Trusts

Front 1

What are the three forms of trust?

Back 1

1- Express Trust
2- Resulting trusts
3- Constructive trusts
* The express trust is the only real trust, the other 2 are just equitable remedies

Front 2

Express trusts defined

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a legal device that allows an owner of property to make transfers of property and to have those assets managed on behalf of someone else (rather than have the beneficiary manage the money by himself or herself)

Front 3

Who is the settlor and what does he have?

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The person who creates the trust, has legal title to manage the money

Front 4

Who are the beneficiaries and what do they have?

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equitable title to enjoy the distributions from the trust

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What are the 2 kinds of express trusts

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1- Lifetime trust, set up during the lifetime of the person who created the trust, who we call the settlor of the trust (also called an inter vivos trust)
2- Testamentary trust, set up in the settlor's will

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What are the 8 requirements for a valid trust

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1- Settlor (creator) who makes a
2- Delivery of legal title to
3- Property (also called res, or corpus, or principal) to a
4-Trustee who holds legal title for the benefit of a
5- Beneficiary (or beneficiaries) with
6 intent to create a trust for
7- a lawful purpose
8- in a validly executed document

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Is consideration required to create a trust?

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NO

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The settlor can be

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anyone 18 or older, with the capacity to enter into contracts

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Delivery must be

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Titled assets must be formally transfered for delivery to be valid

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Property (res) can be

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

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Property must be

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identified, not just subject to future determination

Front 12

Who can and cannot be a trustee for lifetime and testamentary trusts?

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for a lifetime trust, almost anyone can be a trustee since no court involvement is needed for such trusts
For a testamentary trust created under court supervision, anyone can be a trustee except for those who cant:
1- those under 18
2- Judically declared incompetents
3- convicted felons
4- those incapable because of drunkenness, dishonesty, want of understanding, or improvidence

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Can a non-resident alien serve as a trustee?

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Only if
1- That person is related (either decedent's spouse, the grandparent, or the decendant of the grandparent of decedent; or descendant decedent's spouse, or the spouse of any of them) AND
2- a NY resident serves as co-fidutiary

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What happens if the trust fails to name a trustee?

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The court can appoint someone

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Beneficiaries must be

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definite and ascertainable, no ambiguity.
If ambiguous, the trustee hodls in a resulting trust for the residuary beneficiary of a will (or intestate heirs in absence of a valid will)

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a beneficiary listed as someone's "family" or "next of kin"

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is considered definite and ascertainable and the trust does not fail; consult the intestacy statutes for the name of the persons who fit the description in the trust

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Define intestacy

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When a decedent dies without a valid will and their estate property is distributed pursuant to a state statute

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The Settlor must indent to

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create an enforceable obligation, precatory (non-binding) language is not enough

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Trustee must be given

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duties to perform; if trustee has no duties to perform, it is called a passive trust which is no trust at all

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Using the word trust is interpreted as

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not showing intent to create a trust; look at all language and all the facts to determine intent

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"lawful purpose" means

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1- a trust cannot call for the commission of a crime
2- a trust cannot call for the destuction of property
3- a trust cannot have a condition against public policy
(not restricting marriage or promoting divorce)
BUT if a purpose can be found that is not offensive to public policy then it is valid

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Marriage restrictions to members of a certain religion or ethnic group

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are valid as permissible partial restraints on marriage

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Trust execution:

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must be in writing, signed by settlor and trustee and either
1- acknowledged by a notary public OR
2- signed by two witnesses

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All trusts are presumed to be

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irrevocable unless the trust explicitly authorizes revocation

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The main requirement for a revocable lifetime/inter-vivos trust

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at least one beneficiary who is not the settlor; settlor cannot be the sole beneficiary when also named the trustee

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The settlor can play many roles (4)

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1- trustee
2- 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 ammend the trust

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reasons to have a revocable lifetime/inter-vivos trust

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1- manages assets efficiently, particularly usint a professional trustee
2- helps plan for possible incapacity by avoiding guardianship since trustee will already have access/title
avoids probate (no part of the principal of a trust goes through the settlor's estate in probate)

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reasons to have a revocable lifetime/inter-vivos trust

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1- manages assets efficiently, particularly usint a professional trustee
2- helps plan for possible incapacity by avoiding guardianship since trustee will already have access/title
avoids probate (no part of the principal of a trust goes through the settlor's estate in probate)

