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106 Cards in this Set

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TRUST
A trust is a fiduciary relationship in which one or more persons (the trustee) hold title to property, subject to an equitable obligation to keep or use the property for the benefit of someone else (the beneficiary). The trustee holds legal title to the property, and the beneficiary holds equitable title to it.
VALID TRUST
To be valid, a trust requires a:
1.Beneficiary – who must be sufficiently identifiable
2 Trustee – but trust will not fail for want of a trustee
3.Property (a.k.a res or corpus)
4 Intent – For a private express trust, it must be expressed with appropriate formalities
5.Legal purpose
6.Settlor – who must have capacity (BTPILS)
SETTLOR
The settlor or trustor is the person who creates the trust.
SETTLOR’S CAPACITY TO CREATE AN INTER VIVOS TRUST
To create an inter vivos trust, the settlor must have the present capacity to convey trust property.
SETTLOR’S CAPACITY TO CREATE A TESTAMENTARY TRUST
The creation of testamentary trust requires
1.the same testamentary capacity needed as to create a will and
2.freedom from fraud, undue influence or mistake, also the same rule as for a will
BENEFICIARY
A trust is created only if there is an ascertainable beneficiary. The beneficiary can be an individual. It can be class as long as it is sufficiently described so that it can be determined that at least some person meets the class requirements.
TRUSTEE
The trustee must be a competent adult. The trustee can accept in writing or by conduct. The trustee is not required to give a bond unless required to do so by the trust instrument or if the court decides one is needed. If the trust instrument does not specify, compensation should be “reasonable.”
TRUSTEE COMPENSATION
Trustee compensation can be fixed by the trust instrument or by the court when the trustee’s duties are substantially different than contemplated when the trust was creaed or the compensation in accordance with the trust terms would be inequitable (whether too high or too low).
RESIGNATION OF TRUSTEE
A trustee can resign as
1.
provided in the trust instrument
2.
in the case of revocable trust, with consent of the settlor
3.
in the case of an irrevocable trust, with the consent of all adult beneficiaries
4.
or by a court order obtained on petition by the trustee – the court should accept the resignation and make arrangements for preservation of trust property.
MERGER DOCTRINE
When one person acquires both equitable and legal title to the property, the titles merge and the trust fails. This means one person cannot be the sole trustee and the sole beneficiary, but if there is no merger if:
1.
There are multiples on either side, there is no merger.
2.
the settlor/trustee/beneficiary can all be the same person if there are one or more successor beneficiaries after the death of the settlor
INTENT
A trust is created only if the settlor properly manifests an intent to create a trust. The settlor must
1.
clearly express an intention that imposes an enforceable duty, not merely a moral obligation.
2.
Specify the terms of the trust
3.
Have a present intent to create the trust immediately, not some time in the future
4.
but no precise words are required.
PRECATORY LANGUAGE
Precatory language, such as "I hope" or "desire" that the devisee use the property for the benefit of another is not enough to create a trust. If a person received the property with what is determined to be precatory language, that person gets the property free and clear, with both legal and equitable title.
PRECATORY LANGUAGE – THE EXCEPTIONS
Despite precatory language, the court might find a trust has been created
1.
if circumstances show that the settler did intend to impose mandatory duties and otherwise specified the property, beneficiaries and terms of the trust
2.
and if it seems just given the settlor’s relationship fo the trustee and the proposed beneficiaries, such as whether they had a natural claim on his property or had been promised support.
3.
LEGAL PURPOSE
A private express trust can be created for any purpose that is not illegal or against public policy. It must not be
1.
illegal – it cannot involve commission of a crime or a tort, have been created to defraud creditors or been given for illegal consideration
2.
against public policy – it can’t encourage divorce, and restrictions on marriage will be scrutinized for reasonableness
HONORARY TRUST
A honorary trust can be set up for the care of animals even if there is no beneficiary to seek that the trust is enforced. The trustee is on his honor to care for the animal, and the trust lasts as long as the life of the animal.
WAYS TO CREATE TRUST
A trust can be created by
1.
a declaration by the owner of property that owner holds the property as trustee
2.
a transfer of property by the owner during the owner’s lifetime to another as trustee
3.
a testamentary trust by will or other instrument taking effect at death
4.
an exercise of a power of appointment to another person as trustee
5.
an enforceable promise (contract) to create a trust (must have consideration)
DECLARATION OF TRUST
The settlor declares that he holds property for the benefit of someone else. § 15200(a).
