Trusts

Front 1

Definition of a private express trust

Back 1

a fiduciary relationship with the 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

Front 2

What can constitute the property of the trust

Back 2

any presently existing interest in property that can be transferred to support the trust

Front 3

What cannot constitute the corpus of a trust

Back 3

Anything that is an illusory interest. For example: future business profits, debts/liabilities, mere expectancies, CP if one spouse creates trust

Front 4

Who can be the beneficiary of a private express trust

Back 4

Any ascertainable person or group, including corporations and business associations

Front 5

Will a trust fail for lack of a trustee?

Back 5

No, a trust must have a trustee but the court will appoint one if needed rather then let trust fail

Front 6

Define the intent requirement for a trust

Back 6

There must be a PRESENT MANIFESTATION of trust intent made by the settlor. It cannot be an intent to create a trust in the future. No magic words are necessary but mere precatory words are not enough on their own

Front 7

Can precatory words ever be enough to establish the intent to create a trust?

Back 7

Yes, if combined with parole evidence of actions, they may sufficiently show the settlor's intent to create a trust

Front 8

Do trusts need to be in writing?

Back 8

Trusts for PERSONAL PROPERTY do NOT need to be in writing. The statute of frauds only applies to REAL PROPERTY

Front 9

How does the settlor create a trust to take effect on his death?

Back 9

S must comply with the statute of wills, which means that part of the will must have a provision for a testamentary trust to take effect on S's death

Front 10

How can S create a trust to take effect during his life?

Back 10

Must create a transfer in trust or a declaration in trust

Front 11

What must the settlor do to create a trust for real property?

Back 11

Must execute and deliver a deed transferring title to the trustee in order to comply with statute of frauds

Front 12

How can the settlor deliver the trust corpus to the trustee?

Back 12

delivery can be actual, symbolic, or constructive (just as in gift causa mortis)

Front 13

Must there be delivery of the corpus in order to create a trust?

Back 13

Yes, if no delivery a trust is not created. A promise to deliver the corpus in the future is not sufficient

Front 14

What is required for a transfer in trust?

Back 14

Must appoint someone as trustee, deliver the corpus to the trustee, and manifest an intent to create a transfer in trust

Front 15

What is a declaration in trust?

Back 15

Trust created when settlor appoint himself as trustee

Front 16

Is delivery an issue with a declaration in trust?

Back 16

Not if trust is for personal property b/c trustee is also the settlor, so the only issue is the present manifestation of trust intent.

But if the declaration in trust is for real property, there must be some writing to satisfy SoF indicating settlor is also trustee.

Front 17

What are the elements that are required for a trust

Back 17

1. Trustee
2. Res (trust property)
3. Beneficiary
4. Valid trust purpose
5. Settlor
6. Present intention to create the trust

Front 18

What are the valid purposes for a trust?

Back 18

A trust may be established for any legal purpose.

Front 19

If the trust has an illegal purpose at time of creation what are the possible remedies?

Back 19

1. Excise the bad from the good -- the court will excise the illegal condition and keep the rest of the trust

2. If not possible to excise the bad from the good, the court will either 1) invalidate the trust at inception and allow the settlor to retain ownership of the property or 2) allow trustee to keep property (this is usually done to punish settlor)

Front 20

What are the remedies for a trust that has an illegality that arises after creation?

Back 20

Create a resulting trust, which is an implied in fact trust based on the presumed intent of the parties. The trustee of the resulting trust has one purpose which is to transfer the property back to the settlor or the settlor's estate.

Front 21

What is the definition of a charitable trust?

Back 21

any trust which confers a substantial benefit on society. A charitable trust will not have an ascertainable beneficiay b/c society itself is the beneficiary.

Examples: trusts for education, alleviation of proverty, alleviation of sickness, to help orphans.

Front 22

How is a charitable trust created?

Back 22

In the same manner as a private express trust. Can be done by will or during settlor's lifetime by a declaration or transfer in a trust corpus of a presently existing interest in property that can be transferred.

Front 23

What happens if the settlor creates a trust that appears to be for both the benefit of society and a select group of people (e.g. creating a trust to alleviate poverty of his relatives)?

