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85 Cards in this Set

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  • Back
what are the three things that are called a trust
1) an express trust (a real trust)

2) a resulting trust (not a trust)

3) a constructive trust (not a trust)
what is the definition of an express trust
legal device that allows an owner of property to make transfers of property and to have those assets managed on behalf of someone.
what are the two types of express trusts
1) life trust - set up during lifetime of a person who created the trust, who we call the settlor of the trust (also called an intervivos trust)

2)testamentary trust - set up in settlors will
what are the seven requirements of a valid trust?
1) a settlor (also called a creator), who makes a
2) delivery of legal title to
3) property (also called res, corpus, principal) to a
4) trustee who holds legal title for the benefit of a
5) beneficiary (or beneficiaries) with
6) intent to create a trust for
7)a lawful purpose
what are additional requirements for a valid trust
1) must be in writing, signed by both settlor and trustee and EITHER
a) acknowledged by a notary public, OR
b) signed by two witnesses

2) no consideration is needed for a trust!
who can be a settlor?
anyone 18 or older with teh capacity to enter into a contract
what constitutes delivery fo legal title of a trust?
1) must be delivery of title to trustee

2) titled assets must be formally transferred for delivery to be valid
a) if res consists of titled assets (property with registered title for it), then property must be formally transferred for it to be valid (e.g. car, stock, property, etc).
b) handing over a stock certificate is NOT valid - that is physical delivery of title is NOT valid -- it would have to be transferred in books of corporation for it to be valid.
c)point - official change of record is required
what type of property can be in a trust
almost anything BUT must be something the settlor OWNS.

Can't be a future interest or expectancy interest (e.g. remainder of a life estate).

Also - mere promise to delivery property to the trust is not enough. Rather, it must be identified proeprty, not subject to future determination
Who can be a trustee for a lifetime trust?
almost anyone can be a trustee since no court involvement needed in a lifetime trust
who can be a trustee in a testamentary trust?
testamentary trust, created under court supervision, can have anyone as a trustee EXCEPT
1) people under 18
2) incompetents
3)convicted felons
4)those incapable b/c of drunkenness, dishonesty, wnat of understanding, or improvidence.
Can non-resident aliens serve as a trustee in NY?
yes - IF
1) that person is related to decedent (decedent's spouse, grandparent, descednant of grandparent, etc) AND
2) NY resident serves as co-fiduciary.
what happens if the settlor fails to name a trustee for a trust?
nothing - court can appoint someone.
what is necessary for beneficiaries?
1) for a private trust, beneficiaries must be definite and ascertainable. you must know who they are with no ambiguity
a) if there is ambiguity, trustee holds on "a resulting trust" for the residuary benficiary

2)if beneficiary is listed as someone's 'family' or 'next of kin', that IS considered definite and ascertainable and trust does not fail.
a) consult intestacy statutes for name of persons who fit the description of family/next of kin in a trust
What sort of Intent is needed?
1) settlor must intent to create an enforceable obligation; precatory (non-binding) language is not enough to create a trust, e.g. wish, desire, requirest, would like

2) trustee must be given duties to perform; if trustee is not given duties to perform, this is just a passive trust, which is no trust at all
a) if no powers or active duties to trustee - no trust

3) just b/c the word trust is used that does not show an intent to create - just look at plain language and the circumstances and facts to determine intent
a) if really land-lord tenant relationship, thats what it is
what is a lawful purpose?
1) trust cannot call for the commission of a crime

2) trust cannot call for the destruction of property (that is, trust cannot require person receiving trust to tear down house on property)

3) trust cannot have a condition against public policy
a) trust cannot restrict marriage
b) trust cannot promote divorce
c)trust that gives income to spouse until spouse remarries IS okay, and
d) trust that give income only if someone marries within certain religious or ethnic group IS okay.
What are types of trusts
1) revocable lifetime trusts

2) totten trusts

3) uniform transfers to minors act

4) charitable trusts
What is a revocable lifetime trust?
Main requirement is that there must be one beneficiary who is NOT the settlor
What roles can a settlor play in a revocable lifetime trust?
1) settlor can be trustee

2) settlor can be income beneficiary for life

3) settlor's estate can be one of the beneficiaries of the principal as long as there is at least one other beneficiary

4) settlor can retain the power to terminate and amend the trust
Why would you have a revocable lifetime trust
1) manages assets efficiently, especially if using a professional trustee

2) helps plan for possible incapacity and avoid guardianship

3) avoids probate (no part of principal of trust goes through the settlor's estate in probate)
why would you not have a revocable rust
it does not avoid taxes.