ORAL TRUST
An oral trust of personal property is valid if there is
1.
clear and convincing evidence of the existence and terms of the trust (declaration of settlor only usually not enough)
2.
Settlor must deliver the property to the trustee (the same standard as for inter vivos gifts – actual, constructive or symbolic delivery)
INTER VIVOS TRUST
The settlor transfers property to another, while the settlor is alive, to hold for the benefit of the settlor and/or a third person. § 15200(b). It can be created orally if it only involves personal property, but such a trust must be proved by clear and convincing evidence. § 15207(a)
TESTAMENTARY TRUST
The settlor executes a valid will containing a trust among its provisions. § 15200(c). The will, of course, must comply with the Statute of Frauds.
POUR-OVER WILL
A trust can be designed to accept property from a “pour-over” will as devised in the will; it does not fail for lack of property at the time of its creation. The trust must be identified in the will and its terms set forth in a writing executed before or concurrently with the execution of the will.
POWER OF APPOINTMENT
A power of appointment is a power that authorizes the donee to designate recipients of the appointment property.
TAKER IN DEFAULT
A taker in default is a person who will receive the property if the donee fails to exercise his power of appointment.
CREATION AND EXERCISE OF A POWER OF APPOINTMENT
A trust can be created by the exercise of a power of appointment held by the settlor. A donee usually exercises his power of appointment in his will. If the donee disposes of his own estate without any mention of the power of appointment, it is insufficient to constitute an exercise of the power and the property will go to the takers in default.
GENERAL POWER OF APPOINTMENT
The donee can appoint (give) the property to anyone, including himself.
SPECIAL POWER OF APPOINTMENT
The donee can only appoint the property to a restricted class of designated appointees. A donee may not make appointments outside of the class, and a contract (such as one to give the property to a class member, who will share it with a non-class member) is an invalid appointment.
Under common law, a donee could not enter into a contract to limit how his power of appointment may be exercised. Under California law, a holder of presently exercisable power of appointment (general or specific) may enter into a contract to exercise that power.
RELEASE OF POWER OF APPOINTMENT
A donee may release a power of appointment, but the release must be in writing.
Donee had general power: If the donee’s intent was to have the appointive property pass to the successors of his estate, the California courts give the property to the donee’s estate. This is the capture doctrine because it captures the property for the estate.
CREDITORS AND POWERS OF APPOINTMENT
Creditors can generally reach the property subject to a general power of appointment. They cannot reach property under a special power of appointment.
P.O.D. ACCOUNTS
Payable on death savings accounts are legal in California and not void as will substitutes.
TOTTEN TRUST
A Totten trust is actually a savings account that can be used as a will substitute. The settlor deposits the money in a bank in his own name, with a beneficiary listed. The settlor may use the account and doesn’t have to notify the beneficiary. It is revocable until the settlor dies, at which time the balance vests in the beneficiary.
CLASS GIFTS
A gift can be given to a class, such as “my grandchildren,” and it will close when any member is able to vest.
ANTI-LAPSE APPLIES TO CLASS GIFTS
California’s anti-lapse statute provides that unless a different interpretation is required by the will, if a gift has lapsed because the beneficiary has died before the testator and th e beneficiary has issue, the issue take the estate as the beneficiary would have. The statute applies only to save a gift to a person who is kindred of the decedent or of the decedent’s surviving, deceased or former spouse.
RULE AGAINST PERPETUITIES
A private express trust may be performed for only 21 years, whether or not there is a beneficiary who can seek enforcement and whether or not the terms of the trust express otherwise. A charitable trust is not subject to the RAP.
CHARITABLE TRUST
A charitable trust requires
1.an expressly designated charitable purpose or aim and
2.a definite definable class to be benefited (the class can’t be so large that it includes all of mankind), although the trust cannot name specific people to benefit from the trust.
Charitable trusts are favored by law and courts will try to save them if at all possible
CHARITABLE PURPOSE
A charitable purpose is one that benefits the public at large. Traditional charitable purposes include:
1.health and relief of poverty
2.religion
3.educational and cultural objects
4.social and political objects
5.governmental purpose
6.animals
7.memorials
COMBINATION OF CHARITABLE AND NON-CHARITABLE PURPOSES
A trust may be created for a combination of charitable and private purposes. If the purposes are coupled, the trust usually falls unless, by interpretation, the non-charitable provisions may be severed and part of the property
CY PRES DOCTRINE
The cy pres doctrine permits a court to save a charitable trust by substituting a new beneficiary for the named beneficiary when the beneficiary cannot take the gift. For the doctrine to be used:1.the gift must be to charitable organization for a charitable purpose 2.it must be impossible, impractical or illegal to carry out the donor’s charitable purpose 3.
