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- An arrangement for making gifts of property for the management of assets under which trustee holds legal title to assets for benefit of beneficiaries and has the burdens of ownership. The beneficiaries have equitable title and all the benefits of ownership
EXPRESS TRUST: GENERAL
- - A legal device that allows an owner of property to make transfers of property and have those assets managed on behalf of someone else.
- - Two kinds; (1) lifetime and (2) testamentary
- - 8 requirements: (1) settlor (18 w/capacity to contract) makes (2) delivery of legal title to (3) property (settlor owns and is id'd) to a (4) trustee who holds legal title for benefit of a (5) beneficiary (definite and ascertainable unless fam) with (6) intent (precatory lang no good) to create trust for (7) lawful purpose in (8) validly executed document (signed by everyone, writing, acknowledged by notary or 2 witnesses)
EXPRESS TRUST: LIFETIME
- Set up during lifetime of the person who created the trust, who we call the "settlor" of the trust
EXPRESS TRUST: TESTAMENTARY
- Set up in settlor's will
TYPES OF TRUSTS: REVOCABLE LIFETIME/INTER-VIVOS TRUSTS
- - Need at least 1 beneficiary who is not settlor. Settlor cannot be sole beneficiary when named sole trustee
- - Settlor can be a trustee, income beneficiary for life, retain power to terminate/amend trust, his estate can be beneficiary of principal w/at least 1 other beneficiary
- - Manages assets efficiently, helps avoid guardianship proceeding, avoids probate BUT does not avoid taxes.
TYPES OF TRUSTS: POUR-OVER GIFTS
- - Testamentary gift (made in will) to existing revocable trust. There must be (1) trust in existence OR (2) trust executed concurrently w/will.
- - (1) avoids will formalities in the trust, (2) can be changed during the lifetime of settlor in ways easier than changing will.
- - NOTE: not limited to trusts created by settlor and valid even if trust unfunded during settlor's lifetime
- - life insurance can be paid to trust by (1) creating unfunded revocable insurance trust naming trustee as policy beneficiary or (2) have trust be testamentary and name trustee as life insurance policy beneficiary
TYPES OF TRUSTS: TOTTEN TRUST
- - Bank acct in depositor's name "as trustee for" named beneficiary.
- - (1) Depositor makes withdrawals/deposits as he wishes during his lifetime and (2) beneficiary have no beneficial interest during depositor's lifetime.
- - 4 ways to revoke: (1) withdraw all money, (2) express revocation during lifetime naming beneficiary and financial institution and having it notarized and delivered to bank, (3) revocation in a will, (4) death of beneficiary
- - change in beneficiary must be done like a revocation
- - creditors can always reach trust
TYPES OF TRUSTS: JOINT BANK ACCOUNT (NOT REALLY TRUST)
- - John and Jane w/right of survivorship
- - If clear and convincing evidence shows that a survivorship was not intended when acct was established, and acct opened only as matter of convenience to depositor, then survivorship can be set aside.
- - Each acct holder owns 1/2 of acct
TYPES OF TRUSTS: UNIFORM TRANSFERS TO MINORS ACT (UTMA)
- - 3 reasons: (1) avoids guardianship proceeding, (2) avoids trust/ct supervision of trust, (3) qualifies for $13K annual exclusion from fed/state gift tax.
- - Gifts must be made to a custodian and must specify that it is made under the UTMA
- - Gifts can be made in will as long as required statutory lang used
- - Custodian (1) holds/manages/invests property under prudent person standard, (2) pay to minor for minor's needs, (3) pays leftover when minor turns 21 (18 for pre 1997 gift)
TYPES OF TRUSTS: CHARITABLE TRUSTS
- 5 things: (1) must have indefinite beneficiaries of reasonably large group, (2) made for charitable purpose, (3) can be perpetual, (4) cy pres can be used to change trust, (5) AG has duty of representing beneficiaries in the state.
NON-TRUSTS: HONORARY TRUSTS
- - When no human being is the beneficiary of a private (non-charitable) trust. Private trust must have HUMAN beneficiary
- - Residuary Estate: Whatever remains in the probate estate after payment of specifically designated gifts/items/cash
- - Exceptions: (1) pet trusts, (2) cemetery trusts
NON-TRUSTS: CONSTRUCTIVE TRUSTS
- - Flexible equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct.
