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Requirements for a valid trust:
Settlor delivers trust property to trustee for the benefit of beneficiaries with the intent to create a trust for a lawful purpose. No consideration is required for the creation of trust.
Trust property must be conveyed
To the trustee
A trustee must:
1. Have legal capacity to deal with the property
2. Give notice to current beneficieares within 30 days after accepting the trust or after a revocable trust becomes irrevocable.
3. Must keep the beneficiaries reasonably informed as to the trust's administration.
4. Must give annual accountings.
What if a will does not name anyone as trustee?
No trust fails for lack of a trustee. If the intent to create a trust is clearly manifested but no trustee is named, or if the named trustee dies or resigns with no provision for a successor trustee, the court will appoint a suitable successor to carry out the trust.
When can a trustee be replaced by the beneficiary?
Only if the hostility prevents the parties from carrying out its duties.
1. Not subject to Rule Against Perpetuities; can be perpetual
2. Must be for a charitable purpose. Must confer a substantial amount of social benefit: education, religion, medical research, relief of perverty, governmental purpose
3. Must be in favor of a reasonably large number of unidentifiable members of the public at large, and cannot benefit identifiable individuals
4. When the stated charitable pupose can no longer be accomplished, MUST be reformed in judicial proceeding under the doctrine of cy pres (near as possible.)
Not a trust, it is a term of art used by the courts to describe situations where a trust fails for some reason.
Rule Against Perpetuities
No future interest is good unless it must vest, if it does vest, not later than 21 years, after some life in being at the creation of the interest.
Uniform Statutory Rule Against Perpetuities (USTRAP)
An interest is valid if:
1. It is valid under the common law Rule later than 21 years after the death of a life in being at the interest's creation, or
2. The interest actually vests or terminates within 90 years after the interest's creation.
Wishes, desires, requests and hopes of the Testator. Does not create a trust.
Trusts against Public Policy
1. Encourage divorce
2. Total restraint on marriage
Oral trusts of real property
Not valid as per the Statute of Frauds. However, oral trusts of personal property are valid if established by clear and convincing evidence.
Does Settlor retain the power to revoke or amend a trust if the instrument is silent as to the issue?
No if trust was created before July 8, 2012. Yes if created afterwards.
Can creditors reach assets in a revocable trust?
Yes, but only if probate estate is exhausted. Creditor must first file suit against estate, if unsatisfied, then he can go after a revocable trust.
A trust for the care of an animal:
Valid for the life of the animal
Not a trust. It is the name given to an equitable remedy designed to disgorge unjust enrichment where there is:
1. Wrongful conduct
2. Unjust enrichment
May be imposed if: There is Fraud in the inducement.
Purchase Money Resulting Trust
If A pays the purchase price for land, but takes title in B's name, and A and B are not related, there is a presumption that B held the property in a Purchase Money Resulting in Trust and A can compel conveyance at anytime.
Spendthrift clause effect
Example: "No interest of any beneficiary herin shall be assignable by such beneficiary nor shall it be subject to the claims of the beneficiary's creditors by attachment or other legal process."
Prohibits a creditor from reaching a beneficiary's interest in a trust and prohibits a beneficiary from assigning his his interest.
In MA spendthrift clauses cannot bar assignments for:
1. Contracts for necessaries (medical, food, rent)
2. Alimony, child support obligations
3. Any interest retained by the Settlor
4. Federal tax liens
What if creditor sues a beneficiary as a guarantor, seeking to reach trust principal or 1/2 of the income from a trust with a spendthrift clause?
No spendthrift protection. Can't use trust to defeat personal interests
Fraudulent Conveyance of a Trust
The three Ds.
1. Intent to defeat, defraud, or delay creditors by the creation of a trust will revoke it.
Beneficiary compel action:
Beneficiary can compel the trustee for principal distribution if the beneficiary shows there is need for the support. Trustee must exercise discretionary power in good faith.