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Pour over gifts are

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testamentary gifts (made in a will) to an existing revocable trust, it avoides wil formailties in the trusts

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Trusts can be changed during the

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lifetime of the settlor; somewhat easier than changing a will

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Key requirements for a "pour-over" gift to a trust to be valid

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1- the trust must be in existance or
2- executed concurrently with the will

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Pour-over is not limited to trusts created by the settlor, but it can be

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to any existing trust including those executed by other persons

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pour-over gifts are valid even if

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unfunded or partially funded during settlor's lifetime

Front 34

There are two ways an insured can make life insurance proceeds payable to a trust

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1- insured can create an unfunded revocable insurance trust and name the trustee of the trust as policy beneficiary
2- have the trust be a testeamentary trust and have the life insurance policy contract name "'the trustee named in my will" as the life insurance policy beneficiary
*proceeds of savings accounts or pension plans can be handled the same way as life insurance proceeds

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Totten trust is

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a bank account in the depositor's name "as trustee for" a named beneficiary, also called a bank account trust

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Two key things to remember about Totten trust accounts

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1- depositor makes deposits and withdraws 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 teh account when the depositor dies

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To create a totten trust

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no particular words are required ("in trust for")

Front 38

four ways to revoke a totten trust

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1- withdraw all the money in the account
2- express revocation made during lifetime by depositor making a writing naming the beneficiary and the financial institution, and having the revocation notified and delivered to the bank
*any missing elements make the whole attempted revocation invalid
3- revocation in a will; must comply with the same requirements for revocation during lifetime
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

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Change of totten trust beneficiary can be made by

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depositor, but it must be done the same way as the revocation
*Notarized statement sent to the financial institution naming the old beneficiary and the new one

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Creditors of the totten trust depositor

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can 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

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Joint Bank accounts that are not totten trust, after on eof the parties to the account dies, can anyone block the money from going to the survivor of the joint tenancy?

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If clear and convincing evidence shows that a survivorship was not intended when the account was established and that the account was opened only as a matter of convenience to the depositor, then the survivorship language can be set aside.
this is a hard requirement to satisfy

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Each joint account holder owns

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half of the joint account, no matter who deposits the moeny and if one person makes teh entire deposit it is considered a gift of one half to the other account holder

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Three reasons to give a gift under the Uniform Transfers to Minors Act (TUMA)

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1- it avoids a guardianship proceeding
2- it avoids a trust and court supervision of a trust
3- it qualifies for the $13,000 pr donee annual exclusion from federal and state gift tax

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Gifts under TUMA must be made

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to a custodian and it must specify that it is made under the NY Uniform Transfers to Minors Act

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UTMA gifts can be made in

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a will so long as the same required statutory language is used

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Duties of an UTMA custodian

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1- hold, manage and invest the property under a prudent person standard
2- pay over to the minor or for the minor's needs what part of the property that the custodian deems advisable and
3- pay what is left of the property to the minor when the minor turns 21 with a post- Jan 1, 1997 gift or 18 with a pre-Jan 1, 1007 gift

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UTMA creates a

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special statutory conservatorship, where teh custodian does not hold legal title, the minor holds title. it is not a trust

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UTMA Tax consequences

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1- If donor names him or herself as custodian then the amount of the gift is includible in the custodian's gross estate for federal and state estate taxes
2- If donor names someone else as custodian than the amount of the gift is not includible

Front 49

5 things to remember about charitable trusts

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1- must have indifinite beneficiaries and they must be a reasonably large group (not specific, named persons as beneficiaries but a trust for masses for relatives is ok)
2- must be for a charitable purpose (health, education, and religion)
3- may be perpetual, are not subject to the RAP which indirectly limits the duration of trusts
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 be 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

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AG's duty of representing the beneficiaries of charitable tursts

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1- the AG is an indispensible part to any suit on construction or enforce
2- the AG and the donor have standing to sue to enforce the trust's terms

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NON-Trusts, that are called trusts, but are NOT trusts

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1- Honary trusts
2- Constructive trusts

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Honorary trusts

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where no human being is teh beneficiary of a private trust

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Residuary estate definition

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whatever remains in the probate estate after the payment of specifically designated gifts of items or cash

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A private trust must have a

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human beneficiary EXCEPT
1- pet trusts- a valid pet trust can last for no longer than the duration of the pet's lifetime
2- Someone designated in the will or appointed by the court, can enforce the trust and make sure the trust's purposes are carried out
2- Cemetary trusts- for the pepertual care and maintenance of cemetaries and burial plots are classified as charitable trusts and are OK, even though they have no human beneficiaries. Since they are called charitable trusts, there is no RAP problem

