Trusts

Front 1

(Trusts Generally)

What is a trust?

Back 1

A trust is a fiduciary relationship in which a trustee holds legal title to property subject to an equitable obligation to protect or use the property for the benfit of a beneficiary, who holds equitable title.

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What is the essential element of a trust?

Back 2

The separation of LEGAL and EQUITABLE title is an essential element of a trust, and a merger of the two terminates the trust. Thus the sole trustee cannot be the sole beneficiary.

Front 3

Is a trust a debtor-creditor relationship?

Back 3

NO. a trust is not a debtor-creditor relationship. A creditor has a personal claim against the debtor only for the amount of the debt, while a trust beneficiary has an equitable interest in specific trust property and may trace the trust corpus.

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Is a trust a bailment?

Back 4

NO. A trust is not a bailment. A trustee has legal title, not merely possession, of the property and has greater powers over the property and also a higher level of fiduciary duty than does a bailee.

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What types of trusts exist?

Back 5

Trusts are classified as EXPRESS TRUSTS or trusts created by OPERATION OF LAW.

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How are express trusts created?

Back 6

EXPRESS TRUSTS are created by the EXPRESSED INTENTION of the owner of the property.

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How are trusts created by operation of law created?

Back 7

Trusted created by OPERATION OF LAW are of two types: RESULTING TRUSTS, where intent to create a trust is implied by law, and CONSTRUCTIVE TRUSTS, which are not really trusts but are an equitable device to remedy fraud or unjust enrichment.

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I) KEY ELEMENTS OF A TRUST

Back 8

B TRIPS

-BENEFICIARY
-TRUSTEE
-RES
-INTENT
-PURPOSE
-SETTLOR

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What are the BENEFICIARY requirements?

Back 9

1) trust must have a DEFINITE, ASCERTAINABLE BENEFICIARY (capable of being identified by the time their interests are to be enjoyed) who will enforce the trust, unless the trust is a charitable or honorary trust.

2) Beneficiary must DIRECTLY BENEFIT from the trust

3) Beneficiary must be CAPABLE of taking and holding title to property

4) ACCEPTANCE by beneficiary, which may be express or implied, is required but can occur after the creation of the trust

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What is the EXCEPTION ofthe beneficiary requirement?

Back 10

CLASS GIFTS are valid, as long as the named class is a reasonably definite one, and the trustee may select the members of the class, so long as the class groups is limited, not overbroad ans sufficiently described.

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What happens if there is no beneficiary and the exception does not apply?

Back 11

A resulting trust is presumed. Always argue that a discretionary power of appointment was created where a trust fails, because a resulting trust is a harsh result.

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Is a beneficiary's interest in a trust freely transferable?

Back 12

Yes and creditors may reach her interest in the trust except in the case of a spendthrift, discretionary or support turst, or where a valid foreiture provision prohibits transfer of the benficiary's interest.

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What are the trustee elements?

Back 13

1) Trust must have a NAMED TRUSTEE (absence of a trustee may cause an attempted intervivos trust to fail for lack of delivery (since present & effective delivery are required).

2) Trustee must have ACTIVE DUTIES, if not the benficiary takes active title

3) Trustee must be CAPABLE of acquiring & holding property for his own benefit in order to be capable to hold property as trustee, and must be able to administer the trust. Some states hold that foreign corps. are incapable. NOTE (If trsutee is detrimental to trust, court may remove trustee, but beneficiaries may not unless trust instrument provides otherwise).

4) Trustee must ACCEPT trust responsibilities; trustee is freee to decline appointment w/o reason, but after she accepts, she cannot resign wihtout permission from ct. unless trust instrument provides otherwise or all beneficiaries consent. The trustee's resignation is not effective until a new successor is appointed. Trustee's acceptance of a testamentary trust relates back to the date of S's death.

5) MERGER: If beneficiary & trustee are the same person, the legal & equitable titles are merged.

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What are the Res elements?

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1) Res (trust property) must be a PRESENTLY EXISTING PROPERTY INTEREST and not a mere expectancy, because trust must have property to manage. The property may be of any type and may be a future interest.

2) Rest must be specific property that is IDENTIFIABLE & actually IDENTIFIED w/ such certainty that it can be ascertained.

3) Res must be CAPABLE OF BEING TRANSFERRED into a trust, because settlor must convey property to trust.

