Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
54 Cards in this Set
- Front
- Back
|
What is a trust?
|
It is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.
|
|
|
How are trusts classified, and what are the different types of trusts?
|
Trusts are classified according to their creation:
(1) express trusts (private or charitable) -- arise from the expressed intention of the owner of property to create the relationship with respect to the property. (2) resulting trusts -- arise from the presumed intention of the owner of property. (3) constructive trusts -- created for the benefit of an indefinite class of persons or public in general |
|
|
What are the three ways to create an express trust?
|
INTERVIVOS ("LIVING") TRUST (two ways to create):
(1) created by declaration of trust by a property owner (settlor), stating that he holds the property as trustee in trust; OR (2) by transfer of property by the settlor (property owner) during his lifetime to a trustee. TESTAMENTARY TRUST must be created by will. |
|
|
What must be necessary in order for an express trust to be valid?
|
(1) Present intention to create trust;
(2) while currently owning an interest (may be future) in the intended trust property (res); and (3) intention for trust to take immediate effect |
|
|
What is the result when the transferor of a property merely expresses a hope, wish, or suggestion that the property be used for a certain purpose?
|
Most courts will infer from such precatory language that NOT trust was intended.
This inference may be overcome if: (1) directions are definite and precise; (2) directions are addressed by a decedent to his executor or administrator (or similar); (3) failure to impose a trust results in an "unnatural" disposition by a testator; OR (4) extrinsic evidence shows that the transferor had been supporting the alleged beneficiary prior to executing the instrument, and the beneficiary would not have sufficient means of support absent a finding that a trust was created. |
|
|
What is the result when the trustee of an established trust dies, becomes incapacitated, resigns, or is removed?
|
The trust will NOT fail.
A successor trustee will be appointed in order to carry out the testator's intention, except in the unusual case where it is clear that trust should only continue as long as original trustee continues to serve. |
|
|
Does the absence or refusal of an intended trustee prevent creation of a trust?
|
No, for a testimentary trust.
Yes, for a living trust, because there needs to be an effective transfer of property (delivery), in order for such trust to take effect. |
|
|
What is the difference between an active trust and a passive trust?
|
An active trust is one where the trustee has duties. Courts will imply trustee's duties if: (i) intent to create trust; (ii) there is res; and (iii) beneficiary is identified
A passive trust is one where trustee has no duties at all. Passive trusts will fail and beneficiaries will take title immediately. NOTE: many jurisdictions consider the duty to "convey title" sufficient to make the trust "active." |
|
|
What are the qualifications necessary to be a trustee?
|
(1) Capacity to acquire or hold title for one's own benefit
(2) Administrative capacity (3) Not barred by statutory limitations on right to serve as trustee |
|
|
On what grounds may a court remove a trustee?
|
Generally: if continuation as trustee would be detrimental to the trust (in light of settlor's intentions)
Specifically: (1) Commission of serious breach of trust (2) Legal or practical incapacity to administer trust; (3) Unfitness for the position (chronic drunkenness, crime involving dishonesty, etc.) (4) Refusal to post pond or to account; (5) Significant conflict of interest; (6) Trustee's insolvency if court feels that it jeopardizes welfare of trust; and (7) Extreme friction or hostility between trustee and beneficiaries. |
|
|
When can a trustee resign after accepting appointment?
|
MUST have permission of the appropriate court (who has discretion to accept or reject) UNLESS:
(1) authorized under the terms of the trust; or (2) consent is given by all of the beneficiaries, all of whom have capacity to consent. |
|
|
What is the "relation back of a trustees acceptance"?
|
A trustee's acceptance relates back to the death of T (for liability purposes).
|
|
|
What are the necessary elements of a valid private trust?
|
1. Intent to create a trust (manifested by words, writing (required if LAND), or conduct.
2. Trustee (inter vivos only; testamentary will not fail for lack of trustee) 3. Trust property (res) 4. Definite beneficiaries 5. Valid trust purpose (not illegal, tortious, or against public policy) |
|
|
What are the formal requirements of a testamentary trust?
|
Essential terms (trust res, beneficiaries, and trust purpose) MUST be ascertained from will, incorporated writing, facts having independent legal significance, or from the exercise of power of appointment
|
|
|
What is a "secret trust"?
|
Where a will makes a gift that is absolute on its face, but was actually made in reliance on the beneficiary's promise to hold the property in trust for another.
