Trusts New York

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Trust Defined

Back 1

A trust arises from the expressed intention of the owner of property to create a trust with respect to the property. The trustee holds legal title to specific property under a fiduciary duty to manage, invest, and safeguard the trust assets for the benefit of designated beneficiaries, who hold equitable title.

Front 2

Type of Trusts

Back 2

Trusts are classified according to the method of their creation:
1. EXPRESS TRUSTS arise from the expressed intention of the owner of property to create the relationship;
2. RESULTING TRUSTS arise from the presumed intention of the owner of the property; and
3. CONSTRUCTIVE TRUSTS arise in cases involving fraud and unjust enrichment.

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Formal Requisites of Express Trusts: In General

Back 3

To have an express trusts, there must be a SETTLOR (who must have legal capacity) who DELIVERS legal title to the trust RES to a TRUSTEE with the INTENTION TO CREATE A TRUST, whereupon the trustee holds, manages, and administers the res for the benefit of the designated BENEFICIARIES. A trust must be for a LAWFUL PURPOSE. No consideration is required for the creation of a trust.

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Formal Requisites of Express Trusts: In General: Private vs. Charitable Trusts

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Express trusts fall into two categories: private trusts (one or more ascertainable persons as beneficiaries) and charitable trusts (cannot be for the benefit of identifiable beneficiaries). Charitable trusts can be perpetual. Private trusts are subject to the Rule Against Perpetuities.

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Formal Requisites of Express Trusts: In General: Court Supervision

Back 5

An express trust may be created during the settlor’s lifetime (inter vivos trust) or by will (testamentary trust). An inter vivos trust is sometimes referred to an a noncourt trust because no court supervision is involved in creating the trust. A testamentary trust is a court trust because the Surrogate’s Court is involved in creating a testamentary trust.

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Formal Requisites of Express Trusts: In General: Jurisdiction—Surrogate’s Court

Back 6

The Surrogate’s Court has concurrent jurisdiction with the Supreme Court over all proceedings concerning private and charitable trusts.

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Formal Requisites of Express Trusts: Delivery

Back 7

The mere expression of an intent to create a trust, without delivery of legal title in the trust assets to the trustee, has no legal consequences. A lifetime trust is valid only as to any assets transferred to the trust.

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Formal Requisites of Express Trusts: Trustee

Back 8

An individual named as trustee must be of legal age and must not be incapacitated.

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Formal Requisites of Express Trusts: Trustee: Trust Does Not Fail for Want of Trustee

Back 9

A trust does not fail for want of a trustee. If the named trustee dies, resigns, or is removed for misfeasance, and the settlor has not designated a successor trustee, the court will appoint someone to serve as trustee.

Exception: If the court finds that trust powers were intended to be personal to this trustee, the trust will be terminated.

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Formal Requisites of Express Trusts: Trustee: Nature of Trustee’s Estate

Back 10

A trustee’s creditors cannot satisfy their claims from trust assets. On the death of the sole surviving trustee, the trust estate vests in the Surrogate’s Court, which names a successor trustee. On the termination of a trust, the legal and beneficial estates vest in the person entitled thereto, and the trustee’s authority to act on behalf of the trust is limited to actions to wind up the trust’s affairs. Conveyance to two or more trustees creates a joint tenancy.

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Formal Requisites of Express Trusts: Trustee: Resignation of Trustee

Back 11

Once a trustee has accepted the trust, he cannot resign unless:
1. The trust instrument expressly permits resignation, or
2. The court permits resignation for good cause shown.

Front 12

Formal Requisites of Express Trusts: Trustee: Removal of Trustee

Back 12

The court may remove a trustee for:
1. VIOLATING or threatening to violate the trust,
2. INSOLVENCY or imminent insolvency of the trustee, or
3. UNSUITABILITY to serve as trustee.

The beneficiaries cannot compel removal of a trustee unless there are grounds for removal or the power is granted to them by the trust instrument. Mere friction or hostility between a trustee and a beneficiary is NOT a sufficient ground for removal, unless it interferes with the proper administration of the trust.

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Formal Requisites of Express Trusts: Intention to Create Trust

Back 13

If precatory language (e.g., “I wish, hope, and desire”) is used, no trust or enforceable gift is created. However, the mere fact that precatory language has been used does not preclude a court from finding that an enforceable obligation was intended. The central question is the settlor’s probable intent. Expression of motive for a gift does not create an enforceable duty. No particular words are required to express intent to create a trust. But the intent cannot be a secret one; it must be expressed by some words or conduct.

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Formal Requisites of Express Trusts: Intention to Create Trust: Situations in Which No Trust Arises

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The fact that the words “trust” or “trustee” were used does not compel a finding that a trust was created. No trust arises where there is:
1. A transfer “in trust” but with NO TRUST TERMS, or
2. A gift of income with NO TIME LIMIT AND NO DISPOSITION OF PRINCIPAL.

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Formal Requisites of Express Trusts: Intention to Create Trust: No Merger Even if Sole Income Beneficiary is Sole Trustee

Back 15

A 1997 statute abrogated the merger doctrine. A trust is not merged or invalid because a person (including the settlor) is the sole trustee and sole current beneficiary, as long as at least one other person holds a beneficial interest in the property, such as a vested or contingent remainder interest.

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Formal Requisites of Express Trusts: Res

Back 16

There must be specific assets to which trust duties relate. A debtor cannot hold his own debt in trust. However, a creditor can hold the debt of another in trust. Any property that the settlor has the power to convey can be the subject of a trust. Trust property must be adequately and specifically described. A designation of “all my property” or “all the rest, residue, and remainder of my estate” in setting up a testamentary trust is sufficient.

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Exam Tip

Back 17

Remember that a res need not be tangible property, but the settlor must have an assignable interest. Property that the settlor expects to own in the future but has no present right to transfer (an “expectancy”) cannot be the subject matter of a present trust.

Front 18

Formal Requisites of Express Trusts: Beneficiaries

Back 18

A trust may be validly created without notice to or acceptance by beneficiaries. If a beneficiary designation does not specifically describe an individual or a group of persons, the trust fails. Designation of a definite class of beneficiaries (e.g., “my descendants,” “my heirs”) is sufficient. As long as the individual members are readily ascertainable, the trust beneficiaries may be a large group. The “ascertainable beneficiaries” rule does not apply to charitable trusts. Finally, a settlor can be a beneficiary of a trust.

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Formal Requisites of Express Trusts: Trust Purposes

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A trust may be created for any purpose that is not illegal or contrary to public policy. A trust will fail if:
1. Its enforcement requires commission of a crime or tort,
2. It violates public policy,
3. It was created to defeat the settlor’s creditors, or
4. It was based on illegal consideration.

