Trusts

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Valid Trust

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A valid trust is 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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A Valid Trust Requires:

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A valid trust requires a trustee, trust corpus, beneficiary, valid trust purpose, settlor and an intention to create the trust
Note: Trusts of personal property do not have to be in writing. The statute of frauds applies only to real property.

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Settlor/Trustor:

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Creator who often provides assets to create trust (must have capacity to create trust).

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Trust Property (Res):

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Any presently existing interest in property that can be transferred can be the corpus of the trust. Such as: a fee simple, a future interest such as a contingent remainder, life insurance policy, bonds, stocks.

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Illusory interest

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Illusory interest cannot be part of the corpus, future profits to a business, a debt that the settlor owes beneficiary, a mere expectancy.

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Beneficiaries
Unincorporated Associations
Class gifts

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Person(s) holding equitable title and receiving benefit of assets (must be definite and ascertainable);
1. Unincorporated Associations: common law does not allow as beneficiary; modern law allows to be beneficiary.
2. Class gifts. May be invalid if beneficiary is too big (such as all Californians.

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Trustee

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Person holding legal title to trust property and managing assets. A trust must have a trustee, but the court will not allow the trust to fail solely because there is no trustee or trustee refuses to serve.

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If there is a lack of trustee:

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In such case:
1. The court will appoint a trustee
2. Until a trustee is appointed, the settlor or the settlor’s estate will hold legal title.

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Intent

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Settlor must have present manifestation of intent to create trust (at the time settlor owned the trust corpus).
Note: No magic words are needed to create a trust. Settlor does not have to use the words “trust”, “trustee”, or “beneficiary”.

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Intent - Precatory words

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2. Precatory words by themselves are not sufficient to create a trust. Precatory words are words of wish, hope or desire.
a. Precatory words are not mandatory words such as: S gives 100K to his brother with “the direction and order that he use it for my sister” this creates a trust.
b. Words such as: S gives 100K to his brother, “with the hope and desire that he will use it for my sister” are not mandatory words and such are precatory words and thus this does not create a trust.
c. Note: Precatory words and Parol evidence may create trust.

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Delivery

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Handing over property from settlor to trustee .

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Valid Trust Purpose

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Purpose cannot violate law or public policy.

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If trust is illegal at creation:

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If trust is illegal at creation:
a. Excise bad from good and trust will stand; OR
b. If excise impossible, court has option to choose either (i) invalidate the trust and therefore return property to settlor or his estate; or (ii) allow trustee to keep property for himself as punishment to the settlor who does not come with clean hands.

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If trust is illegal after creation:

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If trust illegal after creation: A resulting trust is decreed by the court. The resulting trustee must transfer the property back to the settlor or settlor’s estate.

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If an express trust fails:

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If an express trust fails, the trust property will revert back to the settlor or the settlor’s estate by way of a resulting trust.

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Effect

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Trust may take effect either at settlor’s death or during settlor’s lifetime.

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Effect at settlor's death

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Requires that trust instrument comply with the statute of wills.

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Effect During lifetime

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Trust may take effect either at settlor’s death or during settlor’s lifetime.

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Transfer in Trust

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Creates a trust with a third party as trustee. For real property, instrument is subject to SOF. For personal property, res must be delivered to trustee.
a. A promise to deliver the corpus in the future is not a delivery.

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Declaration in Trust

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Creates a trust with the settlor as trustee. For real property, instrument is subject to SOF. For personal property, res need not be delivered.
a. Since property is not transferred only must look for the present manifestation of trust intent of the settlor. Trust should say something like “I declare myself as trustee for this 100K for Able during Able’s lifetime.”

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Types of trusts - Mandatory

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Trustee lacks discretion; must pay per the terms of the trust .

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Types of trusts - Discretionary

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The trustee is given sole and absolute discretion in determining how much to pay the beneficiary if anything and when to pay the beneficiary if ever.

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Types of trusts - Discretionary Voluntary alienation

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The beneficiary cannot voluntarily transfer his right to future payments because the beneficiary might not get anything. But, if there is an assignment then the assignee steps into the shoes of the beneficiary. Because the beneficiary could not force payment by the trustee, neither can the assignee. However, if the trustee has notice of assignment and does decide to pay, he must pay assignee or be held personally liable.