INTENDED BENEFICIARY must prove the existence of the promise by clear and convincing evidence. If he succeeds, court will create a CONSTRUCTIVE TRUST in his favor. |
|
|
What is a "semi-secret trust"?
|
Where the will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds property on a resulting trust for the testator's heirs.
|
|
|
What are the three primary ways in which a charitable trust differs from a private trust?
|
(1) Trust must be in favor of indefinite beneficiaries (an unnamed and changing class), and cannot be fore the benefit of identifiable individuals (ex: "disabled elderly persons" is indefinite).
(2) Can be Perpetual (whereas all interests in private trusts must vest within the period of the Rule of Perpetuities) (3) CY PRES ("as near as possible") doctrine applies. |
|
|
What is an honorary trust and what are the duties that may imposed on trustee?
|
It is a trust created for the benefit of a non-human beneficiary (such as a pet, or a burial place). The trustee is "on her honor" to carry out the terms of the trust.
Most courts will VOID an honorary trust if it may continue beyond perpetuties period (which most will). A court will uphold honorary trusts as long as the named trustee is willing to perform her duties; if trustee fails this, court will impose a resulting trust. |
|
|
May a beneficiary transfer his interest in a trust?
|
Yes, unless there are restrictions by statute or the trust instrument (if it is a "spendthrift trust"). Additionally, absent restrictions, creditors may levy on a beneficiary's interest (involuntary transfer).
|
|
|
(1) What is a discretionary trust?
(2) support trust? |
(1) where a trustee is given discretion whether to apply or withhold payments to a beneficiary (beneficiary's creditor's assignees have same rights as beneficiary -- can't compel payment)
(2) directs the trustee to pay only so much of the income or principal as is necessary for the beneficiaries support. They are NON-ASSIGNABLE and CAN'T BE REACHED BY CREDITORS |
|
|
May a settlor of a trust modify or revoke the trust?
|
In California, a trust is revocable unless expressly made irrevocable. The power to revoke INCLUDES the power to amend.
|
|
|
When can beneficiaries of a trust modify or terminate the trust?
|
ONLY when (1) all consent and
(2) the modification or termination will NOT frustrate any material trust purpose. NOTE: (a) Trustee won't be liable if he accommodates. (b) Settlor's objections to termination not a bar (but may evidence frustration of trust purpose) |
|
|
Can a trustee terminate a trust?
|
NO, unless expressly authorized by the terms of the trust.
The trust terminates only when the trust purpose is accomplished. |
|
|
When can the court modify or terminate a trust?
|
A court can prematurely terminate a trust if it's purpose has become impossible or illegal or has been completed.
Under the DOCTRINE OF CHANGED CIRCUMSTANCES, a court may, upon unanticipated changed circumstances, authorize a deviation from the administrative terms where necessary to achieve the trust purpose. But beneficiaries still have right to their interest in income or corpus. |
|
|
What is the standard of care imposed on a trustee?
|
The degree of care, skill, and caution that would be exercised by a reasonably prudent person in managing her OWN property. If trustee, has greater skill, she'll be held to that standard.
|
|
|
What does the duty of loyalty prohibit a trustee from doing?
|
(1) buying/selling trust assets
(2) selling property of one trust to another trust of which she's also a trustee (3) borrow trust funds nor loan personal funds to the trust; (4) use trust assets to secure personal loan; (5) personally gain through her position as trustee; (6) a corporate trustee can't invest its own stock as a trust investment. (7) self-employment can constitute prohibited dealing (but trustee is entitled to additional compensation if she renders extraordinary services to trust) |
|
|
What are the beneficiaries rights when a trustee breaches his duty of loyalty by self-dealing?
