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68 Cards in this Set

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  • Back
Express Trust
A legal device that allows an owner of property to make transfers of property and have those assets managed on behalf of someone else
Title to Trust Property
The creator of the trust, the settlor, has legal title to manage the money and transfers that legal title to the trustee.

The beneficiaries have equitable title to enjoy distributions from the trust
Lifetime Trust
An express trust set up during the lifetime of the settlor

AKA inter vivos trust
Testamentary Trust
A trust set up in the settlor's will
Requirements for a Valid Trust
1. Settlor who makes a
2. Delivery of legal title to
3. Property to a
4. Trustee who holds legal title for the benefit of a
5. Beneficiary with
6. Intent to creat a trust for
7. A lawful purpose
8. In a validly executed document

No consideration is necessary
The settlor can be anyone 18 yrs or older, with the capacity to enter into contracts
Assets must be placed out of the control of the settlor for delivery to be valid (unless the settlor is the trustee)
Trust Property
AKA res, corpus, or principal

The property can be almost anything, but must be property that the settlor owns, not just a mere expectancy of ownership in the future

It must be identified property, not subject to future determination
Anyone who has capacity to acquire or hold title to property for his own benefit can be a trustee

Failure to name a trustee does not cause the trust to fail. The court can appoint someone as the trustee
Must be definite and ascertainable; no ambiguity

If ambiguous, the trustee holds in a resulting trust for the residuary beneficiary of a will (or intestate heirs in the absence of a valid will)

Exception: a beneficiary listed as the unborn descendant of a named individual is considered definite and ascertainable and the trust will not fail
Settlor must intend to create an enforceable obligation; precatory (non-binding) language is not enough

The trustee must be given duties to perform; if the trustee doesn't have any duties to perform it is called a passive trust, which is not a trust at all.
Lawful Purpose
A trust cannot call for the commission of a crime, the destruction of property, and cannot have a condition against public policy (trusts restricting marriage or promoting divorce)

BUT if a purpose can be found that does not violate public policy then it is valid.

Also, partial restraints on marriage are okay (restrictions on marriage to members of certain religious or ethnic groups)
Trust Execution
Trusts of land must be in writing, and signed by the settlor
Revocable Trusts
All trusts are presumed to be irrevocable unless the trust explicitly states it may be revoked

If a trust is revocable, trustee may be absolved from liability when acting in accordance with settlor's directives, because settlor is treated as the effective owner.
Requirements for Lifetime Trust
There must be at least one beneficiary who is not the settlor;

Settlor cannot be the sole beneficiary when also the sole trustee
Roles of the Settlor
1. Settlor can be a trustee
2. Settlor can be an income beneficiary for life
3. Settlor's estate can be one of the beneficiaries of the principal so long as there is at least one other beneficiary
4. Settlor can retain the power to terminate or amend the trust
Reasons to Have a Revocable Lifetime Trust
1. Manages assets efficiently, particularly using a professional trustee
2. Helps plan for possible incapacity by avoiding guardianship
3. Avoids probate
Tax Consequences of a Revocable Trust
If a settlor keeps an income interest or keeps a power to revoke, the full trust assets will be included in the settlor's gross estate for federal estate tax purposes
Pour-Over Gifts
A testamentary gift to an existing revocable trust

Requirements for a valid pour-over gift to a trust:
1. The trust must be in existence, OR
2. Executed concurrently with the will

A pour-over gift can be made by anybody, not just the settlor

Pour-over gifts are valid even if the trust was unfunded or only partially funded during the settlor's lifetime
Life Insurance Proceeds Payable to a Trust
Can be created in 2 ways:
1. The insured can create an unfunded revocable insurance trust and name the trustee of the existing trust as the policy beneficiary
2. The creator can create a testamentary trust and then have the life insurance policy name "the trustee named in my will" as the policy beneficiary

Proceeds of a savings account or pension plan can be handled the same way
Totten Trust
Bank account trust; it is a bank account in the depositor's name "as trustee for" a named beneficiary

Key things to remember:
1. Depositor makes deposits and withdrawals as he or she wishes during the depositor's lifetime
2. Beneficiary has no beneficial interest during the depositor's lifetime, but gets whatever is in the account when the depositor dies

A change in beneficiary can be made by the depositor but it must be done through a notarized statement sent to the financial institution naming the old beneficiary and the new one