ENFORCEMENT
The attorney general’s office can enforce charitable trusts. A trustee or person with standing can also sue to enforce a charitable trust.
ASSIGNMENT
Unless the terms of the trust provide otherwise, a beneficiary’s equitable interest in income or principal may be freely assigned and may be subject to the claims of judgment creditors.
SPENDTHRIFT TRUST
A settlor may create a spendthrift trust, a trust that provides that a beneficiary’s interest in the income is not subject to voluntary or involuntary transfers and is not subject to a money judgment until paid to the beneficiary.However, it is against public policy to prohibit only the involuntary alienation of the beneficiary’s interest (that is, attachments by creditors.)
CREDITORS
Once a beneficiary actually receives a distribution of principal (but not interest) from a trust, his creditors may reach that distribution. However, California permits a court to order the trustee to satisfy a creditor’s judgment out of any payments to which the beneficiary is entitled or that the trustee has determined are payable to the beneficiary, up to 25 percent of the payment. Amounts necessary for support of the beneficiary or his dependents may not be attached, and an order for support has priority over other judgments.
SUPPORT TRUST
A support trust is one containing a provision that only so much of the income as is necessary for the beneficiary’s education or support may be paid out. To the extent that the money is needed for those purposes, it may not be transferred or subject to creditor’s claims, but any excess paid above what is needed for education or support can be attached.
DETERMINING THE AMOUNT NECESSARY FOR SUPPORT
The court can consider a variety of factors in determining the amount necessary for support, including the lifestyle to which the person has been accustomed. The trustee must undertake an a reasonable investigation to determine the beneficiary’s needs.
DETERMINING THE AMOUNT NECESSARY FOR SUPPORT
The court can consider a variety of factors in determining the amount necessary for support, including the lifestyle to which the person has been accustomed. The trustee must undertake an a reasonable investigation to determine the beneficiary’s needs.
EXCEPTIONS TO SPENDTHRIFT PROVISIONS
A typical spendthrift provision is something all the lines of “The interests of this trust are not capable of assignment, anticipation or seizure by the legal process.” A spendthrift provision will not bar
1.claims of the beneficiary’s spouse or children for support or
2.claims of creditors for necessaries supplied to the beneficiary or his family.
3.to repay public assistance
4.felony crime restitution
5.and, in a support trust, amounts
PROHIBITION ON SPENDTHRIFT TRUST TO BENEFIT SETTLOR
A settlor may not create a spendthrift trust to benefit himself. If he tries to do so, the trust is valid but not the restraint on alienation.
DISCRETIONARY TRUST
A discretionary trust is one in which the beneficiary has no right to income unless the trustee decides to make a payment. But a trustee’s discretion is not absolute. It must be exercised reasonably.
PRESUMPTION OF REVOCABILITY
In California, a trust is presumed to be revocable unless the trust instrument expressly states otherwise.
METHODS OF REVOCATION
If a trust is revocable, it can be revoked or modified by the settlor under the same procedures allowed for revocation in the trust instrument, or by the settlor delivering a writing to the trustee during his lifetime; it cannot be done by will.
TERMINATION OF TRUST
A trust terminates when any of the following occurs:
1.term of the trust expires
2.trust purpose is fulfilled
3.trust purpose becomes illegal
4.trust purpose becomes impossible to fulfill
5.trust is property revoked
6.or it can be terminated by the trustee if the principal falls below $20,000.
The trustee will retain authority to wrap up trust affairs.
TERMINATION OR MODIFICATION OF A IRREVOCABLE TRUST
An irrevocable trust can be modified if
1.circumstances not known by or unanticipated by settlor
2.continuation of the trust under the present terms will defeat the settlor’s intent
If necessary, the court may order the trustee to do acts not authorized or forbidden by the trust instrument.
TERMINATION OR MODIFICATION OF A TRUST BY THE SETTLOR AND BENEFICIARIES
If the settlor and beneficiaries all agree, they can compel a modification or termination of the trust. If any beneficiary does not consent, the settlor and other beneficiaries may still succeed in the modification or partial termination if the interest of the non-consenting beneficiary are not impaired. If trust beneficiaries include heirs or next of kin, the court may limit the consents needed to those reasonably likely take under intestacy codes.