Self-Dealing by fiduciary:
1. Trustee cannot buy or sell trust assets to himself
2. Trustee cannot borrow trust funds.
3. Trustee cannot loan funds to the trust.
4. Trustee cannot profit from serving as trustee (except for being compensated).
5. Corporate trustee cannot buy its own stock as a trust investment (but may retain its own stock if part of the estate recieved by it as trustee).
Self dealing is an automatic wrong; good faith reasonableness is no defense. Only issue in a self-dealing case: measure of damages.
Self-dealing Statute of Limitations does not begin to run on any action against a fiduciary unless and until he:
1. repudiates the trust (denies the existence of the trust with respect to property)
2. dies or resigns, or
3. Gives an accounting that makes full disclosure of the facts upon which the action is based.
3rd parties who benefited from a fiduciary's self-dealing
If the third party was a BFP it cuts off equitable ititle, unless the 3rd party knew or should have known that the fiduciary was acting improperly.
Loans or sales from a fiduciary to a relative
Self dealing rules also apply to loans or sales to a relative, and to a business entity of which the trustee is an officer, partner, employee or principal shareholder.
Fiduciary exculpatory clause
Is valid only to exculpate a fiduciary from liability or for ordinary negligence. Cannot relieve liability for acts in bad faith, gross negligence or fraud.
A trustee cannot sell or mortgage real property without prior court approval unless:
The trust instrument grants the trustee that authority.
Uniform Prudent Investor Act in MA
Analyzes a trustee's investment liability from the standpoint of when the investment decision was made. Trustee must have a custom tailored investment strategy for each trust, taking into acoount such factors as:
1. the role that each investment plays within the overall trust portfolio
2. the expected total return from income and capital gain.
Trustee Investor Prudences
Prudence is not measure via hindsight. We do not look to the outcome or performance.
Under UPIA, investment returns are measured by:
total return, including appreciation and capital gains.
Uniform Principal and Income Act
A trustee can exercise:
adjustment power in favor of income beneficiary where appropriate, and can allocate capital gains and principal to income.
Under UPIA, investment duties can be delegated to an investment advisor. Trustee must exercise reasonable care in selecting advisor and periodically review agent's performance.
Trust distributions received from an entity:
All money is allocated to income (unless receipt is characterized as capital gain for federal income tax purposes). All receipts other than money (such as stock dividends) are allocated to principal.
Reciepts from mineral leases, patents copyrights, book royalties, other "liquidating assets" that produce income for a limited time:
receive the ten percent rule. 10% allocated to income; and balance allocated to principal.
Trustees are entitled to "reasonable" compensation. Commissions, expenses for accountings, judicial proceedings are
allocated between the principal and income accounts in trustee's discretion "as shall be determined by the trustee."
Ordinary expenses that come up every year:
charged against the income of the trust
Capital expenditures are those which are extraordinary expenses, capital improvements, environmental expenses, mortgage principal payments:
are paid from principal.
Trustee is not personally liable on torts of self or agents unless:
personally at fault.
A Trustee is not personally liable on contracts unless:
contract imposes personal liability or trustee fails to disclose her representative capacity and identify the trust in the contract.
Trust beneficiaries can modify or terminate a trust prior to time fixed for termination if:
All beneficiaries consent and no material purpose of the trust would be adversely affected.
A court may approve a trust dissolution if the trust:
no longer has a material purpose and the interest of the non-consenting beneficiary is adequately protected.
THe court may authorize termination or modification of a trust under changed circumstances if:
the circumstances were unanticipated by the settlor or adversely affect the purpose of the trust.
If the value of a trust is less than $200k, upon giving notice to qualified beneficiaries the trustee may:
terminate the trust without court approval if the trustee concludes that the trust's value is insufficient to justify the administration costs.
Wills that create a trust can give a general testamentary power to the beneficiary and is:
unlimited to whom the class of beneficiaries can be named or
Wills that create a trust can give a special testamentary power to the beneficiary and:
limits the testamentary power of the appointment because she is limited in the class of persons to whom she can appoint.
A general reference to powers of appointment is not a:
specific reference that is required for for powers of appointment.