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What are the intent requirements?

Back 15

1) Settlor must manifest (through written or spoken words or by his conduct, ie transferring property to trustee) AN INTENTION TO CREATE A TRUST. Oral trusts of personal property are valid, but writing may be required if statute of wills/fraud applies.

*Precatory expressions, including a settlor's expression of hope, wish or mere suggestion that property be used in a certain way do not create a trust, unless it is shown that (1) directions are defined & precise; (2) directions are addressed to a fiduciary; (3) failure to impose trust would result in an unnatural disposition; (4) the S previously supported the intended beneficiary.

2) Intention to create a present trust must have been EXTERNALLY manifested by settlor AT THE TIME HE OWNED THE PROPERTY (but conduct of the settlor subsequent to conveyance may be evidence of his earlier intent)

3) Settlor must intend that trust take effect IMMEDIATELY. However, a promise to create a trust may be validated by later action.

4) Writing required if res is land.

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What are the requirements for purpose?

Back 16

1) Trust must have a VALID PURPOSE not contrary to public policy or illegal (e.g. restraint on marriage, fraud on creditors, encouraging divorce or a criminalortious act).

NOTE: If condition which is attached to a trust interest is against public policy or illegal: then look to S's alternative, if stated; if unstated, and interest is subject to a condition subsequent, the condition is invalidated but the trust is valid, if interest is subject to a condition precedent, preferred view is to hold interest valid unless T's intention is contra.

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What are the requirements for settlor?

Back 17

1) Settlor must have capacity to create a trust (same as in Wills: ability to understand extent of his property, natural objects of his bounty and nature of his disposition).

2) After creating trust, settlor only has those rights she has reserved to herself, and whatever beneficial interests (e.g. rt to income for life) retained by settlor may be transferred by him & can be reduced by creditors.

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What are the different types of EXPRESS TRUSTS?

Back 18

1) Inter Vivos Trust
2) Revocable Inter Vivos Trust
3) Testamentary Trust
4) Life Insurance Trust
5) Totten Trust
6) Pour Over Will
7) Secret Trust
8) Charitable Trust
9) Honorary Trust
10)Spendthrift Trust
11)Discretionary Trust
12)Support Trust

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II) WHAT KIND OF TRUST WAS CREATED AND ARE ANY ADDITIONAL LEGAL REQUIREMENTS MET?

Back 19

In addition to BTRIPS requirements above, additional requirements exist depending on what kind of trust was created. First, identify the type of trust and then look to see whether the additional requirements are met.

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What is an inter vivos trust?

Back 20

Inter vivos trust is a trust created while settlor living and takes effect during settlor's life.

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In addition to BTRIPS, inter vivos trusts require

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1)immediate present transfer of trust res to trustee; res property must be transferred beyond the settlor's control, unless settlor is trustee; trustee takes title upon delivery of a deed or transferable property;

2) Writing is required where land is involved

3) Adequate delivery of trust res to trustee;

4) If settlor is trustee, she must segregate the trust assets from other property w/ necessary trust intent;

5) Parol evidence admissible where instrument is ambiguous or silent as to trust, but never where instrument clearly declares a trust or nontrust intent.

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What is a revocable inter vivos trust?

Back 22

Trust created whereby res passes during settlor's life and possession of res passes at settlor's death, and is subject to settlor's revocation.

*Such a trust avoids probate costs, delay, need to be recorded & may sometimes be used to prevent surviving spouse's share, unless transfer is merely illusory.

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What is a testamentary trust?

Back 23

Trust created by will.

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What does a testamentary trust require?

Back 24

Testamentary trust requires BTRIPS and:

1) Trust provisions must be ascertained by terms of the will instrument, or by a existing document incorporated by reference into the will, by facts having independent significance apart from the will, or by a power of appointment created under the will.

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What is a life insurance trust?

Back 25

Trust whereby insurance policy provides for a trustee to hold insurance proceeds for beneficiaries.

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What is a totten trust?

Back 26

A totten trust is a trust created whereby trustee holds money in savings account for beneficiary.

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What are the key elements to a totten trust?

Back 27

In addition to BTRIPS, a totten trust:
1) May be revoked at any time or expressly or implied by contrary provision in settlor's will;

2) Terminates on beneficiary's death;

3) Rebuttable presumption: where person deposits money in her own name as trustee for another a revocable trust is created;

4) Delivery or declaration of irrevocability may make trust irrevocable;

5) Settlor's creditors can reach the trust in some states;

Front 28

What is a pour over trust?

