Wa Bar Trusts

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What is a trust?

Back 1

an arrangement for management of property where the property is held by a trustee for the benefit of the beneficiaries.

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Terminology

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• Settlor (Transferor of property and forms agreement to create trust)
• Trustee (Holds legal title to the property but owes fiduciary duty to the beneficiary to carry out the instructions of the settlor)
• Beneficiaries (Have an equitable interest, Settlor can be a beneficiary but cannot be the trustee and serve as the sole beneficiary)
• Trust Res (property transferred to the trust)
• Trust Agreement (terms of the trust that will govern trustee’s administration of the trust).

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Types of Trusts

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• Inter Vivos (living), Testamentary (death), Revocable or irrevocable
• Express trust (Settlor expresses intention to establish trust)
• Resulting trust (Failure of the express trust, held for settlor’s heirs)
• Constructive trust (Equitable remedy when one person holding property from another and it is unconscionable for them to keep it).

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Formation of a trust

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Must have (i) trustee, (ii) a beneficiary, (iii) Trust property (Res), (iv) intention on the part of the settlor to create a trust, and (v) valid trust purpose. Intervivos trust Does not need to be in writing or witnessed. Settlor cannot exclusively be the trustee and the beneficiary. Irrevocable unless unless the settlor includes an expres power to revoke in the original trust instrument.

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Rights of Beneficiaries/Creditors

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Distribution rights to beneficiaries can be mandatory or discretionary
Spendthrift Trusts
• No involuntary alienation except for child support or necessities
• All but self-settled trusts are spendthrift by statute
• Express spendthrift clauses protect against both involuntary & involuntary alienation
• Protection exists only for so long as assets are in the trust. Once paid or payable, creditors can reach.
• Creditors cannot compel a trustee to exercise discretion

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Modification/Termination of irrevocable trusts

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Settlor Available:
Power to revoke/modify omitted by mistake OR settlor & all beneficiaries agree

Settlor Unavailable
Administrative Modification - Allowable
Distributive Modification - Need:
Unforeseen circumstances would defeat or substantially impair accomplishment of trust purposes and changes justified to carry out trust purposes

Termination - Claflin Rule: All beneficiaries consent & would not be contrary to a material purpose of the settlor;
HOWEVER procedure for nonjudicial settlement agreements can terminate!

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How to get agreement of unborn/Minors

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• Virtual Representation: If competent beneficiary’s interest is same, then adult beneficiary can bind the contingent beneficiaries.
• Guardian: If minor/unborn beneficiaries’ interest are different, agreement can be obtained by appointment of Guardian, or Guardian Ad Litem, Or a Special Representative.

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Removal of trustee

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Generally only allowed for cause such as: serious breach of trust, Dishonesty, Lack of capacity to administer.
Friction between trustee & beneficiaries not enough. Hardest to remove when appointed by settlor. Terms of trust can specify Grounds for removal and/or give authority to replace.

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What if no successor trustee is named in the trust?

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The Court will appoint one. Trust will not fail unless it clearly appears that the trust is only to continue so long as the original designated trustee continues to survive. Court will appoint one to carry out testator's intention. No specific right of spouse to be trustee.

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Power of the trustee

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extensive powers granted by statute, can be expanded or limited by trust instrument.

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Duty of Loyalty

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• Trustee must act solely in the best interest of the beneficiaries, self-dealing is prohibited w/o further inquiry unless beneficiaries consent or ratify, grantor allows self-dealing entrusts instrument, court gives advance approval, statutory exceptions for corporate trustees

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Duty of Care (IDIDSPA)

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• Invest Prudently (modern portfolio theory)
• Diversify Appropriately (except as provided by trust or for original trust assets unless imprudent to retain)
• Impartiality to Beneficiaries (under productive property & discretion between principle and income unless also a beneficiary)
• Delegate Responsibly (not liable for agent’s investment decisions if trustee exercises due care in selecting & reviewing agent’s performance.
• Separate and Earmark Trust Property (cannot commingle)
• Preserve Trust Property (must keep property adequately insured)
• Account & Keep Informed (Send an accounting at least annually, unless trust agreement says otherwise) Also rememver significant nonrountine transactions

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Significant nonroutine transactions

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"significant nonroutine transactions" require both written advance notice & appraisal and include transactions affecting real estate > 25% of total trust assets, sale of tangible personal property > 25% of total trust assets, sale of closely held stock, sale of stock representing >= 25% interest in a public corporation, or sale of stock causing trust to lose controlling interest)

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Charitable Trusts

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Characteristics (charitable purpose; may last forever; does not need an ascertainable beneficiary; courts have more flexibility to modify under cy pres; tax benefits)
• Cy Pres (courts can modify if grantor had general charitable intent & implementation as written is impractical or impossible)
• Enforcement (AG has standing, grantor does not)

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Future interest

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Rule Against Perpetuities (trusts may last for 150 years; if not vested by then, terminates & assets distributed consistent with trustor's intent)

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Powers of Appointment

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• General (exercisable in favor of donee, his estate, his creditors, or the creditors of his estate)
• Limited or Special (any power that is not exercisable in favor of the above four)
• By Deed or Will (exercisable during life or at death)
• Donee of power does not have to have any other interest in the trust
• NOT a fiduciary power
• Trust failure due to unascertainable beneficiaries can be re-characterized as a power of appointment

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Venue

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Venue is proper in:
• Superior Court in which the situs of the trust is located, or
• The superior court of the county in which the trustee resides, or has its principal place of businesses.