Trusts

Front 1

Express Trust, defined

Back 1

1. a legal device that allows an owner of property to make transfers of property and have those assets managed on behalf of someone else
2. "settlor" creates the trust and has legal title to manage the money
3. beneficiaries have equitable title to enjoy the distributions

Front 2

Express Trust, two kinds

Back 2

1. lifetime or inter vivos: set up during the lifetime of the person who creates it
2. testamentory: set up in settlor's will

Front 3

Express Trust, 8 requirements

Back 3

1. settlor, creator who makes a
2. delivery of legal title to
3. property, res to a
4. trustee who holds legal title for the benefit of a
5. beneficiary with
6. intent to create a trust for
7. a lawful purpose
8. in a validly executed document

Front 4

Express Trust, Settlor

Back 4

1. must be at least 18
2. must have capacity to enter into Ks

Front 5

Express Trust, Delivery

Back 5

Titled assets must be formally transferred for delivery to be valid.

Front 6

Express Trust, Property/Res

Back 6

1. can be almost anything, but
2. must be something the settlor owns, not just an expectancy
3. it must be identified, not subject to future determination

Front 7

Express Trust, Trustee

Back 7

1. for a lifetime trust: almost anyone can be a trustee since no court involvement is necessary
2. for a testamentary trust anyone can be a trustee, except
a. those under 18
b. judicially declared incompetents
c. convicted felons
d. those incapable because of drunkenness, dishonesty, want of understanding
3. a non-resident alien can serve as a trustee only if
a. that person is related to the decedent, and
b. a NY resident serves as a co-fiduciary
4. failure to name a trustee is OK: court will appoint one

Front 8

Express Trust, Beneficiaries

Back 8

1. must be definite and ascertainable
2. if ambiguous, trustee holds for the residuary beneficiary
3. exception: "family" and "next of kin" are deemed definite

Front 9

Express Trust, Intent

Back 9

1. settlor must intend to create an enforceable obligation
a. precatory, aka non-binding, language is not enough
2. trustee must be given duties to perform: if no duties, it's a passive trust, which is no trust at all

Front 10

Express Trust, Lawful Purpose

Back 10

1. can't call for the commission of a crime
2. can't call for the destruction of property
3. can't have a condition against public policy (restricting marriage or promoting divorce)
a. if a purpose can be found that is not offensive to public policy, then it's valid
b. marriage restrictions based on religion or ethnic group are seen as partial restrictions and are OK

Front 11

Express Trust, Execution

Back 11

1. must be in writing, signed by settlor and trustee, AND
2. either
a. acknowledged by a notary public, or
b. signed by two witnesses

Front 12

Revokable Lifetime Trust

Back 12

1. at least one beneficiary who is not the settlor
2. settlor cannot be the sole beneficiary when also named the sole trustee

Front 13

Revokable Lifetime Trust, Pros and Cons

Back 13

1. pros
a. manages assets efficiently
b. helps plan for possible incapacity by avoiding guardianship
c. avoids probate
2. cons
a. does not avoid taxes
b. full trust assets will be included in settlor's gross estate for tax purposes

Front 14

Pour-Over Gift, definition

Back 14

1. gifts made in a will to an existing revokable trust
2. trusts are easier to change than a will
3. for a "pour over" gift to a trust to be valid, either
a. the trust must be in existence, or
b. executed concurrently with the will

Front 15

Pour-Over gifts, life insurance proceeds

Back 15

Two ways to make insurance proceeds payable to a trust:
1. insured can create an unfunded revokable insurance trust and name the trustee of the trust as policy beneficiary
2. have the trust be testamentary and have the life insurance policy contract name "the trustee named in my will" as the life insurance policy beneficiary

Note: proceeds of savings accounts and pension plans have been handled the same way

Front 16

Totten Trust, definition

Back 16

1. bank account trust
2. bank account in depositor's name "as trustee for" a named beneficiary
3. depositor makes deposits and withdraws as usual
4. beneficiary has no interest until trustee dies

Front 17

Totten Trust, four ways to revoke

Back 17

1. withdraw all money from the account
2. express revocation during lifetime: depositor makes a writing naming the beneficiary and financial institution and having the revocation notarized and delivered to the bank
3. revocation in a will: must comply with same requirements for a revocation during a lifetime
4. death of a beneficiary revokes the trust and the money goes to the depositor

Front 18

Totten Trust, creditors

Back 18

Creditors of the depositor can reach the trust either before or after the depositor's death.

Front 19

Joint Bank Accounts (that aren't totten trusts), basics

Back 19

1. if clear and convincing evidence shows that a survivorship was not intended when the account was opened, and that it was opened merely as a matter of convenience, then survivorship language can be set aside (hard req to satisfy)
2. each account holder owns half, regardless of how much they put in

Front 20

Joint Bank Accounts (that aren't totten trusts), Uniform Transfers to Minors Act (UTMA)

Back 20

1. three pros
a. avoids a guardianship proceeding
b. avoids the court supervision of a trust needed for a minor
c. qualifies for the 13K gift exclusion
2. must be made via a custodian
3. can be made in a will
4. duties of the custodian
a. manage as a prudent person
b. pay to the minor or for their needs what the custodian deems advisable, and
c. pay what's left to the minor at 21 (1997+) or 18 (pre-1997)
d. note: if donor names himself as as custodian, the amount of the gift is includible in their gross income

