Trusts

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stevendwhang
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279003
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Trusts
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2014-07-15 17:38:28
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Trusts
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  1. Private Express Trust definition?
    • 1. a fiduciary relationship w/ respect to property whereby
    • 2. one person, the trustee, holds legal title for the benefit of another, the beneficiary,
    • 3. and which arises out of the manifestation of intent to create it for a legal purpose
    • Note: must have an ascertainable beneficiary!
  2. What can be property of the trust?
    • any presently existing interest in property that can be transferred can be the corpus of a trust
    • e.g., Fee simple, future interests, life insurance policy, bonds, stocks
    • Illusory interests cannot be the subject matter of a trust
  3. Illusory interest cannot be the subject matter of a trust
    • Future profits of a business
    • Future profits from stocks
    • Debt that settlor owes a beneficiary is not property and cannot be the corpus of a trust, a debt is a liability NOT an asset
    • Mere expectancy from inheritance not property
  4. Who can be a beneficiary of a trust?
    • Any ascertainable person or group of persons, including corporations
    • NOTE: at CL un-incorporated associations CANNOT be the beneficiary of a private express trust, but MODERNLY it can.
    • Class gifts are valid, but not if it’s too big (ex: everyone in CA is too big)
    • Baby in the womb is valid
  5. The Rule Against Perpetuities applies
    • O to Bank in trust for A but if liquor is ever sold, then to B
    • Condition violates RAP so B’s interest is stricken and A is left w/ fee simple as beneficiary of the trust and trust may be terminated b/c A is only beneficiary.
  6. Trustee rules?
    • Trust must have a trustee, but court will appoint one if none is listed
    • Until trustee appointed settlor’s estate holds legal title
  7. Creation of Trust?
    • 1. Manifestation of Intent
    • 2. Delivery
    • 3. Legal Purpose: trust not have an illegal purpose (or violate public policy)
  8. Manifestation of Intent to create a trust?
    • PRESENT manifestation of intent @ time of creation
    • No magic words (doesn’t have to say “trust” or “trustee” or “beneficiary”)
    • BUT precatory words are insufficient (words of wish, hope, desire) to establish trust
    • Parol evidence generally allowed to show intent for creation of trust: thus, precatory words + Parole Evidence may = trust
    • If words are precatory (not mandatory): transfee just hold title in fee simple.
    • Trust of personal property don’t have to be in writing. SoF only for Real Property
  9. Delivery of Testamentary Trust?
    • Trust created to take effect at settlor's death.
    • Settlor is really a TESTATOR! (Must comply with the Statute of Wills (probate code)).
    • 1. Must have a VALID will
    • 2. Will must have a provision for a testamentory trust.
    • e.g., "I device blackacre to bank, to hold in trust"
  10. Delivery of Intervivos Trust?
    • Trust created to take effect during settlor's lifetime
    • 2 types, Transfer in Trust and Declaration in Trust.
  11. Transfer in Trust rules?
    • 3rd person is trustee
    • Real Property: requires transfer of a deed to the trustee
    • Personal property: must deliver the PP to the trustee AT the TIME the settlor manifests his intent to create the trust (actual, symbolic, or constructive). promise to deliver insufficient. No delivery, no trust
  12. Declaration of trust rules?
    • Settlor as Trustee
    • for R/P there must be a writing to satisfy the SoF to indicate settlor is now trustee
    • For PP, no issue of delivery, b/c can’t deliver to self. present intent to create a trust is all that is required
  13. What happens if trust was illegal at creation of trust?
    • 1. Try to excise the illicit condition. If possible, the trust will stand. (e.g., settlor creates a trust for Able if he divorces his wife)
    • 2. Not possible to sever the illicit condition? Court has discretion between choice of two options:
    • a) invalidate trust at inception (trust not recognized, settlor remains owner of property) OR
    • b) allow the trustee to keep property for himself or herself (as punishment to settlor)
  14. What happens if trust was illegal AFTER creation of trust?
    • A "resulting trust" is decreed (formed)
    • resulting trust = implied in fact trust, based on presumed intent of parties
    • the resulting trustee has only one obligation: to transfer the property back to the settlor if the settlor is alive, and if not, to the settlor’s estate
    • Thus, if a trust is created that was perfectly legal at the time of creation but subsequently becomes illegal due to a change in law, we have a resulting trust in favor of the settlor if settlor is alive, and if not, to the settlor’s estate.
  15. What qualifies as a charitable trust?
    • CL: trusts for education, alleviation of poverty, sickness to help orphans
    • Restatement/Modern: trust which confers a "substantial benefit on society"
    • e.g., help poor, advance education, help sick, promote religion etc.
  16. Creation of a charitable trust?
    • same way private express trust is created
    • 1. Manifestation of Trust Intent (at T’s death by will or during settlor’s lifetime by declaration or transfer of trust or by transfer in trust)
    • 2. Of a presently existing interest in property that can be and is transferred
    • 3. For a legal charitable purpose
  17. Beneficiary of a Charitable Trust?
    • No ascertainable person or group of people necessary. Society is the beneficiary
    • Individual may receive an incidental benefit but the FOCUS must be on society (e.g., trust to endow a chair at a University; society benefits when education advanced)
  18. What if the beneficiary of a charitable trust is a small group of people?
    • e.g., trust for settlor’s poor relatives
    • Courts are split!