Back 23

Split of authority:

One view: b/c only a few people benefit it is a private trust

Second view: it is a charitable trust b/c whenever poverty is eliminated, society benefits.

Front 24

Why is it important to distinguish a charitable trust from a private express trust?

Back 24

B/c RAP does not apply to charitable trusts and charitable trusts can also be distributed under the cy pres doctrine

Front 25

What options are available if settlor creates a charitable trust but doesn't fund it w/ enough money?

Back 25

1. Create a resulting trust and give money back to settlor or settlor's estate

2. Apply cy pres doctrine

Front 26

What is cy pres

Back 26

Means "as nearly as possible"

Only applies to charitable trusts. If the court finds that the settlor had a general charitable intent and the mechanism for effectuating the intent is not possible or practicable the court can modify the trust through cy pres to effectuate settlor's general intent

Front 27

What type of evidence is admissible to ascertain whether settlor had a general or specific charitable intent?

Back 27

Both intrinsic (trust instrument) and extrinsic (parol evidence) is admissible

Front 28

When is cy pres not allowed

Back 28

When S had only a specific charitable intent

Front 29

What is an honorary trust?

Back 29

a trust that has no ascertainable beneficiary and confer no substantial benefit on society (so neither private express trust or charitable trust).

Instead, an honorary trust expresses a goal of the settlor that the trustee can choose to carry or not.

Front 30

What happens if a trustee refuses to carry out an honorary trust?

Back 30

The honorary trust will fail and the court will create a resulting trust to give the property back to settlor

Front 31

How does the court address the problem that honorary trusts violate the RAP b/c there is no life in being?

Back 31

courts take two approaches:

1. Strike honorary trust at its inception and create a resulting trust back to settlor

2. Allow the honorary trust to endure but only for 21 years, after that it becomes a resulting trust back to settlor

Front 32

Totten Trusts

Back 32

Bank account wherein the named beneficiary takes whatever is left in the bank account at the settlor's death (essentially a will substitute rather than a trust b/c trustee owes no fiduciary duty to the beneficiary)

Front 33

Can a totten trust ever become a full blown private express trust with fiduciary duties?

Back 33

Yes, if the depositor/trustee manifests a trust intent. For example, trustee tells B "I created a trust for you." This will elevate the totten trust to a private express trust and all the fiduciary duties will kick in.

Front 34

How can a totten trust be revoked?

Back 34

1. By withdrawal of funds
2. By changing the name on the account
3. By will in some jurisdictions

Front 35

Can the beneficiary of a private express trust sell his rights to future/present trust payments?

Back 35

Yes. This is called voluntary alienation and it is okay when there is a private express trust.

Front 36

Can B's creditors attach or seize right to future payments on the trust?

Back 36

Yes. Trust property can be involuntarily alienated which means that it can be attached by creditors after proper legal proceedings.

Front 37

Spendthrift Trusts

Back 37

A trust in which the beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attach the beneficiary's right to future payments or principal

Front 38

Can the beneficiary ever voluntarily alienate his interest or transfer his right to future payments in a spendthrift trust?

Back 38

NO, this would defeat the terms of the trust.

However, some court will recognize an assignment or transfer as an order for the trustee to pay B's agent or representative and would enforce it. Prior to the time of payment B would have the right to revoke the order to the trustee.

Front 39

Can creditors ever involuntarily alienate B's interest or attach B's right to future payments in a spendthrift trust?

Back 39

Generally NO, however there are two exceptions.

1. Common law exception for preferred creditors which include:
1) government creditors
2) those who provide B w/ necessities
3) Child support payments
4) spousal support payments
5) ex-spouse alimony payments
6) tort judgment creditor

2. Many jurisdictions allow any creditor to attach to SURPLUS.
Surplus is the amount NOT needed for beneficiary to maintain station in life (subjective standard)

Front 40

Can a settlor every create a spendthrift trust for himself?

Back 40

It depends.

Involuntary alientation = Almost Never allowed. Except for in a few jurisdictions a settlor cannot insulate himself from his own creditors. The rest of the trust is valid but the spendthrift provision is not.