IF a settlor keeps an income interest, or keeps a power to revoke, the full trust assets will be included in settlor's gross estate for federal estate tax purposes
Are testamentary gifts to an existing revocable gift okay?
YES - this is called a pour-over gift. Such a gift avoids will formalities in the trust.

Trust can be changed over lifetime, and somewhat easier to change than a will.
what is the key requirement for a pour-over gift to a trust?
KEY requirement for a pourover gift to a trust is that it be valid - trust must be in existance, or executed concurrently with the will.

2 minor points
1) pour-over gifts is not limited to trusts created by settlor, but can be to any existing trust, including those executed by another person

2) pour-over gifts are valid even if the trust was unfunded or even partially funded during settlors lifetime.
How can an insured make life insurance proceeds payable to a trust?
1) insured can create an unfunded revocable insurance trust and name the trustee of the trust as a policy beneficiary, or

2) have the trust itself be a testamentary trust and name the "trustee named in my will" as beneficiary

**Proceeds of savings accounts or pension plans can be handled the same way as life insurance proceeds
what is a totten trust, aka a bank account trust, aka a poor persons trust?
bank account in depositors name with "as trustee for" and a named beneficiary
What are depositor/creators rights pertaining to a totten trust
1) she can make deposits and withdrawals as she wishes during depositors lifetime
what are beneficiary's rights to a totten trust?
beneficiary has no rights during the depositor's lifetime, but gets whatever is in the account when depositor dies

Subject to T-subs (testamentary substitutions, thus claim of spouses elective share)
What words are needed to create a totten trust
none in particular. "ITF" is fine.
How can a totten trust be revoked?
1) withdraw all money in account

2) express revocation made during lifetime by depositor making a writing naming beneficiary and the financial institution and having the revocation notarized and delivered to the bank (absolute requirements)
a) notarized statement
b) delivered to bank
c) naming financial institution
d) naming beneficiary

3) revocation in a will - must comply with same requirements for revocation during lifetime

4) death of a beneficiary revokes Totten trust account - money in account goes free and clear to the depositor
Can the depositor make a change to who the beneficiary is?
yes - but must be done in same way as revocation - 1.notarized statement
2. sent to financial institution
3.naming old beneficiary
4. naming new beneficiary.
Can creditors of the depositor reach the Totten trust account, either before or after depositor's death?
yes, both before and after death.

It is a form of revocable trust, partially revoked each time a withdrawal is made
are joint bank accounts -- john and jane with rights of survivorship -- totten trusts?
NO. joint bank accounts are not totten trusts.
what if clear and convincing evidence can show that survivorship was not intended when account was established?
RULE - if clear and convincing evidence shows that survivorship was not intended when the account was established, and that the account was open only as a matter of convenience to the depositor, then the survivorship language can be set aside.

BUT this is a very hard requirement to satisfy.
What does each joint account holder own?
1/2 of joint account, no matter who put in money.

if one perosn made entire deposit, it is considered a gift of 1/2 to other holder.

if one person takes out more than 1/2, other person can sue for return of portion over 1/2
Why would someone make a gift to a minor under the Uniform Transfers to Minors Act (UTMA)?
1) avoids guardianship

2) avoids a trust

3) qualifies for $12k per donee annual exclusion from federal and state gift tax
how must gifts under UTMA be made
1) to a named custodian ANd

2) must specify that it is made under NY UTMA
What are the duties of a custodian under UTMA?
1) hold, manage, and invest property under a prudent person standard

2) pay over to minor for minor's needs what part of the property that custodian deems advisable

3) pays what is left of property to the minor when minor turns 21
Does utma create a trust?