Front 55

Constructive trust is a

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flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.
The trustee's only duty is to convey the property to the person who, in equity, should have the property

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Resulting trust is

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an equitable remedy

Front 57

Purchase Money Resulting Trust is recognized

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in the vast majority of states, but NOT in NY

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Purchase Money resulting Trust only arises when

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a purchaser buys property and has title put in someone elses name (who is not a relative); later purchaser claims no gift was intended and asks title holder for title to the property and the title holder refuses to give it up

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Purchase Money Resulting Trust allows the purchaser to

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compel the title holder to give up title; NOT in NY!

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In NY, there is an exception to the no Purchase Money Resulting Trust Rule:

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If there is clear and convincing evidence that the grantee had expressly or impliedly promised to reconvey the land to the purchaser, then a constructive trust can be imposed to benefit the purchaser

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Statutory spendthrift rule protects a trust beneficiary's interest from creditors by

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prohibiting voluntary or involuntary transfer of the beneficiary's interest

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NY has a special statutory rule that prtects all

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income interest in trusts with spendthrift protection even if the trust instrument does not contain a spendthrift clause, but this just applies to income from the trust, not principle

Front 63

To provide spendthrift protection to the remainder beneficiary (the one who gets the principal) the spendthrift clause must

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be expressly stated in the trust

Front 64

Typical Spendthrift clause language

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"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"

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Effect of the spendthrift clause (statutory or expressly stated in the trust):

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keeps creditors at bay

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5 Major exceptions to spendthrift clauses to remember

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1- creditors who furnish necessities (food, clothing, shelter)
2- child support and alimony
3- federal tax liens
4- express income beyond that needed for support and education (a last resort remedy; have to show all other possible remedies have been exhausted, what is needed for support is based on the lifestyle of the beneficiary)
5- the 10% levy provided by CPLR Ss 5205(e) available to creditors- all creditors together share the levy, it is not 10% per creditor

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Self-Settled Trust Rule as a big limitation on a spendthrift clause

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1- spendthrift protection does not apply to any interest retained by the settlor
2- Settlors cannot hide out from their own creditors but they can protect other beneficiaries
3- All revocable trusts are fair game for settlor's creditors; even if the settlor has no immediate financial interest in teh trust, but settlor retained the power to revoke, then the trust offers no protection atl all against creditors of the settlor

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Trust modification by trustees and/or beneficiaries is appropriate

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only when the objectives of teh truwt would be defeated or substantially impaired if the trust is not modified
2- the purpose of teh trust comes first, overriding any specific directions in the trust

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Two level trust modification test

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1- find out the primary intent of the settlor regarding trust purposes
2- Look at specific directions in teh trust instrument to determine whether, because of changes in circumstances, those specific directions in the trust would now frustrate the primary intent of the trust; IF SO, then those directions can be changed by the court.
3- the court can authorize the invasion of the principal if the income is not enough to carry out the settlor's purpose of the trust

Front 70

Trust termination by the settlor in NY

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hard to terminate; they are irrevocable unless the power to revoke and amend is expressly reserved in the trust instrument
EXCEPTION: a settlor can terminate an irrevocable trust if all beneficiaries in being consent; this is often impossible because no one can give consent for any beneficiary who is a minor or who is incompetent
Beneficiaries must be born alive to count here; for purposes of trust termination, a child in gestation is not regarded as a person
If a trust gives property to heirs or next of kin, that interest is not considered a beneficial interest and thus no consent need be obtained from them (as they cannot be ascertained until the decedent's death)

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Trustee's Powers: NY fiduciary Powers Act (FPA) controls, sets out powers that can be exercised by

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a trustee without court order and without express authorization in the trust

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FPA controls not only what a trustee of a trust can do, but also

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what an executor or administrator of a decedent's estate can do

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In NY, trustee can do

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almost anything:
1- sell any real or personal property
2- mortgage property
3- lease property
4- make ordinary repairs
5- contest, compromise or settle claims
or
6- do almost anything to manage the corpus of the trust

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Trustees cannot

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1- Engage in Self-Dealing
2- Borrow money on behalf of the trust
3- continue a business
- Trustee is liable for lossees incurred by the business unless trustee has court approval to continue the business

