Wa Bar Trusts

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Trust: Basic Definition

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A trust is an arrangement for management of property, where the property is held by one person (trustee) for the benefit of another person (beneficiary)

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Settlor

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Two functions – transferor of property, and forms agreement to create the trust

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Trustee

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holds legal title to the property but owes a fiduciary duty to the beneficiary to carry out the instruction of the trustor, there can be multiple trustees

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Beneficiaries

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can be more than one, the interest is an equitable one.

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Res

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the property transferred to the trust.

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Trust Agreement

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– sets forth the terms of the trust that will govern its administration

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Inter Vivos Trust

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one set up during settlor’s lifetime

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Testamentary trust

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established under settlor’s will at time of death

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Irrevocability

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h. Trust can be revocable or irrevocable (will be irrevocable if not stated).

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Constructive Trust

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may be created by court when person holds prop but received it unconscionably

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Residuary Trust

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failure of express trust. Like where S creates a life estate but does not name who it should go to after death

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Creation of Trust: Elements

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Intent, Trust Property, Beneficiaries Trustee, legal purpose, documentation

a. Intent to create a trust
b. Trust Property – must have trust res existing at time trust established. Exceptions for insurance trusts, or revocable trust as Will beneficiary Intent – must have intent
c. Beneficiaries
i. Must be ascertainable (“friends” is too vague) OR
ii. Charitable purpose
iii. Stat. exemption – pet trusts may be set up but pet must be vertebrate
d. Trustee
e. Purpose – must be legal
f. Documentation
i. May be oral – but not if it would violate SoF
ii. Secret/semi-secret trusts – secret trusts can be enforced, semi-secret ones cannot

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Rights of beneficiaries

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Trustee's duty may be mandatory or discretionary depending on trust agreement

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Spendthrift Trusts

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i. Statutory spendthrift – all trusts are spendthrift. Protected from involuntary alienation (attachment by creditors). Except for child support, or for those providing necessities
ii. Express spendthrift – can protect from involuntary and voluntary (assignment by beneficiary to 3rd party) assignments
iii. Exceptions – Self-settled trusts (trusts set up by a grantor for himself) cannot be spendthrift
iv. Spendthrift only protects while in trust, once out, creditors may go after. Creditors may not require the trustee to exercise discretion with management of the trust.

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Modification/Termination of Trust: If Settlor available

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i. By settlor if revocable
ii. By consent of settlor and beneficiaries, or if power to revoke/modify omitted by mistake

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Modification/Termination of Trust: If Settlor unavailable

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1. Administrative deviation allowed
2. Distributive deviation allowed only if consent of all beneficiaries and necessary for trust purpose and Unforeseen circumstances OR if pursuant to non-judicial agreement
3. Termination – Claflin Rule - allowed if consent of all beneficiaries AND no material purpose frustrated
a. Non-judicial agreement: consent of all interested parties.
b. Spendthrift clauses – material purpose
4. Unborn/unascertained beneficiaries:
a. Doctrine of virtual representation – may be represented by competent person with same interests OR
b. Appointment of a Special representative

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Removal of Trustee

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only allowed for cause such as
i. Serious breach of trust
ii. Dishonesty
iii. Lack of capacity to administer
iv. Friction between trustee and beneficiaries not enough
v. Hardest to remove when appointed by settlor
vi. Terms of trust can specify grounds for removal or give authority to replace

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Charitable Trusts

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a. Charitable purpose
b. Can last forever
c. Does not require ascertainable beneficiaries
d. Cy pres – ct. can modify charitable trust if grantor had charitable intent AND implementation as written is impractical or impossible
e. Enforcement – state atty general has standing to enforce, grantor of trust has no standing

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Trust Administration: Trustee Powers

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extensive powers granted by statute, the trust instrument can expand or limit powers

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Trust Administration: Trustee Duties - Duty of Loyalty

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trustee must act solely in the best interest of the beneficiary
1. Prohibition on self-dealing – if trustee engages in this there is no further inquiry – doesn’t matter if it was fair, it is a violation. Exceptions – beneficiaries consent or ratify, grantor allows self-dealing in instrument, court gives advanced approval, statutory exceptions for corporate trustees

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Trust Administration: Trustee Duties - Duty of Care

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1. Prudent investor rule – follow modern portfolio theory – look at overall portfolio
2. Duty to diversify – required except assets originally placed in trust by grantor – but trustee can’t keep these assets when it becomes imprudent to do so (like where stock is steadily losing value)
3. Duty of impartiality – underproductive property – trustee givien discretion to allocate between principal and income, unless trustee is also a beneficiary.
4. Duty to segregate and preserve property
5. Duty to delegate responsibly
6. Duty to preserve trust property
7. Duty to account and keep informed
a. Significant non-routine transactions
i. Duty to appraise
ii. Duty to give notice
b. Significant non-routine transactions include –
i. Transaction affecting contributed real estate, tangible personal property, or stock that is at least 25% of the total trust assets
ii. Most notify any time they are going to sell any closely held stock, or a sale of stock that will cause them to lose a controlling interest

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Future Interests: RAP

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a. Rule against Perpetuities (RAP)
i. 150 years – if at the end of 150 years the trust is still in existence and all interests have not yet vested, then the trust will terminate and the assets distributed as determined by a courts consistent with trustor’s intent

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Future Interests: Powers of appointment

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– exercisable in favor of donee, his estate, his creditors, or the creditors of his estate
ii. Limited, or special – any power that is not exercisable in favor of the above four
iii. By deed or will – exercisable during life or death
iv. Not a fiduciary power
v. If trust fails because beneficiaries are not ascertainable then it can be recharacterized as power of appointment