Creditors of the depositor can always reach the Totten Trust account balance either before or after the depositor's death, since it is a form of revocable trust, revoked partially each time a withdrawal is made
Revocation of a Totten Trust
1. Withdraw all the money in the account
2. Manifest an intention to revoke during lifetime
3. Revoke in a will (not allowed under UPC)
4. Death of a beneficiary also results in having the Totten Trust revoked and the money in the account goes free and clear to the depositor
Charitable Trusts
1. Must have indefinite beneficiaries, and they must be a reasonably large group. The beneficiaries cannot be specifically named persons
2. Must be for a charitable purpose
3. May be perpetual (not subject to RAP)
4. Cy pres can be used to change the trust. If the stated purpose of the charitable trust can no longer be accomplished, or the designated charity goes out of existence, the court may use this to make the trust as near as possible to what the settlor wanted
5. The attorney general has the duty of representing the beneficiaries of charitable trusts in the state (AG is an indispensable party and has standing to sue to enforce the trusts terms)
Honorary Trusts
Not really trusts

Where no human being is the beneficiary of a private (non-charitable) trust. The property meant for the honorary trust falls into the residuary estate

Brings up Rule Against Perpetuities problems.
Constructive Trusts
An equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct

The trustees only duty is to convey the property to the person who, in equity, should have the property
Resulting Trust
An equitable remedy that arises when:
1. An express trust fails
2. A Purchase Money Resulting Trust (PMRT) is created

PMRT only arises when a purchaser buys property but has title put in someone else's name (who is not a relative); later purchaser claims no gift was intended and asks the title holder for the title to the property and the title holder refuses. This creates a PMRT which allows the purchaser to compel the title holder to give up title. Defenses: Gift/loan
Statutory Spendthrift Rule
Protects a trust beneficiary's interest from creditors by prohibiting voluntary or involuntary transfer of the beneficiary's interest

To provide spendthrift protection to a beneficiary, the spendthrift clause must be expressly stated in the trust
Typical Spendthrift Language
No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary's creditors by attachment, garnishment, or other legal process
Exceptions to Spendthrift Clauses
1. Creditors who furnish necessities
2. Child support and alimony
3. Federal tax liens
Self-Settled Trust Rule
Spendthrift protection does not apply to any interest retained by the settlor

All revocable trusts are fair game for settlor's creditors; even if the settlor has no immediate financial interest in the trust, but settlor retained the power to revoke, then the trust offers no protection at all against creditors of the settlor
Trust Modification by Trustee and/or Beneficiaries
Appropriate only when all the beneficiaries consent and the objectives of the trust would be defeated or substantially impaired if the trust is not modified

Claflin Doctrine: Trust may be modified by the beneficiaries only if all beneficiaries consent and the modification will not interfere with a material purpose of the trust.
Modification Test
1. Determine the primary intent of the settlor regarding the trust purposes
2. Look at specific directions in the trust instrument to determine whether, because of changes in circumstances, those specific directions in the trust would now frustrate the primary intent that is the material purpose of the trust; If so, then those directions can be changed by the court
Trust Termination by the Settlor
Trusts are difficult to terminate. They are irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust instrument
Trustee's Powers
Powers can be exercised by a trustee pursuant to:
1. The terms of the trust
2. The terms of a statute
3. By court decree

These fiduciary powers also encompass what an executor or administrator of a decedent's estate can do
Trustee Can:
1. sell any real or personal property
2. Mortgage property
3. Lease property
4. Make ordinary repairs
5. Contest compromise or settle claims
6. Do almost anything to manage the corpus of the trust
Trustee Cannot:
1. Engage in self-dealing
2. Borrow money
3. Continue a business without court authorization

The trustee is liable for losses incurred by the business unless the trustee has court approval to continue the business

When there are 3 or more trustees, trustees who dissent from the decisions of the majority of trustees will not be liable
Prohibition on Self-Dealing
1. Cannot buy or sell trust assets to himself
2. Cannot borrow trust funds
3. Cannot lend money to the trust. Any interest earned on such a loan must be returned to the trust, and any security given for the loan is invalid
4. Cannot profit from serving as trustee (except for appropriate trustee fees). Trustee cannot take advantage of confidential information received while trustee
5. Corporate trustee cannot buy its own stock as a trust investment
Affirmative Duties on Self-Dealing
1. Must segregate trust assets from personal assets. If commingled funds are used to buy an asset and the asset goes down in value there is a conclusive presumption that personal funds were used and vice versa
2. Duty to earmark trust assets by tilting them in trustee's name
Remedies for Breach of Fiduciary Responsibilities
1. Beneficiary can sue to remove the trustee
2. Beneficiary can ratify the transaction and waive the breach
3. Beneficiary can sue for any loss
4. An action to recover losses to the trust is called a surcharge
No Further Inquiry Rule
Breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made

Good faith and reasonableness are not defenses
Actions Against a 3rd Party when the Trustee Engages in Self-Dealing
If a trustee engages in a prohibited transaction, such as self-dealing, and sells trust property to a 3rd party, the beneficiary cannot sue the purchaser if that purchaser was a BFP