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Types of trusts - Discretionary involuntary alienation

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creditors cannot attach beneficiary’s right to future payments because trustee may never pay beneficiary anything and since beneficiary cannot force payment, neither can creditors. BUT if trustee has notice of debt and creditor’s judgment against beneficiary and trustee decides to pay, he must pay creditors or be held personally liable.

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Types of trusts - Discretionary self settled discretionary trusts

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Same rules at Spendthrifts.

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Types of trusts - Spendthrift

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Beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attach the beneficiary’s rights to future payments of income or principal. Spendthrift trusts limit voluntary and involuntary alienation.
1. Provision in private express trust that provides that:
a. Beneficiary cannot transfer his right to future payments of income/principal; and
i. But court will sometimes recognize an assignment on ground that beneficiary has merely directed trustee to pay beneficiary’s agent
b. Creditors cannot attach beneficiary’s right to future payments of income/principal
i. But common law exceptions allow preferred creditors to attach beneficiary’s right to future payments (preferred include: government creditors like the IRS; child/spouse for support; ex-spouse for alimony; tort judgment creditor; those who provide necessities for life; any creditor for surplus as measured by beneficiary’s station in life (subjectively measured by reasonableness test)

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Types of trusts - Self-settled spendthrift trust

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a. Involuntary alienation: trust itself may be valid but spendthrift provision is not. Insulating oneself from one’s own creditors violates public policy.
b. Voluntary alienation (split): some jurisdictions ignore provision and allow settlor to transfer her right to future payments; other jurisdictions enforce provision based on estoppel.

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Types of trusts - Honorary
RAP

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A trust which has no ascertainable beneficiary and confers no substantial benefit upon society.
1. Not a valid trust as lack human beneficiaries, trust is simply a goal of the settlor.
2. Trustee has power but not required to carry out settlor’s goal. Such as:
a. A trust of further fox hunting,
b. A trust to care for settlor’s pet
c. A trust to advance an unusual political ideology.
3. If trustee refuses, trust fails and resulting trust in favor of settlor or his estate
4. RAP: almost always violated because no measuring life ; other courts allow to run for 21 years then decree resulting trust.

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Types of trusts - Resulting trust

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Is an implied in fact trust and is based on presumed intent of parties. If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the settlor if the settlor is alive or to the settlor’s estate. A resulting trust arises when:
1. Private express trust ends by its own terms and no provision to what happens with the corpus.
2. Private express trust fails because there is no beneficiary.
3. Charitable trust ends due to impossibility or impracticability and cy press cannot be used.
4. Private express trust fails because after creation it becomes illegal
5. Private express trust has excess corpus
a. i.e. settlor creates a trust but due to excellent investing there is more than enough corpus to accomplish trust corpus. The excess becomes a resulting trust.
6. Purchase money resulting trust, arises when A pays consideration to B to have title to property transferred to C
a. If A & C not closely related, rebuttable presumption that C holds as purchase money resulting trust for As benefit
b. If A & C close related, rebuttable presumption that A simply made gift to C.

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Types of trusts - secret trust

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the will on its face makes a gift to A but the gift is given on the basis of an oral promise to A to use the property for the benefit of B. Courts will impose a constructive trust.
1. Thus from the four corners of the will it appears that A is the true beneficiary.
2. Parol evidence is admissible to show that the beneficiary is actually B.
3. A will not be allowed to keep the property and a constructive trust will be created thus A will be the constructive trustee with the obligation to transfer the property to B.

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Types of trusts - semi secret trust

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arises when the will makes a gift to a person to hold as trustee but does not name the Beneficiary. It is unenforceable and courts will impose a resulting trust.

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Types of trusts - revocable

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settlor retains the right to amend or revoke during his lifetime.

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Types of trusts - trotten trust

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Tentative bank account trust. Where named beneficiary takes whatever is left in the account at death of the owner of the account.
1. Totten Trust is not a true trust because the depositor owns the account during the depositor’s lifetime and owes the named beneficiary no fiduciary duties whatsoever.
2. A Totten Trust (or totten account) is a will substitute.
3. BUT: depositor may, by manifesting trust intent, elevate account to private express trust.

