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67 Cards in this Set

  • Front
  • Back

Requirements to Create a Trust

1) Settlor
2) Trustee
3) Beneficiary
4) Property
5) Intent to create a trust (for a lawful purpose)

What informs Virginia's regulation of trusts?

Virginia has enacted the Uniform Trust Code. Although it's effective date is July 1, 2006, it applies to all charitable and noncharitable trusts created on, before, or after that date.

Settlor

The person who creates a trust.


Settlor must:


(1) be over the age of 18


(2) have the ability to convey title


(3) have proper, legal capacity

Trust Property

Must be certain and ascertainable.


Legal title to a specific interest in property must be FULLY conveyed to the trustee.

Trustee

Must be:


(1) able to take and hold legal title


(2) over the age of 18


(3) have the capacity to contract and execute deeds.



Testamentary Trustee

A trustee appointed under a valid Last Will and Testament. A nonresident individual (but not a nonresident bank) can serve as a testamentary trustee.




The nonresident trustee must appoint a Virginia resident for purpose of service of process.

What happens if a will manifests an intention to create a trust, but no trustee is named?

If no trustee is named (or the trustee dies or resigns with no provision for a successor trustee), the court will appoint a suitable successor to execute the trust.




Exception: if the settlor stated that no one but a particular trustee could serve and that trustee is unavailable, then the trust fails.

How does a trustee accept the responsibility of being a trustee?

(1) By signature accepting the trust


(2) By performing the duties of the trust




Exception: Any prospective trustee may inspect trust property to determine potential liability under environmental law; actions taken during inspection period to not constitute acceptance by conduct.

Do trustees have to post a fiduciary bond?

No, unless required by the terms of the trust.




Exception: The court may require a bond to protect the interests of the beneficiaries.




Exception to the Exception: Corporate fiduciaries NEVER have to give bond, even if required by the terms of the trust.

Intent to Create a Trust

The settlor's intent controls whether a trust was created. Intent is established if the settlor attached enforceable duties that can be supervised to the transfer of the property.

Private Trust

Trusts that benefit private individuals.




Must have definite and ascertainable beneficiaries.

Charitable Trust

Must have a charitable purpose (such as education, health, religion, government, or public good) and must benefit an indefinite number of beneficiaries.




CANNOT benefit identifiable individuals.




Not subject to Rule Against Perpetuities.

Honorary Trust

Trusts whose beneficiaries are pets and/or cemeteries (e.g. to pay for the care of a beloved pet, and the keeping of the settlor's tomb). RAP does not apply to cemeteries.




Only animals alive during settlor's lifetime can be beneficiaries, and the trust terminates on the death of the last surviving animal.

Lawful Purpose Requirement

Any trust whose purpose is to further commission of a crime, or calling for the wasteful destruction of property, is invalid as against public policy.




Unlawful conditions imposed by the terms of the trust are unenforceable (e.g. encouraging divorce).

What happens to trusts with unlawful conditions?

The beneficiary takes free of the unlawful condition; there is no resulting trust, because the settlor violated public policy.

Oral Trusts

Oral trusts of all property (including real property) are valid if the terms of the trust are proven by clear and convincing evidence.

Inter Vivos Trust

Requires all the elements of a trust:


1) Settlor


2) Trustee


3) Beneficiary


4) Property


5) Intent to create a trust (for a lawful purpose)


AND must be validly created during the lifetime of the settlor.

Revocability of Inter Vivos Trusts

All inter vivos trusts created on or after July 1, 2006 are revocable unless expressly made irrevocable and non-modifiable by the settlor.

Revocability of Inter Vivos Trust by Conservator, Guardian, or Agent

A conservator, guardian, or agent of an incapacitated settlor may revoke or amend a revocable trust distribution ONLY IF:
(1) expressly authorized by the trust, or


(2) authorized by the court for good cause shown.

Pour Over Devices

Assets from inter vivos arrangements (such as IRAs, life insurance, and trusts) may be designated by the decedent to "pour over" into the decedent's estate.




Additionally, a Last Will and Testament provision may be payable to a previously establish inter vivos trust.

