Trust And Federal Estate And Gift Tax

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Settlor

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Must have legal capacity

Age 18 or older and have capacity to convey title to a trustee.

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Delivery

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NOT required for self-declaration of trust or testamentary trust.

However with an inter vivos trust that names a third party as trustee, there must be delivery of subject matter of the trust w/ intent to convey legal title to the trustee.

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Trust Property

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To have a trust, legal title to a specific interest in property must be conveyed to the trustee.

• Must be certain and identifiable
  
• NO trust prop, NO trust
• WATCH: for consideration which will attach trust duties to a mere promise to make a gift.

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Trustee

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Must have legal capacity to deal with property (18 or older).

Must have capacity to K and to execute a deed, a higher standard of capacity than is required for execution of wills.

Unincorporated associations cannot be trustee. Only...

• banks
• trust companies
• charities (charitable trusts only)

Individual must post fiduciary surety bond, unless waived by settlor.

Corporate trustee DOES NOT.

Trustee is entitled to reasonable compensation.

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Lack of trustee

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No trust ever fails for lack of a trustee. Court will appoint a suitable successor to excuse the trust.

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Trustee Acceptance

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Trustee signature or acceptance by conduct (i.e exercising trust powers and duties)

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Trustee resignation

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1. Court approval upon showing

• can no longer appropriately serve as trustee
• Conflicts justify resignation

2. Accounting

• property initially recieved
• receipts and dispursements
• property now on hand, plus liabilities.

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Trust Powers/Terms

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Must me be indicated in the trust.

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Beneficiaries

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A noncharitable trust must have definite and ascertainable bene-ficiaries, and their interests must vest, if at all, no later than lives in being plus 21 years (RAP).

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Spendthrift Clause

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No beneficiary shall have the power to transfer his or her interest, nor shall suchinterest be reachable by a beneficiary's creditors by attachment or other legal process."

Spendthrift given full affect in TX: Protects atrust beneficiary's interest from creditors by prohibiting voluntary assignment orinvoluntary transfer of the beneficiary's interest. Thus judgmentcreditor cannot reach beneficiary's interest in spendthrift trust by garnishment or attachment.

EXCEPT:

1. Contracts for necessaries

2. Child Support obligations

3. Any interest Retained by the settlor (Revocable Trust)

4. Fed tax liens

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Precatory Language

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I request, I hope, I would like

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Intent to create a trust

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Language must NOT be precatory in nature and MUST impose an enforceable obligation.

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Lawful Purpose

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The objective or purpose of the must be lawful...

3 examples of prohibited objectives...

1. Commission of a crime
2. Destruction of property
3. Unlawful condition that is against public policy

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Testamentary Trusts

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Court will NOT enforce 2 unlawful conditions..

1. Encourage Divorce

2. Total restraint on marriage

Partial restraints on marriage are valid.

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Writing a trust

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All trusts must be in writing...EXCEPT transfer of personal property to a trustee other than the settlor or beneficiary coupled with a declaration of intent to create a trust simultaneously with or prior to the transfer.

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Revocable trusts

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all inter-vivo trusts are revocable and amendable by the settlor, revocation and amendments MUST be made...

• in writing
• only a court can revoke a trust
• divorce revokes all revocable trust provisions.

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Pourover will

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Provides a means for addingtestamentary assets to a trust created by the testator during lifetime. By statute, such apourover gift is valid (i) even if trust is subject to revocation and amendment and is lateramended, (ii) even if trust is unfunded (eliminates concern about "trust property" in an unfundedlife insurance trust). The trust need not be in existence before or executed concurrently withwill; it can be created after the will is signed.

Trust laws control NOT wills. Must be written and signed, BUT no witnesses necessary.

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Life Insurance

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1. Name"the trustee named in my will" as policy beneficiary. Such a beneficiary designation isexpressly validated by statute.
2. Statute also authorizes payment of employee death benefits to (1) trustee of intervivos trust, (2) trustee named in will.
   

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Right of Survivorship

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• Must explicitly say in the trust, " onthe death of one party, all sums in the account shall vest in and belong to thesurviving party” or said “with right of survivorship” [or similar wording]?
  
• JT or JTWROS are not enough.

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Durable Power of Attorney

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which must be signed and acknowledged before a notary public,authorizes another person (agent, attorney-in-fact) to act on behalf of the principal. The agent'sauthority is not affected by the principal's incapacity if it states that "this power of attorney is notaffected by my subsequent disability or incapacity," or contains words of like effect. Theprincipal can grant a springing durable power: "This power of attorney becomes effective uponmy incapacity." Third parties who rely on a durable power without actual knowledge that it hasbeen revoked or that the principal has died, are protected. A durable power given to principal’sspouse terminates on divorce, but not on principal’s bankruptcy. [July 2001] Appointment ofguardian of the estate for principal terminates the durable power. But for many families, adurable power of attorney to a child or trusted friend may eliminate the need to have a guardianappointed.