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Types of trusts - Charitable

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Statute of Elizabeth: Trust for education, alleviation of poverty, alleviation of sickness, to help orphans. Restatement: Any trust which confers s substantial benefit upon society such as (help the poor, advance education, help the sick, promote religion).

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Types of trusts - Charitable - Creation

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created same way as a private express trust. (i) Manifestation of trust intent which can be done (ii) at testator’s death by will or (ii) during settlor’s lifetime by declaration of trust or by transfer in trust (iv) of a presently existing interest in property that can be transferred (v) for a legal charitable purpose.

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Types of trusts - Charitable - Beneficiary
Small group

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No ascertainable person/group of people because society is beneficiary

a. Small group. Split of authority – private trust because only a few people get benefit, charitable trust because society benefits.

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Types of trusts - Charitable - RAP/CyPres

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1. RAP: RAP does not apply to charitable trusts.
2. Cy Pres: If settlor manifests a general charitable intent and only the mechanism for effectuating that intent is not possible or practicable, the court can modify the mechanism cy pres (as nearly as possible) to effectuate settlor’s charitable intent.

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Types of trusts - Support
Voluntary/Involuntary alienation

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Provision in private express trust that provides that the trustee is required to use only so much of the income and principal as is necessary for beneficiary’s health, support, maintenance or education. [HEMS]
1. No voluntary alienation: beneficiary cannot transfer right to future payments (violates purpose of trust/S’s intent)
2. No involuntary alienation: creditors cannot attach beneficiary’s right to future payments of income/principal
a. Common Law allow preferred creditors to attach beneficiary’s right to future payments
b. Also, any creditor can attach ‘surplus” as measured by beneficiary’s “station in life”
3. Self-settled support trust (identical as spendthrift: see above).

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Types of trusts - Pour-over wills

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settlor creates inter vivos trust & puts provision in will devising part or all estate to trustee of trust.

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Types of trusts - Pour-over wills - Validated by:

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1. Pour-over provision validated by 1) incorporation by reference; 2) act of independent significance; statute (so long as trust is valid and in existence before/at time will executed).

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Types of trusts - Pour-over wills - If modified after will executed:

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2. If trust modified after will executed 1) incorporation by reference no longer good b/c trust as modified not in existence when will executed; 2) but provision can still be validated by statute or as fact of independent significance.

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Types of trusts - Testamentary Trust

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Created by the terms of a will and becomes effective upon testator’s death.

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Types of trusts - Constructive Trust

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Not a trust, but a remedy to prevent fraud and unjust enrichment; wrongdoer’s obligation is to transfer property to intended beneficiary as determined by court; A constructive trust arises when:
1. Trustee of a private express trust or charitable trust makes a profit from self-dealing at the expense of beneficiaries;
2. Fraud in inducement or undue influence in execution of will;
3. Will is a secret trust;
4. Oral real estate trust (for breach of promise)
a. Deed on its face transfers land outright to A but in reality transfer was made on the basis of an oral promise by A to hold property for the benefit of B
b. A will not be allowed to invoke SOF to keep property from B and will be deemed constructive trustee if there was 1) fiduciary relationship between A and transferor; 2) fraud in inducement on A’s part; 3) detrimental reliance by B (B taking possession and making improvements, possession alone is not enough).

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Modification and Termination of trusts - General rule

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A settlor can modify a trust if the settlor expressly reserves the power to modify the trust. The settlor also has the power to modify if the settlor has the power to revoke the trust.

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Modification by the court

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there can be modification by the court regarding charitable trusts and the cy pres power: changing the mechanism to further settlor’s general charitable intent.

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Claflin doctrine

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a trust cannot be modified or terminated even if all beneficiaries agree, if to do so would be contrary to a material purpose of the settlor. (Material purpose includes spendthrift, support and discretionary trusts).

