Trusts

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Requirements for a Valid Trust

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The five elements required for an express trust are: (1) a settlor with capacity to convey, (2) a present intent to create a trust relationship, (3) a competent trustee with duties, (4) a definite beneficiary, and (5) the same person is not the sole trustee and sole beneficiary. Additionally, there must be a present disposition in trust of specific property then owned by the settlor, and the trust must have a valid trust purpose. Consideration is not required.

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Settlor (grantor)

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Must have legal capacity. (Must be over 18 or over; must have capacity to convey legal title to the trustee, a higher test for capacity than for wills.)

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Delivery Requirement

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Requirement does not apply to a self-declaration trust or testamentary trust. But for an inter vivos trust that names a third party as trustee, the mere intent to create a trust, or a gratuitous promise to create a trust, is not sufficient. As with the law of gifts there must be delivery of subject matter of the trust, with the intent to convey legal title to the trustee.

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Trust Property

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The corpus, the principal, the subject matter of the trust. To have a trust, legal title to a specific interest in property must be conveyed to the trustee. The subject matter of the trust must be certain and identifiable. If there is no trust property, there is no trust.

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Watch out for Trusts Supported by Consideration

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A different result is reached when the promise to hold property (to be received in the future) in trust is supported by consideration. Under contract principles, the trust automatically attaches when the property is received.

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What if no trustee is named or the trustee dies or resigns?

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No Trust Fails for Lack of a Trustee – If the intent to create a trust is clearly manifested but no trustee is named or if the named trustee dies or resigns with no provision for a successor trustee, the court will appoint a suitable successor to carry out the trust.

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What constitutes acceptance of the trust by the trustee?

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1. Trustee’s signature, signifying acceptance of the trust. But what if he does not sign a written acceptance of the trust?
2. Acceptance by conduct, exercises trust powers or performs trust duties.

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Trustee Removal

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A trust may be removed for:
1. Commission of a serious breach of trust;
2. Lack of cooperation among cotrustees that impairs administration of the trust;
3. Unfitness, unwillingness, or persistent failure to effectively administer the trust; or
4. Substantial change of circumstances making removal in beneficiaries’ best interest.
Note: Friction and hostility is not a proper ground for removal unless it is so extreme that it compromises the ability of the trustee to faithfully perform its trust duties.

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Trustee Resignation

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Once an appointment has been accepted, the trustee can resign by either: (i) giving 30 days notice to the qualified beneficiaries, settlor (if living), and co-trustees; or (ii) obtaining court approval.

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Requirement of Fiduciary Duties

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If named trustee has no powers or active duties to perform, no trust arises. A trustee must owe fiduciary duties to someone.

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Requirement for Beneficiaries in Trust

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For a noncharitiable trust, the beneficiaries must be definite and ascertainable, and their interests must vest, if at all, within period of the Rule Against Perpetuities. The rule for charitable trusts is exactly the opposite.

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Intent to Create a Trust - Precatory Language

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Precatory language – A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way is called precatory language. The usual inference is that precatory expressions do no create a trust.

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Lawful Purpose Requirement

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Trust whose purpose is to further commission of a crime, or calls for the destruction of property, is invalid as against public policy (e.g., encourage divorce, total restrain on marriage, c.p. contra, partial restraints on marriage, motive to support during widowhood only). Also, unlawful conditions are unenforceable.

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Relation Back Acceptance

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A testamentary trust is treated as in existence as of the settlor's death, and the trustee's acceptance "relates back" to that date. It is thus possible for a trustee, by accepting, to become liable (in his fiduciary capacity) on tort claim arising prior to the time he accepted.

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Revocable Trust

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This is a valid trust, and can be a useful arrangement to provide for management in event of settlor’s incapacity, avoiding expenses and restrictions of a guardianship administration. As long as there are one or more trust beneficiaries besides the settlor, a trust is not void as an attempted testamentary disposition even though the settlor retains any one or more of the following rights and powers:
a. Income for life;
b. Power to revoke, alter, amend, or terminate the trust;
c. Power to control trustee in the administration of the trust;
d. Power to cause life insurance proceeds or employee benefits to be paid to the trust.

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Validity of Pourover Will

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The testamentary gift to the trust, called a pourover will gift, provides a mechanism for adding testamentary assets to a trust created by the testator during lifetime. By statute, such a pourover gift is valid:
1. even if the trust is subject to revocation and amendment and is later amended,
2. and even if trust is unfunded during the settlor's lifetime.

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Limitation on Challenging Revocable Trust

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An action contesting the validity of a revocable trust must be brought within the earlier of (1) 2 years after the settlor’s death, or (2) 120 days after the trustee sends the person a copy of the trust instrument, the trustee’s name and address, and a notice of the time allowed for contesting the trust.