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The 5 prohibitions on self-dealing

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1- trustee cannot buy or sell trust assets to him/herself: an absolute rule; no wiggle room
2- Trustee cannot borrow trust funds: another absolute rule
3- Trustee cannot lend money to the trust: absolute rule, any interest earned on such a loan must be returned to the trust, and any security given for the loan is invalid
4- Trustee 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

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The two affirmative duties on self-dealing

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1- duty to segregate trust assets from personal assets
-Remedy for violation of this duty:
a. 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
b. If the asset goes up in value, there is a presumption that trust funds were used
2- Duty to earmark trust assets by titling them in trustee's name

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Remedies for breach of fiduciary responsibilities

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1- Beneficiary can sue to remove the trustee
2- Beneficiary can ratify the transaction and waive the breach
3- Beneficiary can sue for any possible losses, an action to recover losses to the trust is called a surcharge

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No further inquiry rule:

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Breach of a fudiciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made
1- good faith is NOT a defense
2- reasonableness is NOT a defense

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If trustee engages in a prohibited transaction, such as self dealing and sells trust proprty to a third party, the beneficiary

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cannot sue the purchaser of property from the trustee if the purchase was a BFP for value without notice

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Actions against a third party when trustee engages in self dealing: to keep a purchaser from being a BFP and thus making the purchaser liable to the beneficiary, the purchaser

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not only has to know that she was dealing with a trustee but that the trustee was engaging in self dealing

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Self-dealing rules also apply to loans or sales to a

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relative of the trustee; or to a business of which the trustee is an officer; employee; partner; or principal shareholder
INDIRECT SELF DEALING

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Exculpatory clauses cannot

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be used to shield trustee from liability for breach of a fiduciary duty in a testamentary trust because relieving an executor or testamentary trustee from liability for negligence is void as against public policy

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Exculpatory clauses can be

Back 83

used in a lifetime or inter vivos trust

Front 84

Personal liability of trustee in contract

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1- How trustee signed contract is key to determining liability:
a. If trustee signed only on behalf of the trust, no personal liability
b. If trustee signed personally and merely mentioned the trust, then trustee has personal liability
2- even if there is personal liability the trustee will be reimbursed by the trust if two things are satisfied
a. The contract was within the powers of the trustee AND
b. Trustee was acting in the course of proper administration of the trust

Front 85

Personal liability of trustee in tort

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1- Trustee is personaly laible for all torts by the trustee or trustee's employees
a. Absolute, no exceptions
b. To deal with this liability trustee should buy liability insurance and charge the cost to the trust
2- Trustee can get reimbursement from the trust for any tort claims if two requirements are satisfied:
a. Trustee must have been acting within trustee's powers AND
b. Trustee was not personally at fault

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Trustee's investment power

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Trustee must manage the property of the trust on behalf of the beneficiary and this means the investment of the corpus of the trust

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Trustee's investment power in NY

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NY has adopted teh Uniform Prudent investor Act (UPIA); this gives a broad latitude to trustees to choose investments

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Trustee can prusue what UPIA calls the modern portfolio theory of investment, where

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the trustee creates a custom-tailored investment strategy for this particular trust

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Two key factors to remember regarding trustee's investment powers

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1- trustee must consider the role each investment plays within the overall trust portfolio
2- Trustee must consider the expected total return from income and capital gain

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Trustee does not have to justify

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the prudence of each investment looked at by itself; can balance off risky speculative investments against safe, conservative investments

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Specific things to remember regarding trustees investment power (2+)

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1- Prudence is not measured by hindsight; look at the decision to invest when made, not later; trustee does not have to have a crystal ball
2- Trustee can exercise adjustment and allocate capital gains to income
- Trustee can switch capital gains into the income category if necessary to protect the income beneficiary and vice versa
- end goal is fairness to all beneficiaries

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The key to the UPIA is

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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

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NY RAP

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NY has a perpetuities exception that automatically reduces all age contingencies to 21 years, thus saving the gift

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NY rule against suspension of the power of alienation, definition

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Any interest is void if it suspends the power of alienation for a peiod longer than lives in being plus 21 years, that is when there are no persons who could, together, thransfer fee simple titleq

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Suspension of alienation is a concern whether

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___________ income interests are in the trust (quite considerable given NY's automatic spendthrift protection when trust is silent aout income alienation) or
2- a life estate is created in an unborn person or in an open class that may possibly include unborn persons