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Doctrine of Changed circumstances/Deviation Power

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a trust can be modified or terminated in a California court (upon petition by trustee or beneficiary) if the changed circumstances would mean violating material purpose of the trust. For the court to use its deviation power:
i. There must be 1) unforeseen circumstances on part of settlor; and 2) necessity to preserve the trust.

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Cy Pres Doctrine

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CyPres doctrine allows the court to apply the trust property to another charitable purpose if the charitable purpose indicated by the settlor is accomplished or becomes impractical. This is allowed if the settlor is found to have “general charitable intent” which requires the court to make a determination of whether the settlor intended the trust to fail or would have instead wanted the property devoted to similar use.
i. Court may direct application of trust property to another charitable purpose that approximates settlor’s intent; OR
ii. Resulting trust returns corpus to settlor or his estate
iii. Note: court can resort to both intrinsic and extrinsic evidence to determine settlor’s intent.

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Termination of Revocable Trusts - Majority/Minority

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i. Majority: to retain power to revoke, settlor must expressly reserve that power in trust instrument
ii. Minority: settlor has power to revoke unless trust is expressly made irrevocable.

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Termination of Irrevocable Trusts

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irrevocable trust can terminate before time set for termination in trust instrument if:
i. Settlor and all beneficiaries agree to terminate it;
1. Must account for contingent remainderman, guardian at litem must be appointed to represent them.
ii. All beneficiaries agree to terminate it and all material purposes have been accomplished;
1. Must account for contingent remainderman, guardian at litem must be appointed to represent them
iii. By operation of law: Passive trusts and Statute of Uses
1. Private express trust with a corpus of real property, and the trust is passive (trustee has no active duties and is just holding bare legal title).
2. In such cases the beneficiaries get legal title by operation of law and thus the trust terminates.

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Trustee Powers

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Trustee has all enumerated powers. Trustee has all implied powers that are helpful and appropriate to carry out the trust purpose.
i. Power to sell trust property
ii. Power to incur expenses
iii. Power to lease
iv. Power to borrow (modernly) (CL no power to borrow)

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Fiduciary Duty owed to Beneficiaries Rule

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A trustee owes a fiduciary duty to administer the trust solely in the interest of the beneficiaries; trustee can only exercise express or implied powers ([BELS] borrow (only modern trend), incur expenses, lease, sell); breach can mean personal liability for trustee.

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Self Dealing

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a trustee cannot buy, sell, or borrow trust assets for himself, spouse or child.

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If trustee engages in self-dealing

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If trustee engages in self-dealing, courts apply the no further inquiry rule. Trustee’s good faith and reasonableness of transaction are irrelevant.

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If there is a loss

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If there is a loss, the trustee is “surcharged”, trustee has to make good the loss.

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If trustee makes a personalprofit

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If Trustee makes a personal profit a constructive trust is created for the ill gotten gain and the profits must be turned over to the beneficiaries.

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Remedies

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4. Remedies:
a. Beneficiaries can ratify the transaction if outcome is favorable
b. Surcharge the trustee: sue for damages
c. Trace and recover the property: except if purchase is BFP without notice of breach.

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Duty of Loyalty/Conflict of Interest

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a trustee must act in the best interest of the beneficiaries and not engage in self-dealing to the detriment of the Bs or trust res; B’s can ratify the transaction if the outcome is favorable or surcharge trustee or sue for damages.
i. Trustee or her relative, agent or representative cannot purchase any trust property owned by the trust, even if he pays full value.

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Duty of Due Care

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Trustee must act as a reasonably prudent person dealing with his own affairs.

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Duties of Care of Trust Property - Earmark trust property

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Requires trustee to label trust property as trust property
1. Consequences of breach: CL – trustee held personally liable for any loss; modern – trustee held personally liable only for those losses caused by failure to earmark.

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Duties of Care of Trust Property - Duty to Segregate

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Trustee must not commingle own funds with trust funds or funds of one trust with another
1. If trustee breaches, he can be removed and held liable for any loss.

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Duties of Care of Trust Property - Duty Not to delegate investment decisions
Common Law
Modern Law

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Trustee may rely on professional advisors in reaching decision but cannot delegate decision-making decisions (modernly however, trustee can delegate duty to invest to a professional money manager)
1. CL – trustees must act unanimously unless trust instrument states otherwise; no delegation to professional money manager
2. Modern – trustees can act by majority decision; delegation to professional money manager allowed.