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Charitable Trusts

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1. Not subject to Rule Against Perpetuities
   
2. Must be for a charitable purpose
3. Must be in favor of a reasonably large segment of public at large
4. If specific purpose can no longer be accomplished, may be reformed under cy press doctrine.

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State the Rule Against Perpetuities.

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"No interest is good unless it must vest, if at all, not later than 21 years after somelife in being at the interest's creation." [LIB + 21 years] Purpose: To limit the duration ofprivate trusts, and placing a check on attempts to tie up property through the creation ofperpetual trusts. The Rule does not apply to charitable trusts.

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TX "Cy Pres type" Perpetuities reform statute

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if will or trust violates RAP, instrument shall be reformed or construed so as to carry out settlor's general intent as FAR as possible within the period of the Rule. (LIB + 21yrs)

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Charitable Trust Trustee

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Attorney general, who is a proper party ( but not necessary party) to any suit concerning a charitable trust. ---AG can join, but is not required to be a named party.

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Honorary Trust

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Decides on her honor whether to perform the trust. IF performed, upheld. If she doesn't, gift fails.

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Purchase Money Resulting Trust

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A pays the purchase price for land,and causes the title to be taken in B's name. Aand B are not related. Thereafter, A brings suit seeking to impose a resulting trust in his favor,contending that he did not intend to make a gift to B, but had some other reason for taking title inB’s name. Presumption:

Evidence admissible to show:

1. Gift
2. loan of purchase price.

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Constructive trust

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is not a trust. It is an equitable remedy whose object is to disgorgeunjust enrichment.

Benefit of constructive trust: Enables injured party to recoverthe very property in dispute; doesn't have to settle for judgment for money damages.

2 elements: 1. wrongful conduct 2. unjust enrichment

2 Steps: 1. Apply the law 2. Apply the equity

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Jurisdiction of Trusts

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District Courts, Statutory Probate Courts have concurrent jurisdictionover all proceedings regarding inter vivos trusts and testamentary trusts.

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Venue

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If an individual trustee, (i) county of trustee's residence or (ii) county in whichsitus [principal office] of trust has been maintained. Two or more individual trustees: county inwhich situs of trust has been maintained. Corporate trustee: county in which situs [principaloffice] of trust has been maintained. [2011 statute:] If settlor is deceased and an estateadministration is pending, action involving inter vivos trust created by the settlor or atestamentary trust created by his will may be brought under above rules or in the county in whichestate administration is pending.

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Accounting

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Trust beneficiaries are entitled to an accounting, on demand

no sooner than 12 mos. after trust was created.

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Decanting Power

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Alimited power to transfer trust assets to a new trust with different provisions. Decanting powercannot be exercised so as to impair beneficiaries’ interests or name new beneficiaries; newtrust must have same beneficiaries and same distribution powers; trustee’s fiduciary dutiescannot be lessened; cannot modify the Rule Against Perpetuities period set out in original trust.Only trustee’s administration powers can be changed (e.g., to correct ambiguity, change trusteeinvestment power, transfer to “special needs” trust to qualify beneficiary for Medicaid). Courtapproval is not required as long as notice is given to current beneficiaries and remaindermen.

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TX Trustee Powers Act

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"The Texas Trust Code, which applies to all trusts in Texas except to theextent the trustee's powers are expanded or limited by the settlor, gives broad fiduciarypowers to trustee. Specifically, the Trust Code expressly authorizes a trustee to [do whateverthe question involves]"

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Six Powers a trustee must exercise in managing real property held in trust.

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(1) Sell the property at public or private sale;

(2) lease the property for any term thetrustee deems appropriate;

(3) give a mortgage;

(4) make improvements;

(5) make repairs;

(6) give mineral leases;

(7) partition and subdivide the property.

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Self Dealing

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1. trustee cannot borrow trust funds
   
2. trustee cannot buy or sell trust assets to itself
3. trustee cannot loan funds to the trust
4. trustee cannot profit from serving as trustee
5. corporate trustee cannot buy its own stock as trust asset.

Also applies to sales or loans to relatives or business entity of which trustee is an officer, director, partner, employee or principal shareholder.

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Trustee investment power

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Under the UPIA, Trustee must establish and maintain a custom-tailored investmentstrategy that will effectuate settlor’s intent as to the purposes of the particular trust, takinginto account such factors as:

-- general economic conditions,

-- the possible effect of inflation or deflation,

-- the expected tax consequences of investment decisions or strategies,

-- the role that each investment plays within the overall trust portfolio,

-- the expected total return from income and capital gain,

-- needs for liquidity,

-- an asset's special relationship or value to the purposes of the trust or a beneficiary, and