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66 Cards in this Set

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  • Back
Define Trust
Trust = arrangement for making gifts of property and for management of assets, under which
• trustee holds legal title to trust assets and burdens of ownership (duty to manage, safeguard, insure, invest, etc);
• beneficiaries have equitable title and all the benefits of ownership
What are the basic creation requirements for a trust?
1. settlor delivers trust property to a trustee for benefit of beneficiaries, with the intent to create a trust.
- trust must be for a lawful purpose.
- No consideration is required
- key characteristic: separation of legal title from beneficial enjoyment
Who can be a settlor?
Anyone with legal capacity (age 18 or over; capacity to convey title to trustee)
What is the delivery requirement for trusts? To what kind of trusts does it apply?
1. does not apply to self-declaration of trust or testamentary trust
2. apples to any lifetime (inter vivos) trust that names 3rd party as trustee.
3. Mere INTENT to create trust isn’t enough: must be delivery of subject matter of trust, with intent to convey LEGAL TITLE to the trustee.
What is the basic requirement of the existence of trust property?
The subject matter of the trust must be certain and identifiable.

If there is no trust property, there is no trust!

If one has only an EXPECTANCY that one will receive property, cannot have a valid trust for that property.

HOWEVER: if a promise to hold property is supported by consideration, then K law comes into play.
Are trust assets subject to claims of the trustee’s creditors? Explain.
B/c a trustee hold legal title only, trust assets are NOT subject to claims of the trustee’s creditors, even if the trustee becomes bankrupt or insolvent.
What happens if there is a trust, but no trustee?

If the intention to create a trust is clearly manifested, by no trustee is named (or if named trustee dies and no successor trustee is named), the Court will appt a trustee.
How can a trustee accept trusteeship?
Acceptance can be manifested by a writing (trustee’s signature)

In the absence of a written acceptance, there can be acceptance by CONDUCT (if trustee performs trust duties, or exercises a trust power)

BUT: a person designated as trustee may, w/o accepting trusteeship, inspect the trust property to determine potential liability under environmental law. This does not constitute acceptance by conduct.
Is a trustee required to post bond?
Not usually.

not required to post a fiduciary bond to secure faithful performance of her duties, unless a court finds that bond is necessary to protect the interests of the beneficiaries.

Corporate fiduciaries are never required to give bond, even if required by the terms of the trust
What is the basic rule for who the benbeficiaries of a trust can be?
If a trust is non-charitable, the beneficiaries must be:

1. definite and ascertainable, AND
2. their interests must vest within the period of the Rule Against Perpetuities and
3. they must be named in the trust instrument – can’t figure it out by parole testimony.
What happens if a trust lacks ascertainable beneficiaries?
the trust assets are placed in a resulting trust

A resulting trust is NOT A TRUST – it’s merely a term courts employ when a trust fails.
What is the RAP? how does it apply to trusts?
No interest is good unless it must vest, if at all, no later than 21 years after some life in being at creation of the interest (Plus any periods of gestation involved in the case)

The interests of beneficiaries must vest within the RAP, UNLESS:

a settlor can provide that the RAP does not apply to personal property held in a trust if the will or trust so specifies

VA has turned this into a default rule for personal property
Does VA follow the RAP?
Yes and no.

VA has enacted the Uniform Statutory Rule Against Perpetuities. (USTRAP).

Under the Act, an interest is valid if:
i. Under the common law RAP
ii. The interest actually vests OR terminates within 90 years after the interest’s creation

Effectively, this provides for an alternate vesting period of 90 years. under common law rule, we don’t wait and see; but under USTRAP, application of the common law rule is only the first step. Next, wait and see what happens over the next 90 years. If it actually vests, then it’s valid.
What kind of language is NOT valid to create enforceable trust terms?
Precatory language.

If the terms of a trust use precatory language, the term is not valid.

Precatory language = words that are merely a suggestion or a hope.