|
(i) set aside transaction;
(ii) recover any profit made; or (iii) affirm the transaction |
|
|
In addition to the duty of loyalty, what additional duties are owed by a trustee to the beneficiaries of a trust?
|
(1) Duty to separate and earmark trust property (no commingling)
(2) Duty to perform personally (can't delegate duties, UNLESS it would be unreasonable for him to perform) (3) Duty to defend trust from legal attack (4) Duty to preserve trust property and make it productive (prudent investor rule) |
|
|
What is the difference between a "prudent investor" jurisdiction and a "legal list" jurisdiction?
|
In a former, only prudent investments are allowed regardless of the trust's terms. In the latter, trust language giving trustee broad discretion will free the trustee from constrictions of the statutory legal list.
|
|
|
Decisions by joint trustees must be made:
|
unanimously, or if large number of trustees, by majority.
|
|
|
Is a trustee personally liable to third parties for contracts made or torts committed in the course of trust administration?
|
YES, the trustee is personally liable, but is entitled to indemnification from the trust if trustee acted within her powers and with reasonable prudence (for contracts) or if trustee was not personally at fault for tort.
|
|
|
Can beneficiaries of a trust sue a third party on behalf of the trust?
|
No, only the trustee can sue. But the beneficiaries may bring suit against trustee to compel him to sue.
|
|
|
Trust property that is improperly sold to a bona fide purchaser:
|
is automatically "cut off" from the trust. The trust beneficiaries no longer have an interest in that property.
|
|
|
What is the "adjustment power" under the Uniform Principal and Income Act (UPAIA)?
|
A trustee is authorized 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.
|
|
|
What is the test for distinguishing a trust from a will?
|
It is a trust if the transfer creates some PRESENT gift, even if that gift is of future interest subject to divestment.
|
|
|
What is a pour-over will?
|
It's a testamentary device wherein the writer of a will creates a trust, and decrees in the will that the property in his estate at the time of his death shall be placed in the trust.
|
|
|
What is a totten trust?
|
A Totten trust is a form of trust where the settlor places money in a bank account or security with instructions that upon the settlor's death, whatever is in that account will pass to a named beneficiary.
Totten trusts are revocable by: (i) withdrawal of funds; (ii) any lifetime act manifesting intent to revoke; and (iii) a specific contradictory provision in a will. |
|
|
What are the two types of trusts which may arise as a matter of law (by the courts)?
|
Constructive trusts (used to prevent unjust enrichment) and resulting trusts (reversionary interests based on presumed intent of settlor).
|
|
|
Describe a resulting trust.
|
It's the leftover property from a trust that: (1) has been completed; (2) has failed; (3) (charitable trust) ends b/c of impossibility and cy pres can't be used; (4) fails after creation b/c illegal; (5) excess corpus; (6) "purchase money resulting trust"; (7) semi-secret trusts (no beneficiary named)
|
|
|
What is a constructive trust?
|
It's not really a trust, but a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of fiduciary duty.
The constructive trustee's only duty is to convey the property to the person who would have owned it BUT FOR the wrongful conduct. THE WRONGDOER HOLDS THE PROPERTY IN CONSTRUCTIVE TRUST FOR PARTY THAT SHOULD RECEIVE THE PROPERTY |
|
|
What the basic rules for allocating INCOME receipts and expenses under the UPAIA?
|
INCOME RECEIPTS:
(1) Ordinary receipts (rents, etc.) (2) Cash dividends (3) Proceeds from contract insuring trustee against loss (4) Deferred compensation -- 10% payment (5) Proceeds from liquidated asset -- 10% (6) Proceeds from working interest (e.g., oil and gas) -- 10% INCOME EXPENSES: (1) Regular compensation of trustee and/or investment agent -- 50% (2) Expenses for accounting, judicial proceedings, and other matters affecting income and remainder interests -- 50% (3) Ordinary expenses (4) Insurance premiums covering loss of a principal asset |
|
|
What the basic rules for allocating PRINCIPAL receipts and expenses under the UPAIA?
