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33 Cards in this Set
- Front
- Back
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Trust - Definition
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Arrangement for making gifts of property and for management of assets, under which trustee holds legal title to trust assets for the benefit of beneficiaries
Trustee has all of the burdens of ownership (duty to manage, invest, insure, safeguard, etc) Beneficiaries have equitable title and all of the benefits of ownership |
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Creation of Trust
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In Texas, express trusts are governed by Texas Trust Code
Trust instrument in TX is valid when: 1. it is in writing and satisfies the Statute of Frauds 2. There is a settlor (grantor with legal capacity) 3. It identifies a beneficiary (although trust beneficiary may assign any interest she may have in trust income or principal) 4. It appoints trustee 5. It designates trust property (corpus or res) and that property was delivered to trustee 6. It is for lawful purpose Trusts may be rendered unenforceable if they are obtained through undue influence, fraud, duress |
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Trustee
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1. No trust ever fails for lack of a trustee
2. No one can be compelled to serve as trustee against is wishes 3. Under merger doctrine, if the sole trustee is also the sole beneficiary of the trust, the legal title and equitable interests merge, and no trust arises 4. Entitled to reasonable compensation for serving as trustee and reimbursement for all expenses reasonably incurred in administering the trust |
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Trustee by Estoppel
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Not recognized in Texas - situation where parties accept/ratify a person's assumption of trust duties and actions as "successor trustee"; person acting without accepting appointment has no authority over trust property, and can be sued for any resulting losses
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Beneficiaries
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Noncharitable trust must have definite and ascertainable beneficiaries, and their interests must vest, if at all, no later than lives in being plus 21 years
Parol evidence is not admissible to identify beneficiary - must be identifiable in trust interest |
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Intent to Create Trust
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Precatory language = suggestive, non-binding (ex. it is my wish and desire that Jim use a portion of the income to make a donation to create a memorial for the Dungeon)
No particular words needed to create a trust; it is a question of intent |
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Lawful Purpose
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3 Examples of Prohibited Trust Objectives:
1. commission of a crime 2. destruction of property 3. unlawful condition that is against public policy (ex. total restraint on marriage - but partial restraints are okay) |
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Revocable Trusts
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All inter vivos trusts are revocable and amendable by settlor unless expressly made irrevocable and unamendable - revocation or amendment must be in writing
If settlor becomes incapacitated, guardian may not revoke trust - only court can upon finding revocation is in ward's best interest Divorce revokes all revocable trust provisions in favor of former spouse (but not relatives of former spouse) unless trust is re-executed |
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Pourover Will
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Pourover will = testamentory gift to trust (adds assets to trust created by testator during lifetime)
Pourover will is valid: 1. even if trust is subject to revocation and amendment and is later amended 2. even if trust is unfunded Trust need not be in existence before or executed concurrently with will; can be created after will is signed |
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Durable Power of Attorney
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Authorizes another person to act on behalf of the principal; must be signed and acknowledged before a notary public
Principal can grant springing durable power - becomes effective upon P's incapacity Appointment of guardian of the estate for principal terminates the durable power (but a durable power of attorney to a child or trusted friend may eliminate the need to have guardian appointed) |
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Charitable Trusts
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1. Not subject to RAP; may be perpetual
2. Must be charitable purpose 3. Must be in favor of reasonably large segment of the public at large and cannot benefit identifiable individuals 4. When specific charitable purpose can no longer be accomplished, may be reformed in judicial proceeding under doctrine of cy pres ("as near as possible") 5. In any action involving charitable trust, certified copy of petition must be sent to Attorney General by registered or certified mail, so AG can decide whether to appear in proceeding (failure to give notice makes judgment voidable by AG) |
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Rule Against Perpetuities
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No interest is good unless it must vest, if at all, not later than 21 years after some life in being at the interest's creation [LIB + 21 years]
Purpose: limit duration of private trusts, and placing a check on attempts to tie up property through the creation of perpetual trusts; does not apply to charitable trusts |
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Cy Pres Doctrine
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Court may reform an interest that violates the RAP so as to carry out grantor's intent as far as possible within the limits of the Rule (within lives in being plus 21years)
Applies only to charitable trusts |
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Trust - Animal as Beneficiary
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statutory rule - only animals alive during settlor's lifetime can be beneficiaries; trust terminates on death of animal (or last surviving animal); individuals named in instrument creating trust can be used as "measuring lives" for perpetuities purposes; trust is enforceable by person named in trust or appointed by court; trust property not used for animal's care distributed to settlor if living or under settlor's will or by intestacy
Outright bequest to animal is void; animals cannot hold title to property |
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Constructive Trust
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Not really a trust; arises whenever one holding title to property is subject to an equitable duty to convey it to another person on the ground that he would be unjustly enriched if he were permitted to retain the interest
Constructive trustee's only duty is to convey the property to the person who would have owned it but for the fraud, undue influence, abuse of confidence, or mistake in the transaction that originated the problem |
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Resulting trust
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based on the implied or presumed intent of the settlor rather than on any expressed intent; trustee's only duty is to hold and convey trust property in accordance with demands of the party deemed to be the beneficiary
Resulting trust arise in three situations: 1. Purchase money resulting trust 2. Resulting trust upon failure of express trust 3. Resulting trust by reversion |
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Purchase money resulting trust