Common precatory words:
i. Wish and desire
ii. Request
iii. Hope
iv. I would like
What specific words are needed to create a trust?
no particular words are needed to create a trust

a settlor does NOT need to use the words “trust” or “trustee”
What happens if a trust has an unlawful purpose?
It is invalid
WHat happens if a trust has an unlawful condition?
The condition is invalid
What are the most common examples of unlawful conditions in trusts? What is the remedy if such a consdition is included in the trust?
2 unlawful conditions that courts will always refuse to enforce:

- Invalid Condition #1: can’t condition a trust on divorce. Against public policy.

- Invalid Condition #2: can’t condition a trust on a term that presents a total restraint on marriage (e.g., remaining “single and celibate”)

NB: only a total restraint is invalid. Partial restraints are fine.

Remedy: If such an invalid condition is included, the beneficiary takes the property free of the condition.
Are oral trusts valid.
Only in rare circumstances:

In VA, oral trusts of REAL property are VALID IF proved by CLEAR AND CONVINCING EVIDENCE of the intent to create the trust.
Are trusts revocable? Explain.
For VA trusts created on or after July 1, 2006, any I-V trust is revocable, and CAN be amended by the settlor UNLESS expressly made irrevocable and unamendable.

all trusts created BEFORE July 1, 2006 are irrevocable and unamendable UNLESS the power to revoke or amend was expressly retained by the settlor.

A conservator of an incapacitated settlor (or the settlor’s guardian, or agent under a durable power of attorney) may revoke or amend a revocable trust distribution of trust property ONLY:
If expressly authorized by the trust OR
If authorized by the court for good cause shown
What do you call a will that make a gift to an existing trust?
Pourover will
Is a bequest of assets to an IV trust created before, concurrently, or after the will’s execution valid?
Yes - even if the trust is subject to revocation or amendment and is, in fact, later amended, AND Even if the trust is unfunded during the settlor’s lifetime.
What do you call a trust in which a settlor names herself as trustee?
Self-declarations of trust

VA recognizes self-declarations of trust
What is the S of L on challenging the validity of a revocable trust?
Action contesting the validity of a revocable trust must be brought within the earlier of:

2 years after the settlor’s death OR
6 months after the trustee sends the person a copy of the trust instrument, trustee’s name/address, & notice of time allowed for contesting the trust
What happens if H&W own stock as JTs, later divorce, and one claims that they did not intend to make a gift of one-half the securities to the other?
as a general rule, the donee has B of P to show by CLEAR AND CONVINCING EVIDENCE that a gift was intended.

BUT when H registered the securities in JT form, this is PRIMA FACIE EVIDENCE that a GIFT WAS INTENDED b/c it was H&W
What is a springing durable poer of attorney
A Durable power of attorney authorizes another person to act on behalf of the principal.

This authority is not affected by the principal’s incapacity if it states as such.

Springing durable power – “This power of attorney becomes effective upon my disability or incapacity.”

Power of attorney automatically terminates on death of principal,

BUT 3rd parties who act in reliance on a durable power w/o actual knowledge that it has been revoked or that the principal has died are protected
What are the rules for the creation of a charitable trust?
FOUR RULES for charitable trusts:
1. Not subject to RAP; can be perpetual
2. Must be for a charitable purpose
3. Cannot be for the benefit of identifiable indivs (must be for a reasonably large # of unidentifiable members of the public at large)
4. Cy pres applied to achieve purposes of trust if original charitable purpose can no longer be accomplished (aka doctrine of equitable approximation)

NO requirement of ascertainable beneficiary. A specific charity or charitable organization does NOT need to be named, as long as a valid charitable purpose is stated.
How are charitable trusts enforced?
VA attny general charged w/ supervision and enforcement of charitable trusts
What is cy pres? how is it applied?
Modification of the terms of a charitable trust to carry out, as closely as possible, the settlor's general charitable intent.

UTC: If a particular charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful,
a. The trust does not fail in whole or in part
b. The trust property does not revert to the settlor or the settlor’s successor’s in interest, and
c. The court may apply cy pres to modify or terminate the trust by directing that the property be applied or distributed, in whole or in part, in a manner consistent with the settlor’s charitable purposes.