Front 20

Formal Requisites of Express Trusts: Trust Purposes: Restraints on Marriage

Back 20

A total restraint on marriage is void, and the beneficiary takes the interest free of the restriction if the condition is intended to compel the beneficiary to remain unmarried and serves no reasonable purpose. Similarly, a condition that encourages divorce or separation is void as against public policy. Note that partial restraints on marriage (e.g., “if David marries a Jewish woman”) are valid, as are total restraints concerning a spouse’s remarriage.

Front 21

Formal Requisites of Express Trusts: Trust Purposes: Provision Calling for Destruction of Property is Void

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A provision calling for the destruction of trust property is void as against public policy.

Front 22

Formal Requisites of Express Trusts: Formalities of Creation and Revocation

Back 22

All lifetime trusts must be in writing, signed by the person establishing the trust and, unless such person is the sole trustee, by at least one trustee, and either acknowledged before a notary public or executed in the presence of two witnesses who also sign. A lifetime trust is irrevocable by the settlor unless the power to amend or revoke the trust is expressly reserved in the trust instrument; any amendments or revocations must be in writing, signed, and witnessed by two people (unless the trust provides otherwise). A revocable lifetime trust can be amended or revoked by an express provision in the settlor’s will. A contract to create a trust in the future must be in writing and signed by the settlor.

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Will Substitutes: Revocable Lifetime Trusts

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The interest in a revocable lifetime trust passes to the beneficiary during the settlor’s lifetime and becomes possessory on the settlor’s death.

Front 24

Will Substitutes: Revocable Lifetime Trusts: Use of Revocable Trusts in Estate Planning

Back 24

Revocable trusts are often used: (i) as an effective way for a person to manage his assets; (ii) as a means to avoid the necessity of a guardianship or conservatorship administration in the event a person (the settlor) becomes incapacitated; and (iii) to avoid probate (trust assets are not subject to probate administration).

Front 25

Will Substitutes: Revocable Lifetime Trusts: Pour-Over Gift from Will to Revocable Lifetime Trust

Back 25

A “pour-over” gift from a will to a revocable lifetime trust is valid. The trust instrument must be executed prior to or contemporaneously with the will and be identified in the will. The trust to which a pour-over gift is made may be unfunded. A revocation or termination of the trust before death of the testator will cause the disposition to fail, unless the testator has made an alternate disposition. A pour-over gift may be to a trust created by someone other than the testator.

Front 26

Exam Tip

Back 26

Don’t be fooled into believing a pour-over gift will fail because the trust is amended after the will creating the gift is executed. The gift is to the trust as it exists at the testator’s death, including amendments subsequent to the execution of the will.

Front 27

Will Substitutes: Revocable Lifetime Trusts: Amendment or Revocation of Trust by Will

Back 27

A revocable trust can be amended or revoked by an express direction in the testator’s will.

Front 28

Will Substitutes: Life Insurance Proceeds, Savings Accounts, and Pension Benefits

Back 28

Unfunded revocable life insurance trusts are valid. The trust must be in existence when the beneficiary designation is made. The insured may name the trustee or a lifetime trust OR of a testamentary trust as beneficiary of the insurance proceeds. The testamentary trustee must qualify within 18 months after the testator’s death; otherwise the proceeds are payable to the designated secondary beneficiary or (if none) to the insured’s personal representative. Insurance proceeds payable to an inter vivos or testamentary trustee are not subject to the insured’s debts to any greater extent than if such proceeds wre payable to beneficiaries named in the trust. Savings account proceeds and pension benefits may also be payable to a lifetime or testamentary trustee.

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Will Substitutes: Totten Trust

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In a Totten trust, the depositor deposits funds in a bank account in his name as trustee for another. The depositor reserves the right to withdraw funds at any time, and on his death the account passes to the named beneficiary. No particular words must be used to create a trust account; “in trust for” or even “ITF” is sufficient.

Front 30

Will Substitutes: Totten Trust: Bank Account Trust Revoked Whenever Depositor Makes Withdrawals

Back 30

An “A, trustee for B” bank account trust is revoked to the extent of withdrawals made by the depositor. The beneficiary is entitled only to the amount on deposit upon the depositor’s death. A bank account trust can be revoked by an acknowledged writing delivered to a financial institution. If the beneficiary predeceases the depositor, the trust is revoked.

Front 31

Will Substitutes: Totten Trust: If Beneficiary Survives Depositor—Funds Belong to Beneficiary

Back 31

If the beneficiary survives the depositor, and the account is not revoked, modified, or terminated by the depositor’s will, title to the funds will vest in the beneficiary free and clear of the trust. However, the depositor’s creditors can reach the amount on deposit in the bank account trust, both before and after the depositor’s death. A Totten trust is a testamentary substitute and is subject to the surviving spouse’s elective share right.

Front 32

Will Substitutes: Totten Trust: Delivery of Passbook to Beneficiary

Back 32

Delivery of a passbook to the beneficiary does not constitute an irrevocable gift. Funds remain the depositor’s as long as he lives and as long as they are not withdrawn.

Front 33

Will Substitutes: Totten Trust: Revocation of Totten Trust by Will

Back 33

Revocation of a Totten trust by the depositor’s will requires an express reference to the account, including the name of the beneficiary and the name of the bank.

Front 34

Will Substitutes: Totten Trust: Payment of Accounts of 10,000 or Less

Back 34

If, on the depositor’s death, the beneficiary is under age 18, and if the amount on deposit is 10,000 or less, payment can be made to the beneficiary’s parents (for the beneficiary’s benefit) or his duly appointed guardian. But if the amount in deposit is more than 10,000, payment must be made to the legal guardian. (A similar statute governs payment of legacies and intestate shares of up to 10,000 to a parent or other interested person if the distribute is a minor, incompetent, or person under a disability.)

Front 35

Will Substitutes: Joint Bank Accounts

Back 35

A deposit into a right of survivorship joint bank account is irrevocable to the extent of one-half. Withdrawal of more than one-half by one depositor without the other depositor’s consent destroys the right of survivorship, and the nonwithdrawing party can recover the amount of the withdrawal in excess of one-half of the account. To create a right of survivorship in a joint bank account, SPECIFIC WORDS OF SURVIVORSHIP must appear on the signature card signed by both parties. The statutory presumption that a survivorship was intended can be rebutted only by clear and convincing evidence that the account was opened as a matter of convenience.