it does not create a trust. it is a special statutory conservatorship where the conservator does not hold legal title to the property (minor holds that).
what if donor names himself as custodian?
then amount of gift is includible in the custodian's gross estate for federal and state estate taxes.

if donor names someone else as custodial than amount of gift is NOT includable in gross estate for estate tax purposes.
Can UMTA gifts be made in a will?
yes, so long as necessary language is used
what is required to form a charitable/honorary trust?
1) charitable trusts must have indefinite beneficiaries and must be a reasonably large group
a) can't have specified persons as beneficiaries
b) trust for "masses" for all relatives is okay
c) yes if for all orphans in a city

2) charitable trust must have a charitable purpose - health education and religion are common

3) charitable trust may be perpetual, so is not subject to rule against perpetuities

4) equitable doctrine of cy pres can be used to change the trust
a)if stated purpose of charitable trust can no longer be accomplished, or designated charity goes out of existence, court may use this to make the trust as close to what the settlor wanted as possible

5) AG has duty of representing beneficiaries of charitable trusts in the state
a)AG is indispensable party to any suit on construction or enforcement of a charitable trust
b) AG and donor have standing ot sue to enforce the trusts terms.
What are "non-trusts"?
1) honorary trusts

2) constructive trusts

3) resulting trust
what is an honorary trust?
where no human being is the beneficiary of a private (non-charitable) trust, this is not generally a trust

RULE - a private trust must have a human beneficiary, if not a charitable trust.
what are the exceptions to the rule that a private trust must have a human beneficiary?
1) pet trusts - can exist but only valid for 21 years. someone designated in will, or by court, cna enforce trust and make sure purpose is carried out

2) cemetary trusts - trust for perpetual care and maintenance of cemetaries and burial plots are classified as charitable trusts and are OK even though no human beneficiaries
a)b/c classified as charitable trusts, don't violate RAP
what is a constructive trust
not a trust, just the name we give a flexible, equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.
How is a constructive trust used
with a constructive trust, a trustee's only duty is to convey the property to the person who, in equity, should have the property.

so, if there's a wrongful trust, you impose a constructive trust, and give property to the right people.
what about an oral trust? one where someone deeds land from a grantor to a grantee, but the grantee orally promised the grantor that grantee would hold land in trust for certain purposes of the grantor? is this the appropriate situation in which to use a constructive trust?
generally - no. constructive trusts will not be imposed to give effect to any alleged oral trusts.

a) when there is fraud in the inducement -- if there is
i)clear and convincing evidence that can be shown to prove that grantee did in fact agree to hold property in trust, and
ii) at the time of the agreement had no intention of carrying out the trust, then a constructive trust will be imposed to benefit the intended beneficiaries
**very narrow**

2) when there is a confidential relationship b/w the grantor and grantee - then an oral agreement to hold property in trust can be shown to impose a constructive trust for the benefit of the intended beneficiaries
i) evidence of oral agreement must be by clear and convincing evidence
ii) confidential relationships include
a)being in same family
b)being a business partner
what is a resulting trust?
not a trust! but an equitable remedy.

A Purchase Money Resulting Trust is recognized in most states, but not in NY.
what is a purchase money resulting trust?
purchaser buys property but title put in someone else's name (not a relation) and later purchaser claims that no gift was intended and asks title holder for title to property and title holder refuses to give it up

Most states would find this to be a PMRT, allowing purchaser to compel title holder to give up title.

BUT - not in NY. NO PMRT's UNLESS there is clear and convincing evidence that grantee had promised to reconvey the land to the purchaser, then a OMRT can be imposed
what is the statutory spendthrift rule?
most states - not a spendthrift trust, unless you affirmatively put clause in document

ny- automatically a spendthrift clause unless you affirmative assert that it is not in the document
what is a spendthrift clause
it protects beneficiary's interests from creditors by prohibiting voluntary or involuntary transfer of the beneficiary's interest
what is the rule for spendthrift clauses in ny?
not only allows spendthrift clauses in trusts, but it actually has a special statutory rule that protects all income interests in trusts with spendthrift protection, even if trust instrument does not contain a spend thrift clause