Pour Over Will

A will that makes a bequest to an existing and valid inter vivos trust.


By statute, a bequest of assets to an inter vivos trust created before, concurrently with, or after the will's execution is valid even if the trust is subject to revocation or amendment and is later amended, or the trust is unfunded during the settlor's lifetime.

Self-Declaration of Trust

Where a settlor names himself as trustee AND a beneficiary, and there is another remainder beneficiary.




Used to avoid expensive guardianship or conservatorship administration, and avoid probate costs.

Statute of Limitations to Contest a Trust

Must be brought within the earlier of:


(1) two years after the settlor's death, or


(2) six months after the trustee sent a copy of the trust instrument, the trustee's name and address, and notice of the time allowed to contest the trust.

Trustee Liability During Contest of Trusts

A trustee may distribute trust property in accordance with the terms of the trust during litigation and not be subject to liability unless:


(1) the trustee knew of a pending judicial proceeding contesting the trust's validity, or


(2) a potential contestant notified the trustee of a possible judicial proceeding and the proceeding commenced within 60 days after the contestant sent notification

Beneficiary Liability

A beneficiary of a trust that is determined to have been invalid is liable to return any distribution received, but has no further liability.

Durable Power of Attorney

Authorizes another person to act on behalf of the principal, regardless of the principal's disability or incapacity.

Springing Durable Power of Attorney

The power of attorney becomes effective only upon the principal's disability or incapacity.

Termination of a Durable Power of Attorney

A durable power of attorney terminates on the principal's death, but third parties who act in reliance on a durable power without actual knowledge that it has been revoked, or that the principal has died, are protected.

Unique Features of Charitable Trusts

Enforcement of the terms of the trust rests with the attorney general of the state, or, if the settlor is alive, he may maintain a proceeding to enforce the trust.




When the charitable purpose can no longer be accomplished, it may be reformed in a judicial proceeding under the doctrine of cy pres.

Applying Cy Pres to Charitable Trusts

If a charitable purpose becomes unlawful, impossible, or wasteful:


(1) the trust does not fail;


(2) the trust property does not revert to settlor;


(3) the court may apply cy pres to modify the trust by directing that the property be reallocated to a charitable purpose that is as near as possible to the original trust purpose.

When may the settlor's heirs claim the property under a trust if the charitable trust can no longer be accomplished and the settlor mandates a resulting trust to his heirs?

(1) if it is to go to the settlor and the settlor is still living, or


(2) it may go to the settlor's heirs if fewer than 21 years have elapsed since the date of the trust's creation.

Constructive Trust

An equitable device meant to remedy a bad act. Constructive trusts arise automatically and do not require the necessary five elements of a trust.


Step 1: apply the law


Step 2: apply equity (wrongful conduct + unjust enrichment = constructive trust)


Step 3: who should take the property?

Resulting Trust

Arise because of operation of law, so the necessary five elements are not required. If it is impossible to complete the private trust's purpose, the assets of the trust "result back" to the settlor.

Purchase Money Resulting Trust

When a purchaser buys real or personal property for a recipient without any reason for doing so, a "purchase money resulting trust" results and there is a presumption that the purchaser may demand the return of the land. The presumption may be rebutted by clear and convincing evidence.




Exception: if the purchaser and recipient have an intimate or familial relation, presumption is that the conveyance was a gift, not a PMRT.

Spendthrift Trust

A trust with a clause in its instrument that restricts the ability of a creditor to reach trust assets (both income and corpus). No specific words are necessary to create it.




Exception: enforced unless restriction violates public policy.