MODIFICATION OF IRREVOCABLE TRUST BASED ON MISTAKE OR CHANGE IN CIRCUMSTANCES
A trustee or beneficiary may petition the court to modify or terminate the trust if there are
1.circumstances not known by or unanticipated by settlor
2.continuation of the trust under the present terms will defeat the settlor’s intent
If necessary, the court may order the trustee to do acts not authorized or forbidden by the trust instrument.
MODIFICATION BY THE COURT’S EQUITABLE POWERS
In addition to the above doctrine of mistake/changed circumstances, the court may exercise its equitable powers to modify trust if unusual circumstances make that necessary in order to carry out the trust’s purpose.
FULL DISCLOSURE AND WAIVER
If the trustee fully disclosed an error to the beneficiaries, and the beneficiaries did not object in 180 days, the exculpatory clause will be enforced.
POWERS OF TRUSTEE
A trustee has the following powers:
1.Express powers – those conferred by the trust instrument
2.Implied powers – those that are necessary and or appropriate to carrying out trust purposes
3.statutory powers (to end trustee with principal below $20,000 and to wind up affairs of terminated trust
TRUSTEE’S IMPLIED POWERS
The trustee’s implied powers include:
1.the power of sale,
2.to invest
3.to meet expenses
4.to lease land
5.to continue a business
6.to make distributions
But usually, unless the trust specifies otherwise, the trustee has no implied power to
1.borrow money
2.mortgage or
3.otherwise encumber trust property but
Under some circumstances, however, mortgaging the property might be appropriate.
DUTY TO CONTINUE A BUSINESS
A trustee may continue to operate a decedent’s business under an express testamentary directive or court order except to continue the operation for a reasonable time pending a sale or wind-up or to continue operation in a partnership.
CO-TRUSTEES
Unless the trust instrument provides otherwise, decisions by co-trustees must be unanimous. If there is a vacancy in a co-trustee spot, the other trustees may still act.
LIABILITY OF CO-TRUSTEES
Generally, a co-trustee is not liable to the beneficiary for a breach of fiduciary duty by another trustee except if the trustee
1. participated in the breach
2. improperly delegated administration of the trust to the co-trustee
3. approves of, or acquiesced in the breach
4. negligently enables the breach
5. or fails to take steps to compel the co-trustee to redress the breach if the trustee knew or reasonably should have known of the breach
POWER OF APPORTIONMENT
The trust instrument may dictate how expenses expenses and profits should be apportioned between the income and principal of the trust. California has adopted the Uniform Principal and Income Act.
DELEGATION
A trustee may delegate investment and management functions as prudent under the circumstances, but the trustee must act prudently in
1. selecting an agent
2. establishing the scope and terms of the delegation, consistent with the purposes of the trust
3. supervising the person appropriately
4. and reviewing the agent’s performance
IMPROPER DELEGATION
If a trustee improperly limits or surrenders control, the trustee becomes responsible for actual losses, no matter the cause of the loss.
DUTIES OF TRUSTEE
The trustee has a duty to follow the trust instrument and the probate code. The trustee also has duties of loyalty and good faith and of due care.
DUTY OF LOYALTY AND GOOD FAITH
The duty of loyalty requires the trustee to
1. administer the trust solely for the benefit of the beneficiaries
2. to be impartial between beneficiarites, to not self-deal with trust property
3. to avoid conflicts of real and apparent interests
DUTY TO DEAL IMPARTIALLY
The trustee has a duty to deal impartially with all beneficiaries, taking into account their differing interests.
1.An income beneficiary generally takes income during his/her lifetime.
2.A principal beneficiary receives the property in the trust after the death of the settlor or an income beneficiary.
If their interests conflict, the trustee must first follow the instructions in the trust instrument. If the trust is silent, then the provisions of the Uniform Principal and Interest Act are followed
UNIFORM PRINCIPAL AND INCOME ACT
The Uniform Principal and Income Act was adopted in California. It permits the trustee to make adjustments to the trust assets to be fair and impartial, under the circumstances, to both kinds of beneficiaries. In doing so, the trustee must consider:
1. nature and purpose of the trust
2. its expected duration
3. intent of the stetlor
4. circumstances of the beneficiaries
5. need for liquidity, regularity of income and preservation of capital
6. economic conditions
7. and tax consequences
The trustee must give all beneficiaries notice of intended actions.