Front 36

Will Substitutes: Uniform Transfers to Minors Act (“UTMA”)

Back 36

A custodial gift is made by transferring property by deed, will, or power of appointment to “[name of custodian] as custodian for [name of minor] under the New York Uniform Transfers to Minors Act.” The custodian has statutory powers:
1. To collect, hold, manage, invest, and reinvest the custodial property;
2. To pay to or on the minor’s behalf so much or all of the custodial property as the custodian deems advisable for the minor’s use and benefit; and
3. To the extent not expended, to pay over the property when the minor attains age 21 (or to the minor’s estate if she dies before age 21). A CUSTODIANSHIP IS NOT A TRUST. The custodian does not hold legal title to the custodial property; legal title is in the minor, subject to the custodian’s statutory powers. Under the UTMA, custodianship TERMINATES WHEN THE DONEE ATTAINS AGE 21 unless the donor in making the gift specifies “until age 18.”

Front 37

Will Substitutes: Uniform Transfers to Minors Act (“UTMA”): Tax Purpose—Qualifies for Gift Tax Annual Exclusion

Back 37

A custodial gift under the UTMA qualifies for the 13,000 per donee annual exclusion under the federal gift tax.

Front 38

Will Substitutes: Uniform Transfers to Minors Act (“UTMA”): Executor, Trustee, or Guardian May Make Distribution to UTMA Custodian

Back 38

An executor, trustee, or guardian may make a distribution out of an estate or trust to an UTMA custodian for a minor beneficiary. If the will does not specifically authorize such distributions, the distribution must be in the minor’s best interest, and distributions in excess of 50,000 require court approval.

Front 39

Will Substitutes: Powers of Attorney

Back 39

A SPRINGING power of attorney is one where the power to act arises only on the happening of a specified future event. A power of attorney can also be SPECIAL (i.e., limited to specific transactions) or GENERAL (i.e., covering all legal acts on behalf of the principal).

Front 40

Will Substitutes: Powers of Attorney: Power of Attorney Survives Disability of Principal

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A power of attorney is durable UNLESS it expressly provides that it is to terminate on the incapacity of the principal. A durable power does, however, terminate on the death of the principal. If a guardian is appointed, the agent (the holder of the power) must account to the guardian.

Front 41

Will Substitutes: Powers of Attorney: Gift by Agent to Himself

Back 41

A gift of the principal’s property made by the agent himself raises a presumption of improper self-dealing, which can be overcome only by a clear showing of the principal’s intent to make the gift.

Front 42

Will Substitutes: Accumulation Trusts

Back 42

Directions to accumulate trusts income within the perpetuities period are permissible. Accumulations may be reached for the support and education of the beneficiary. When income is not disposed of and no valid direction is given for its accumulation, it passes to the person presumptively entitled to the next eventual estate.

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Will Substitutes: Supplemental Needs Trust for Disabled Person

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This is a discretionary trust for the benefit of a person with a severe and chronic disability. In addition to other specified terms, the trust must prohibit the trustee from spending or distributing trust assets in any way that may supplant, impair, or diminish Medicaid or other government benefits for which the beneficiary is eligible.

Front 44

Charitable Trusts: Distinctive Rules Apply

Back 44

A charitable trust cannot benefit individual noncharitable beneficiaries. If the charitable purpose is accomplished or the designated charity goes out of existence, the court may redirect the trust to a purpose as near as possible to the charitable endeavor designated by the settlor (i.e., apply the cy pres doctrine). Charitable trusts may be perpetual.

Front 45

Charitable Trusts: Must Be for Charitable Purposes

Back 45

To qualify as a charitable trust, a trust must be for charitable purpose (i.e., religious, charitable, educational, or benevolent purposes). Trusts for dissemination of ideas may be charitable even though the ultimate purpose may be to accomplish a change in present law.

Front 46

Charitable Trusts: Indefinite Beneficiaries

Back 46

The class of beneficiaries may not be so narrowly defined that the settlor is effectively conferring private benefits upon a few individuals. While the attorney general is charged with the duty to supervise and enforce charitable trusts, the donor of a charitable trust has standing to enforce the trust’s terms. However, a potential beneficiary of a charitable trust has no standing to sue; instead, the attorney general represents all potential beneficiaries. (The attorney general is an INDISPENSABLE party to any suit concerning construction of enforcement of a charitable trust.) The only time charitable beneficiaries may sue is when there is a small and identifiable class of individuals who have a special interest in the trust distinguishable from the interest of the public, and the situation involves a fundamental change in the nature of a charitable institution (e.g., boarding home for widows to be merged with home for terminally ill).

Front 47

Charitable Trusts: Rule Against Perpetuities

Back 47

The Rule Against Perpetuities does not apply to charitable trusts (except to a limitation shifting the interest from a private use to a charitable use or from a charitable sue to a private use).

Front 48

Charitable Trusts: Cy Pres

Back 48

Where the specific charitable purpose can no longer be accomplished but the settlor had a general charitable intent, a court will direct that trust property be applied to another charitable purpose as close as possible to the original one rather than permit the trust to fail and become a resulting trust. This cy pres doctrine is recognized by statute in New York.

Front 49

Charitable Trusts: Termination of Charitable Trust of Less than 100,000

Back 49

The NY attorney general, a trustee, or a beneficiary of a charitable trust may petition for termination of the trust if the market value of the trust assets is less than 100,000 and the expenses of administering the trust are too high in relation to its income. If terminated, the trust assets are distributed to the designated charitable beneficiary; if no beneficiary is designated, the court will order a distribution that accomplishes the trust’s charitable purposes. If the settlor is alive, the termination action cannot be brought without her consent.

Front 50

Charitable Trusts: Honorary Trusts

Back 50

An honorary trust is a trust that is NOT FOR CHARITABLE PURPOSES and has NO INDIVIDUAL BENEFICIARIES (e.g., 25,000 to Fred as trustee to maintain my rose garden). In many states, although the disposition is not enforceable as a trust, it is not wholly invalid. Although the “trustee” cannot be compelled to perform, the courts will permit him to carry out the specified purpose if he is WILLING to do so. Note that these disposition also raise a problem under the Rule Against Perpetuities unless limited in duration to 21 years, because the “measuring lives” that can be used for perpetuities purposes must be human lives (not rose gardens). THE NEW YORK COURTS HAVE REFUSED TO RECOGNIZE HONORARY TRUSTS, but the legislature has validated trusts for certain purposes once considered “honorary” and, in the statutes, has address the Rule Against Perpetuities problem.