BUT ny rule only applies to INCOME interest from trust, not to the PRINCIPAL

to provide protection to the residuary beneficiary (person who gets the principal) the spendthrift clause must be explicitly stated in the trust.
what is typical spendthrift clause look like?
no beneficiary of trust shall have the power to assign his or her interest, nor shall such interst be reachable by the beneficiary's creditors by attachment, garnishment or other legal practice
so what is the effect of a spendthrift clause (statutory or expressly stated)
keeps creditors at bay - can't get anything in trust until its actually paid to the beneficiary.
what are the five major exceptions to the spendthrift clause?
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
*this is a last resort remedy - have to show all other possible remedies have been exhausted, before this is possible. Basically, what is needed for support based on lifestyle of beneficiary.

5) 10% levy provided by CPLR 5205(e)
a)device available to judgment creditors in all cases, regardless of spendthrift provisions
b)all creditors together share levy (not 10% per creditor)
c) not used too much in real life, but shows up on exam.
what is the big limitation of the spendthrift clause?
it does not apply to any interest retained by the settlor! if you set up a trust with income to you, principal to heir - any creditors can get income to you; just principal to heir is protected.

so, settlor cannot hide out from own creditors, but can protect beneficiaries.
can creditors get to revocable trusts?
yes, all revocable trusts are fair game for settlor's creditors. if settler can revoke a trust, then it offers no protection at all against creditors of settlors.
when can a trust be modified by trustee or beneficiaries?
law is reluctant to make changes in what settler has established.

modification is appropriate only where objective/purpsoe of trusts are defeated or would be substantially impaired if trust is not modified

purpose fo trust comes first, overriding any specific directions in trust
so what is the two level modification test?
1) find out the primary purpose fo the settlor regarding the trust's purose

2) look at specific directions in trust insturment to determine whether, b/c of changes in circumstances, those specific directions would now frustrate the primary intent of the trust. IF SO then those directions can be changed by the court.

NOTE_ALSO--- court can authorize the invasion of the principal if the income is not enough to carry out the settlor's purpose of the trust.
how can a settlor terminate a trust
trusts are hard to terminate in ny - they are generally irrevocable and unamendable UNLESS the power to revoke/amend has been expressly reserved in the trust instrument.
so, for an unamendable/unrevocable trust, are there situations where you can actually amend or revoke/
yes. if all beneficiaries in being consent, this is often impossible b/c no on ecan give consent for any beneficiary who is a minor or who is incompetent.
1) beneficiaries must be born alive to count here; for purposes of trust termination, a child in gestation is not considered a person
2) if trust gives properties to heirs or next of kin that interest is not considered a beneficial interest and thus no consent need to be obtained from them.
what governs a trustee's powers
the ny fiduciary powers act controls.

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

FPA controls not only what a trustee of a trust can do, but also what an executor or administrator of a decedent's estate can do.
What can a trustee do
1) sell any real property

2) lease property

3) mortgage property

4) make ordinary repairs

5) contest, compromise or settle claims

6) or do almost anything to manage corpus of trust
what can't a trustee do?
1) engage in self-dealing

2) borrow money

3) continue a business, placed in the trust (trustee is liable for losses incurred by business unless trustee has court approval to continue business)
what are the rules regarding the prohibition on self-dealing of a trustee?
1) trustee cannot buy, or sell trust assets to himself (absolute rule)

2) trustee cannot borrow trust funds (absolute rule)

3) rustee cannot lend money to the trust (absolute rule) -- any interest earned on a loan must be returned to the trust and any security given for the loan is invalid

4) trustee cannot profit from serving as a trustee (except for appropriate trustee fees)
*a trustee can't take advantage of confidential information received while trustee to make money

5) corporate trustee cannot buy its own stock as an investment
what are the two affirmative duties of a trustee on self-dealing
1) duty to segregate trust assets from personal assets

NOTE - if there is a violation of this duty, the remedy is
i) if asset purchased by commingled funds goes up in value, conclusive presumption that trust funds were used
ii) if asset goes down in value, conclusive presumption that personal funds were used

2) duty to earmark trust assets by ttiling them in trustee's name
what are the remedies for breach of a fiduciary duty by at rsutee
1) beneficiary can sue to remove the trustee