For the purchaser to be liable to the beneficiary, the purchaser not only has to know that she was dealing with a trustee, but also that the trustee was engaged in self-dealing
Indirect Self-Dealing
Self-dealing rules also apply to loans or sales to a relative of the trustee or to a business of which the trustee is an officer, employee, partner, or principal shareholder
Exculpatory Clauses
These are clauses that attempt to relieve a trustee of liability for a breach of a fiduciary duty

They can't be used to shield the trustee from all liability (void as against public policy) or for liability from:
1. Bad faith
2. Intentional breach of trust
3. Recklessness
5. An abuse of a confidential relationship
Personal Liability of Trustee in Contract
Unless the contract explicitly shields the trustee from liability, the trustee is personally liable to 3rd parties on contracts the trustee entered into related to the trust property

If there is personal liability, the trustee can get reimbursed if:
1. The contract was within the powers of the trustee, AND
2. The trustee was acting in the course of proper administration of the trust

UTC: Claimant must sue trustee in her representative capacity.
Personal Liability of Trustee in Tort
Trustee is personally liable for all torts he commits as well as those committed by his employees

Trustee can buy liability insurance and charge the cost to the trust

Trustee can get reimbursed if:
1. He was acting within his powers as trustee, AND
2. He was not personally at fault

UTC: Claimant must sue trustee in her representative capacity.
Trustee's Investment Power
Must manage the trust property of behalf of the beneficiary which means investment of the corpus of the trust

The Uniform Prudent Investor Act (UPIA) gives trustees broad latitude to choose investments
"Modern Portfolio" Theory of Investment
Trustee creates a custom-tailored investment strategy for the particular trust (UPIA)

Trustee must consider the role each investment plays within the overall trust portfolio

Trustee must consider the expected total return from income and capital gain
Things to Remember about the Investment Power
1. Prudence is determined at the time the decision to invest was made
2. Trustee can exercise adjustment power and allocate capital gains to income. The end goal is fairness to all beneficiaries
3. The key to the UPIA is flexibility to shape the investment strategy for maximum total return, along with the flexibility to adjust income between the income and remainder beneficiaries to be fair to each of them
Requirement of Trust Property
Subject matter of the trust must be certain and identifiable.
Lack of a trustee
No trust fails for want of a trustee.

Exception: Powers personal to the named trustee.
Private Trust
Must have ascertainable beneficiaries.

Trust can have no living beneficiaries, as long as described.
Constructive Trusts, reasons for formation
1. Fraud in inducement (difficult to show).
2. Confidential relationship: Grantee-trustee served in confidential relationship to the grantor-settlor. (Atty-client, business associates, husband-wife, father-child, brother-sister).
Oral Promise (supported by consideration) to make devise in a will
Majority rule: If a contract to devise land, subject to Statute of Frauds.

UPC: Contract to make a will, not to revoke a will, or to die intestate can only be shown if:
(i) terms are in the will itself,
(ii) terms are in a written contract, or
(iii) the will refers to the contract and extrinsic evidence proves the terms.
Secret Trust
Absolute devise by will with oral promise to hold on trust.

E.g., secret promise that T told someone to be trustee for someone else. Testimony allowed to show existence of promise. Constructive trust may be imposed.
Semi-Secret Trust
Devise "in trust" with oral agreement as to beneficiaries.

E.g., "to my good friend, S, as trustee, for purposes I have already communicated to him."

Majority rule: S holds on resulting trust for T's heirs. Not for intended beneficiaries. Can't get out of the Statute of Wills.
Discretionary trust
Trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary

Still subject to judiciary review to make sure not abuse of discretion
Support trust
Trustee required to pay or apply so much of the income or principal as is necessary for the beneficiary's support.

Need a standard.
Duties of a Trustee
1. Duty of Loyalty: No Self-Dealing
2. Duty to Invest Prudently
3. Duty to Preserve and Protect Trust Property
4. Duty of Impartiality
5. Duty to Account and Inform
Duty to Invest Prudently
Act as a prudent investor
1. Duty to keep trust productive
2. Duty to balance return with potential risk
3. Duty to diversify investments.
4. Duty not to commingle.

Take a portfolio view - total return.
More than one trustee
Majority rule: Need majority of trustees.
Trust accounting
Beneficiaries get net income. Remaindermen entitled to trust corpus at termination of trust.

Power to adjust to comply with trustee's duty of impartiality.
Testamentary powers of appointment
Exercisable only by the donee's will
Presently exercisable power of appointment
exercisable by the donee during lifetime
General power of appointment
Donee can appoint property to one of "herself, her estate, or the creditors of either"
Special power of appointment
Restricted donee power to appoint.
Anti-lapse statute and trusts
May or may not apply to trusts. UPC does apply anti-lapse statute to trusts.
Disclaiming interest
Most states, not effective unless in writing and filed within 9 months of decedent's death.
Class gift
Class closes when some member of the class can call for a distribution of her share of the class gift.