|
PRINCIPAL RECEIPTS:
(1) Extraordinary receipts (proceeds from sale of trust asset) (2) Stock dividends (3) Proceeds from life insurance policy naming trust or trustee as beneficiary (4) Deferred compensation -- 90% payment (5) Proceeds from liquidated asset -- 90% (6) Proceeds from working interest (e.g., oil and gas) -- 90% INCOME EXPENSES: (1) Regular compensation of trustee and/or investment agent -- 50% (2) Expenses for accounting, judicial proceedings, and other matters affecting income and remainder interests -- 50% (3) Expenses of a proceeding that concerns a principal interest (4) Payments on the principal of a trust debt (5) Estate taxes (6) Disbursements related to environmental matters |
|
|
Cy Pres.
|
KEY QUESTION: Did settlor intend trust to fail if the particular purpose has been accomplished or is not possible, or did he intend the trust property to be used for a similar purpose?
Cy pres is the idea that a settlor's general charitable intent should not be frustrated because the particular trustee or beneficiary agency is no longer in existence, or because the trust does not have sufficient funding for a particular project. Where the specified charitable use is no longer possible or practical, the court must decide whether the settlor intended the trust to FAIL or wished the property devoted to a SIMILAR USE. |
|
|
Trustee's standard of care.
|
The care a reasonably prudent person would exercise in managing his own property.
|
|
|
Trustee's duty of loyalty.
|
Undivided loyalty to the trust and ALL of its beneficiaries.
|
|
|
Trustee's duties = APPLE
|
Trustees Duties:
defend from Attack Personally perform Preserve trust property Loyalty separate and Earmark trust property |
|
|
Trustee's duty to preserve trust property and make it productive.
|
Includes the following duties:
(1) Collect all claims due; (2) Lease land or manage it so that it is productive or sell it; (3) Record recordable documents to protect title; keep securities and funds in safe places; pay taxes on trust assets to avoid liens; and secure insurance on trust properties; (4) Invest trust funds and continuously review and reinvest as necessary. |
|
|
"Legal list"
|
Statute which provides approved types of investments for a trust.
Applies only if there is no contrary provision in the trust instrument. |
|
|
Uniform Prudent Investor Act (UPIA).
|
Trustee's must exercise reasonable care, skill and caution when investing trust property.
- Trustee develop investment strategy incorporating risk and return goals suited for purpose of trust. - Trustee may delegate investment and management functions, but must exercise reasonable care, skill and caution in (i) selecting an agent; (ii) establishing the scope of the delegation; and (iii) periodically reviewing the agent's actions. - Investment decisions are evaluated in the context of the entire trust portfolio (corpus). |
|
|
Allocation and Adjustment power.
|
A trustee's power to reallocate investment portfolio returns, by characterizing items as income (or principal) if the trustee deems it appropriate or necessary to carry out the trust purposes.
This is important because sometimes there are income beneficiaries and principal beneficiaries and their interests are opposite when it comes to allocation. |
|
|
Documents may be probated with a will under the following doctrines:
Italian Inmates Always Carry Shotguns |
Integration
Incorporation by reference Acts of independent significance Codicil Secret trusts |
|
|
Presumption against devise to interested witness. (MUD IF).
|
California presumes that the witness procured the devise by:
Menace, Undue Influence, Duress, or Fraud. |
|
|
Characteristics of an express trust.
|
1. Capacity
2. Intent to create a trust 3. Trust res 4. Delivery of trust rest into trust 5. Trustee 6. Ascertainable beneficiary 7. Legal trust purpose |
|
|
Pour-over Trust (will).
|
Where testator adds or "pours" his estate into an inter vivos trust.
Despite lacking the "delivery" requirements of a trust, courts have sustained these trusts on two theories: (1) Incorporation by Reference: permits testator to incorporate any documents in existence at the time the will is executed into the will by referring to and describing that document. (2) Independent Significance: pour over trusts have also been upheld on the theory that the act of creating a trust is an act of independent significance apart and separate from the will. |