2) beneficiary can ratify the transaction and waive the breach

3) beneficiaries can sue for any loss - an action to recover losses to the trust is called a surcharge
what if a fiduciary is found to have breached the duty by engaging in self-dealing?
this is an automatic wrong -- no further inquiry need to be made (trustee loses)

1) good faith is not a defesne

2) reasonableness is not a defense
what actions can be taken against a 3rd party when a trustee engages in self-dealing?
1) if trustee engages in prohibited transaction, such as self-dealing, and sells trust property to TPB, beneficiary cannot sue the purchaser of property from the trustee if that purchaser was a bona fide purchaser of value without notice

2) to keep purchaser from being a BFP and thus making the purchaser liable to the beneficiary, purchaser not only hsa to know that she was dealing with a trustee, but that trustee was engaged in self-dealing.
what about indirect self dealing - to relatives, businesses, partners, employees of trustee?
all self-dealing rules apply to indirect self dealing.
Can a trustee be personally liable in contract?
1) if trustee signed K on behalf of trust, no personal liability

2) if trustee signed personally and merely mentioned trust, then perosnal liability
if trustee is held personally liable for K about trust, when can he be reimbursed by the trust?
1) if K was within the powers of the trustee AND

2) trustee was actin gin the course of proper administration of the trust.
when is a trustee personally liable in tort?
1) trustee is perosnally liable for all torts by trustee or trustee's employees (absolute rule, no exceptions)

2) to deal with this liability, trustee should buy liability insurance and charge the cost to the trust

3) trustee can get reimbursement from trust for tort claims if
a) trustee must have been acting within the trustee's powers when tort was committed AND
b) trustee was not personally at fault.
what governs the trustee's investment power?
trustee must manage property of trust on behalf of beneficiary and this means th einvestment of the corpus fo the trust.

NY has adopted hte uniform prudent investor act (UPIA) which gives broad latitutde to trustees to chose investmetns
what can trustees do under the UPIA
pursue a modern portfolio theory fo investment.

trustee can create a custom tailored investment strategy for this paricular trust
what are the two key things a trustee must do under upia
1) must consider role each investment plays within overall trust portfolio

2) trustee must consider the expected total return from income and capital gain.
does a trustee have to justify the prudence of each investment
no, just the overall trust portfolio - can balance risky speculative investments against safe, conservative investments
a few things to remember about the trustee's investment power
1) prudence is not measured by hindsight; look at the decision to invest when it was made, not later; trustee does not have to have a crystal ball

2) trustee can exercise adjustment power and allocate capital gains to income
a) trustee can switch capital gains into income if necessary to protect income beneficiary, and vice versa
b) endgoal is fairness to ALL beneficiaries
what is the key to upia
the flexibility to shape the investment strategy for a maximum total return, along with the flexibility to adjust income b/w the income and residuary beneficiaries to be fair to all of them.
what is the rule against perpetuities
no interest is valid if it could vest later than any life in being at the time of teh creation of interest, plus 21 years
when is an intrest vested
when there is no condition that has to be satisfied and the exact identity of the taker is known.
how does ny handle the RAP?
has a statute that automatically reduces all age contingencies to 21 years, thus saving gift
how does the RAP interact with trusts? Think of where trust leaves blackacre to ralph, income to ronald, then remaining principal to any child of ronald's that reaches 30?
NY - language of trust wil be changed to reach child of ronald's that reaches 21.
what is the suspension rule?
any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21 years. That is, when there are no persons who, together, transfer a fee simple.
what does it mean to suspend the power of alienation?
a situation where no person scould transfer fee simple title.
So, what if judy created a trust that provided income to her sister jane, for life, and on jane's death to pay income to all of jane's children for their respective lives. At Judy's death, jane has one child, Jed who is 30.
1)RAP violated? no, we know when jane dies, who her kids will be.

2) suspension rule violated? can a full fee simple be transferred?

NO! b/c interest income in jane's children cannot be transferred b/c of spendtrhift clause (bars ransfer of income interest) - power of alienation is suspended to jed's interst.

but, is it suspended more than lives in being +21 years in violation of suspension clause?