Trusts

Front 1

Three things using the name trust

Back 1

(1) Express trust
(2) Resulting trust (equitable remedy)
(3) Constructive trust (equitable remedy)

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Express Trust

Back 2

A legal device that allows a property owner to transfer her property and have those assets managed on behalf of someone else

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Settlor

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Person who creates the trust

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Trustee

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Person who receives legal title to property (from settlor) to manage trust on behalf of beneficiary

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Beneficiary

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Person on whose behalf the trust is managed
Have equitable title to enjoy distributions from the trust

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Two kinds of express trusts

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(1) Lifetime trust / Inter vivos trust (set up during settlor's lifetime)
(2) Testimentary trust (set up in the settlor's will)

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8 requirements of a valid trust

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(1) Settlor
(2) Delivery of legal title
(3) Property (aka res, corpus, principal)
(4) Trustee
(5) Beneficiary
(6) Intent to create trust
(7) Lawful purpose
(8) Validly executed document

(1) Settlor makes (2) delivery of legal title of (3) property to a (4) trustee who holds the legal title for the benefit of the (5) beneficiary, where settlor (6) intends to create a trust for (7) a lawful purpose in a (8) validly executed document.

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Consideration

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NOT required to create a trust

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(1) Settlor

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Anyone 18 or older with the capacity to enter contracts

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Delivery

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Titled assets must be formally transferred for delivery to be valid

E.g., stock certificates must be re-issued in name of the trustee

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Property

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(1) The settlor must actually OWN the property (cannot just expect to inherit property, etc.)

(2) Property must be IDENTIFIED in the trust document (cannot be "whatever property I choose to contribute")

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Trustee (lifetime trust)

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Almost anyone can be a trustee

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Trustee (testimentary trust)

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The following people CANNOT be trustees
(1) people under 18
(2) people judicially declared incompetent
(3) convicted felons
(4) those incapable because of drunkenness, dishonesty, want of understanding, improvidence

Non-resident alien can serve as trustee only if
1. related to decedent (settlor) ? AND
2. a New York resident serves as a co-fiduciary

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Consequences of failing to name trustee

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NONE
Court can name someone

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Beneficiaries

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(1) must be definite and ascertainable (family or next of kin is OK)

(2) if not, trustee holds property in a RESULTING TRUST for the RESIDUARY BENEFICIARY of a will (or intestate heirs in absence of valid will)

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Intent

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(1) Settlor must intend to create an ENFORCEABLE OBLIGATION (precatory language--I would like to--is not enough)

(2) Trustee must be given DUTIES to perform (otherwise it is a passive trust, which is no trust)

(3) Just using the word "trust" is not enough to create a trust

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Lawful purpose

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Trust cannot call for commission of CRIME

Cannot call for DESTRUCTION OF PROPERTY

Cannot include a CONDITION AGAINST PUBLIC POLICY

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Trusts restricting marriage or promoting divorce

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INVALID

Except for trust providing for widow until he/she remarries
Also OK: Trust providing for payment contingent on marriage to person of certain religion or ethnic group

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Trust execution

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(1) must be in writing
(2) must be signed by SETTLOR AND TRUSTEE
(3) must be EITHER (a) acknowledged by notary public OR (b) signed by two witnesses

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Types of trusts

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(1) Revocable Lifetime / Inter-Vivos Trusts
(2) Pour-Over Gifts
(3) Totten Trust
(4) Joint Bank Accounts
(5) Uniform Transfers to Minors Act
(6) Charitable Trusts
(7) Non Trusts
(8) Statutory Spendthrift Rule

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Revocable Lifetime / Inter Vivos Trusts

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** Trust must explicitly authorize revocation
(otherwise all trusts are presumed to be IRREVOCABLE)

Requirement for revocable lifetime trust: the Settlor cannot also be the SOLE beneficiary

Settlor *can* retain the power to terminate or amend the trust

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Pour Over Gift

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Gifts made in a will to an existing revocable trust

To make a pour over gift, trust must be have been executed (signed) BEFORE or CONCURRENTLY with the will

Existing trust need not have been made by the settlor
You can pour over a gift that's unfunded or partially funded

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Life insurance proceeds (type of pour over gift)

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Insured party can make life insurance proceeds payable to a trust.