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Four distinct rules apply to charitable trusts:

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i. Not subject to Rule Against Perpetuities; can be perpetual.
ii. Must be for a charitable purpose. Must confer a substantial amount of social benefit: education, religion, education, health, relief of poverty, research, governmental purpose.
iii. Must be in favor of a reasonably large number of unidentifiable members of the public at large, and cannot benefit identifiable individuals.
iv. When the stated charitable purpose can no longer be accomplished, may be reformed in judicial proceeding under the doctrine of cy pres (as near as possible).

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Honorary Trust Gift – (Majority Rule)

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To have a trust, the trustee must owe enforceable duties to someone. Animal and objects cannot file lawsuits. The gift is valid only in the sense that it will be upheld if “trustee” chooses to perform. If she doesn’t, the gift fails and there is a resulting trust in favor of another.

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Honorary Trust Gift – (Minority Rule)

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A number of states have enacted the Uniform Trust Code, under which such trusts are valid subject to the following requirements:

i. Only animals alive during settlor’s lifetime can be beneficiaries, trust terminate on death of animal, individuals named in instruments creating the trust can be used as “measuring lives” for perpetuities purposes, trust is enforceable by a person named in trust or appointed by court, and trust property not used for the animal’s care is distributed to the settlor if living; otherwise under settlor’s will or by intestacy.

ii. Trust is valid for 21 years. Trust is enforceable by a person named in trust or appointed by court, and trust property not used for the designated purpose is to be distributed to the settlor if living; otherwise under settlor’s will or by intestacy.

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Constructive Trust (Nature & Elements & B.O.P)

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a. Constructive Trust – IS NOT A TRUST. It is the name given to a flexible equitable remedy designed to disgorge unjust enrichment.

i. Two elements:
1. Wrongful Conduct, and
2. Unjust Enrichment

ii. Burden of Proof – The burden of proof is on the party seeking the constructive trust to establish facts relied upon by clear and convincing evidence.

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Purchase money resulting trust

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A purchase money resulting trust is presumed whenever X (the “beneficiary”) furnishes the consideration (usually money, but any other valuable consideration suffices) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”).

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Circumstances giving rise to resulting trust

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A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and (1) the trust is void or unenforceable, or (2) the beneficiary is dead or cannot be located. A resulting trust may also apply on failure of a charitable trust where cy pres is inapplicable. In such event, the express trust terminates and the settlor becomes the beneficiary of the resulting trust.

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Exceptions to Spendthrift Clause Validity

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Spendthrift clauses are valid, except at:
i. Contracts for necessities. This is seen as benefiting a beneficiary whose only source of income is a spendthrift trust, enabling her to get such contracts.
ii. Child support obligations
iii. Any interest retained by the Settlor
1. Revocable trust – settlor is treated as “owner” for creditor’s rights purposes
iv. Federal tax liens

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Discretionary Trust - Effect on Creditor's

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If the trustee have discretion to pay, accumulate, or appoint the income among several beneficiaries, the beneficiary does not have any "right" to the income until the trustee exercises his power. Thus, the beneficiary's creditor cannot compel payment from the trustee even in the absence of a spendthrift clause.

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Modification and Termination of the Trust - Settlor

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A settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable.

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Modification and Termination of the Trust - Beneficiaries

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A trust may be terminated or modified upon the consent of the settlor and all beneficiries, even if the modification or termination conflicts with material purpose of the trust. A trust also may be terminated or modified on the consent of only all beneficiaries, but only if no material purpose of the trust would thereby be frustrated.

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Modification and Termination of the Trust - Court

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A court may terminate or modify a trust if: (1) unanticipated circumstances threaten the purpose of the trust; (2) continuation of the trust on its existing terms is impracticable or wasteful; or (3) the value of the trust is insufficient to justify the cost of administration or to achieve settlor's tax objectives.

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Modification and Termination of the Trust - Trustee

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A trustee can terminate a trust if property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice.

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Joint Powers of Trustees

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Co-trustees who are unable to reach a unanimous decision may act by majority decision.

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Co-Trustee Duty to Prevent Breach

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Each co-trustee has an affirmative duty to prevent a breach of a trust by a co-trustee.
a. Do not participate in the transaction.
b. Express dissent in writing.

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Duty to Administer Trust

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The trustee has a duty to administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries.