Public Policy Exceptions to Spendthrift Trusts

(1) Child support obligations


(2) Lawyer who has provided legal services for protection of beneficiary's interest


(3) Claims of US, VA, a county, city, or town


(4) Claims of state agency for reimbursement for public assistance (including medical)


(5) Creditor may reach a mandatory distribution if trustee has not distributed in a reasonable time

Qualified Self-Settled Spendthrift Trust

Allows settlor to establish an inter vivos spendthrift trust for himself that isolates the trust assets from creditors as long as the trust is:


(1) Irrevocable during settlor's life


(2) A valid trust and has a spendthrift clause


(3) Legally authorized qualified trustee


(4) at least one other beneficiary at all times distributions may be made


(5) settlor does not have the right to disapprove of trust distributions

Trustee's Fiduciary Duty Against Self-Dealing

1) Cannot buy or sell trust assets to himself


2) Cannot borrow trust funds


3) Cannot loan funds to the trust


4) May not profit from serving as trustee (except for compensation)


5) Corporate trustee cannot buy its own stock as a trust investment

Ratification by Beneficiary

A trustee may proceed with an action that would otherwise be regarded as self-dealing if beneficiary consents after complete and full disclosure.




Exception: release is ineffective if consent is improperly induced or the beneficiary is unaware of the rights and material facts

Statute of Limitations for an Action Against the Trustee (Under Accounting)

One year, if the trustee gives the beneficiary a report that


1) discloses facts that show existence of a potential breach of trust, and


2) informs beneficiary of the time allowed for commencing an action

Statute of Limitations for an Action Against the Trustee (Under Termination)

In all other causes of action against the trustee, five years after the first to occur of:


1) trustee's removal, resignation or death


2) termination of beneficiary's trust interest, or


3) termination of the trust.

Waiver by Settlor

A settlor may waive all rules except the following:


1) reckless indifference to the purposes of the trust or interests of the beneficiaries; or


2) acts resulting from an abuse of a confidential relationship


3) trust cannot be created for an illegal purpose


4) duty of a trustee to act in good faith


5) exculpate trustee from liability for breach of trust committed in bad faith, intentionally, or with reckless indifference to beneficiary


6) limit statute of limitations


7) limit the power of a court to exercise its jurisdiction

Duties of a Trustee

1) Act prudently


2) Impartiality


3) Control and protect trust property


4) Collect trust property and enforce and defend claims


5) Segregate trust property from trustee's own


6) Keep adequate records


7) Keep beneficiaries reasonably informed


8) Furnish copy of trust instrument upon request


9) 60 day notice provision


10) Duty to furnish annual reports

60 Day Notice Provision

Within 60 days after accepting trusteeship, a trustee must notify beneficiaries of


1) the trust's existence


2) identify the settlor(s)


3) their right to request a copy of the trust instrument


4) their right to an annual report


5) trustee's name, address, and phone number

Corporate Trustee and Trust Protector Liability

In order to avoid fiduciary breach by the corporate trustee (and shift potential liability to the trust protector):


1) Settlor must incorporate the code provisions into the trust instrument


2) Corporate trustee must avoid instances of willful misconduct or gross negligence in following the trust protector's direction.

Trust Protector

A trust protector may be permitted by a settlor to make sensitive personal decisions regarding the trust, while the trust itself is managed by a corporate trustee.

Trustee Powers

If the fee simple owner of the property can perform an act in reference to the trust property, then the trustee may do so as well, as long as there is no self-dealing.

Uniform Prudent Investor Act

Utilizes a portfolio theory of diversified investments. Each element of a portfolio is deemed prudent in reference to:


1) the portfolio as a whole


2) the beneficiaries' needs


3) the terms specified by the settlor at the time of the investment (not in hindsight).




Investment returns are measured by the total return, including growth, capital gains, and income.

Trustee's Duty of Prudence

A trustee must administer the trust as a prudent person would, by considering:


1) purposes


2) terms


3) distributional requirements


4) other circumstances of the trust


The trustee must exercise reasonable care, skill, and caution.

De Facto Prudent Investments

Virginia always considers investments in Virginia bonds and obligations as prudent.




However, trustee is not restricted to any legal list when investing.

Exceptionally Skilled Trustee

If a trustee is chosen because that trustee has special skills or expertise, that trustee will be held to that level of expertise in the evaluation of prudence.

Duty of Impartiality Between Income and Remaindermen Beneficiaries

The trustee must act impartially between the income beneficiaries (who seek high income) and the remainder beneficiaries (who seek an increasing and valuable portfolio).