Front 51

Charitable Trusts: Honorary Trusts: Trusts for Cemetery Purposes Designated as Charitable Trusts

Back 51

Trusts for the perpetual care and maintenance of cemeteries and burial lots are deemed to be for charitable purposes. These trusts are valid notwithstanding any indefiniteness or uncertainty as to the trust beneficiaries, and they are exempt from the Rule Against Perpetuities.

Front 52

Charitable Trusts: Honorary Trusts: Trusts for Pets—Valid for Animals’ Lifetimes

Back 52

A trust for the care of a designated pet animal is valid. The trust will terminate on the death of the last surviving animal.

Front 53

Charitable Trusts: Honorary Trusts: Compare—Gift on Condition; Precatory Language

Back 53

The NY courts construe bequests such as “to Fran, on the condition that she take care of my dogs, Bowser and Howser,” as a divesting condition subsequent, which is void under the Rule Against Perpetuities. Therefore, the legatee takes the money free of any condition. Also, a “wish and desire” that the bequest be used to take care of the testator’s pets is precatory and does not impose an enforceable obligation on the legatee.

Front 54

Resulting and Constructive Trusts: Not True Trusts

Back 54

In an express trust, the trustee holds and administers assets for the benefit of beneficiaries over a period of time. However, a resulting or constructive trust is a passive trust in which the trustee has no active duties to perform, and the beneficiary holds legal and equitable title and can compel transfer of the assets.

Front 55

Resulting Trusts: Failure of Express Trusts

Back 55

A resulting trust will be imposed when an express trust fails for any reason (e.g., failure to identify the beneficiaries)

Front 56

Resulting Trusts: Resulting Trust by Reversion

Back 56

Resulting trust also covers the situation where the settlor has made an incomplete disposition of the assets transferred in an express trust.

Front 57

Resulting Trusts: Purchase Money Resulting Trust Not Recognized

Back 57

By statute in NY, if A pays the purchase price for land, but title is place in B’s name, no resulting trust arises in the absence of fraud or deceit. The Statute of Frauds bars any testimony that contradicts the deed naming B as grantee. There is one exception to NY’s rule against purchase money resulting trusts: A conveyance to one party upon payment of consideration by another party is presumptively fraudulent as against the creditors of the party paying the consideration. A resulting trust arises in favor of the payor’s creditors, to the extent necessary to satisfy their claims.

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Constructive Trusts

Back 58

A constructive trust is an EQUITABLE REMEDY imposed in cases involving fraud or unconscionable conduct and unjust enrichment. A constructive trustee has no duties of administration. His sole duty is to transfer title and possession of the property to the person who would have owned it but for the wrongful conduct. Proof of the facts necessary to establish a constructive trust must be by clear and convincing evidence. UNJUST ENRICHMENT results when: a beneficiary kills the testator; a beneficiary suppresses a later will; and a promise to keep a life insurance policy in force is breached. Where a gift is made to a person in a confidential or fiduciary relationship with the donor, the burden of proof is on the donee to show by clear and convincing evidence that the gift was made voluntarily and understandingly, and was not influenced by fraud, duress, or coercion.

Front 59

Constructive Trusts: Oral Trusts of Land—Lifetime Transfers

Back 59

If a deed is absolute on its face and an oral agreement to hold land in trust is alleged, the general rule is that no constructive trust will be imposed. The grantee may choose to perform his moral obligation, but he cannot be compelled to do so. Exceptions to the general rule are:
1. Fraud in the inducement (the grantee agreed to hold in trust and, at the time he agreed, he had no intention of carrying out the trust); and
2. Where the grantee who orally promises to hold property in trust is in a confidential relationship with the grantor, and the grantee’s promise is proved by clear and convincing evidence.

Front 60

Constructive Trusts: Oral Trusts of Land—Lifetime Transfers: Confidential Relationship—Constructive Trust Imposed

Back 60

When consideration is paid by one party and title taken by another, a constructive trust will be imposed when there is:
1. A confidential or fiduciary relationship;
2. A promise to reconvey (express or implied);
3. A transfer in reliance thereon;
4. A breach of the promise; and
5. Unjust enrichment.

Note that a constructive trust may be imposed to prevent unjust enrichment, regardless of whether the other elements are present.

Front 61

Constructive Trusts: Oral Trusts—Testamentary Transfers: “Secret Trust”—Constructive Trust May be Imposed

Back 61

If a will makes an absolute gift, but a trust is intended (secret trust), the trust may be enforced. To prevent unjust enrichment of the named beneficiary (who promised to hold gift property in trust for another), the court will allow the intended trust beneficiary to present extrinsic evidence of the agreement. If the agreement can be proved by CLEAR AND CONVINCING EVIDENCE, a constructive trust will be imposed on the named beneficiary. The Statute of Frauds is not a bar because the suit is not to compel enforcement of the trust, but rather is to impose a constructive trust to prevent unjust enrichment. With respect to life insurance policies, clear and convincing evidence is required to show that the party named as beneficiary orally promised to hold the insurance proceeds for the benefit of other persons.

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Exam Tip

Back 62

Keep in mind that a constructive trust will be imposed in the above case even if the will beneficiary did not make the promise until AFTER the will was executed. Furthermore, it does not matter whether the will beneficiary INTENDED to perform the promise when he made it; all that matters is that the testator RELIED on the promise.

Front 63

Constructive Trusts: Oral Trusts—Testamentary Transfers: “Semi-Secret Trust”—Resulting Trust Implied

Back 63

If a will makes a gift “in trust” without specifying beneficiaries (semi-secret trust), no trust is created under the NY and majority rule. The legatee holds on a resulting trust for the testator’s heirs.

Front 64

Constructive Trusts: Oral Trusts—Testamentary Transfers: Different Result in Secret Trust and Semi-Secret Trust Cases Explained

Back 64

In secret trust cases (i.e., will purports to make absolute disposition), the trust can be proved, but in semi-secret trust cases, it cannot. In a secret trust case, the issue is between the legatee and the beneficiaries of an alleged oral promise; to prohibit proof of the legatee’s promise would lead to unjust enrichment. But in a semi-secret situation, the only thing that is clear is that the legatee was not intended to take beneficial enjoyment; disposition to him was in trust. Thus, the dispute is between the intended but unidentified beneficiaries and the heirs; the induced reliance-unjust enrichment element of a secret trust is not present.

