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CREATING A TRUST
- A valid trust requires a settlor (capacity, 18), trustee (capacity, 18, acceptance), beneficiary, trust property (certain and ascertainable, not an expectancy), and intent to create a trust (not just precatory language).
- No trust, however, will fail for lack of a trustee.
- The court can appoint a suitable one, unless the settlor provided that only a certain person could be the trustee and that person died or lacked capacity
RULE AGAINST PERPETUITIES
Subject to RAP?
- Charitable trusts (no identifiable individual beneficiaries) are not subject to the RAP.
- Private trusts (individual beneficiaries) must have definite and ascertainable beneficiaries and are subject to the RAP.
RAP in VA
- Va adopted the Uniform Statutory RAP, which allows for courts to wait and see whether all interests vest within 90 years of the interests’ creation.
- If they fail, the court will fix them according to the cy pres doctrine.
- Trusts holding personal property (and their powers of appointment) are not subject to the RAP if the trust instrument provides as much.
Trusts must be for lawful purposes and may not violate public policy by encouraging divorce or imposing unreasonable restraints on marriage.
Oral trusts are valid, even if they’re for real property, if the terms are proven by clear and convincing evidence.
- The settlor can revoke and modify all intervivos trusts (before July 2006 the presumption is the opposite- only modifiable/revocable if expressly stated), unless he states otherwise.
- S’s conservator/guardian/agent with durable power of attorney can revoke if the trust expressly provides or the court finds good cause.
Pour Over Devices
Assets can pour-over into a will and therefore pass through probate, and vice versa - the will may pour gifts into a trust (even if the will is unfunded during T’s lifetime).
Self-Declaration of Trust
- S can be the trustee and the beneficiary, so long as there are alternate beneficiaries. If there are not, the interests merge and the trust fails.
- A self-settled trust can't be a spendthrift trust.
Contest of Trusts
- The SoL for contesting a trust is 6 months after receiving a copy of the trust instrument or 2 yrs after S’s death, whichever is earlier.
- Therefore, if S is worried that a beneficiary will contest the trust, he should have his trustee notify the beneficiary of the trust and its terms. After 6 months, the beneficiary may not challenge it.
- A trustee may not distribute the assets if he knows of a pending contest of the trust’s validity or if the contestant notifies him of his intent to challenge and brings suit within 60 days of that notice.
- A beneficiary who has received assets from an invalid trust must return the assets.
Durable Powers of Attorney
- authorizes another to act on the principal’s behalf.
- Principal must state that the power is durable: “This power is not affected by my incapacity.”
- Principal can provide for springing durable powers of attorney: “This power of attorney becomes effective upon my disability.”
CHARITABLE TRUSTS; HONORARY TRUSTS
- Charitable trusts are not subject to the RAP, must be for charitable purposes (beneficial to the community), and for an indefinite number of people.
- The AG enforces the terms of the trust if S is dead; otherwise, S enforces.
- If the charitable purpose can no longer be accomplished (the disease is cured), the court will reform the trust according to cy pres—approximating S’s intent (the funds are for curing another disease).
- Honorary trusts are for pets and cemeteries.
- Only animals alive during S’s life can be beneficiaries, and the trust terminates with the death of the last animal.
- The RAP applies to trusts for pets, and all people named in the trust are measuring lives.
- Trust property not used for the pet reverts to S or his estate.
- The RAP does not apply for honorary trusts for cemeteries.
CONSTRUCTIVE AND RESULTING TRUSTS
- A constructive trust is an equitable remedy for fraud. It’s not really a trust.
- This would arise if someone learned T was going to execute a new will invoking a previous one in which she took more, then prevented T from executing the second will.
- The first will would still be valid, but the court would impose a constructive trust, and the wrongdoers would not benefit.
- A resulting trust occurs also arise by operation of law.
- It happens when the purpose has been accomplished or can no longer be completed (the beneficiary dies before the condition is fulfilled) and results back to S or an alternate taker.
- Purchase money resulting trusts are presumptively resulting trusts. They occur when A puts B’s name on a deed, and A and B are not related. If A is alive, the law presumes that A did not mean to gift the property to B and that A can revoke the property at any time. B can rebut the presumption with clear and convincing evidence that the transfer was a gift.
- If A and B are related, the law presumes the transfer was a gift.
CREDITORS' CLAIMS AND SPENDTHRIFT TRUSTS
- “No interest of any beneficiary shall be assignable by the beneficiary or subject to the claims of the beneficiary’s creditors by garnishment or attachment.”
- But there are no magic words.
- “This is a spendthrift trust,” suffices.
- S cannot use a spendthrift trust (where he is a beneficiary) to protect his assets from his own creditors, only from the beneficiary’s creditors.
- Absent child support obligations, taxes, and debts to lawyers, creditors may not touch the corpus of the trust.
- The creditors may only reach the trust’s income once it has been distributed to the beneficiary.