Back 28

A pour over trust is an attempted testamentary gift to a pre-existing trust; an attempt by decedent to have the assets of his estate added to the corpus of a trust which he (or a 3rd party) created during his lifetime.

*As noted in Wills, trust is valid under Uniform Testamentary Additions to Trust Act, even though the trust does not have a res prior to settlor's death, if trust is sufficiently described and identified in settlor or testator's will

Front 29

What is a secret trust?

Back 29

Where there is no mention of the trust in the will, and instead the res is devised to trustee, a constructive trust may be imposed in favor of the intended beneficiary if the trust is ascertainable by resort to extrinsic evidence. SEMI-SECRET TRUST: where will names trustee, but omits the beneficiary MAJ imposes a constructive trust in favor of residual legatee, while MIN gives intended beneficiary.

Front 30

What is a chartiable trust?

Back 30

Trust created for public benefit (i.e. relief of proverty, advancement of religion, education, etc).

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What are the requirements for a charitable trust?

Back 31

1) Charitable purpose is required-look to the effect of the gift to determine charitable purpose, not the motive of the settlor.

2) Beneficiaries must be indefinite; where specfic individuals are named as beneficiaries, the trust is not charitable, even if those individuals need charitable assistance.

3) Charitable trusts may be enforced by Attorney General or beneficiary acting with a special interest in the trust.

4) Legal title to trust res must vest in a trustee within the Rules Against Perpetuities; once title has vested however, RAP does not apply when shifting from one charity to another charity, but does apply if shifted from a charity to an individual, or vice-versa.

Front 32

What is the Doctrine of Cy Pres and how does it relate to charitable trusts?

Back 32

Ct acting in equity may modify provisions of charitable trust where necessary, so that rather than its purpose being frustrated by the circumstances teh settlor did not anticipate, settlor's overall purpose may be carried out as nearly as possbile. Cy Pres requires general charitable intent. Hence, ct. may substitute beneficiaries or may change the terms of the trust. If Cy Pres does not apply, always discuss equitable deviation, where a court acting in equity may order a deviation in an administrative term of a trust.

Front 33

What is an honorary trust?

Back 33

An honorary trust is a trust created with a specific noncharitable purpose & there is no living beneficiary (e.g. trust for the settlor's dog or to keep up a grave). Because there is no beneficiary to enforce trust, these are not true trusts. MAJ holds that such trusts are unenforceable. But MIN holds that a power of appointment is created, & trustee may choose to carry out settlor's direction, and if not, a resulting trust is created. Watch for RAP problems.

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What is a spendthrift trust?

Back 34

A spendthrift trust is a trust which, by its terms, prevents the beneficiary from either voluntarily or involuntarily transferring his interest in the trust. These trusts are established to protect the beneficiary from his own improvidence.

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What are the key elements of a spendthrift trust?

Back 35

1) Creditors cannot reach the beneficiary's interest in the trust, but some states allow creditors to reach amounts not needed for support of the beneficiary in his accustomed manner of living; many states, however, allow certain types of creditors (dependents, furnishers of necessities or govt) to reach beneficiary's interest, notwithstanding the spendthrift provision.

2) Spendthrift provision which prevents creditors from reaching beneficiary's interest, but allows beneficiary to transfer his interest is invalid.

3) Settlor cannot be the beneficiary of a spendthrift trust, unless an interest is also conferred on others

* MAJ holds that restraints on equitable remainders are valid, but the MIN allows restraints only on the income interest.

Front 36

Waht are discretionary trusts?

Back 36

Discretionary trusts are trusts which the trustee is given the discretion to pay or w/hold payments of income or principal to or from a particular benficiary. Creditors cannot reach the beneficiary's interest BEFORE the trustee exercises her discretion to make payments, but AFTER the trustee decides to pay, the right thereto "vests" in the beneficiary and the creditors may reach his interest.

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What is a support trust?

Back 37

Trust where trustee can pay only so much of income or principal as is necessary for the benficary's support. Benficiary's interest cannot be assigned or reached by creditors.