Front 65

Transferability of Beneficiary’s Interest; Creditors’ Rights: Income Interests Given Spendthrift Protection by Statute

Back 65

A “spendthrift clause” in a trust prohibits voluntary and involuntary transfers of a beneficiary’s interest. In NY, all income interests are AUTOMATICALLY given spendthrift protection. Thus, income interests of a beneficiary cannot be transferred or reached by the beneficiary’s creditors unless a provision is inserted in the trust instrument expressly authorizing such transfers. Remainder interests in corpus, however, can be transferred unless a provision is inserted expressly prohibiting such transfers.

Front 66

Transferability of Beneficiary’s Interest; Creditors’ Rights: Exceptions to Statutory Spendthrift Rule

Back 66

(The following exceptions are not relevant if a trust contains a provision allowing the beneficiary to transfer his income interest; in that case, the beneficiary could transfer on the strength of the trust provision). A beneficiary’s income can be reached:
1. By creditors who furnish NECESSARIES;
2. In a suit to enforce CHILD SUPPORT or an ALIMONY obligation;
3. By the FEDERAL GOVERNMENT asserting a tax lien; and
4. By creditors to the extent of income BEYOND THAT NEEDED FOR EDUCATION AND SUPPORT.

The burden of proof is on the creditor to show that the beneficiary has excess income. The beneficiary’s station in life and income from other sources are considered in determining education and support needs. Under exception 4, a creditor must have exhausted other legal remedies, but this remedy does not limit the rights of creditors who furnishes necessaries. In addition to the above exceptions, judgment creditors may levy upon 10% of income due a debtor-beneficiary from a spendthrift trust in any case.

Front 67

Transferability of Beneficiary’s Interest; Creditors’ Rights: Gratuitous Assignment of Income in Excess of 10,000

Back 67

The beneficiary may assign her right to “any amount in excess of 10,000 of the annual income to which the beneficiary is entitled from such trust.” The purpose is to shift income and income tax liability to other family members. This limited power to assign the right to future income is not available if the trust contains an express spendthrift clause prohibiting transfers. The right and amount of assignment is not limited if the trust authorizes assignment of income interests. Assignment must be made by written instrument, signed, acknowledged, and delivered to the trustee accompanied by an affidavit that the beneficiary has not and will not receive consideration for the transfer. Permissible transferees include a spouse, grandparents, or issue of grandparents. Assignment may be made to a trustee, committee, conservator, or curator of the transferee or to the custodian for a minor under the UTMA.

Front 68

Transferability of Beneficiary’s Interest; Creditors’ Rights: Discretionary Trusts

Back 68

Under a discretionary trust, distributions of income are in the trustee’s discretion. A creditor cannot reach a beneficiary’s interest in a discretionary trust until the trustee exercises discretion to distribute income to the beneficiary.

Front 69

Transferability of Beneficiary’s Interest; Creditors’ Rights: Settlor as Beneficiary—No Spendthrift Protection

Back 69

A disposition in trust for the use of the settlor is void as against existing or subsequent creditors of the settlor. The settlor-beneficiary can transfer his interest even if the trust that he created contains a spendthrift clause that prohibits transfer. A revocable trust is reachable by creditors. If the trust is irrevocable and the settlor retains some but not all of the beneficial interest in the trust, his creditors can reach the full amount of the interest retained by the settlor, but no more. If creation of the trust was a “fraudulent conveyance” under Creditor’s Rights law, the creditors can reach the entire trust property that was transferred with an intent to defraud creditors. Spendthrift protection is given to interests in a qualified retirement plan, subject to limited exceptions.

Front 70

Exam Tip

Back 70

When it is unclear whether a particular beneficiary is the actual settlor, determine who FURNISHED THE CONSIDERATION for the creation of the trust. If a person furnishes the consideration, he is the settlor even though the trust was created by another person.

Front 71

Transferability of Beneficiary’s Interest; Creditors’ Rights: No Statutory Spendthrift Protection of Remainder Interest

Back 71

The statutory spendthrift rule applies only to INCOME interests. Remainder interests are freely transferable unless the trust contains a spendthrift clause applicable to such interests.

Front 72

Invasion of Principal for Income Beneficiary: Invasion Power Given to Trustee: General Rules on When Beneficiary Can Compel Disposition

Back 72

If an invasion power is given to the trustee, quite commonly a standard (e.g., health and support needs) is inserted to give the trustee guidance as to when to exercise the power. With a support invasion power, the trustee must consider the beneficiary’s other sources of income in determining whether there a need for support. This standard may be enforceable by the beneficiary. If the invasion power is not governed by a standard, the beneficiary cannot compel a distribution because the trustee’s discretion is unfettered.

Front 73

Invasion of Principal for Income Beneficiary: Invasion Power Given to Trustee: Trustee-Beneficiary Cannot Exercise Certain Invasion Powers

Back 73

A trustee-beneficiary cannot make a discretionary distribution of income or principal to himself or allocate receipts and expenses between principal and income UNLESS:
1. The trust INSTRUMENT PROVIDES OTHERWISE;
2. The distribution is limited by an ascertainable standard relating to his HEALTH, EDUCATION, MAINTENANCE, OR SUPPORT; or
3. The trust is a REVOCABLE TRUST and the grantor is serving as trustee.

If the power is conferred on two or more trustees, it may be executed only by the disinterested trustees. If a trustee-beneficiary is sole trustee, the court may exercise the power. This is a tax statute, designed to avoid inclusion of principal or accumulated income in the beneficiary-trustee’s gross estate on the ground that he has a general power to appoint corpus or income to himself.

Front 74

Invasion of Principal for Income Beneficiary: Invasion Power Given to Beneficiary

Back 74

For tax reasons, an invasion power given to a beneficiary is invariably either an ascertainable-standard power (limited to health, education, maintenance, and support) or a “5,000 or 5%” power, or perhaps both. A beneficiary who is given these limited powers is not deemed to have a general power of appointment for purposes of including the entire corpus of trust in the beneficiary’s gross estate.

Front 75

Invasion of Principal for Income Beneficiary: Invasion Power Authorized by Court

Back 75

Upon petition, the court can authorize distribution in all cases where the beneficiary’s support is not sufficiently provided for, whether or not such a person is entitled to the principal of the trust or any part thereof. Distribution must further the purposes and intent of the settlor. A court cannot authorize an invasion where the remainder is to a charity.

Front 76

Termination and Modification of Trusts: Passive or “Dry” Trusts are “Executed”

Back 76

The Statute of Uses, applicable in NY, converts nominal trusts into legal estates. If a trustee is merely a depository of naked title and has no duties to perform, the trust is executed, and the beneficiary has full title to the property, free of the trust.