2. Voluntary alienation = split of authority.
Majority view DOES allow S to go back on his word and later voluntary alienate his interests.
Minority view: Does not allow S to deny validity of his own instrument. Sees provision as being there to protect settlor from himself.

Front 41

Support Trusts

Back 41

The trustee is required to use only so much of the income or principal as is necessary for the B's health, support, maintenance or education.

Front 42

Can B ever voluntarily alienate his interest or transfer right to future payments in a support trust?

Back 42

Absolutely NOT. This would violate settlor's intent

Front 43

Can creditors ever involuntarily alienate B's interest in a support trust?

Back 43

Generally no.

However, the two exceptions (for preferred creditors and surplus) apply.

Front 44

Can a settlor ever create a support trust for himself?

Back 44

same as w/ spendthrift trusts.

Almost never allowed w/ regard to involuntary alienation b/c don't want to allow S to insulate himself from creditors.

Voluntary alienation allowed under majority view but not under minority.

Front 45

Discretionary Trusts

Back 45

Trustee is given sole and absolute discretion in determining how much to pay beneficiary, if anything, and when to pay beneficiary, if ever

Front 46

Can B ever voluntarily alienate his interest or transfer his right to future payments in a discretionary trust.

Back 46

Two step analysis:

1. No b/c B may not get anything so not clear what he would be assigning.

2. But IF there is, in fact an assignment, the assignee steps into the shoes of the beneficiary.

So, although trustee doesn't have to pay, if he does pay and has notice of the assignment, he has to pay assignee or is personally liable (although neither B nor assignee can ever force payments)

Front 47

Can creditors ever involuntarily alienate a discretionary trust?

Back 47

Two step analysis.

1. No, b/c there is nothing to attach since trustee may never give B anything. Since B cannot force payment neither can creditor

2. BUT if the trustee had notice of debt and creditor's judgment against B and does decide to pay, he must pay creditor or else be held personally liable.

Front 48

Can a settlor ever create a discretionary trust for himself?

Back 48

same as w/ spendthrift and support trusts.

Almost never allowed w/ regard to involuntary alienation b/c don't want to allow S to insulate himself from creditors.

Voluntary alienation allowed under majority view but not under minority.

Front 49

How would you analyze a fact pattern that said, "Trustee in his sole and absolute discretion shall pay amount needed for B's support and maintenance"?

Back 49

Say:

1. B/c of words "sole and absolute" it could be a discretionary trust.
Then apply rules of discretionary trusts to facts.

2. B/c of words "support and maintenance" in the alternative, it may be a support trust.
Then apply rules of support trust to facts

Front 50

Resulting Trust

Back 50

Implied in fact trust based on the presumed intent of the parties. Trustee's sole purpose is to transfer property to settlor (if alive) or settlor's estate (if dead)

Front 51

How does a resulting trust arise?

Back 51

7 situations:

1. Private trust ends and there is no provision for what should happen to corpus.

2. Private trust fails b/c no beneficiary

3. Charitable trust fails b/c of impossibility or impracticability and cy pres cannot be used

4. When a private trust fails b/c it is has illegal purpose

5. When there is excess corpus in private trust

6. When there is a purchase money resulting trust

7. When there is a semi-secret trust.

Front 52

What is a purchase money resulting trust?

Back 52

Occurs when A pays consideration to B to have title transferred to C. If A and C are NOT closely related, this creates a rebuttable presumption C is holding as a purchase money resulting trust for benefit of A.

Note: if C and A are closely related there is a rebuttable presumption A made gift to C

Front 53

What is a semi-secret trust?

Back 53

A semi-secret trust will only arise in a will scenario. Occurs when T makes devise in will to hold as trustee but doesn't name beneficiaries saying instead T knows who to give to. Since will shows trust intent but can't identify specific beneficiary w/o admitting in extrinsic evidence which would violate statute of will. So instead courts will decree a resulting trust.

Front 54

Constructive trust

Back 54

Not really a trust. Rather it is a remedy to prevent fraud or unjust enrichment. When a court decrees a constructive trust, the wrongdoer's sole obligation is to transfer property to intended beneficiary as determined by court

Front 55

When will a constructive trust be imposed?

