries. 2. Note on Revocable Trusts & Settlor’s Creditors—all revocable trusts are fair game for settlor’s creditors; even if the settlor has no immediate financial interest in the trust, but settlor retained the power to revoke, then the trust offers no protection at all against creditors of the settlor. a. Rationale: if settlor can use his power to revoke at any time (or like an ATM card), then creditors should be allowed to go after the money in the trust. |
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EXAM TIP: when it is unclear whether a particular beneficiary is the actual settlor, what should you do?
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Determine who furnished the consideration for the creation of the trust. If a person furnishes the consideration, he is the settlor even though the trust was created by another person.
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Invasion powers given to a trustee--
What are the general rules on when a beneficiary can compel distribution? |
If an invasion power is given to th trustee, quite commonly a standard (e.g., heath and support needs) is inserted to give the trustee guidance as to when to exercise the power.
With a support invasion power, the trustee must consider the beneficiary's other sources of income i determining whether there is a need for support. This standard may be enforceable by the beneficiary. If the invasion power is not governed by a standard, the beneficiary cannot compel a distribution because the trustee's discretion is unfettered. |
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Invasion powers given to a trustee--
What powers can an trustee-beneficiary NOT exercise? |
A trustee-beneficiary cannot make a discretionary distribution of income or principal to himself or allocate receipts and expenses between principal and income UNLESS:
1. the trust instrument provides otherwise, 2. the distribution power is limited by an ascertainable standard relating to his health, education, maintenance, or support, or 3. the trust is a revocable trust adn the grantor is serving as trustee. If the power is conferred on two or more trustees, it may be executed only by the disinterested trustees. If a trustee-beneficiary is sole trustee, the court may exercise the power. This is a tax statute, designed to avoid inclusion of principal or accumulated income in the beneficiary-trustee's gross estate on the ground that he has a general power to appoint corpus or income to himself. |
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Invasion powers given to a trustee--
What invasion powers are given to the beneficiary |
For tax reasons, an invasion power given to a beneficiary is invariably either an ascertainable-standard power (limited to health, education, maintenance, and support) or a $5000 or 5% power, or perhaps both. A beneficiary who is gen these limited powers is not deemed to have a general power of appointment for purposes of including the entire corpus of trust in the beneficiary's gross estate.
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Invasion powers given to a trustee--
What invasion power may be authorized by a court? |
Upon petition, the court can authorize distribution in all cases where the beneficiary's support is not sufficiently provided for, whether or not such a person is entitled to the principal of the trust or any part thereof.
Distribution must further the purposes and intent of the settlor. |
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Modification of Trust
What is the Claflin Doctrine? |
i. This is appropriate only when the objectives of the trust would defeated or substantially impaired if the trust is not modified.
ii. The purpose of the trust comes first, overriding any specific directions in the trust. This is called the Claflin doctrine. |
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iii. Most Famous Trust Case-- what was the result?
Joseph Pulitzer, the newspaper publisher, established a trust to provide income to his wife, children and grandchildren. He directed the trustee to keep and not sell the principal trust asset, stock in newspaper. Over the years, losses at the newspaper resulted in virtually no income to be paid to the income beneficiaries. Trustee petitioned the court to allow the sale of the newspaper stock so the funds could be more broadly diversified and thus provide income to the beneficiaries. |
1. Result: the trustee was allowed to sell the newspaper stock, notwithstanding the direction of the settlor that the stock must not be sold because the primary purpose of the trust was to provide income to the Pulitzer family and retention of the stock of the newspaper was just incidental to that purpose.
2. Effect: this case gave rise to the two-level modification test used today when trustees petition to have a trust modified. |
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What is the two-level test for trust modification?
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B. Two-Level Modification Test:
a. Two-Level Test: i. Level 1: Find out the primary intent of the settlor regarding trust purposes. ii. Level 2: Look at specific directions in the trust instrument to determine whether, because of changes in circumstances, those specific directions in the trust would now frustrate the primary intent of the trust; IF SO, then those directions can be changed by the court. b. Remedies to Ensure Trust Purpose is Carried Out: The court can authorize the invasion of the principal if the income is not enough to carry out the settlor’s purpose of the trust. |
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How can a trust be terminated by the settlor?