Front 77

Termination and Modification of Trusts: Termination According to Trust’s Terms

Back 77

A trust will terminate automatically at the expiration of the time specified in the instrument. If there is no direction that the corpus be paid out to designated persons, the trustee holds on a resulting trust for the settlor or her successors in title.

Front 78

Termination and Modification of Trusts: Termination of Trust by Settlor

Back 78

A revocable trust can be terminated by the settlor at any time. An irrevocable trust can be revoked or amended by the settlor if ALL beneficiaries consent. If any beneficiary is incompetent or is a minor, the trust cannot be revoked, because a committee or guardian cannot grant necessary consent. Consent unborn or unascertained beneficiaries need not be obtained. A remainder to the settlor’s “heirs” does not prevent termination.

Front 79

Termination and Modification of Trusts: Termination of Trust by Beneficiaries

Back 79

Even if all beneficiaries consent, a trust cannot be terminated if the termination would be contrary to purposes of the settlor (known as the Claflin doctrine or the American rule). Trusts in which the beneficiaries are given the right to transfer income interests may be terminated by the beneficiaries if no other material purpose of the settlor is to be served. Spendthrift trusts cannot be terminated; thus, NY statutory spendthrift trusts cannot be terminated by beneficiaries.

Front 80

Termination and Modification of Trusts: Judicial Modification of Administrative Provisions--Changed Circumstances

Back 80

A court may permit deviation from trust terms if, due to circumstances not known to or anticipated by the settlor, compliance with the trust will impair or frustrate the purpose of the trust. The cases usually involve restriction on the sale of trust assets by the trustee.

Front 81

Termination and Modification of Trusts: Modification or Division of Trust for Tax Purposes

Back 81

A trustee may amend nondispositive trust provisions without court or beneficiary approval to qualify the trust for a charitable deduction, meet the requirements of a qualified domestic trust for a noncitizen spouse, or satisfy the rules governing personal residence trusts. Also, a trustee may, without court order or beneficiary approval, divide a trust into two or more trusts to qualify for the estate tax marital or charitable deduction, the generation-skipping transfer tax exemption, a qualified subchapter S income tax election, or some other tax purpose. Division of a trust for any other purpose requires either the consent of all beneficiaries or court approval, and must not be contrary to the settlor’s trust purposes.

Front 82

Trust Administration: Fiduciary Powers Act: Applies to All Trustees, Executors, and Administrators

Back 82

The NY Fiduciary Powers Act sets out the powers that trustees (and executors and administrators of decedents’ estates) can exercise without court approval or confirmation. The Act applies to all New York trusts and estates in the absence of provisions in the trust instrument or will modifying, enlarging, or reducing the fiduciary’s powers.

Front 83

Trust Administration: Fiduciary Powers Act: If Fee Simple Owner can Do It, Fiduciary Authorized to Do It

Back 83

The Fiduciary Powers Act gives a fiduciary most of the powers a fee simple owner would have with respect to his own property. A fiduciary, however, is prohibited from self-dealing, making imprudent investments, and exercising certain powers not statutorily granted.

Front 84

Trust Administration: Fiduciary Powers Act: Most Important Powers and Authorities Granted by Fiduciary Powers Act

Back 84

A fiduciary has the power to accept additions to the trust from sources other than the testator or settlor. A trustee has the power to grant a lease for a period not exceeding 10 years. (An executor or administrator has the power to grant a lease for a period not exceeding three years.) A fiduciary has the power to grant a mortgage; make ordinary repairs; grant options for the sale of property for a period not exceeding six month; contest, compromise, and settle claims; and vote securities in person or by proxy. Corporate fiduciaries have the power to hold securities in the name of the nominee.

Front 85

Trust Administration: Fiduciary Powers Act: Powers Not Granted by Statute

Back 85

Powers NOT granted by statute, and therefore prohibited unless expressly authorized by the will or trust, include the power to:
1. Continue a business;
2. Abandon, alter, or demolish real property;
3. Borrow;
4. Lend personal funds to the estate;
5. Employ agents;
6. Make extraordinary repairs or alterations; and
7. Keep funds uninvested.

Front 86

Trust Administration: Duties of Trustee

Back 86

A trustee has the duty to:
1. Take possession of an PRESERVE TRUST PROPERTY;
2. NOT DELEGATE fiduciary responsibilities;
3. Make PERIODIC ACCOUNTINGS;
4. EXERCISE REASONABLE CARE AND SKILL;
5. SEGREGATE TRUST PROPERTY;
6. PREVENT BREACH by a co-trustee; and
7. Make trust property PRODUCTIVE.

Front 87

Trust Administration: Duties of Trustee: Duty to Segregate Trust Property—No Commingling

Back 87

A trustee cannot invest or deposit trust property in her own name individually; it must be done as a fiduciary. If a trustee commingles trust property with her own and some of the property is later lost or destroyed, the presumption is that the property lost was the trustee’s own, and that the property still on hand belongs to the trust. If a trustee commingles trust funds with her own and thereafter makes withdrawals, the presumption is that the amount still on deposit belongs to the trust; but if the trustee withdraws funds and makes investments that have increased in value, the beneficiary can claim that the trustee used trust funds to make the investment.

Front 88

Trust Administration: Duties of Trustee: Exculpatory Clause in Testamentary Trust Void

Back 88

Exculpatory clauses relieving a trustee of liability for ordinary negligence may be upheld in a lifetime trust. A provision in a testamentary trust precluding beneficiaries from questioning the conduct of the trustee and from demanding an accounting is void as contrary to public policy.

Front 89

Trust Administration: Trustee’s Investment Power

Back 89

The PRUDENT INVESTOR RULE is applied to a trustee’s investment decisions. The rule requires the trustee to invest and manage property in accordance with a standard of prudence; i.e., he must use REASONABLE CARE, SKILL, AND CAUTION in making investment decisions as a prudent investor would. Under this rule, prudence is determined with respect to the entire investment portfolio rather than each individual investment. The rule requires the trustee to evaluate investment decisions in the context of the ENTIRE TRUST PORTFOLIO (corpus) and as part of an OVERALL INVESTMENT STRATEGY that has risk and return objectives reasonably suited to the particular trust.

Front 90

Trust Administration: Trustee’s Investment Power: Prudent Investor Rule Looks to Conduct, Not Outcome or Performance

Back 90

Compliance with the prudent investor rule is determined in light of the facts at the time the investment decision is made; thus, fiduciary who acts in compliance with the rule is not liable if the trust declines in value or produces less income.

Front 91

Trust Administration: Trustee’s Investment Power: Any Type of Investment Permitted, Including Mutual Funds

Back 91

No investment is inherently imprudent; thus, a trustee may make any investment consistent with the overall investment strategy for the trust.