Front 21

Charitable Trusts

Back 21

1. must have indefinite beneficiaries that are a reasonably large group
a. exception: masses for relatives
2. must have charitable purpose
3. not subject to RAP
4. the AG represents the beneficiaries

Front 22

Honorary Trust: Not a Trust

Back 22

1. no human being is the beneficiary of a non-charitable trust
2. a private trust must have a human beneficiary, with exceptions
a. pet trust: can't last longer than the pet's lifetime, can be enforced by someone designated in the will
b. cemetery trust: classified as charitable, no RAP problem

Front 23

Constructive Trusts: Not a Trust

Back 23

1. flexible equitable remedy
2. disgorges unjust enrichment that results from wrongful conduct
3. trustee's only duty is to convey the property to the person who, in equity, should have the property

Front 24

Resulting Trust: Not a Trust

Back 24

1. equitable remedy
2. Purchase Money Resulting Trust (PMRT) not recognized in NY
3. arises when purchaser buys property and puts it in someone else's name, then title-holder claims it was a gift and refuses to transfer it
4. NY exception to not allowing PMRT: if there's clear and convincing evidence that grantee expressly or impliedly promised to reconvey the land, then a constructive trust can be imposed to benefit the purchaser

Front 25

Statutory Spendthrift Rule

Back 25

1. prohibits voluntary transfer of the beneficiary interest to keep creditors at bay
2. NY: protects all income but need an explicit statement in the will if you want to protect principle
3. exceptions
a. necessities
b. child support and alimony
c. federal tax liens
d. excess income beyond that needed for support and education (based on lifestyle)
e. 10% levy shared by all creditors
4. spendthrift protection doesn't apply to any interest retained by the settlor (settlors can't hide from creditors, but can protect beneficiaries)

Front 26

Trust Modification by Trustees and/or Beneficiaries

Back 26

Purpose of the trust comes first, so only modify if the objectives of the trust would be defeated or substantially impaired if you didn't.

Front 27

Two-Level Trust Modification Test

Back 27

1. find out the primary intent of the trust
2. would specific directions in the trust now frustrate the primary purpose
3. court can authorize the invasion of the principle if the income isn't enough to carry out the settlor's purpose

Front 28

Trust Termination by the Settlor

Back 28

1. NY: irrevocable and unamendable unless the power to do so is reserved in the trust
2. exception: settlor can terminate an irrevocable trust if all beneficiaries in being consent, but NO ONE can give consent for a minor or an incompetent
3. but note: "heirs" or "next of kin" can't be determined until death, so no consent needed

Front 29

Trustee's Powers

Back 29

NY Fiduciary Powers Act

Trustees CAN: sell, mortgage, lease, repair property; contest, compromise, or settle claims; or do almost anything to manage

Trustees cannot:
1. engage in self-dealing
2. borrow money on behalf of the trust
3. continue a business (even if the trust operated it before)

Front 30

Self-Dealing, five prohibitions

Back 30

1. cannot buy or sell trust assets to himself
2. cannot borrow trust funds
3. cannot lend money to the trust
4. cannot profit from serving as trustee (except appropriate fees)
5. cannot buy its own stock as a trust investment

Front 31

Self-Dealing, two affirmative duties

Back 31

1. must segregate trust assets from personal assets
a. remedy: if commingled funds and asset goes up, trust keeps; if asset goes down, person loses
2. duty to earmark trust assets by titling them in the trustee's name

Front 32

Remedies for Breach of Fiduciary Duty

Back 32

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

Front 33

Self Dealing and the No Further Inquiry Rule

Back 33

Self dealing is an automatic wrong
1. good faith is not a defense
2. reasonableness is not a defense

Note: these rules apply to loans and sales to family as well.

Front 34

Self Dealing and 4rd Parties

Back 34

1. if the 3rd party was a BFP, the beneficiary can't sue them
2. purchaser would have had to know that she was dealing with a trustee AND that the trustee was self-dealing

Front 35

Exculpatory Clauses

Back 35

1. can't be used to shield trustees from liability in a testamentary trust
2. but can be used in a lifetime trust

Front 36

Personal Liability of Trustee in Contract

Back 36

1. if trustee signed only on behalf of the trust, then no personal liability: "X, by Y, trustee"
2. if trustee signed personally and only mentioned the trust, then personal liability: "Y, trustee, of X trust"
3. if liability, trustee will be reimbursed if
a. the K was within the powers of the trustee, and
b. trustee was acting in the course of proper administration of the trust

Front 37

Personal Liability of the Trustee in Tort

Back 37

1. personally liable for torts by the trustee or trustee's employees
2. trustee should buy liability insurance
3. can be reimbursed if
a. trustee was acting within power, and
b. trustee was not personally at fault

Front 38

Trustee's Investment Powers

Back 38

1. NY: Uniform Prudent Investor Act = latitude to trustees to choose investment
2. trustee must consider the role each investment plays within the overall portfolio
3. trustee must consider the expected total return from income and capital gain
4. prudence isn't measured by hindsight

Front 39

Trusts and the RAP

Back 39

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.

NY reform --> 21yrs

Front 40

NY Rule against the Suspension of the Power of Alienation

Back 40

1. any interest is void if it suspends the power of alienation for a period longer than LIB + 21
2. i.e. when there are no persons who could, together, transfer a fee simple title
3. suspension of alienation is a concern when either
a. spendthrift income interests are in the trust (remember NY's automatic provision), OR
b. a life estate is created in unborn person(s), or in an open class that may possibly include unborn persons