Front 38

III TRUSTS BY OPERATION OF LAW (CONSTRUCTIVE/RESULTING TRUSTS)

Back 38

Trusts created by the court to grant relief when person obtains legal title which rightfully belongs to another.

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When is a constructive trust granted?

Back 39

1) A constructive trust is granted where one party receives legal title for real or personal property and another party can prove he supplied the consideration before the other party took title, unless both parties are close relatives (parent, grandparent, spouse) title was taken for an illegal purpose, or where fraud or wrongdoing is involved.

2)Where one obtains legal title through theft, conversion, fraud or duress, breach of fiduciary duty, homicide.

3) Where title to land or to an inheritance is obtained by breaching a promise to hold property for another.

*Constructive trustee may convey title to the beneficiary, must account for all profits and damages from to property, and may raise equitable defenses.

Front 40

What are the trustee's powers?

Back 40

1) Trustee has those power expressly conferred by the trust instrument, state law and court decree and all powers implied as necessary to accomplish the trust purpose.

2) Trustee exercises either "imperative power" which he is required to exercise or "discretionary power" which trustee may or may not exercise, and both powers are subject to review for abuse of discretion.

3) Trustee may not borrow money, mortgage or otherwise encumber the trust res.

4) Trustee may sue third parties who damage the trust property, beneficiaries do not have the power to maintain a direct suit against 3rd parties, unless trustee participates in the breach, fails to sue or abandons responsibilities and no successor is appointed.

5) Joint trustees must normally exercise their power by unanimous agreement, & are liable for each others act if the trustee approved, acquiesced or participated in the act amounting to a breach, or knew or should have known of the breach.

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What are the duties of the trustee?

Back 41

Trustee must exercise that degree of CARE, SKILL AND PRUDENCE, which would be exercised by a resonably prudent person in managing his or her own property; if a trustee has greater, special skills, she will be held to a higher standard.

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In addition, what other duties does the Trustee owe?

Back 42

FADSEA

Duty to FOLLOW instructions
Duty to AVOID self-dealing
Duty to DIVERSIFY assets
Duty to SUPERVISE agents
Duty to EARMARK asets
Duty to ACT with skill

Front 43

What is the duty to follow instructions?

Back 43

Trustee must comply with terms and duties under the trust but cannot follow instructions blindly.

Front 44

what is the duty to avoid self-dealing?

Back 44

Trustee must take no personal advantage (other than trustee's fees) from his position. Self-dealing is absolutely prohibited, and trustee must avoid conflicts and treat all beneficiaries impartially. Where this is violated, trustee's good faith is irrelevant and trustee is strictly liable for any loss to the trust.

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What is the duty to diversify?

Back 45

Trustee must make the trust property productive, and must invest & properly diversify assets. Some states have mandatory & permissive lists of investments, but these lists cannot be followed blindly.

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What is the standard regarding investing?

Back 46

The Prudent Investor Rule

-Rule imposes the standard of good faith, reasonable prudence, sound discretion and care in making trust investments by considering: (TERD)

T=prudent investment will be measured at the TIME of the investment.

E=overall portfolio performance is disregarded: EACH investment must be prudent.

R=investments must be constantly REVIEWED & changed if necessary

D=factors such as DIVERSIFICATION of trust investment and marketability of the investment should be taken into account.

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What are considerd proper investments?

Back 47

govt securities, first mortgages on land w/ adequate security, high grade corp. bonds, productive land.

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What are considered improper investments?

Back 48

unsecured loans & second mortgages.

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What is the duty to supervise agents?

Back 49

Trustee can only delegate acts that would be unreasonable or hiim to perform personally and cannot delegate entire administration of a trust to another. Trustee must select investments himself and must select carefully and supervise all agents.

*Trustee is liable for acts of his agent if he directs, permits or acquieces in the act, conceals the act, or fails to compel the agent to redress his wrong, or improperly selects or delgates, & is liable for torts committed by agents in court of trust administration.

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What is the duty to earmark assets?

Back 50

Trustee owes a duty to separate trust assets from other assets and earmark trust property; udner traditional view, trustee is strictly liable for failure to earmark, but under the modern view, trustee is liable only to the extent that damages were caused by her failure to earmark.

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What is the duty to act with skill?

Back 51

Trustee must act with that skill, degree of care and prudence which would be exercised by reasonably prudent person in managing his or her property.