Front 92

Trust Administration: Trustee’s Investment Power: Factors Considered in Making Investment Decisions

Back 92

The following circumstances are relevant and must be considered by the trustee in making investment decisions:
1. Size of the portfolio;
2. Nature and estimated duration of the fiduciary relationship;
3. Liquidity and distribution requirements of the trust instrument;
4. General economic conditions;
5. Possible effect of inflation or deflation;
6. Expected tax consequences of investment decisions or strategies;
7. ROLE THAT EACH INVESTMENT PLAYS WITHIN THE OVERALL TRUST PORTFOLIO;
8. EXPECTED TOTAL RETURN from income and appreciation of capital; and
9. Needs of the beneficiaries.

Front 93

Trust Administration: Trustee’s Investment Power: Diversification May Be Appropriate, But is Not Required

Back 93

Diversification of investments is usually appropriate, but a trustee may decide not to diversify. For example, a trustee might decide not to diversify in the case of real estate that has long been in the family, or in the case of stock in a closely held family corporation.

Front 94

Trust Administration: Trustee’s Investment Power: Delegation of Investment and Management Functions Permitted

Back 94

A trustee may delegate his management and investment functions, but the trustee must exercise reasonable care in selecting the agent.

Front 95

Trust Administration: Trustee’s Investment Power: Trustees with Special Skills Held to Higher Standard

Back 95

A bank, trust company, or professional investment adviser that serves as trustee, or any trustee that represents that it has special skills, must exercise such diligence as would be exercised by prudent investors of discretion and intelligence having special investment skills.

Front 96

Trust Administration: Trustee’s Investment Power: Above Rules Apply Absent Contrary Trust Provision

Back 96

In establishing a trust, a settlor can expand or limit any of the trustee’s powers, including investment powers.

Front 97

Trust Administration: Prohibited Transactions—No Self-Dealing

Back 97

A trustee owes a duty of undivided loyalty to the trust and its beneficiaries, and that loyalty might be tainted by personal interest. Therefore, unless expressly authorized by the trust, a trustee may not:
1. Purchase property owned by the trust, even if he pays full value, or sell assets to the trust, even if the price is fair; or
2. Borrow trust funds, make loans to the trust, or use trust assets to secure a personal loan.

A trustee cannot personally gain through his position, other than through his compensation for serving as trustee. In addition, a corporate trustee cannot invest in its own stock (but it can retain its own stock if it was part of the original trust res when the trust was established), and a trustee of one trust may not sell property to another trust of which it is also trustee. The trustee is accountable for any profit arising out of trust administration, even if the profit did not result from a breach of trust.

Front 98

Trust Administration: Prohibited Transactions—No Self-Dealing: “No Further Inquiry” Rule—No Defense to Self-Dealing Transaction

Back 98

Under the “NO FURTHER INQUIRY” rule, all the beneficiary has to show is that the trustee engaged in self-dealing—no further inquiry is made. Self-dealing is an automatic wrong. There is NO DEFENSE; the only issue is damages. As in any breach of trust, the beneficiaries may ratify the transaction and waive the breach of trust (if it is in their interest to do so), or they may sue the trustee for damages or (if appropriate) to recover the property.

Front 99

Trust Administration: Beneficiary’s Remedy for Breach of Trust

Back 99

Any violation of a trust duty or improper exercise of power gives rise to AUTOMATIC liability via a surcharge action. Negligence need not be shown, and innocence or good faith is not a defense. If the beneficiary does not elect to ratify an improper act, upon proof of the improper conduct, the trustee is liable, with the measure of damages being the full amount of loss to the trust estate resulting from the improper act. Thus, the plaintiff has the option of RATIFYING the trustee’s act, even though improper, or bringing an action for SURCHARGE.

Front 100

Trust Administration: Beneficiary’s Remedy for Breach of Trust: Statute of Limitations

Back 100

Generally, the statute of limitations does not begin to run on actions against a trustee until the trustee repudiates the trust, the trustee gives an accounting that reports the conduct in question, or the trust relationship comes to an end. Note, however, that there is a six-year statute of limitations on the proceeding to compel an accounting.

Front 101

Trust Administration: Beneficiary’s Remedy for Breach of Trust: Beneficiary’s Rights Against Third Parties

Back 101

A bona fide purchaser or creditor who relied on the trustee’s apparent ownership of the trust property is protected. Purchasers and creditors who know of the trust are charged with knowledge of the trustee’s powers. If an act is beyond the trustee’s powers, such parties are not protected. An act within the trustee’s authority, even if done with intent to defraud the estate, is binding on the beneficiaries as against the third persons acting in good faith and without notice of improper motive. A person who in good faith transfers money or property to a trustee is not responsible for improper application of such money or property.

Front 102

Trust Administration: Trustee’s Liability in Contract or Tort: Trustee Personally Liable on Contracts with Third Persons

Back 102

A trustee is personally liable on all contracts with third persons entered into on behalf of the trust unless the contract relieves her of liability. This is true whether she was exceeding her powers or acting within her powers as trustee. To avoid personal liability, a contract must expressly so stipulate. However, a trustee is entitled to INDEMNIFICATION from the trust estate if:
1. The contract was WITHIN HER POWERS, and
2. She acted IN THE COURSE OF PROPER ADMINISTRATION of the trust.

If the trust estate is insufficient to indemnify, the trustee is out of luck.

Front 103

Trust Administration: Trustee’s Liability in Contract or Tort: Trustee Personally Liable for Torts

Back 103

If a trustee or her agent commits a tort on a third person in the course of administration of the trust, she is personally liable to the victim to the same extent and under the same circumstances as if she were the beneficial owner of the property. Prudent trustees always purchase liability insurance. A trustee’s personal fault is material only on the issue of her right to indemnification, not on the issue of liability to the third party. A trustee is entitled to REIMBURSEMENT from the trust estate if:
1. Liability was incurred IN THE COURSE OF PROPER ADMINSITRATION of the trust, and
2. The trustee was NOT PERSONALLY AT FAULT.

If the trust estate is insufficient to indemnify, the trustee is out of luck.

Front 104

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Uniform Principal and Income Act

Back 104

NY has enacted the Uniform Principal and Income Act (“UPAIA”). This statute, which applies to ALL NEW YORK TRUSTS AND ESTATE unless the governing instrument provides otherwise, gives the trustee or personal representative an ADJUSTMENT POWER to reallocate investment portfolio return. This adjustment power authorizes the trustee 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.

