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What are the legal requisites for a trust?
(1) Settlor must (2) deliver legal title to (3) trust property to (4) a trustee (5) for the benefit of beneficiaries (6) with intent to create a trust (7) for a lawful purpose.
What type of capacity must the settlor have in order to create a trust?
- Must have legal capacity (which is stricter than the legal capacity test for wills):
- (1) 18+ y/o
- (2) Capacity to convey title to the trustee
What is an exception for “delivery” of legal title to the trustee?
The settlor doesn’t have to deliver legal title to the trustee in (1) self-declared trusts or (2) testamentary trusts.
What are the requisites for “trust property”?
Legal title to trust property MUST be conveyed. The subject matter must be certain and identifiable.
Watch out for the difference between future interest and mere expectancy because mere expectancy doesn’t count (but a future interest can be conveyed by a trust).
What are the requirements for someone to be a “trustee”?
- (1) Legal capacity (18+ y/o); capacity to contract and to execute deeds (higher than for wills).
- (2) Companies (such as banks and charities) can be trustee, BUT an incorporated association can’t be a trustee.
- (3) Individuals must post bond unless settlor waived requirement, BUT corporate trustees don’t have to.
- (4) A trust will not fail for lack of a trustee.
- (5) No one can be compelled to serve as trustee.
- (6) Trustee entitled to reasonable compensation and reimbursement for expenses reasonably incurred in administering the trust.
Will a trust fail for lack of a trustee?
No. But, at a very least the trust instrument must name the beneficiaries and give a trust purpose.
How does a trustee accept the trust office?
- (1) Trustee’s signature on the trust, or
- (2) Acceptance by conduct (consistent with duties)
How does a trustee resign?
- (1) Court approval upon showing trustee can no longer appropriately serve as trustee and
- (2) Give accounting of property received, receipts, disbursement, property now on hand and liabilities
What are the requirements for a beneficiary under a trust? Are there any exceptions?
Beneficiaries must be definite and ascertainable, and Rule Against Perpetuities applies.
These requirements do not apply to charitable trusts.
What is required to prove “intent” to create a trust?
There are no particular words necessary to show intent, BUT do NOT use precatory language, such as “It is my wish”, “I hope that”, etc”, because those are suggestions and not indicative of “intent.”
What types of purposes are prohibited in a trust and what isn’t prohibited?
- (1) trust calls for commission of a crime
- (2) destruction of property (“tear down my house”
- (3) unlawful condition against public policy (such as a total restraint on marriage
- Not Prohibited:
- (1) partial restraints on marriage (property to my son provided he marries a Jewish woman)
Are there any exceptions to the requirement that a trust must be “in writing”?
- Trusts must be in writing UNLESS
- (1) a transfer of personal property to a trustee other than the settlor, or
- (2) beneficiary coupled with a declaration of intent to create a trust simultaneously with or prior to the transfer.
Are trusts revocable?
In Texas, all inter vivos trusts are revocable and amendable by the settlor (unless expressly made otherwise).
All revocations must be in writing.
Does divorce revoke all provisions related to the ex-spouse and her family?
Divorce revokes all provisions relating to the ex-spouse. But, unlike wills, divorce does NOT revoke all provisions relating to the ex-spouses family.
When is a trust NOT void as an attempted testamentary disposition?
- As long as there is 1+ beneficiaries besides the settlor, a trust is not void as an attempted testamentary disposition even though settlor retains:
- (1) income for life
- (2) power to revoke, alter, or amend the trust
- (3) power to control trustee in the administration of the trust
- (4) power to add property, LI proceeds, employee benefits to the trust
What is a pour-over will?
A testamentary gift to a trust, provides means for adding testamentary assets to a trust created by the testator during lifetime. Trust need not be in existence before or executed concurrently with the will, it can be created after the will is signed. Pour-over gift is valid (1) even if trust is subject to revocation and amendment and is later amended, (2) even if trust is unfunded.
What is required to create a survivorship bank account?
For non-married account holders – survivorship created if bank card signed by the person who died
For married couples – survivorship created if bank card signed by BOTH husband and wife when account was funded with community property.
Note: There must always be survivorship language (can’t just say “joint tenants”).
What is required to amend a trust?