1. can create a trust unfunded revocable insurance trust and name the trustee of the trust as the policy beneficiary (e.g., create trust with no money in it, and when policy pays out, it goes into the trust)

2. trust can be a testimentary trust (created in will) and have the life insurance policy contract name the trustee as the policy beneficiary

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Proceeds of savings accounts, pension plans (pour over)

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Create intervivos unfunded trusts, waiting to have the proceeds poured into it from these accounts and plans

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Totten Trust (bank account trust)

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Trust-like alternative (not trust b/c no fiduciary duties)

A opens bank account named "A as trustee for B"
A = depositor
B = beneficiary

Depositor can make deposits and withdrawals as he wants
Beneficiary has no interest during depositor's lifetime; only gets whatever is left in the account when depositor dies

No particular words are required to create Totten Trust ("ITF" is enough)

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How to revoke a Totten Trust

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1. withdraw all the money in the account
2. express revocation during lifetime by depositor
3. express revocation in depositor's will
4. death of beneficiary ($ goes to depositor, beneficiary's heirs get nothing)

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Express revocation (e.g., by depositor during life or in will)

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Depositor must make writing
1. must name the exact beneficiary
2. must name the financial institution
3. must be notarized
4. must be delivered to the bank

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Change of beneficiary (Totten Trust)

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Must be made by depositor
SAME way as revocation (name the beneficiary, name bank, notarized, deliver to bank)

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Creditors of the depositor

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Creditors can reach the totten trust account balance whenever they need to satisfy outstanding debts

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Joint Bank Accounts (NOT totten trusts)

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Trust-like alternative
E.g., A opens an account named "A and B, payable to either, or to the survivor of them"

OR "A and B, with right of survivorship"

After one of parties to the account dies, $ goes to survivor of joint tenancy

Each joint account holder owns 1/2 of the joint account, no matter who deposits the money

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Challenging a survivorship account

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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

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Taking $ out of bank account during existence of the joint tenancy

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A and B own 1/2
A can only take out 1/2 of balance during B's lifetime
If A takes out entire balance during B's lifetime, he SEVERS the joint tenancy (and owes 1/2 to executor's estate when B dies)
EVEN THOUGH he would have gotten 100% upon B's death

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NEW YORK Uniform Transfers to Minors Act

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Easy way to make gift to minor
1. avoids guardianship proceeding
2. avoids a trust (court's supervision of trust)
3. qualifies for $14,000/donee exclusion from federal estate tax

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How to make gift under UTMA

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1. must make gift to a custodian
2. gift must specify that it is made under the UTMA
3. UTMA gifts can be made in a will

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Duties of UTMA custodian

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1. hold, manage and invest the property under a prudent person standard
2. pay to minor whatever part of property the custodian deems advisable for minor's needs
3. pay what is left of the property to minor
- at age 21 (for 1997+ gift)
- at age 18 (for pre 1997 gift)

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Difference between UTMA gift and trust

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UTMA is a special statutory conservatorship
UTMA does not create a trust
Custodian does NOT hold legal title
Minor holds legal title

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UTMA tax consequences

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If donor names himself or herself as custodian, then the amount of the gift is includible in the custodian's gross estate for federal and state estate taxes

If donor names someone else as custodian, then the amount of the gift is NOT includible

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(6) Charitable Trusts

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(1) Beneficiares
- cannot be specifically named
- must be a reasonably large group
(2) Must be for charitable purpose (health, education, religion)
(3) Allowed to last perpetually (not subject to RAP)
(4) Cy Pres--if stated purpose of trust can no longer be accomplished, or charity goes out of existence, court can change trust to bring it as near as possible to what the settlor wanted
(5) Atty General has the duty of representing the beneficiaries of the charitable trust
- Atty Gen is an indispensable party to any suit concerning construction and enforcement of trust
- AG has standing to sue to enforce the trust's terms

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Examples

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NOT charitable trust
Settlor creates trust to benefit descendents of settlors

YES charitable trust
Settlor creates trust to benefits all orphans of Syracuse
Trust to pay for the costs of Masses for descendants (the "Masses exception")

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(7) Non-Trusts

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1. Honorary Trusts
2. Charitable Trusts
3. Resulting Trust

Property transfer consequences even if not really trusts

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(a) Honorary Trust (nontrust)

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NOT a private trust because no human being is the beneficiary (e.g., give $10K to T to take care of garden)

Money falls into the RESIDUARY ESTATE

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Exceptions to requirement that private trust have a human beneficiary

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(1) Pet trust: can be valid for the LIFETIME of the pet (someone designated in the will or appointed by the court enforces the trust)
(2) Cemetery trust: trusts for perpetual care and maintenance of cemeteries and burial plots -- classified as charitable (so don't violate RAP)

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(b) Constructive Trusts

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A flexible equitable remedy designed to disgorge UNJUST ENRICHMENT that results from WRONGFUL CONDUCT

Trustee's only duty is to convey the property to the person, who, in equity, should have the property

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Example 1 of constructive trust

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A wants to change her will to give $ to C but she was prevented by people who stood to gain from will (B)
If A never signed new will, then there would be no new will
But unjust enrichment for B --> constructive trust
B holds title under a constructive trust and have duty to transfer title to C
Otherwise they would be unjustly enriched by their wrongful conduct

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Example 2 of constructive trust

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A has two kids, B and C
B kills A
A dies without a will
Intestacy statute would say B and C each get half
But that would bring unjust enrichment to B
A constructive trust is imposed, property goes as if wrongdoer (B) pre-deceased A --> 1/2 goes to B's children

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(c) Resulting Trust

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Not a trust, but an equitable remedy

E.g., Purchase Money Resulting Trust (PMRT)

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Purchase Money Resulting Trust (PMRT)

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New York is one of 5 states that do NOT recognize PMRT

Purchaser buys property and has title put in someone else's name who is not a relative. Later, purchaser claims that no gift was intended, asks title holder for title to property and title holder refuses.