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Duty of Loyalty

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i. A trustee cannot buy or sell trust assets even if the price is a fair one.

ii. A trustee may not sell property of one trust to another trust of which she is also trustee.

iii. A trustee may not borrow trust funds nor loan her personal funds to the trust (except to protect the trust), and any interest paid on such a loan must be returned to the trust.

iv. A trustee cannot use trust assets to secure a personal loan.

v. A corporate trustee cannot invest in its own stock as a trust investment. But it can retain its own stock if such stock was a part of the original trust res when the trust was established, provided that retention of the stock meets the prudent investor standard.

vi. Self-employment can constitute a form of prohibited dealing. However, it the trustee renders extraordinary services to the trust, she may be entitled to additional compensation.

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Duty to Report

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A trustee must: (1) provide the qualified beneficiaries with her name, address, and telephone number; (2) respond to beneficiary requests for information about the trust's administration and provide a copy of the trust instrument if requested; and (3) furnish an annual accounting of the trust.

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Duty to Separate Trust Property and Keep Records - No Commingling

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A trustee may not commingle trust property with her own property or that of another trust.

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Duty to Enforce Claims and Defend Trust from Attack

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The trustee has a duty to enforce claims of the trust and to defend the trust.

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Duty to Preserve Trust Property and Make it Productive

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The power to invest is normally implied from the duty to make trust property productive. The trustee is expected to take actions to , e.g., lease land, collect claims and invest money. The measure of damages for breach of this duty is the amount of income that would normally accrue from proper investments.

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Statute of limitations for action against trustee

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1 year if trustee gives beneficiary a report (accounting) that (1) discloses facts that show existence of a potential breach of trust, and (2) informs beneficiary of the time allowed for commencing an action.

In all other cases: 5 years after the first to occur of (1) trustee’s removal, resignation or death, (2) termination of beneficiary’s trust interest, or (3) termination of trust.

Front 39

Uniform Prudent Investor Act

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Based on the modern portfolio theory of investing. Trustee must satisfy the “prudent investor” standard by exercising reasonable care, skill and discipline, taking into account the risk-return objectives of the particular trust and the role each investment plays within the overall investment portfolio.

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Trustee must establish a custom-tailored investment strategy for each trust, taking into account such factors as:

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1. general economic conditions,
2. the possible effect of inflation or deflations,
3. the expected tax consequences of investment decisions or strategies,
4. the role that each investment plays within the overall trust portfolio,
5. the expected TOTAL RETURN from income and capital gain,
6. needs for liquidity,
7. an asset’s special relationship or value to the purposes of the trust or a beneficiary, and
8. any differing interests of the income beneficiaries and the remaindermen.

Front 41

Delegation of Investment and Management Functions Permitted

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A trustee may delegate investment and management functions but must act prudently in (1) selecting an agent; (2) establishing the scope and terms of the delegation; and (3) periodically reviewing the agent's actions.

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Remedies for Breach of Trust

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If the trustee commits, or is about to commit, a breach of his trust duties, the court may: (1) enforce specific performance of the the trustee's duties, (2) enjoin the trustee from committing a breach of trust, (3) compel the trustee to pay money or restore property, or (4) suspend the trustee.

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Trustee's Liability to Third Parties

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A trustee may be sued on the contract or in tort in his representative capacity. He may be sued personally on the contract only if, in entering into the contract, he failed to reveal his representative capacity and identity the trust.

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Uniform Principal and Income Act

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This Act, which applies to all trusts and estates unless the governing instrument provides otherwise, gives the trustee or personal representative an adjustment power to reallocate investment portfolio return. This adjustment power authorizes the trustee to characterize items such as capital gains, stock dividends, etc., as income if the trustee deems it appropriate or necessary to carry out the trust purposes.

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Non-waivable Trust Rules

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1. cannot limit requirement that a trust cannot be created for an illegal purpose, or require trustee to commit a criminal or tortuous act or act contrary to public purpose;
2. cannot exculpate a trustee from liability for a breach of trust committed in bad faith, intentionally, or with reckless indifference to the interest of a beneficiary;
3. cannot limit the statute of limitations for commencing a judicial proceeding;
4. cannot limit a trustee’s duty to respond for an accounting by the trust’s primary beneficiaries, to act in good faith; and
5. cannot limit court’s power to exercise its jurisdiction to modify or terminate a trust, to remove a trustee, to require a fiduciary bond, or to deny a trustee’s compensation.

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Trustee Exculpatory Clause

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An exculpatory clause is valid even though it exculpates from liability ordinary negligence. However, a clause that purports to relieve liability for acts in bad faith, gross negligence or fraud is unenforceable; against public policy.

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TEN PERCENT RULE

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Receipts from mineral leases, patents, copyrights, book royalties, other assets that produce income for a limited time; receipts from deferred compensation – TEN PERCENT RULE: 10% allocated to income; and 90% allocated to principal.