Trust amendments must be in writing and signed, but no attesting witnesses needed.
Who have statutes expressly authorized to be a policy beneficiary?
“Trustee named in my will” = expressly validated by statute → also: payment of employee death benefits to (1) trustee of inter-vivos gift, (2) trustee named in will.
Who is a proper party to any suit concerning a charitable trust?
The Attorney General.
What are some of the requirements for a charitable trust?
- (1) must have a charitable purpose, which means a substantial amount of social benefit for religion, education, relief of poverty, medical research, support of the arts, etc.
- (2) Must be in favor of a reasonably large segment of public at large, can’t benefit identifiable individuals
What is the Doctrine of CyPres?
When a specific charitable purpose can no longer be accomplished, it may be reformed in judicial proceedings under the doctrine of cy pres to conform as closely as possible to the stated charitable purpose.
Equitable cy pres doctrine, applies only to charitable trusts, the traditional cy pres doctrine doesn’t apply to non-charitable trusts, BUT…
…Texas has a “cy pres type” perpetuities reform statute: If a will or trust violates RAP, the instrument shall be reformed or construed so as to carry out settlor’s general intent as far as possible within the period of Rules Against Perpetuities.
When is a court proceeding NOT needed in order to achieve cypres-like results?
If the named charitable beneficiary ceases to exist, or ceases to qualify as a charity for federal income tax purposes, the trustee can name a new charity doing the same work as a beneficiary without court proceedings BUT MUST give notice to the Attorney General.
Where must a judicial cy pres proceeding occur?
A judicial cy pres proceeding must be brough where the trust purpose was changed (and not just a new charitable beneficiary carrying out the same charitable activity).
What is an honorary trust?
A gift in which an object is the beneficiary (use income to wash my Porsche each week). It’s called an honorary trust because the trustee is “on her honor” in deciding whether to perform the trust (since cars can’t sue people). It will be upheld if the trustee chooses to perform, and if the trustee doesn’t perform the gift fails and there is a resulting trust.
What is a Purchase Money Resulting Trust, what code applies and why, and what is the presumption regarding them?
Situation – C pays purchase price for land, and causes title to be taken in B’s name. C & B are not related and C brings suit seeking to impose a resulting trust in his favor, contending that he didn’t intend to make a gift to B, but had some other reason for taking title in B’s name.
Code – The Texas Trust Code does NOT apply since this is not a real trust.
Presumption – this is a purchase money resulting trust. C can compel a reconveyance at any time UNLESS the presumption is rebutted. Evidence is admissible to show (1) gift or (2) loan of purchase price.
Note: If C and B are related, the presumption is not of a PMRT, but a gift, evidence admissible to rebut this presumption.
What is a Constructive Trust, who does it benefit, what are its elements, and what code applies?
Definition – constructive trusts are NOT a trust; they are an equitable remedy whose object is to disgorge unjust enrichment.
Benefit – enables injured party to recover the very property in dispute; doesn’t have to settle for judgment for money damages.
Elements – (1) wrongful conduct and (2) unjust enrichment.
Code – The Texas Trust Code does NOT apply because it is NOT a real trust.
What is a Slayer Statute?
Life Insurance Proceeds: by statute (no constructive trust remedy needed), if the beneficiary willfully brings about the death of the insured, proceeds are distributed as though the killer predeceased the insured victim.
What is a spendthrift clause and what are the exceptions to them?
Spendthrift clause – “No interest of a beneficiary shall be assignable by the beneficiary nor shall it be subject to the claims of the beneficiary’s creditors by garnishment, attachment, or other legal process.” / “This shall be a spendthrift trust” (this is also ok).
Spendthrift clauses are given full effect in Texas because it protects the trust beneficiary’s interest from creditors by prohibiting voluntary assignment or involuntary transfer of beneficiary’s interest.
- (1) contracts for necessities (medical, food, rent)
- (2) child support obligations
- (3) any interest retained by the settlor
- (4) revocable trust
- (5) federal tax liens
When can a creditor (who doesn’t meet the exceptions for a spendthrift trust) get paid?
Once the income is distributed from the trust to the beneficiary, it’s no longer subject to the trust or its spendthrift clause, BUT, creditors would have to file suit each time beneficiary received a distribution. Spendthrift clauses take away creditor’s efficient remedies of garnishment and attachment.