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If A pays the purchase price for land but causes title to be taken in B's name, and A and B aren't related (thereby cutting against notion that a gift was intended), presumption arises that A didn't intend to make a gift to B but had some other reason for handling the transaction this way
Presumption: B holds on a "PMRT" for A - this means A can compel a reconveyance of the property at any time |
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Resulting trust upon failure of express trust
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when an express trust fails and there is no indication of what is to be done with the trust property
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Resulting trust by reversion
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resulting trust in favor of settlor arises when the trust purpose is fully satisfied and some trust property remains or the trust makes an incomplete disposition of trust assets (simply another name for "reversion")
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Spendthrift Clauses
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Given full effect in Texas
Prohibits beneficiary from voluntarily or involuntarily transferring her interest in the trust (usually to immunize assets from claims of creditors) |
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Exceptions to Spendthrift Clauses
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1. "Cake and eat it" principle: if the settlor is also a beneficiary of a trust, a spendthrift provision doesn't prevent settlor's creditors from reaching any interest retained by her; this includes a revocable trust
2. Ks for necessaries - actually seen as benefit to beneficiary whose sole source of income is from the trust 3. Child support obligations 4. Federal tax liens |
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Discretionary Trust
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Trustee has sole discretion whether to make a distribution from the trust; not subject to any standard
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Support Trust
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-Trustee provides for beneficiary's support (housing food, school tuition) but trustee has no right to provide for luxuries
-Beneficiary may have to prove why any requested payment is necessary for his support -Likely a discretionary trust -"Level of support" is generally interpreted as the level to which beneficiary is accustomed -Creditor who furnishes necessaries can reach support trust |
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Trust Admin Issues
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Jurisdiction: district courts and statutory probate courts have concurrent jurisdiction
Venue: if an individual trustee, either county of trustee's residence or county in which situs (principal office) of trust has been maintained Accounting: beneficiaries entitled to accounting, on demand, no sooner than 12 months after trust created; then at same intervals |
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Trustee's Powers
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Texas Trust Code, which applies to all trusts in Texas except to the extent the trustee's powers are expanded or limited by the settlor, gives broad fiduciary powers to trustee; Trust Code expressly authorizes a trustee to sell, lease, assign, mortgage, drill for oil, make improvements ...
2 situations where trustee doesn't have power: 1. self dealing 2. imprudent investment |
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Self Dealing
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1. Trustee cannot borrow trust funds
2. Trustee cannot buy or sell trust assets to itself 3. Trustee cannot loan funds to the trust 4. Trustee cannot profit from serving as trustee (ex. cannot accept bonus for investing trust funds) 5. Corporate trustee cannot buy its own stock as trust asset Settlor can waive the self dealing rules, even as to corporate trustees as well as individuals named as trustees |
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Beneficiary's Options when Trustee Commits Breach of Trust
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1. Ratify transaction and waive breach of trust
2. Sue for the resulting loss; name of action is surcharge; if cases involves self-dealing, under "no further inquiry rule," breach of a fiduciary duty is an automatic wrong so the only issue is measure of damages 3. If trustee still has possession of property, beneficiary can petition for constructive trust 4-year statute of limitations doesn't begin to run on action against a fiduciary unless and until he: 1. repudiates the trust 2. dies or resigns 3. gives an accounting that makes full disclosure of the facts upon which the action is based |
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Duties of Trustee
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1. Duty of Loyalty: no self-dealing
2. Duty to Separate and Earmark Property: trust assets must be kept physically separate from trustee's personal assets (no commingling); includes duty to insure trust assets if prudent person would insure 3. Duty to Perform Personally: must personally perform functions that a prudent person would not delegate 4. Duty to Preserve and Make Trust Property Productive: must use reasonable care to invest property (prudent investor rule), collect claims due, lease/manage land, record documents, pay taxes, and secure insurance |
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Prudent Investor Rule
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speculative investments aren't prohibited or inherently bad; fact that trust investments declined in value doesn't give rise to trustee liability automatically; compliance with prudent investor rule is determined in light of the facts and circumstances existing at the time of the trustee's decision or action - not hindsight
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Exculpating Trustee
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beneficiary can exculpate trustee from liability for ordinary negligence, but not for gross negligence, bad faith, or fraud (against public policy)
Exculpatory clause by itself does not authorize self-dealing |
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Uniform Prudent Investor Act (1/1/2004)
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Under UPIA, invest for total return, taking into account potential appreciation and capital gain as well as ordinary income
Prudence is measured by conduct at time the investment decision is made, not by hindsight based on outcome or performance Trustee can exercise adjustment power in favor of income beneficiary where appropriate, and can allocate capital gain and principal to income |
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Income versus Principal
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Income: interest, rental income, cash dividends on stock, delay rentals (but royalty and bonus, allocate equitably), all money received from corporation
Principal: eminent domain condemnation award, insurance proceeds for trust property destroyed by fire, all receipts other than money from a company (ex. stock dividends) Ordinary expenses (come up every year) are charged against income: property taxes, ordinary repairs, mortgage interest payments Capital expenditures are charged against principal: capital improvements, estate taxes, mortgage principal payments |
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Revocation, Modification, Termination of Trust
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All trusts are revocable/amendable unless expressly made irrevocable or unamendable; any revocation or amendment must be in writing and signed by grantor
Beneficiaries may compel modification or termination if: 1. all beneficiaries consent and modification or termination won't frustrate any material trust purpose 2. changed circumstances Upon termination, trustee may continue to exercise trust powers for the reasonable time needed to wind up the trust's affairs and make distribution to beneficiaries; trustee entitled to reimbursement for expenses reasonably incurred in administering trust and can include attorney's fees |