Back 55

4 situations:

1. Trustee makes a profit at expense of B's from self-dealing

2. When there is fraud in the inducement of a will or undue influence

3. In will's context, when there is a secret trust

4. When there is an oral real estate trust. There are 3 situations where the transferee (A) will not be able to raise SoF defense and will instead have to transfer property to intended beneficiary: 1) a fiduciary relationship existed between T (transferor) and A (transferee); 2) Fraud in the inducement on A's part; 3) detrimental reliance by the intended beneficiary which requires B to have taken possession AND made improvements.

Front 56

What is a secret trust?

Back 56

T leaves money to A in his will after A agrees to use the money for the benefit of B. Parol evidence is admissible to show trust was intended for B, and the court will impose a constructive trust to force A to transfer money to B.

NOTE: The remedy for a semi-secret trust is a resulting trust while the remedy for a secret trust is a constructive trust. Discuss both on exam.

Front 57

When will an oral real estate trust result in the court imposing a constructive trust.

Back 57

Occurs when A agrees to transfer property to B if S deeds it to him. Deed appears on its face to give property to A and if B claims property A will assert a statute of frauds defense.

In three situations, A will not be able to invoke SoF and court will impose constructive trust for benefit of B.

1) a fiduciary relationship existed between S and A.

2) Fraud in the inducement on A's part (A agreed to transfer to B knowing that he wouldn't do it)

3)There was detrimental reliance by B which requires B to have taken possession AND made improvements.

Front 58

What powers does a Trustee have?

Back 58

A trustee has all enumerated powers and all implied powers (those that are helpful and appropriate to carry out trust). Implied powers include: power to sell trust property, power to incur expenses, power to lease and power to borrow.

Front 59

Duties trustee owes to beneficiary

Back 59

1. Duty of loyalty
2. Duty to invest
3. Duty to earmark
4. Duty to segregate
5. Duty not to delegate
6. Duty to account
7. Duty of due care

Front 60

Duty of loyalty

Back 60

Requires the trustee to administer the trust for the benefit of the beneficiaries having no other consideration in mind (i.e. no self dealing)

Consequences: If there is a loss, trustee is surcharged and must make good the loss. If trustee makes a profit, the trustee becomes a constructive trustee of the profits and must turn over to Bs

Front 61

Duty to invest

Back 61

3 alternative approaches:

1. State lists which give good and bad investments: Usually federal bonds and CDs are good, publicly traded stock is sometimes ok, and it is never ok to invest in a new business or second deed of trust in real estate.

2. Reasonable prudent investor: Requires trustee to act as reasonably prudent person investing his own (old view) or another's (modern view) property, trying to maximize income while preserving corpus. Under this approach, every individual investment is scrutinized. Usually, federal bonds and CDs are good as are blue chip stocks and first deeds of trusts.

3. Uniform Prudent Investor Act (most states follow): Trustee must invest as reasonably prudent investor. Key is that each individual investment is NOT scrutinized and performance is based on ENTIRE PORTFOLIO. No one investment is absolutely prohibited or considered to always be bad.

UNDER ANY STANDARD TRUSTEE HAS DUTY TO DIVERSIFY and not to speculate.

Front 62

What are the remedies for breach of duty to invest?

Back 62

If profit, beneficiaries will affirm the transaction.

If two investments that breach duty, and one results in loss while other results in gain, trustee is surcharged for loss while Bs affirm transaction that made money. In other words, not netting is allowed by the trustee

Front 63

Duty to earmark

Back 63

Requires the trustee to label trust property as trust property

Front 64

Consequences for breach of duty to earmark.

Back 64

Common law: Trustee is personally liable for any loss. Does not require a causal relationship between breach and loss.

Modern approach: trustee is only liable if failure to earmark CAUSED the loss

Front 65

Duty to Segregate

Back 65

Trustee cannot co-mingle his own personal funds with trust funds and cannot co-mingle the funds of Trust A with the funds of Trust B.

Breach = liable for resulting losses

Front 66

Duty not to delegate

Back 66

Trustee an rely on professional advisors in reaching a decision BUT cannot delegate decision making authority to these advisors.