Spendthrift creditor’s can’t reach any interest transferred to 3rd parties unless they prove a fraudulent transfer (made with intent to defeat, delay, or defraud creditors).
What is a Discretionary Trust?
“Trustee may distribute to Settlor so much of income as Trustee in its sole discretion deems appropriate” – perfectly fine, Trustee has sole discretion, not subject to any standard.
What is a Support Trust? When can a beneficiary compel a distribution? Can a beneficiary’s creditors reach a support trust?
“Income to my daughter for life, remainder to grandkids and if Trustee determines that income is insufficient, Trustee may, in its sole discretion, distribute as much of the principal as is needed for her support.”
Thus, Beneficiary can compel a distribution of amount she shows is needed for her support. Any distribution far in excess of beneficiary’s actual support needs gives remainderman a cause of action against Trustee.
Creditors can reach support trust for contracts and for necessaries.
What is the proper jurisdiction and venue for a cause of action against a trustee for breach of duty?
Jurisdiction – district court and state probate court have concurrent jurisdiction over all proceedings.
- Venue –
- (1) individual trustee’s (i) county of residence, or (ii) county in which situs (principal office) of trust has been maintained;
- (2) 2+ Trustee’s county in which situs of trust has been maintained;
- (3) Corporate Trust: county in which situs (principal office) of trust has been maintained
When are beneficiary’s of a trust entitled to an accounting?
Beneficiary’s are entitled to an accounting, on demand, no sooner than 12 months after the trust is created.
What is the Texas Trustee Powers Act?
Basically, if a FSA owner can do it, then a Texas trustee can do the same.
“The Texas Trust Code, which applies to all trusts in Texas 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 _____ [do whatever the Q involves].
What powers may a trustee exercise in managing real property held in a trust?
- (1) Sell at public/private sale
- (2) Lease property for any term Trustee deems appropriate
- (3) Mortgage
- (4) Make improvements
- (5) Make repairs
- (6) Give mineral leases
- (7) Partition and subdivide
What are breaches of a Trustee’s duty of care and loyalty to the trust? Can self-dealing rules be waived?
- (1) Can’t borrow trust funds or use trust assets as collateral for a personal loan.
- a. Exception: Corporate Trustee if a prudent person would do it
- (2) Trustee can’t buy or sell trust assets to itself (but corporate Trustee can do so with court order)
- (3) Trustee can’t loan funds to the trust, and any interest earned on such a loan must be returned to the trust, and any security received in connection with such a loan is invalid
- (4) Trustee can’t profit from serving as Trustee (except for compensation), Ex: taking advantage of confidential information received as Trustee, or accepting bonus for accepting trusts funds in a start-up
- (5) Corporate Trustee can’t buy its own stock as trust asset
- (6) Duty to segregate (and duty to earmark trust assets by placing them in Trustee’s name). Trustee can’t commingle trust funds with her own. If commingled funds used to buy an asset and the asset goes down in value, conclusive presumption – to the extent available, she used her own funds. If asset goes up in value, conclusive presumption – to the extent available, she used trust funds.
- (7) Indirect Self-dealing – self-dealing rules apply to loans or sale to a relative and to a business entity of which Trustee is an officer, director, partner, employee, or principal shareholder.
Self-dealing rules can be waived.
What are a beneficiary’s options after Trustee breaches trust duty? What is the Statute of Limitations?
- (1) Ratify the transaction and waive breach of trust
- (2) Sue for any resulting loss (cause of action = surcharge)
- (3) If Trustee still has possession of property, beneficiary can petition for imposition of constructive trust
- (4) Note: If case involves self-dealing, then good-faith reasonableness is no defense, so only issue is damages.
- SOL – 4 years, but it doesn’t begin to run on action against a fiduciary unless and until he
- (1) repudiates the trust (i.e. denies its existence),
- (2) dies or resigns, or
- (3) gives an accounting that makes full disclosure of facts upon which action is based.
What are a trustee’s duties when there are multiple trustees?
Multiple Trustees – Majority rules; each co-Tenant has an affirmative duty to prevent a breach of trust by co-Tenant. To protect himself from liability (1) don’t participate in transaction and (2) express dissent in writing.