2. Cy pres presupposes the finding of a general charitable purpose
a. Applied when the specific direction can no longer be accomplished, but we do not want to frustrate the general charitable intent
b. reform trust to carry out settlor’s specific instruction as near as possible while giving effect to their general charitable intent
c. How it’s done: hearing w/ attny general.
If there’s a clause in a charitable trust that if the property ceases to be used for the specific stated purpose, then it reverts to the settlor/successors, what happens?
depends on the length of time that have passed since the trust was created:

1. the property reverts to the settlor, if the settlor is still living
2. the property reverts to the settlor’s successors if the settlor is dead and fewer than 21 years have passed
3. if more than 21 years have elapsed since the trust was created, apply cy pres in EVERY CASE.
Can animals be beneficiaries of a trust?
OLD VA law: Animals and objects can’t file lawsuits, so it’s a fully valid trust
An honorary trust would result instead. Not wholly invalid. RAP problem. You have to use human lives.
Honorary trusts were valid in the sense that if the trustee chose to perform, they could do so

NEW UTC provision, as of July 1, 2006: trusts to benefit animals AND objects are valid if created after July 1, 2006!

i. only animals alive during T’s life
ii. trust terminates on the death of the animal (or tha last-surviving animal)
iii. individuals named in the instrument creating the trust can be used as measuring lives for RAP purposes.
iv. Enforceable by a person named in the trust or appted by a court
v. Trust property not used for animal’s care if distributed to the settlor, if living; otherwise by settlor’s will or intestacy.
Can objscts be beneficiaries of a trust?
Yes -- same as with animals.
What happens if the beneficiary of a will was the one who murdered the testator?
the Slayer Statute applies.

A killer forfeits their interest in the victim’s estate if they are convicted of murder.

applies across the board – to wills, intestacy, life insurance, trusts, etc.

A killer’s portion of the victim’s estate does NOT pass to their children by Representation in VA!

What happens if the beneficiary of a will was the one who killed the testator (voluntary manslaughter, not murder)?
A constructive trust will be applied.

If a person is convicted of voluntary manslaughter – or plea bargains – they probably won’t inherit under a will or intestacy b/c:

wrongful conduct + unjust enrichment = constructive trust

- same result as slayer statute, but not statutorily based.
What is a constructive trust?
Constructive trust is NOT A TRUST. It is the name given to a flexible equitable remedy designed to disgorge unjust enrichment resulting from wrongful conduct.

Apply whenever the facts pattern shows wrongful conduct that led to unjust enrichment.
What is a purchase money resulting trust?
Arise when A pays the purchase price for land, but causes title to be taken in B’s name.

If A and B are not related, a presumption arises that A did not intend to make a gift to B, but instead did it for another purposes = pmrt presumption

Evidence is admissible to overcome the presumption by clear and convincing evidence that the reason was:
i. gift OR
ii. loan of purchase price

If A & B are related under the able scenario, it is presumed to be a gift; no presumption of PMRT if A&B are related. presumption can be rebutted; requires C&C evidence that it was NOT a gift.
What is a spendthrift clause?
A spendthrift clause protects a trust beneficiary’s interest from creditors by prohibiting voluntary assignment or involuntary transfer of the beneficiary’s interest
What kinds of creditors CAN reach the assets of a spendthrift trust?
i. Child support obligations*
ii. Lawyers who provided legal services for the protection of the beneficiary’s interest
iii. Claims of US Government
iv. Claims of state agency for reimbursement for public assistance, including medical assistance (unless beneficiary has a mental/ physical disability that impairs their ability to provide for their care and custody)
can the assets of a spendthrift trust ever be reached by creditors (other than the creditors who are exceptions to the rule)?
Trust income CAN BE reached AFTER it is distributed to the beneficiary.