Note: under modern law trustee can delegate the duty to invest to a professional money manager and trustees only need a majority to act (used to need to act unanimously)

Front 67

Duty to account

Back 67

Requires trustee on a regular basis to give the Bs a statement of income and expenses.

If trustee fails to do so, Bs file an action for accounting

Front 68

Duty of Due Care

Back 68

Common Law: The trustee must act as a reasonably prudent person dealing with his own affairs

Modern: Trustee must act as reasonably prudent person dealing with another person's property (a little stricter)

NOTE: duty of care will almost always be one of the breaches you find in a trust question

Front 69

Remedies of beneficiary for breach of duties

Back 69

1. Damages
2. Constructive trust remedy
3. Tracing and equitabe lien
4. Ratify the transaction if good for beneficiary
5. Remove the trustee

Front 70

Liability in Contract of Trustee to Third Persons

Back 70

Common law: Trustee is sued in his personal capacity (personal assets at stake) but if trustee if w/o personal fault, the trustee can get indemnification from trust assets

2. Modern law: if other person to the contract KNOWS the trustee is entering into the contract in his REPRESENTATIVE CAPACITY then the trustee must be sued in his representative capacity and his personal assets are not at stake

Front 71

Liability in tort of trustee to third persons

Back 71

Common Law: The trustee is sued in personal capacity, but if not personally at fault, can get indemnification from trust assets

Modern law: trustee is liable for torts ONLT IF the trustee is personally at fault (e.g. acted negligently or otherwise committed the tort). So if it was an agent that committed the tort or claim is brought under strict liability thoery, trustee MUST be sued in representative capacity.

Front 72

When can the settlor modify the trust

Back 72

When he expressly reserves the power to do so OR if he has the power to revoke the trust

Front 73

How can the courts modify trusts?

Back 73

1. For charitable trusts can use cy pres.

2. Fo any trust, can modify using court's deviation power, which allows court to change administrative/managerial provisions BUT does NOT allow court to change beneficiaries

Front 74

When can the court exercise its deviation power?

Back 74

Under the doctrine of changed circumstances, court can modify using deviation powers if:

1) Unforeseen circumstances on the part of the settlor or testator AND
2) Deviation necessary to preserve trust.

Front 75

When does the settlor have the power to revoke the trust?

Back 75

Majority view: only when settlor expressly reserves power to revoke in trust instrument

Minority view: Settlor has power to revoke UNLESS trust is expressly made irrevocable

Front 76

How can a trust be terminated prematurely?

Back 76

1. Settlor and all beneficiaries agree (must appoint guardien ad litem to protect interests of unborn or contingent remaindermen)

2. All the beneficiaries agree to terminate and all the material purposes of the trust have been accomplished. (note: court will make sure sufficient assets are set aside to accomplish minor purpose). Again, appoint guardien ad litem if necessary.

3. Operation of law: statute of uses (not recognized in all jurisdictions):
If private express trust has real property and trustee has not active duties (passive trust) then Bs will get title by operation of law and trust will terminate. Might be able to apply by analogy to real property

Front 77

What income and expenses are allocated to life tenant?

Back 77

Income:
1. cash dividends
2. interest income
3. net business income

Expenses:
1. interest or indebtedness (not principle)
2. Taxes
3. minor repairs (e.g. paint job)

Front 78

What income and expenses are allocated to remainderman?

Back 78

Income:
1. Stock dividends
2. stock splits
3. net proceeds on sale of a business

Interest pays for:
1. Principal part of loan indebtedness
2. Major repairs or improvements (new wing or building)

Front 79

Adjustment Power of trustee

Back 79

The UNIFORM PRINCIPAL AND INCOME ACT allows trustee to disregard rules regarding allocation of income to life tenants and remainderman if different allocation is necessary to adminsiter trust fairly.

Front 80

What does the prudent investor rule require?

Back 80

a trustee must adhere to a standard of good faith, reasonable prudence, sound discretion and care in making trust investments.

Front 81

Is a trustee, or his relative, agent or representative ever allowed to purchase trust property?

Back 81

NO. This is considered a conflict of interest and self-dealing so it is a breach of the duty of loyalty. Bs can set aside transaction, recover property and require trustee to pay profits earned on property while it was owned by trustee/relative