Most states: this creates PMRT that allows purchaser to compel title holder to give up title. NOT in NY.

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Exception for NY: when constructive trust can be imposed

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If there is CLEAR and CONVINCING evidence that 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

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(8) Statutory Spendthrift Rule and Protection from Creditors

[only applies to irrevocable trusts!]

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Protects a trust beneficiary's interest from creditors by prohibiting voluntary or involuntary transfer of the beneficiary's interest

New York: if a trust is silent, INCOME from trust will have spendthrift protection (does NOT apply to Principal)

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Protecting Income vs. Principal

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If trust is silent, INCOME beneficiaries are protected
There must be an express spendthrift clause for PRINCIPAL beneficiaries

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Spendthrift clause (example)

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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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EXCEPTIONS to spendthrift clauses

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(1) creditors who furnish necessities (food, clothing, shelter)
(2) child support and alimony
(3) federal tax liens
(4) excess income beyond that needed for support and education
- must show that all other possible remedies have been exhausted
- what's needed for support is based on life style of the beneficiary
(5) The 10% levy under CPLR (available to all judgment creditors) -- all creditors together share 10% of trust income (still cannot sue for garnishment, attachment, etc.)

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Interest retained by Settlor

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Spendthrift protection does NOT apply to any interest retained by the settlor

(This applies even if trust includes an express spendthrift clause!)

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Revocable trust

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NO protection at ALL against creditors of settlor in revocable trust

This goes EVEN IF settlor doesn't have any interest in the trust

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MODIFICATION AND TERMINATION OF TRUSTS

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(1) Modification
(2) Termination

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Modification

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is appropriate only when the OBJECTIVES of the trust would be defeated or substantially impaired if the trust is not modified

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Clafflin Doctrine

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The purpose of the trust comes first, overriding any specific directions in the trust

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Two level modification test:

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1. find out the primary intent of the settlor regarding trust purposes
2. look at whether those specific directions in the trust would frustrate the primary intent of the trust

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Invasion of the Principal

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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

(even if trust expressly says A is entitled to income, and B is entitled to principal-- court can invade principal for A if income not enough to carry out trust purposes)

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Revocation and Amendment

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trusts are irrevocable and unamendable UNLESS the power to revoke and amend is expressly reserved in the trust instrument

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Termination by Settlor (irrevocable trusts)

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Settlor can terminate an irrevocable trust if all beneficiaries in being consent

No one can give consent for any beneficiary who is a minor or who is mentally incompetent

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Consent NOT required from

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- child in gestation (e.g., pregnant woman)
- heirs or next of kin (don't have beneficial interest)

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TRUST ADMINISTRATION

Trustee's powers
New York Fiduciary Powers Act (FPA)

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Sets out powers that can be exercised by a trustee
- without court order and
- without express authorization in the trust

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What trustee can do under FPA

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1. sell any real property
2. mortgage property
3. lease property
4. make ordinary repairs
5. contest, compromise or settle claims
6. do almost anything needed to manage corpus (principal) of trust

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What trustee CANNOT do under FPA

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1. Engage in self-dealing
2. Borrow money on behalf of trust
3. Continue a business (liable incurred by the business unless trustee has court approval to continue the business)

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Accounting

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submission of receipts and expenditures
beneficiary reviews accounts
1. ratify or approve actions of fiduciary or
2. challenge any apparent wrongdoing in the books

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Self-Dealing

Things trustee CANNOT do

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1. Trustee cannot buy property from trust or sell property to trust
2. Trustee cannot borrow trust funds
3. Trustee cannot lend money to the trust (any interest earned on loan must be returned to the trust, and any security given for the loan is invalid)
4. Trustee cannot profit from serving as trustee (CAN get an appropriate fee, but CANNOT take advantage of confidential information)
5. Corporate trustee CANNOT buy its own stock as a trust investment

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Things trustee MUST do

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1. Segregate trust assets from personal assets
- 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
- if assets go up in value, there is a conclusive presumption that trust funds were used

2. Earmark trust assets by titling them in the trustee's name ("John Jones trustee")

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Remedies for breach of fiduciary duty

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1. beneficiary can sue to remove the trustee
2. beneficiary can ratify the transaction and waive the breach
3. beneficiary can sue for any loss ("SURCHARGE action")