DUTY OF DUE CARE
The duty of due care requires the trustee to
1. use reasonable care in managing trust property
2. to properly safeguard, separate and designate trust property
3. to make trust property product
4. to properly account for income and assets
5. to provide accountings and inform the beneficiaries
PRUDENT PERSON STANDARD
The trustee has a duty to administer the trust with reasonable care, skill and caution under the circumstances that a prudent person of like capacity would use in conducting a similar enterprise and with like aims to accomplish the trust’s purpose.
PRUDENT INVESTOR RULE
Under the prudent investor rule, the trustee has a duty to invest trust property as a prudent investor would do, using reasonable care and substantial diversification unless there is some compelling reason not to diversify. In managing the assets, the trustee can consider:
1. general economic conditions
2. tax consequences
3. the role each investment plays in the overall portfolio
4. the expected total return from income and appreciation of capital
5. other resources of the beneficiaries
6. needs for liquidity, regularity of income and preservation or appreciation of capital
7. an asset’s special relationship or value to the purposes of the trust or to one or more beneficiaries
DUTY TO ENFORCE CLAIMS OF THE TRUST
The trustee has a duty to take reasonable steps to enforce claims of the trust or to defend against actions that may result in a loss to the trust.
TRUSTEE COMPENSATION
A trustee is entitled to reasonable compensation, but cannot spend trust assets just to make his life easier.
REMEDIES AVAILABLE TO A BENEFICIARY
If a trustee breaches his fiduciary duty, the remedies available to beneficiaries include
1. asking the court to compel the trustee to perform his duties
2. enjoining the trust from breaching the duties
3. surcharging the trustee by payment or otherwise
4. removal of the trustee
5. reducing or denying trustee compensation
6. imposing a constructive trust or equitable lien on the property
REMOVAL OF TRUSTEE
A trustee may be removed in the following ways:
1. as specified in the trust instrument
2. by the court on its own motion
3. or on petitition by the settlor, cotrustee or beneficiary
GROUNDS FOR REMOVING A TRUSTEE
Grounds for removing a trustee include:
1. a breach of trust by the trustee
2. the trustee is insolvent
3. hostility or lack of cooperation among cotrustees impairs the trust
4. trustee declines or fails to act
5. trustee’s compensation is excessive
6. where the sole trustee is the person who drafted the instrument or a relative of that person or someone who has a prior fiduciary relationship with the settlor (that is, someone with undue influence) unless that person is related by blood or marriage to the settlor and trust document is reviewed by an independent attorney
LIABILITY OF THE TRUST EE FOR BREACH OF DUTY
A trust who breached his fiduciary duty may be liable for 1. any loss of value to the estate, with interest
2. any profit derived from the breach, with interest
3. any profit that would have accrued to the trust but for the breach
EXCULPATORY CLAUSE
An exculpatory clause is a trust provision that waives the personal liability of the trustee. The clause is generally enforced in California, except when there is
1. gross negligence
2. bad faith
3. reckless indifference to the interests of the beneficiaries
4. the trustee made a profit
5. or the person drafting the clause and serving as trustee is an attorney
TRUSTEE’S LIABILITY TO THIRD PARTIES IN CONTRACT
Unless otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity in the course of the administration of the trust unless the trustee fails to reveal the trustee’s representative capacity or identify the trust in the contract.
TRUSTEE’S LIABILITY TO THIRD PARTIES IN TORT
A trustee is personally liable for torts committed in the court of trust administration, including those committed by agents. There is indemnification if
1. the trustee was not personally at fault
2. or the tort occurs as a normal incident to an activity in which the trustee was properly engaged.
If the trustee is entitled to indemnification, the creditors can reach the trust assets to satisfy their claims.
RESULTING TRUST
A resulting trust is an implied in fact trust and is based on the presumed intent of the parties. It is usually found when an attempt to make a trust fails. A resulting trust may arise when
1. a private express trust ends by its own terms and there is no provision for what happens to the property
2. a private express fails for lack of beneficiary or for illegality
3. there is excess corpus in a private express trust
4. a purchase money trust
5. a semi-secret trust
PURCHASE MONEY TRUST
In California, when a person pays consideration for property but title is taken in the name of another, a purchase money resulting trust arises from the presumed intent that the person paying for the property should have the beneficial use of it. But if the one paying has an obligation to support the person who is taking title to the property, there is a presumption that a gift was made. The court will look at all the circumstances to determine if it were in fact a gift.
CONSTRUCTIVE TRUST
A constructive trust is a remedy to prevent unjust enrichment and may be enforced when
1. trustee makes a profit through self-dealing
2. there fraud or undue influence in the making of a will
3.a will contains a secret trust
4. oral real estate trusts