What is a trustee’s duty to diversify investments? What happens if Trustee makes one bad investment (but other trust investments are doing well)?
The prudent investor rule applies (unless otherwise stated in trust). I.e. Settlor can authorize Trustee to make nothing but speculative investments not within the prudent investor standard.
Under new law (Uniform Prudent Investor Act), we use modern portfolio theory of investing and look at the total return on investment. So Trustee won’t be held liable for losses, if everything balances out in the end. Basically, under the UPIA, invest for total return, taking into account potential appreciation and capital gain as well as ordinary income. Prudence is measured by conduct at the time of investment decision is made, not be hindsight based on outcome or performance. Under the UPIA, Trustee can exercise adjustment power in favor of income beneficiary where appropriate, and can allocate capital gain and principal to income.
How do you allocate funds between income (I) and principal (P) under the UPIA?
- (1) Income – interest, rental income, cash dividends on stock, delay rentals in oil and gas
- (2) Principal – eminent domain condemnation award, insurance proceeds for trust property destroyed by fire
- (3) Special rules for Oil and Gas Royalties
- a. Pre Jan. 1, 2004 – 72.5% was income; 27.5% was principal
- b. Post Jan. 1, 2004 – 85% is income; 15% is principal
- (4) Special rules for Pension Plans, Annuities, IRAs which name a trust as beneficiary
- a. Distributions are allocated to income until payments equal 4% of the plan or IRA’s value at the beginning of the accounting period (usually Jan 1) and excess goes to principal.
- (5) Special rules for “Liquidating Assets” (patents, copyrights, book royalties)
- a. Income = 10%
- b. Principal = 90%
- (6) All money received from an entity > income; all other money > principal
How do you allocate expenses between the income beneficiary and the principal beneficiary?
- (1) Trustee’s commissions, expenses from accountings, judicial proceedings: 50% (I) and 50% (P)
- (2) Ordinary expenses (annual): property taxes, casualty insurance payments, ordinary repairs, mortgage interest payments: 100(I)
- (3) Capital expenses: capital improvements, expenses relating to environmental matters, estate taxes, mortgage principal payments: 100(P)
What is the liability of a trustee in a lawsuit for contracts or torts? Are exculpatory clauses valid?
Suits must be brought against the Trustee? A trust, like an estate, is not an entity that can be sued.
- (1) Contracts – Trustee isn’t personally liable on contract UNLESS she failed to disclose her representative capacity (unlike the personal representative of an estate)
- (2) Torts – Trustee is personally liable for torts committed by itself and its agents; but Trustee is enetitled to reimbursement from the trust estate if tort was a common incident of the business activity in which the Trustee was properly engaged when the tort was committed.
???Exculpatory clauses??? – trust language can limit liability to acts or omissions in gross negligence, bad faith or fraud. BUT, can’t limit liability for gross negligence, bad faith, or fraud.
What are the conditions that cause a trust to terminate?
- (1) A trust terminates automatically according to its terms
- (2) Upon petition of Trustee, Court may order that the Trustee be changed, that terms be modified, that Trustee be directed to do acts that aren’t authorized, or prohibited from doing acts that are required by the trust, or that the trust be terminated if one of the following is met:
- a. Purposes of the trust or any provision thereof have been fulfilled or have become illegal or impossible to fulfill
- b. Changed circumstances: not known to or anticipated by the Settlor, the modification or termination order will further the purposes of the trust
- c. Achievement of tax purposes: the modification or termination order is necessary or appropriate to achieve the Settlor’s tax objectives
- (3) Termination of uneconomic trust: after giving notice to beneficiaries, the Trustee of a trust having a value less than $50K may terminate the trust without court approval if the Trustee determines that the cost of administration doesn’t justify continuation of the trust.
- (4) Note: Except for uneconomical trusts, modification or early termination of a trust must be by court hearing (not by extra-judicial party agreement)
- a. EXCEPT >>> division of trust into 2 trusts, merger of 2 into 1, can be accomplished without judicial proceeding, division.merger can be done for any reason, but usually done for tax purporses.
How long can a Trustee act following the termination of a Trust?
Following termination, Trustee continues to exercise trust powers for reasonable time needed to (1) wind up trust affairs, and (2) make distributions to beneficiaries.