Then it is no longer subject to the trust or its spendthrift clause
If a creditor of a beneficiary sues the settlor as guarantor, and seeks to reach spendthrift trust principal, can they get it?
as to any interest retained by the settlor, there is NO spendthrift protection

The entire trust may be vulnerable if the settlor retained power to revoke.

Settlor’s creditors cannot reach interests irrevocably transferred to others. Settlor doesn’t own that anymore.

EXCEPTION: fraudulent transfer (Transfers made with intent to defeat, delay, or defraud creditors)
What is self-dealing with regard to trustees? What are trustees not allowed to do?
Examples of self-dealing:
a. Trustee cannot buy or sell trust assets to herself
Eg, can’t, under deed of trust, buy the property at foreclosure sale
b. Trustee can’t borrow trust funds
c. Trustee can’t loan funds to the trust. Any interest earned on such a loan must be returned to the trust. Any security interest received as part of the loan is invalid.
d. Trustee can’t profit from serving as trustee (except for being compensated)
e. Corporate trustee can’t buy its own stock as a trust investment. BUT, a bank can RETAIN its own stick if it was part of the estate when the trust was created, PROVIDED that retention of the stock is PRUDENT.

Self-dealing rules apply to loans or sales to a relative of the trustee, AND to business entity of which trustee is an officer, employee, partner, principal shareholder (aka, indirect self dealing)
What is the S of L for actions against a trustee?
1 year if, and only if, the trustee gives the beneficiary a report that:
1. discloses facts that show the existence of a potential breach of trust, and
2. informs the beneficiary of the time allowed for commencing an action

In ALL other cases, the S of L is 5 years after the first to occur of:
i. Trustee’s removal, resignation, or death,
ii. Termination of the beneficiary’s trust interest, OR
iii. Termination of the trust
What are the trust rules that CANNOT be waived by the settlor?
a. Requirements for the creation of a trust
b. Duty of a trustee to act in good faith and in accordance with trust purposes
c. Requirement that a trust have a purpose that is not unlawful, not contrary to public policy, and not impossible to achieve
d. Existence of a court’s jurisdiction to modify or terminate a trust, remove a trustee, require a fiduciary bond, or adjust/deny a trustee’s compensation
e. Settlor can’t modify a spendthrift provision o as to limit the rights of certain creditors
f. *** settlor cannot include an exculpatory clause that relieves liability for acts committed in bad faith or with reckless indifference, or insert an exculpatory clause that relieves liability for ordinary negligence w/o adequate communication to the settlor.
g. Settlor can’t limit the protection of persons dealing w/ the trustee
h. Can’t limit the S of L for commencing a judicial proceeding
i. Can’t limit the court’s power to take such action and exercise such jurisdiction as may be necessary in the interests of justice.
What are some of the remedies a court can order if it finds there has been a breach of trust by a trustee?
1. Compel the trustee to perform her duties
2. Enjoin the trustee from committing a breach of trust
3. Compel the trustee to redress a breach of trust, including compelling the trustee to pay $ or restore property
4. order the trustee to give an accounting
5. remove the trustee; appoint a successor trustee or receiver
6. reduce or deny compensation to the trustee
7. impose a constructive trust, trace trust property which the trustee wrongfully disposed of, void an act of the trustee; or
8. *** “order any other appropriate relief”
What are the duties imposed on trustees under the VA Trust Code?
1. Duty to act prudently
2. Duty of impartiality in relation to income beneficiaries and remaindermen in investing and managing the trust property
3. Duty to control and protect trust property, including the duty to acquire liability insurance on trust assets, if a prudent person would insure them
4. Duty to collect trust property and enforce and defend claims
5. Duty to segregate trust property form trustee’s own property, and duty to earmark trust property by taking title in trustee’s name
6. Duty to keep adequate records regarding the trust’s administration
7. Duty to keep beneficiaries reasonably informed about the admin of the trust and the material facts necessary for them to protect their interests; must promptly respond to a beneficiary’s request for info related to the trust’s administration
8. Duty to furnish a copy of the trust instrument upon request of the beneficiary.
9. For irrevocable trusts created after July 1, 2006: 60-day notice provision.
a. W/in 60 days of accepting trusteeship, trustee must send to permissible distributes, and other requesting beneficiaries:
i. A report of the trust property, liabilities, receipts, and disbursements (including trustee compensation), AND
ii. A listing of the trust assets and their market values
10. Accountings – duty to furnish an annual report to permissible distributes and requesting beneficiaries
a. Benef. can waive right to annual report, and right to be kept reasonably informed of the trust’s administration.
What powers does a trustee have?
VA Trustee Powers Act: “VA’s UTC, which applies to all trusts in VA except to the extent the trustee’s powers are expanded or limited by the settlor, give broad fiduciary powers to the trustee. Specifically, the Trust Code expressly authorizes a trustee to do [whatever the question involves].”