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No further inquiry rule (special rule for self-dealing)

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Breach of a fiduciary duty by engaging in self-dealing is an Automatic Wrong
Good faith is not a defense
Reasonableness is not a defense

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Actions against a third party when trustee engages in self dealing

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If trustee engages in a prohibited transaction (e.g., self-dealing) and sells trust property to a third party...
the beneficiary cannot sue the purchaser of property from the trustee if the purchaser was a BFP for value without notice (Bona Fide Purchaser)

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Purchaser is NOT a BFP only if

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1. he knows he was dealing with a trustee
2. the trustee was engaging in self dealing

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Indirect Self-Dealing

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Self-dealing rules also apply to
loans or sales to the
1. RELATIVE of the trustee or to
2. a business of which the trustee is an officer, employee, partner or principal shareholder

SO relatives & businesses associated with the trustee CANNOT be BFP
If trustee sells property (bought with improperly borrowed trust funds) to unwitting relative, relative can be sued by beneficiary

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Exculpatory Clauses (used to shield trustees from liability for breach of a fiduciary duty)

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Cannot be used in a testimentary trust

CAN be used in a lifetime (intervivos) trust

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LIABILITY OF TRUSTEE IN CONTRACT AND TORT

Personal liability of trustee in contract

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Depends on how trustee signed:

1. if signed only on behalf of the trust, no personal liability
- e.g., "JJ Trust, by Mary Jones Trustee"
- e.g., "Mary Jones, as Trustee of the JJ Trust and not individually"

2. if trustee signed personally and merely mentioned trust, then there is personal liability (e.g., signing "Mary Jones, Trustee of the JJ Trust")

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When trustee will be reimbursed from trust (even if there is personal liability)

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Reimbursement follows when:
1. contract is within the powers of the trustee
2. trustee was acting in the course of proper administration of the trust

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Personal liability of trustee in tort

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Trustee is personally liable for all torts
1. by the trustee or
2. by trustee's employees

**should buy liability insurance and charge cost to trust

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When trustee will be reimbursed for liability in tort

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Both must be true:
1. trustee was acting within his powers when tort was committed
2. trustee was not personally at fault (e.g., it was employee's fault)

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Trustee's investment power

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Trustee is obligated to manage the property of the trust on behalf of the beneficiary

Uniform Prudent Investor Act (UPIA) governs -- gives trustee broad latitude to choose investments

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Uniform Prudent Investor Act (UPIA)

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Trustee can pursue the MODERN PORTFOLIO theory of investment -- Trustee creates a custom-tailored investment strategy for this particular trust

UPIA gives trustee FLEXIBILITY to shape investment strategy for maximum total return

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Two factors trustee should consider in making investment in the trust (UPIA)

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(1) Trustee must consider the role each investment plays within the overall trust portfolio
(2) Trustee must consider the expected total return from income and capital gain
--> trustee does not have to justify the prudence of each investment looked at in isolation

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How prudence is measured

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Based on decision when made (not based on hindsight)
If investment is prudent at the time, in the context of the overall investment strategy, that is enough

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Adjustment power

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Trustee can allocate capital gains to income
(Can adjust income between the income and remainder beneficiaries to be fair to each of them)

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THE RULE AGAINST PERPETUITIES

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No interest is valid if it could vest later than
ANY life in being at the time of the creation of the interest
plus 21 years

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When is an interest vested?

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1. when there is no condition that has to be satisfied and
2. the exact identity of the taker is known

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NY reform statute

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Automatically reduces all age contingencies to 21 years

(e.g., "conveyance would be void under common law RAP but the NY reform statute saves the conveyance")

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A conveys property to B for life, remainder to Bank in trust to pay the income to C for life, then principal to any child of C who reaches 30

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1. income interest (C) -- vests after B's life
2. principal interest (child) -- vests after C's life + (max) 30 -- common law: violates RAP
-- NY: age contingency reduced to 21 years

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New York Rule Against Suspension of the Power of Alienation

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Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years -- that is, there are no persons who could, together, transfer fee simple title

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Power of the alienation

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income and principal beneficiaries come together and put their their interest together to transfer a full fee simple title

Why might they not be able to do that? the spendthrift trust rule (income beneficiary cannot sell that interest)
-

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How to identify when suspension of alienation concern is present

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1. whenever there's a spendthrift interest (always there unless explicitly rejected)
2. when there's a life estate created in an unborn person
3. when there's a life estate created in open class that includes unborn persons

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O says to A and his heirs so long as no liquor is consumed, and if it is, then to B

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Suspension rule NOT violated
A has present possessory interest
B has a future interest
Together they could agree to transfer the full fee simple within their won lifetimes plus 21 years

RAP IS violated
Vesting in B's interest might take place after RAP period of A's and B's lifetimes plus 21 years