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a. Norm: Trusts are hard to terminate in New York; they are irrevocable and unamenable unless the power to revoke and amend is expressly reserved in the trust instrument.
i. Exception: a settlor can terminate an irrevocable trust if all beneficiaries in being consent; this is often impossible, however, because NO ONE can give consent for any beneficiary who is a minor or who is incompetent. b. Beneficiaries must be born alive to count here: for purposes of trust termination, a child in gestation is NOT regarded as a person. c. Heirs & Next of Kin: if a trust gives property to heirs or next of kin, that interest is not considered a beneficial interest and thus no consent need be obtained from them (as they cannot be ascertained until the decedent’s death. While you are living you have no heirs. i. Heirs & Next of Kin Defined: the people entitled to another’s property by statutory intestate distribution at the time of a death of a decedent who failed to leave a valid will. |
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ii. Example: In 1999, Jim created a valid irrevocable trust: “Income to Jim for life, then to his daughter Susan for life, and on Susan’s death the principal shall go to Susan’s heir(s) at law.”
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1. Result: Jim can now terminate the trust if Susan gives consent because the remainder is a gift to Susan’s heirs and that is NOT considered a beneficial interest requiring consent.
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What is the statute that governs what trustees (and executors and administrators) can do?
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a. New York Fiduciary Powers Act (FPA) controls:
i. Trustees: The FPA sets out powers that can be exercised by a trustee without court order and without express authorization in the trust. 1. Trustees can do almost anything except for the exceptions below. Therefore, as long as the trustee does not step outside those broad powers, whatever he/she does should be OK. ii. Executors & Administrators: FPA also controls not only what a trustee of a trust can do, but also what an executor or administrator of a decedent’s estate can do. 1. Executor—Defined: the person nominated in a testator’s will to act as personal representative and execute the will provisions. The executor carries out the will’s directions regarding disposition of the testator’s estate. 2. Administrator—Defined: a person appointed by the probate court as personal representative to administer (collect, manage, and distribute) the estate of a person who dies intestate, or for the estate in a will that does not name an Executor, or the named executor is not available. |
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What is the general approach to what trustees can do in NY? What are they prohibited from doing?
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b. General Approach to Trustee’s Powers in New York:
i. Trustee can do almost anything with some clearly-defined specific exceptions. 1. Trustee can: a. Sell any real or personal property b. Mortgage property c. Lease property d. Make ordinary repairs e. Contest, compromise or settle claims, OR f. Do almost anything to manage the corpus of the trust. 2. Trustee CANNOT: do the following three things a. Engage in self-dealing b. Borrow money c. Continue a business (unless trustee obtains court approval) i. Trustee is liable for losses incurred by the business unless trustee has court approval to continue the business. |
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What is an accounting?
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ii. An accounting—beneficiaries can discover that a trustee has violated its fiduciary duties by requesting an “accounting” from the trustee of the trust.
1. An accounting is a statement of receipts and expenditures of the trust. It is basically a statement of the books of the trust. 2. When a beneficiary asks for an accounting and discovers a wrongdoing by a trustee, beneficiary has two options: a. Beneficiary can ratify the activity OR b. Challenge any apparent wrongdoing on/in the books. |
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There are five prohibitions of self dealing for trustees. What are they?
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B. Self-Dealing: this is heavily tested
a. There are five prohibitions on self-dealing: i. Trustee CANNOT buy or sell trust assets to him/herself and CANNOT sell things to the trust. 1. This is an absolute rule! There is no wiggle room. It does not matter how good of a deal the sale was on the date of the transaction, the transaction is still prohibited! ii. Trustee CANNOT borrow money from the trust funds. 1. This is another absolute rule. It does not matter how secure the loan is or how favorable the terms of the loan are for the trust. This is an absolute prohibition! iii. Trustee CANNOT lend money to the trust 1. This is another absolute rule. 2. Any interest earned on such a loan must be returned to the trust, and any security give for the loan is invalid. iv. Trustee CANNOT profit from serving as trustee (except for appropriate trustee fees). 1. Trustee cannot take advantage of the confidential information received while being a trustee to earn a profit. v. Corporate trustee CANNOT buy its own stock as a trust investment |
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Trustees have two affirmative duties with respect to self-dealing. What are they?
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b. Two Affirmative Duties on Self-Dealing:
i. Duty to segregate trust assets from personal assets: A trustee CANNOT commingle personal funds and trust funds. 1. Remedy: a. If commingled funds are used to buy an asset and the asset goes down in value, there is a conclusive presumption that personal funds were used. b. If commingled funds are used to buy an asset and the asset goes up in value, there is a conclusive presumption that trust funds were used. ii. Duty to earmark trust assets by titling them in trustee’s name |
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What is the remedy for breach of fiduciary duty by a trustee?