Trustee does NOT have power to do X if:
1. there was self-dealing
2. there was an imprudent investment
What is the current rule with regard to trustee investments of trust assets?
under the Uniform Prudent Investor Act - based on the modern portfolio theory of investing - a truste must invest prudently.

“prudence” is measured by conduct when the investment decision was made. The investment must fit the overall investment strategy for the trust.

Trustee has to have a custom tailored investment strategy for each trust.

What are the factors to be considered when a trustee implements an investment strategy for each trust?
1. general economic conditions
2. possible effect of inflation or deflation
3. expected tax consequences of investment decisions or strategies
4. **the role that each investment plays within the overall trust portfolio
5. ** the expected total return from income and capital gains
6. needs for liquidity
7. an asset’s special relationship or value to the purposes of the trust or beneficiary
8. any differing interests of the income beneficiaries and the remaindermen
How are investment returns on a trust measured?
Under UPIA, investment returns are measured by TOTAL RETURN, including growth and capital gain, as well as ordinary income.
WHat is the adjustment power?
Under the Uniform Principal and Income Act, a trustee can exercise adjustment power and allocate capital gains to income!

If trust says “income to W for life,” then trustee first distributes “income” items (interest income, rental income, dividends, etc) to income beneficiary. THEN trustee adds capital gains to corpus of the trust.
Factors to be considered in exercising the adjustment power?
i. Purpose and expected duration of the trust
ii. Intent of the settlor as to respective interests of the beneficiaries
iii. Net amount of ordinary income and capital gain available for allocation
iv. Circumstances of the beneficiaries
v. Need for liquidity, regularity of income, & preservation and appreciation of capital
vi. Any increase or decrease in the value of the trust assets
vii. Whether the trust gives the trustee power to distribute principal
viii. Effect of economic conditions and effects of inflation/ deflation, AND
ix. Anticipated tax consequences of an adjustment
Exam language if a question relating to trustees' investment approach comes up:
“under the Uniform Prudent Investor Act, invest for total return. Prudence is measured by conduct in making investment decisions at the time the investment is made, not by hindsight based on outcome or performance. Under the Uniform Principal and Income Act, a trustee can exercise adjustment power in favor of an income beneficiary where appropriate, and can allocate capital gains to income.”
Can a trustee delegate their powers/duties?
YES - A trustee may delegate powers and duties – INCLUDING the investment power).
i. Trustee not liable for any actions taken by the agent if the trustee exercised reasonable care in:
i. Selecting the agent
ii. Establishing the terms of the delegation, AND
iii. Periodically reviewing the agent’s actions.
How are receipts allocated to a trust?
In allocating receipts, for receipts from mineral leases, patents, copyrights, book royalties, and other assets that produce income from deferred compensation (pension & profit-sharing plans, 401Ks, IRAs): 10% is allocated to income, and 90% to principal
How are expenses charged to a trust?
A trustee is entitled to “reasonable compensation.”
For a trustee’s commissions, expenses for accountings, and judicial proceedings:
i. ½ is charged to income, and ½ is charged against principal

Ordinary expenses are charged against income. E.g.:
i. Account expenses that come up every year
ii. Property taxes
iii. Casualty insurance premiums
iv. Ordinary repairs
v. Mortgage INTEREST payments

Capital expenses are charged against and paid from principal. Eg:
i. Extraordinary expenses
ii. Capital improvements
iii. Environmental expenses
iv. Mortgage PRINCIPAL payments
If two beneficiaries are at odds as to how best to invest trust assets, a trustee can help find a middle ground - how?
by converting the trust into a total return unitrust.