- - Trustee's only duty is to convey the property to the person who, in equity, should have the property
NON-TRUSTS: RESULTING TRUST
- - Equitable remedy
- - Purchase Money Resulting Trust (PMRT) not recognized in NY. Arises when purchaser buys property and has title put in someone else's name, who is not relative. Later, purchaser claims no gift was intended and asks holder of title for title and title holder refuses to give it up. Most states make title holder give up title, but NOT NY unless clear and convincing evidence that grantee expressly/impliedly promised to reconvey land.
STATUTORY SPENDTHRIFT RULE/PROTECTION FROM CREDITORS
- - Protects trust beneficiary's interest from creditors by prohibiting voluntary/involuntary transfer of beneficiary's interest. Essentially makes interest non-alienable.
- - NY statutory rule protects all income interests in trusts w/spendthrift, but does not apply to trust principa;
- - To provide protection to remainder beneficiary, spendthrift must be expressly stated in trust
- - 5 exceptions: (1) creditor who provides necessity, (2) child support/alimony, (3) fed tax liens, (4) excess income, (5) 10% levy
- - Spendthrift does not protect any interest retained by settlor
- - Appropriate only when objectives of trust would be defeated/substantially impaired if not modified
- - Purpose of trust overrides any specific directions in trust
- - Test: (1) Find primary intent of settlor regarding trust purpose, (2) looks at specific directions in trust to determine whether, b/c of changes in circumstances, those directions would now frustrate primary intent. If so, ct can change directions
- - Ct can authorize invasion of principal if income is not enough to carry out settlor's purpose
- - Trusts are irrevocable and unamendable unless power to do both is expressly reserved
- - Exception: Settlor can terminate irrevocable trust if all beneficiaries in being consent. Cannot consent for minor/incompetent.
- - NOTE - if trust gives property to heirs/next of kin, interest is not considered beneficial interest and no consent needed
TRUST ADMINISTRATION: TRUSTEE'S POWERS
- - Trustee can do almost anything; sell any real/personal property, mortgage property, lease property, make ordinary repairs, contest/compromise/settle claims, OR do almost anything to manage the corpus of trust.
- - Trustee can't...(1) engage in self-dealing, (2) borrow money on behalf of trust, (3) continue a business
TRUST ADMINISTRATION: SELF -DEALING
- - Trustee cannot buy/sell trust assets to himself
- - He cannot borrow trust funds
- - He cannot lend money to trust
- - He cannot profit from being trustee (other than normal fees)
- - Corporate trustee cannot buy its own stock as trust investment
- - He must separate trust and personal assets and earmark trust assets by titling them in trustee's name
- - No further inquiry if engaged in self-dealing. No defense to this
- - Everything applies to dealing to relative/business of trustee (indirect)
TRUST ADMINISTRATION: REMEDY FOR SELF DEALING
- - Beneficiary can sue to remove trustee
- - Beneficiary can ratify transaction and waive the breach
- - Beneficiary can sue for any loss ("surcharge action")
- - Beneficiary cannot sue 3rd party if 3rd party is BFP
LIABILITY OF TRUSTEE IN CONTRACT
- - If trustee signed only on behalf of trust, no personal liability
- - If signed personally and merely mentioned trust, then he is personally liable
- - Even if liability, reimbursed by trust if (1) contract was w/in powers of trustee, and (2) he was acting in course of proper administration of trust
LIABILITY OF TRUSTEE IN TORT
- - Trustee is personally liable for all torts by trustee or trustee's employees so he should buy liability insurance and charge cost to trust.
- - Reimbursed for tort liability if (1) acting w/in his powers and (2) not personally at fault
TRUSTEE INVESTMENT POWER
- - Uniform Prudent Investor Act (UPIA) allows him to pursue modern porfolio theory of investment where trustee creates a custom-tailored investment strategy for particular trust
- - Must consider the role each investment plays w/in overall trust portfolio and consider total expected return from income/capital gain
- - Prudence not measured in hindsight and can exercise adjustment power to allocate capital gains to income.