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Duties of Care of Trust Property - Duty to keep trust property productive

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Implied in duty to preserve trust property is a duty to make the trust property productive and to invest with reasonable care.

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Duties of Care of Trust Property - Duty to account to trust beneficiaries

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Trustee must give beneficiaries statement of income/expenses of trust on regular basis
1. If trustee does not, beneficiaries can file action for an accounting.

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Duty to Invest - State Lists

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Some states maintain lists that trustee must follow absent directs in the trust.
a. Good investments: federal government bonds; federally insured certificates of deposit; first deeds of trust in real estate; publicly traded stocks (modernly)
b. Bad investments: new business; or second deeds of trust.

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Duty to Invest - Common Law Prudent Person Standard

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The duty to invest requires the trustee to act as reasonably prudent person investing his own property, trying to maximize income while preserving the corpus. If trustee holds himself out as having greater skill, he is held to higher standard. Each Individual Investment is scrutinized.
1. Good investments: federal government bonds; federally insured certificates of deposit; first deeds of trust in real estate; blue-chip stocks; mutual funds (maybe)
2. Bad investments: new business; second deeds of trust.

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Duty to Invest - Uniform Prudent Investor Act

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A trustee owes a duty to invest and manage trust assets as a prudent investor would. A trustee must exercise reasonable care, skill and caution when investing and managing trust assets. A trustee with special skills or expertise, or who has represented herself as having such knowledge, has a duty to use such skills or expertise.
1. Each individual investment is not scrutinized but rather performance is measured in the context of the entire trust portfolio.

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Duty to diversify

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Under any standard the trustee has a duty to diversify so that if there’s a loss the whole portfolio is not wiped out.

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Speculating

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Speculating is not allowed under CL or State List, allowed under UPIA.

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Remedies for Breach of duty to Beneficiaries

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Damages, Constructive trust, Tracing and equitable lien on property, ratify the transaction if good for the beneficiaries, and remove the trustee.
ii. Notes: look for 3 or 4 duties breached on Bar exam. Always discuss due care.

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Trustee Duties Owed to Third Persons - Liability in Contract

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1. CL: Trustee is sued in his personal capacity. Consequently the trustee’s personal assets are at state.
a. Trustee can get indemnification from trust assets if the trustee acted within his or her powers and was not personally at fault.
b. Trustee can be sued in his representative capacity if the contract provided that in event of a breach by trustee the trustee is to be sued in his representative capacity.
2. Modern: If the other party to the contract knows that the trustee is entering into the contract in his representative capacity, then the trustee must be sued in his representative capacity, i.e. trustee signs K as John Smith, as trustee of ABC Trust.

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Trustee Duties Owed to Third Persons - Liability in Tort

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1. CL: trustee sued in personal capacity but can get indemnification if he was without personal fault
2. Modern: trustee sued in personal capacity only if he is personally at fault.

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Trustee Duties Owed to Third Persons - Remedies

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Remedies: damages; constructive trust; tracing and equitable liens on property; ratification of transaction; removal of trustee; no netting.

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Income and Principal Allocation - Income and Expenses Allocated to Life Tenant

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Life Tenant receives cash dividends; interest income; net business income and pays for interest on indebtedness; taxes and minor repairs.

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Income and Principal Allocation - Income and Expenses Allocated to a Remainderman

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Remainderman receives stock dividends; stock splits; net proceeds on sale of trust assets and pays for principal on indebtedness; and major repairs or improvements.

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Income and Principal Allocation - Adjustment Power of the Trustee

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i. Trustee can disregard above stated rules if a different allocation is necessary to administer the trust fairly
ii. All assets received by the trustee must be allocated to the trust principal or income
iii. Traditionally, cash dividends on corporate stock and capital gains are treated as income, while stock dividends are allocable to trust principal.
iv. However, under Uniform Principal and Income Act, trustee has an adjustment power to reallocate investment portfolio return if it is necessary to carry out the trust purposes and the allocation is fair and reasonable to all B’s.