No court approval needed

Only requirement is for the trustee to give notice to the beneficiaries. Eliminates prospect of a beneficiary being unhappy with a trustee’s decision to exercise or not exercise an adjustment power.

Administration of trust simplified – no more allocation of receipts/ expenses. Just have to determine net value of trust assets on valuation date, then apply the unitrust percentage to that amount.
Is a trustee liable for torts committed while administering a trust?
A trustee is not personally liable for torts committed in the course of administering a trust UNLESS the trustee was PERSONALLY at fault.
Is a trustee personally liable on Ks they enter into?
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 K. (Eg, the other party doesn’t know they are dealing with a trustee.)
What happens if there are multiple trustees, and they don't agree on what course of action to take?
Majority rules if there are 2 or more trustees (absent a contrary provision)
What special duty do co-trustees have?
Each co-trustee has an affirmative duty to prevent a breach by co- trustees.

If a co-trustee is concerned about an action about to be taken by other trustees, they should:
i. Not participate in the transaction
ii. Express dissent IN WRITING
What is the rule for Modification and Termination of a trust during settlor’s lifetime?
If the settlor and all beneficiaries consent, a court can order modification or termination of a trust, even if that modification or termination is inconsistent with a material purpose of the trust

Rationale: if all parties (incl. settlor) agree it should be modified/ terminated, there’s no point in continuing trust under its current terms
What is the rule for Modification and Termination of a trust after the settlor's death?
If all beneficiaries consent, a trust can be modified if a court finds that the modification is NOT inconsistent with a material trust purpose, and terminated if the court finds that the continuance of the trust is not necessary to achieve any material trust purpose.

Modification or termination may be approved, even if not all beneficiaries consent if a court finds that:
a. the test for modification or termination would have been met if all beneficiaries had consented, AND
b. the interests of a beneficiary who does not consent will be protected.
Can a trust be modified or terminated w/o all beneficiaries’ consent?
Yes - under several circumstances:

1. Unanticipated Circumstances - On petition of trustee or benef, court may modify or terminate a trust if, b/c of circs not anticipated by the settlor, modification or termination will further the purposes of the trust

2. Inability to Administer Trust Effectively - On petition of trustee or benef, court may modify or terminate a trust if continuation of the trust on its existing terms would be impracticable or wasteful or would impair the trust’s administration.

3. To achieve settlor’s tax objectives - The court may modify a trust in a manner that achieves the settlor’s tax objectives

4. In addition: a trust may terminate:
i. If no trust purpose remains to be achieved, OR
ii. If the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve.
WHat happens if there is an uneconomic trust?
Termination without court approval: If the value of the trust is less than $100,000, the trustee may terminate the trust w/o court approval if the trustee concludes that the value of the trust is insufficient to justify the administration costs. Trustee must first give notice to the qualified beneficiaries.

2. WITH Court approval: Upon petition of the trustee or a benef, the court may modify or terminate a trust, or remove the trustee and appoint a different trustee, if the court determines that the value of the trust property is insufficient to justify the cost of administration.
Can trusts be divided or merged?
Yes, no court approval needed.

After giving notice to qualified beneficiaries, a trustee may, w/o court approval, combine two or more trusts into a single trust, or divide a trust into 2 or more trusts, if the result does not adversely affect achievement of trust purposes. The merger/division can be for tax purposes or for any other purpose.
Can a court reform the terms of a teust?

The court may reform the terms of a trust, even if unambiguous, to conform to the settlor’s intention, if it is proved by C&C evidence that both the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, whether in expressing the terms of the trust or in inducement