Trusts

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Basics of Trusts

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TRUST can be either testamentary or inter vivos (before the settlor dies)
NY trusts are subject to RAP in 24 states (NJ) perpetual trusts ARE permitted.

A trust must be funded with delivered property, EG cash securities or a deed to real property. A trust cannot exist unless it actually possesses assets delivered to the trustee.

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A trustee cannot sell to or buy from the trust unless (1 or 2) ...

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1. it is expressly authorized by the trust,
2. it was approved by the surrogates court.
*absent 1 or 2 above, a transaction can be rescinded by a trust beneficiary. Under the no further inquiry rule, the surrogate will automatically rescind the transaction and will not inquire into its fairness.

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RULE – a trustees investments must be prudent. The court evaluates the overall investment strategy and the trustee's entire Trust portfolio based on TIN DAD

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TRUST terms and whether it restricted the trustee to “safe investments”
TIN DAD

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T – TRUST TERMS restricting trustee investments
I – INFLATION
N – NEEDS of beneficiaries
D – DIVERSIFICATION of investments
A – The total AMOUNT of the trust
D – DURATION of the trust

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TRUSTEE may delegate to a broker, but both are liable if the strategy is IMPRUDENT and will be surcharged for any resulting loss.

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A trust beneficiary CANNOT sign away trust income before it is received. And those beneficiaries cannot sign away until (Mnemonic)

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10-10 SENATE
*all trusts in NY are presumed “spendthrift” which seals trust assets from beneficiaries creditors.

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10-10 in 10-10 SENATE

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10 – 10% of distributed trust income can be seized by the trust beneficiary’s judgment
creditor
10 – Trust Income in excess of $10,000 can be assigned away by the beneficiary prior to
its receipt, but only if assignment was gratuitous (no consideration received) AND
assignee is a close family relative, not more distant than Aunt, Uncle, Nephew or
Niece of the beneficiary

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S in 10-10 SENATE

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S – SELF-SETTLED trusts, where the settlor and beneficiary are the same person, trust
can be attached by creditors for up to 100% of the settlor’s interest. If settlor
retained only a life estate, his creditors can only seize 100% of the life estate, not
the remainder interest.

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E in 10-10 SENATE

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E – Trusts that are EXPRESSLY made non-spendthrift

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N in 10-10 SENATE

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N – If NECESSARIES are furnished to a beneficiary, the creditor is allowed to recover
their fair value from the beneficiary’s trust income

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ATE in 10-10 SENATE

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A – ALIMONY & child support obligations
T – Federal income TAXES owed by the beneficiary
E – EXCESS trust income that is not reasonably needed for maintenance & education of
beneficiary or his family

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TRUST LITIGATION arises most frequently when a beneficiary attempts to TIP a NY trust.

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In NY there is a strong public policy against terminating trusts. thus when the settelor has died, all beneficiaries MUST consent to its termination and the trust must serve NO FURTHER PURPOSE. NY courts generally try to prevent the termination of a trust and the courts try to find a purpose to keep it going. NY courts have found that the spendthrift purpose is a valid purpose for continuing a substantial trust. The surrogate can allow termination of a non-economical trust.

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T in TIP

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T - TERMINATE the trust – generally court permission is required. There is a presumption that an inter-vivos trust is irrevocable, unless it expressly provides it is revocable.

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if the creator of an INTER-VIVOS trust did not expressly provide a right to revoke, the only other way for the settlor to terminate is to obtain the consent of ALL OTHERS who have a present or future interest in the trust (income beneficiaries and remaindermen). However, if a beneficiary is an infant or mentally incompetent, then because they are legally incapable of consenting, generally the trust cannot be terminated.

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the doctrine of worthier title (a class of people have less rights in a trust than a specific named beneficiary)

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Althouth EPTL 6-5.9 abolishes the doctrine of worthier title, EPTL 7-1.9 revives it and applies it as a rule of construction whenever the settelor of an Inter Vivos Trust wishes to revoke the trust without the consent of beneficiaries described as "heirs" or "distributees." By using the doctrine of worthier title, these heirs are not given a beneficial interest in the TR and their consent is not required. Their remainder interest reverts back to the settelor who is then free to revoke the trust.

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H established an Inter Vivos TR with income payable to W for life then to H's “heirs” if H desires to amend or terminate the trust, the only consent required would be that of H and W. however, if the remainder was to a class more specific than “heirs” such as to H's issue or siblings, then their consent would be required and the doctrine of worthier title would not defeat their interest.

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I in TIP

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I – I – Invade accumulated INCOME. Where the INCOME beneficiary prematurely seeks distribution of accumulated trust income, she must seek the surrogate trusts permission.

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RULE – if a beneficiary is without sufficient means to support or educate herself, the court may order the withdrawal of a sufficient sum from accumulated income or as an advance of income, EVEN though a remainderman's contingent interest may be defeated by an early withdrawal of accumulated income, the court may nevertheless pay it out for the benefit of B's support and education.

RULE – courts allow income beneficiaries to invade trust principal if the trust expressly creates a standard for trust principal.

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P in TIP

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P – Invade trust PRINCIPAL. where an invasion std is not provided in the trust instrument, then invasion of corpus will be permitted by the surrogate whenever a beneficiary is not being provided for and court does not need consent of either contingent or vested remainders.

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REVOCABLE lifetime trusts.

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To avoid the expense and time of probate, an adult can execute a revocable lifetime trust during her life, she must transfer the property to the trust, giving herself a life estate, naming herself as trustee, and expressly giving her the right to amend or revoke the trust at any time during her life or in her will by specifically referring to the trust.