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C. Remedies for Breach of Fiduciary Responsibilities
a. Beneficiary can sue to remove the trustee. b. Beneficiary can ratify the transaction and waive the breach. c. Beneficiary can sue for any loss. i. An action to recover losses to the trust is called a surcharge. |
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What is the no further inquiry rule?
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D. No Further Inquiry Rule: this is harsh on the trustee
a. Breach of fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made. i. Good faith is NOT a defense ii. Reasonableness is NOT a defense |
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What actions may be taken against a TP by a beneficiary if a trustee sells trust property in breach of his fiduciary duty to that TP?
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E. Actions Against a Third Party When Trustee Engages in Self Dealing
a. If trustee engages in a prohibited transaction, such as self-dealing, and sells trust property to a third party, the beneficiary cannot sue the purchaser of property from the trustee if that purchaser of property from the trustee if that purchaser was a bona fide purchaser (BFP) for value without notice. b. To keep the purchaser from being a BFP and thus making the purchaser liable to the beneficiary, the purchaser not only has to know that she was dealing with a trustee, but that the trustee was engaged in self-dealing. |
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What is indirect self-dealing?
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F. Indirect Self-Dealing
a. Self-dealing rules also apply to loans or sales to a relative of the trustee; or to a business of which the trustee is an officer; employee; partner; or principal shareholder. |
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When can exculpatory clauses be used with respect to trusts to shield a trustee from liability for negligence?
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G. Exculpatory Clauses
a. Cannot be used to shield trustee(s) from liability for breach of a fiduciary duty in a testamentary trust because relieving an executor or testamentary trustee from liability for negligence is void as against public policy. b. But exculpatory clauses can be used in a lifetime or inter-vivos trust. |
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When will a trustee be held liable in contract?
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a. How trustee signed contract is key to determining liability
i. If trustee signed only on behalf of the trust then no personal liability for the trustee 1. Examples: no personal liability for trustee that signed: a. “Jonathan Jones Trust, by Mary Jones, Trustee” b. “Mary Jones, as Trustee of the Jonathan Jones Trust and not individually” ii. If trustee signed personally, and merely mentioned trust, then trustee has personal liability 1. Example: where personally liability attaches a. “Mary Jones, Trustee of the Jonathan Jones Trust.” |
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Even if there is personal liability in contract, can the trustee still be reimbursed?
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Yes!
Even if there is personal liability the trustee will be reimbursed by the trust if two (2) things are satisfied: i. The contract was within the powers of the trustee ii. Trustee was acting in the course of proper administration of the trust |
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When will and for whom will a trustee be liable for in tort?
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a. Trustee is personally liable for all torts by trustee of trustee’s employees:
i. An absolute rule, no exceptions. ii. To deal with this liability trustee should buy liability insurance and charge the cost to the trust. |
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When can a trustee be reimbursed for his liability in tort?
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b. Trustee can get reimbursement from the trust for any tort claims if two requirements are satisfied:
i. Trustee must have been acting within trustee’s powers, when tort was committed, AND ii. Trustee was not personally at fault |
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What are a trustee's investment powers?
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a. Trustee must manage the property of the trust on behalf of the beneficiary, and this means the investment of the corpus of the trust.
b. New York has adopted the Uniform Prudent Investor Act (UPIA); this gives a broad latitude to trustees to choose investments. c. Trustees can pursue what UPIA calls the modern portfolio theory of investment strategy for this particular trust. d. Two key factors to remember: i. Trustee must consider the role each investment plays within the overall trust portfolio. ii. Trustee must consider the expected total return from income and capital gain. e. Trustee does not have to justify the prudence of each investment looked at by itself; can balance off risky speculative investments against safe, conservative investments. f. Specific things to remember: i. Prudence is not measured by hindsight; look at the decision to invest when made, not later; trustee does not have to have a crystal ball. ii. Trustee can exercise adjustment power and allocate capital gains to income. 1. Trustee can switch capital gains over to income category in order to protect the income beneficiary, and vice versa. 2. End goal is fairness to all beneficiaries g. The key to the UPIA is flexibility to shape the investment strategy for maximum total return, along with the flexibility to adjust income between the income and remainder beneficiaries to be fair to each of them. |
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What is the rule of perpetuities (and in NY)?