Accommodated by adjustment and unitrusts.

Reformation to Correct Mistakes

The court may reform the terms of a trust, even if the terms are unambiguous, if it is proved by clear and convincing evidence that both the settlor's intent and the trust terms were affected by a mistake of fact or law.

Division or Combination of Trusts

After giving notice to the qualified beneficiaries, a trustee may, without court approval, merge two or more trusts into a single trust or divide a trust into two or more trusts, if the result materially does not adversely affect achievement of the trust purposes.

Trustee's Power to Modify or Terminate Without Beneficiaries' Consent

The court may modify or terminate under the following circumstances:


1) Unanticipated Circumstances


2) To achieve settlor's tax objectives


3) No trust purpose remains to be achieved, or the purpose of the trust has become unlawful, contrary to public policy, or impossible.




The trustee may terminate the trust without court approval if


1) the value of the trust is less than $100k


2) the trust's value is insufficient to justify administration costs


3) trustee FIRST gives notice to qualified beneficiaries, those who would be income or remainder beneficiaries, or would be distributees if the trust terminated on that date.

Modification of Trust After Settlor's Death


(All Beneficiaries Consent)

If all beneficiaries consent, a trust can be modified if the court finds that the modification is not inconsistent with a material trust purpose, and terminated if the court finds that continuance of the trust is not necessary to achieve any material trust purpose.

Modification of Trust After Settlor's Death


(Not All Beneficiaries Consent)

If not all beneficiaries consent to modification or termination, the court may order it so if the court is satisfied that:


1) If all beneficiaries had consented, the trust could be modified or terminated; and


2) The interests of a beneficiary who does not consent will be adequately protected

Who may give consent to modify or terminate a trust on behalf of a settlor if the settlor is incapacitated?

1) Agent under a durable power of attorney (only if authorized by the power of attorney or trust)


2) Conservator acting on behalf of an incapacitated settlor (with court approval) only if an agent under a POA is not so authorized


3) Guardian (with court approval) only if no conservator and no POA

Modification of Trust When Settlor and All Beneficiaries Consent

A court can order a modification or termination of an irrevocable trust even if the modification or termination is inconsistent with a material purpose of the trust.

Trustee's Liability in Contract

A trustee is not personally liable on contracts entered into on behalf of the trust unless the trustee's fiduciary capacity is not disclosed in the contract (i.e., the other party does not know that he is dealing with a trustee).

Trustee Liability for Co-Trustee's Acts

A co-trustee has no liability for actions taken by the other trustees if the co-trustee dissents, does not join in the action, and notifies the other trustees.

Delegation by Trustee

A trustee may delegate powers and duties, including the investment power. The trustee is not liable for actions taken by the agent if the trustee exercised reasonable care in:
1) selecting the agent


2) establishing terms of the delegation


3) periodically reviewing the agent's actions

(Total Return) Unitrust

A trustee may, without court approval, elect to make an income trust a total return unitrust. The trustee must give notice to the qualified beneficiaries. The income beneficiary automatically receives 3-4% of the fair market value of the trust, regardless of income actually generated.

Adjustment Power

Trustee may "adjust" between capital and income to promote fairness between the two types of beneficiaries. Trustee must distribute income items (interest income, rental income, dividends, etc) to the income beneficiary and add capital gains (part of proceeds of the sale of a principal asset) to the corpus of the trust

How should the trustee distribute trust expenses?

Trustee's Fees: half charged against income, half charged against principal




Ordinary Expenses (i.e. expenses arising yearly): charged against income (e.g. property tax, ordinary repairs)




Capital Expenses: charged against principal (e.g. extraordinary expenses, improvements)

General Duties of a Trustee

Must administer a trust


1) prudently


2) in good faith


3) in the interest of the beneficiaries


4) in accordance with the terms and purposes of the trust instrument

Absolute Discretionary Trust

Under an absolute discretionary trust, a trustee has absolute discretion over how to distribute trust assets to each beneficiary; he can distribute all or none of the trust assets to any beneficiary.