*Trustee may also be liable for acts of co-trustees, & predecessor trustees if he participated in breach or know or should have known of breach, trustee is also personally liable to third parties for Ks entered into & torts, but may be entitled to reimbursement where she acts for the benefit of the trust.

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What happens if the trustee breaches the duty of trust?

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1) The beneficiaries may seek damages or removal of the trustee for the breach of duty. The settlor may sue for breach only if he is also a beneficiary, but outsiders cannot.

2) An exculpatory clause absolving trustee from liability will be strictly construed, & cannot absolve trustee from all liability.

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What is the measure of damages for trustee's breach?

Back 53

Actual loss to the trust + interest. The trustee is not permitted to offset the loss from one breach by the gain which resulted from another breach where the loss and gain occurred from separate transactions or one breach of trust.

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FUTURE INTERESTS

(GENERALLY)

Back 54

A future interest is one that will not become possessory until a later date, if at all

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What makes a future interest a remainder?

Back 55

If an interest is created in a third party in the same instrument as the prior possessory interest and can take in possession upon the termination it is a remainder

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What makes a remainder contingent?

Back 56

A remainder is contingent if there is a condition precedent to its becoming possessory or the holders are unascertained.

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What makes a remainder vested?

Back 57

A remainder is vested if it can take whenever and however the previous estate terminates. The persons taking are ascertained and there is no condition precedent to their taking.

Front 58

If a named vested remainderman dies before the life tenant, his devisees take his interest if?

Back 58

1) He leaves a will

2) His heirs take if he dies intestate

Front 59

What are the rules regarding a class gift?

Back 59

1) If there is a class gift (a gift to children or grandchildren), afterborn members of the class can join the class until the class closes.

2) If the grantor does not indicate otherwise, the class closes at the time any member of the class is capable of taking possession of the gift.

Front 60

Can a futre interest be alienated prior to its becoming possessory?

Back 60

Yes

Front 61

Are the interest in "heirs" of a living person contingent?

Back 61

Yes, because heirs cannot be determined until the person's death.

Front 62

(Life Estates)

What are the rights of a life tenant?

Back 62

1) Right to POSSESSION of the real property as against the grantor and others

2) Right to PROFITS and RENTS during possession

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What obligation does the life tenant have?

Back 63

Not to commit WASTE

Front 64

Does the life tenant have an obligation to pay real estate taxes on the property to the extent he receives income from the property?

Back 64

Yes

Front 65

Can a remainderman enjoin a life tenant from committing waste and sue a third party who damages the property?

Back 65

Yes

Front 66

(The Rule Against Perpetuities)

General Rule

Back 66

All nonreversionary future interests must be certain to either fail or vest within twenty-one years after some life in being at the creation of the interest, or they will be invalid.

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What does the rule applies to?

Back 67

-Unvested, nonreversionary contingent reaminders
-Executory interests
-options or rights of first refusal

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What does the rule not apply to?

Back 68

-Interests in the grantor (reversions, possibilities of reverter, or rights of entry for condition broken) or vested remainders.

Front 69

Will a child conceived but not born at the time of the commencement of the rule be considered a life in being?

Back 69

Yes

Front 70

When is the time for determining lives in being when the conveyance is by will?

Back 70

At the time of death of the testator

Front 71

When is the time of determining lives in being when the conveyance is by intervivos deed?

Back 71

At the time of conveyance

Front 72

When is the time of determining lives in being when the conveyance is by irrevocable intervivos trust?

Back 72

At the time of conveyance

Front 73

What is the time of determining lives in being when the conveyance is a revocable trst?

Back 73

at the time that the power to revoke terminates

Front 74

Does the rule against perpetuities invalidate rights of first refusal?

Back 74

Yes

Front 75

Is any person irrebutably presumed to having children until death?

Back 75

Yes

Front 76

What happens if the RAP invalidates the interest of one member of a class?

Back 76

Then the disposition of the entire class is invalid.

Front 77

What happens when an interest is invalid because of RAP?

Back 77

The disposition is construed with the invalid gift deleted.

Front 78

Note regarding above (common law rule)

Back 78

The common-law rule, although frequently tested, is no longer the majority rule in the US. Most American jurisdictions have modified the rule by a number of mechanisms, including a "wait and see" approach and/or exempting commercial transactions

Front 79

(Restraints On Alienation)

Back 79

Disabling restraings are considered void