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a. Definition of the Rule: No interest is valid if it could vest later than any life in being (LIB) at the time of the creation of the interest, plus 21 years.
i. An interest is vested when there is no (1) condition that has to be satisfied, and the (2) exact identity of the taker is known. ii. If there is any possibility, no matter how remote, that an interest could vest (i.e., take longer) than lives in being plus 21 (LIB + 21) years, it is void. b. New York has a perpetuities reform statute that automatically reduces all age contingencies to 21 years, thus saving the gift. |
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a. Example: John conveyed Blackacre to his son Ralph for life, remainder to the First National Bank, in trust, to pay the income to my grandson Ronald for life, and then to pay the principal to any child of Ronald who reaches thirty (30).
i. Does the income interest of Ronald violate RAP? ii. Does the principal interest in a child of Ronald who reaches thirty (30) violate RAP? 1. At common law: 2. New York: |
i. Does the income interest of Ronald violate RAP?
1. No, because his interest is vested now. Ronald’s interest is currently possessory. ii. Does the principal interest in a child of Ronald who reaches thirty (30) violate RAP? 1. At common law: yes, the gift would violate the RAP 2. New York: No, because the reform rule reduces the age contingency to 21. That means that the language of the trust is changed to 21 and the trust is okay under New York law. |
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What is C. the N.Y. Rule Against Suspension of the Power of Alienation
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a. Definition of the Rule: any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years (LIB +21), that is, when there are no persons who could, together, transfer fee simple title.
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When is suspension on alienation a concern?
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b. Suspension of Alienation is a Concern when Either:
i. Spendthrift income interests are in the trust (quite considerable given New York’s automatic spendthrift protection when trust is silent about income alienation); OR ii. A life estate is created in an unborn person, or in an open class that may possibly include unborn persons. |
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What are some additional considerations you should keep in mind when analyzing suspension of alienation questions?
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i. Suspending the power of alienation means that you are in a situation where no beneficiaries are able to come together if they wanted to & put their pieces of interest together & sell the property or trust as one whole.
ii. Selling, giving away, conveying = alienation iii. If you find that there are no beneficiaries alive that would come together and combine their interests together then the power of alienation has been suspended. This is a lapse of ability to sell. If the PoS is suspended for more than LIB + 21 years (if it takes too long), then the interest is void under the suspension rule. iv. Note—this is different from RAP. A trust may be okay under RAP, but still violate PoS. The restriction of the power of alienation is what PoS seeks to limit. |
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i. O to A and his heir(s) so long as no liquor is consumed on the premises, and if liquor is ever consumed then to B and her heir(s).
Does this violate the suspension rule or RAP? |
1. The suspension rule is NOT violated by this grant because A and B together could transfer a fee simple within their own lifetimes plus 21 years.
2. However, the gift over to B violates RAP because the vesting in B’s interest might take place beyond the RAP period of A+B’s lifetimes plus 21 years. (Who knows when liquor will ever be consumed on the premises). 3. Explained—A has a present possessory interest & B has a future interest… if A & B want to they could come together and alienate // convey the trust estate. PoS is not violated. a. Note—“To A and her heirs” is just an old common law way of signifying a transfer to A. |
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ii. Judith created a trust that provided income to her sister Jane for life, then on Jane’s death to pay the income to Jane’s children for their respective lives, then remainder to Bob. At Judith’s death Jane, who is thirty (30) years old, has one child, Jed.
Does this violate the suspension rule or RAP? |
1. Is RAP violated?
a. No. 2. Is the Suspension Rule violated? a. Yes, because upon creation of the trust Jane could not join the other beneficiaries to transfer a fee simple absolute, since the class gift to Jane’s children includes potential unborn children who cannot presently consent to join in a transfer of a fee simple absolute, (and who will not have a LIB to validate the duration of their spendthrift income interest). Thus, their unborn state may extend beyond the statutory period of LIB + 21 years. b. Notes—because they could conceivably continue collecting interest subject to the spendthrift rule (of not selling) long after the 21 years have passed from the deaths of Jane & Jed—the only LIBs available to us, this violates the suspension rule. (i.e., the statutory spendthrift rules will keep those income interests unalienable beyond the LIBs + 21.) |
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Recap on RAP
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a. RAP
i. Deals with vesting only ii. Just says for an interest to be valid it must vest w/in lives in being at the time of the grant, plus 21 years. iii. Look at the facts to make sure there is no way the vesting could come outside the time period of the rule; if any chance of that then the interest is void. |
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Recap on Suspension Rule
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i. Does not deal with vesting; is only concerned with the possible suspension of the ability to transfer a fee simple.
ii. Look for facts to make sure there are persons identified and alive who could, together, convey a full fee simple; if you cannot find such persons who could do this during lives in being plus 21 years, then the interest is void. iii. Remember that the perpetuities reform statute provision reducing age contingencies to 21 years (an all other reform provisions listed in your Real Property New York Distinctions Supplement regarding the Rule Against Perpetuities) also apply for saving gifts from suspension rule violations. |