Front 105

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Uniform Principal and Income Act: Duty of Fairness to All Beneficiaries

Back 105

The trustee is under a duty to administer the trust impartially, except to the extent that the trust or the will manifests an intent that one or more of the beneficiaries is to be favored over the others.

Front 106

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Uniform Principal and Income Act: Adjustment Power

Back 106

If the trust calls for distribution of trust income to a beneficiary, the trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc., to the beneficiary. If the resulting distribution effectuates the settlor’s intent and the purposes of the trust, then nothing further needs to be done. If, however, the trustee determines that by distributing only the trust’s income she is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may adjust between principal and income to the extent necessary.

Front 107

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Uniform Principal and Income Act: Factors to be Considered

Back 107

In deciding whether and to what extent to exercise the adjustment power, the trustee must consider the following factors:
1. The nature, purpose, and expected duration of the trust,
2. The intent of the settlor,
3. The circumstances of the beneficiaries;
4. The needs for liquidity, regularity of income, and preservation and appreciation of capital; and
5. The nature of the trust’s assets

Front 108

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Uniform Principal and Income Act: Adjustment Not Permitted If Result Would Be Adverse Tax Consequences

Back 108

The trustee may not make an adjustment if the trustee is a beneficiary of the trust, as this would give the beneficiary a general power of appointment for estate tax purposes, and the trust assets would be taxed in the beneficiary’s estate. Also, an adjustment cannot be made if the adjustment power would disqualify the trust for a federal estate tax marital or charitable deduction.

Front 109

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts

Back 109

In general, the allocation rules follow traditional accounting rules; e.g., net rental income is income and the proceeds of sale of a trust asset are principal.

Front 110

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts: Receipts from Entity

Back 110

MONEY received from an entity such as a corporation (e.g., cash dividends) is characterized as income unless the money is characterized as a capital gain for federal income tax purposes, or is received in partial or total liquidation of the entity. ALL PROPERTY OTHER THAN MONEY received from an entity (e.g., stock dividends) is characterized as principal.

Front 111

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts: Insurance Policies and Other Contracts

Back 111

Proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary is allocated to principal. If a contract insures the trustee against a type of loss, the proceeds are allocated to income. Dividends on an insurance policy are allocated to the account from which the premiums are paid.

Front 112

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts: Deferred Compensation—Ten Percent Default Rule

Back 112

For periodic receipts from a deferred compensation plan (e.g., pension plan), the receipt is income to the extent that the payment is characterized by the payor as income, and the balance is principal. If no part of the payment is characterized as income or as a dividend, 10% of the payment is characterized as income and the balance is principal.

Front 113

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts: Liquidating Assets Such as Patents, Copyrights—Ten Percent Rule

Back 113

A “liquidating asset” is an asset whose value will diminish over time because the asset is expected to produce receipts over a limited period. Proceeds from such liquidating assets (e.g., patents, copyrights) are allocated 10% to income and 90% to principal.

Front 114

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts: Mineral Interests—Ten Percent Rule

Back 114

For most oil, gas, mineral lease, and water right payments, receipts are allocated 10% to income and 90% to principal.

Front 115

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Receipts: Unproductive Property

Back 115

Under the former law, if a particular trust asset produced little or no income, on the asset’s sale, the income beneficiary was entitled to a portion of the sale proceeds under the principle of “delayed income.” Because the prudent investor rule looks to the TOTAL RETURN FROM THE OVERALL PORTFOLIO, the unproductive property rule was repealed except for certain trusts that are intended to qualify for the estate tax marital deduction.

Front 116

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Expenses: Expenses Charged to Income

Back 116

The following expenses are charged against income: one-third of expenses for investment advisory or custodial services to the trustee; all or a portion of expenses for any proceeding that concerns primarily income; ordinary expenses incurred in the administration, management, and preservation of trust property; and insurance premiums covering the loss of a principal asset.

Front 117

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Allocation of Expenses: Expenses Charged to Principal

Back 117

The following expenses are charged against principal: the remaining expenses for investment advisory or custodial services to the trustee; the trustee’s compensation; payments on the principal of a trust debt; all expenses, accountings, and judicial proceedings involving both the income and remainder interests or that concern primarily principal; expenses incurred in connection with the settlement of the decedent’s estate; and disbursements related to environmental matters.

Front 118

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Conversion of “Income” Trust to Four Percent Unitrust

Back 118

To address concerns that an “income only” trust may not provide substantial economic support to the primary beneficiary, a trustee may convert such a trust into a 4% unitrust if the trustee obtains:
1. The consent of all persons interested in the trust, and
2. Court approval

Under a 4% unitrust, instead of receiving the trust’s income, the beneficiary receives an amount equal to 4% of the value of the trust principal, valued annually.

Front 119

Trust Administration: Allocation of Receipts and Expenses Between Income and Principal Accounts: Conversion of “Income” Trust to Four Percent Unitrust: Factors to be Considered by Court

Back 119

In deciding whether to approve a conversion, the court will consider:
1. The nature, purpose, and expected duration of the trust;
2. The intent of the settlor;
3. The circumstances of the beneficiary;
4. The needs for liquidity, regularity of payment, and preservation and appreciation of principal; and
5. The nature of the trust’s assets.

Front 120

Trust Administration: Virtual Representation

Back 120

The doctrine of virtual representation permits the representation of minor or unborn beneficiaries with contingent interests in a trust by an adult beneficiary who has the same or similar interest, thereby eliminating the need for appointment of a guardian ad litem.

Front 121

Trust Administration: Virtual Representation: Representation of Class Interests

Back 121

If a gift is made to a class, with class members to be determined upon the happening of a future event, it is necessary to serve only persons in being who would constitute the class if the event occurred immediately before the commencement of the proceeding.

Front 122

Trust Administration: Virtual Representation: Representation of Alternate Contingent Interests

Back 122

If two parties have identical alternate contingent interests, the party with the second contingent interest need not be served.

Front 123

Trust Administration: Virtual Representation: Powers of Appointment

Back 123

Where a party to the proceeding has a power of appointment, it is not necessary to serve the potential appointees or takers in default of appointment.

Front 124

Trust Administration: Virtual Representation: Remainderman with Income Interest Cannot Represent Other Remaindermen

Back 124

A remainderman who has an income interest CANNOT virtually represent other remaindermen.

Front 125

Trust Administration: Virtual Representation: Trustee-Beneficiary Cannot Virtually Represent Other Beneficiaries

Back 125

A beneficiary who is a trustee CANNOT virtually represent other beneficiaries with contingent interests.