- If S creates an irrevocable intervivos trust and gives the trustee sole discretion regarding distributions, S cannot compel distribution, and his creditors can reach the trust.
- The trustee has a fiduciary duty and may not self-deal, even if it’s to the beneficiary’s benefit.
- He cannot buy/sell trust assets, borrow/loan trust funds, profit from his position, or purchase own stock.
- A TP contracting with a self-dealing trustee is not liable solely because she knew she was dealing with a trustee.
- The TP must also know the trustee was self-dealing.
Statute of Limitations
- If the trustee provides the beneficiary with an accounting that discloses self-dealing facts and informs beneficiary of the SoL, then the SoL is 1 yr.
- Otherwise, it’s 5 yrs from trustee’s removal/resignation/death, termination of the trust or the beneficiary’s interest in it, whichever occurs first.
Waiver by Settlor
- S may waive the rule against self-dealing if he is completely informed of the consequences.
- But S may not waive liability for acts resulting from reckless indifference to the trust/its beneficiaries or from an abuse of a confidential relationship.
- Nor may S make a trust for an illegal act, eliminate trustee’s duty to act in good faith, exculpate trustee from bad faith acts, limit the SoL or the court’s power to modify/terminate the trust or remove a trustee.
Duties of a Trustee
- The trustee has general powers to do anything the settlor could and anything enumerated in the Va statute.
- Va also imposes duties of:
- controlling and protecting the trust property,
- collecting trust property and enforcing and defending claims,
- segregating trust property from his own,
- keeping adequate records and beneficiaries reasonably informed,
- furnishing to the beneficiary a copy of the trust instrument upon request and annual reports, and
- (for trusts created after July 2006) of notifying the beneficiaries of the trust’s existence within 60 days of accepting trusteeship, identifying S, their rights to a copy of the instrument and annual reports, and giving his name, address, phone, and email.
TRUST ADMINISTRATION PROBLEMS
VA's trust code, which applies to all trusts in VA except to the extent the trustee's powers are expanded or limited by the settlor, gives broad fiduciary powers to trustee. Specifically, the Trust Code expressly authorizes a trustee to _________."
Prudent Investments, Allocation, and Unitrusts
- Va adopted the Uniform Prudent Investment Act, which measures a trustee’s prudence with regard to an investment by looking at the portfolio as a whole.
- The trustee must take into account the purposes, terms, distribution requirements, and exercise reasonable care, skill, and caution.
- Trustees with greater expertise will be held to a higher standard, but investment decisions are not judged in hindsight.
- Va bonds and obligations are always prudent investments. I
- f a trust is to pay income to a beneficiary for life then pass the corpus to a remainderman, the trustee has adjustment powers - he can allocate capital gains to income; the standard is 10%.
- His fees should be split between the principal and the income, ordinary expenses should come from income, and capital expenses should come from the principal.
- A trustee can also create a unitrust without court approval by notifying the beneficiaries. In a unitrust, the income beneficiary receives annually a fixed percentage of the trust’s value.
Delegation by Trustee
A trustee can delegate his powers so long as he exercises reasonable care in selecting the agent, establishing terms of delegation, and reviewing the agent’s actions periodically.
- A trustee is personally liable for torts he commits only if he is personally at fault while administering the trust.
- He is not personally liable for contracts he enters on the trust’s behalf, unless he doesn’t disclose that he is acting as a fiduciary.
- If there are multiple trustees, only a majority is needed to act. A dissenting trustee should express his dissent in writing and not participate in an action he believes breaches the fiduciary standard to protect himself from liability.
MODIFICATION & EARLY TERMINATION OF TRUSTS
- A court can modify/terminate an irrevocable trust if all parties agree (S and all Bs).
- The court doesn’t need S’s consent if continuing the trust isn’t necessary to achieve its material purpose and all beneficiaries agree.
After S's Death
- After S dies, if all Bs agree, the court can modify if it isn’t inconsistent with a material purpose or terminate if the trust is no longer necessary to achieve a material purpose.
- If some Bs are unborn and the living agree to modify/terminate, the court may do so if the interests of the unborn will be protected and modification isn’t inconsistent with a material purpose/trust is no longer necessary to achieve a material purpose.
*Trustee's Power to Modify or Termination W/out All Beneficiaries' Consent
- T can modify without unanimous beneficiary consent if modification would further the purposes of the trust or would achieve S’s tax objectives.
- T can terminate without unanimous beneficiary consent if no trust purpose remains to be achieved, the purpose has become unlawful/against public policy/impossible to achieve, or its value is under 100k not justifying administration costs.
Division or Combination of Trusts - Court Approval Not Required
A trustee can merge trusts if there’s no material adverse effect (hedge fund qualification).
Reformation to Correct Mistakes
Unlike wills, the court can reform plain meaning terms if there’s clear and convincing evidence that S’s intent was based on a mistake of fact or law, and modification would better achieve the trust’s primary purpose