    • 1. private trust (only a few getting benefit)
    • 2. charitable trust b/c whenever poverty ended, society benefits.
    • Matters b/c of Cy Pres and RAP: this trust would violate RAP, and Cy Pres could not modify it, if it were considered a private trust. But RAP doesn't apply to charitable trusts.
  19. What if a charitable trust is impossible to carry out?
    • 1. Resulting trust. the corpus is returned to settlor, if alive; if not, to settlor's estate
    • 2. Cy Pres
  20. Cy Pres
    • “as nearly as possible”
    • If settlor manifests a general charitable intent, but the mechanism for effectuating that intent is not possible or practicable, the court can modify the mechanism cy pres, as nearly as possible, to effectuate S’s general charitable intent
    • Only court can invoke it, trustee cannot (but trustee can petition)
    • If settlor has a specific charitable intent: cy pres cannot be used!
  21. How do we know if settlor's charitable intent was general or specific?
    We introduce both intrinsic evidence (trust instrument) and extrinsic evident to ascertain settlor’s intent.
  22. What is a pour-over will?
    Settlor creates an intervivos trust w/ provision in her will devising part or all of the estate to the trustee of the trust
  23. How are the pour-over provisions validated?
    • 1. Incorporation by reference;
    • 2. Facts of independent significance; and
    • 3. UTATTA (Uniform Testamentary Additions to Trusts Act
  24. Honorary Trusts
    • A trust with no ascertainable beneficiaries and no substantial benefit conferred on society
    • Simply a goal of the settlor. Trustee is not legally required to carry out settlor’s goal, but has the power to carry it out (on his honor to carry out settlor’s intent.)
    • E.g., trust to further fox hunting; trust to take care of settlor’s pet.
  25. What are the 2 problems with Honorary Trusts?
    • 1. Trustee refuses to carry out settlor's wishes
    • 2. RAP
  26. What if trustee of an honorary trust refuses to carry out settlor's wishes?
    • Trust fails. We get a Resulting trust in favor of the settlor, or, if she is dead, to settlor’s estate.
    • This failure of trust b/c trustee refuses to serve, NEVER happens w/ private express trust or charitable trust b/c court will just appoint a new trustee.
  27. Rule against Perpetuities and Honoary Trusts?
    • No measuring life for an honorary trust, so virtually always violate the RAP. Courts are split!
    • 1. Strike at its inception, and we get a Resulting Trust
    • 2. courts allow the honorary trust to endure for 21 years and then a resulting trust follows to end the trust.(Restatement & Uniform Probate Code)
  28. What is a Totten Trust?
    Totten trust is also referred to as tentative bank account trust, whereby the named beneficiary takes whatever is left in the account at death of the owner of the account.
  29. Is a Totten Trust a true trust?
    • No, really just a will substitute
    • The depositor/trustee owns the account during his lifetime and owes beneficiary no fiduciary duties. Beneficiary simply takes whatever is left over, if anything.
    • It is more accurate to call it a Totten account.
    • A Totten trust or Totten account is always a type of savings account with a bank or other financial institution.
  30. How can a settlor/trustee in a Totten trust elevate this Totten account with no fiduciary duties into a full-blown private estate trust with full range of fiduciary duties?
    • Look to the actions of the depositor/trustee for a manifestation of trust intent.
    • e.g., telling beneficiary, “I’ve created this trust for you." No magic words necessary!
  31. Voluntary Alienation
    • Voluntary Alienation of beneficiary's right to receive future payments from the trust is VALID
    • Beneficiary of private express trust can sell his right to future payments or right to receive every interest payment for the rest of his life
  32. Involuntary Attachment
    • Involuntary attachment of beneficiary's right to receive future payments from the trust is VALID
    • Trust interest can be attached by creditors after proper legal proceedings.
  33. Spendthrift Trust (Spendthrift provision of a Private Express Trust) - definition?
    • 1. beneficiary CANNOT transfer his right to future payments of income or principal AND
    • 2. creditors CANNOT attach the beneficiary’s right to future payments of income/principal
  34. How to recognize a spendthift trust?
    • The terms of the trust must essentially include the definition:
    • Ex: “No beneficiary of this trust shall be allowed to voluntarily transfer his right to future payments, and no creditor shall be allowed to attach any beneficiary’s right to future payments.”
  35. Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding a trust with spendthrift provisions?
    • General Rule: No
    • Sometimes a court will recognize the assignment on the ground that the beneficiary merely has given the trustee a direction or order to pay the beneficiary’s agent or representative, i.e. the assignee. In such case, prior to the time of payment, beneficiary would have the right to revoke the order or direction.
  36. Can creditors ever attach the beneficiary’s right to future payments, notwithstanding a trust's spendthrift provisions?
    • General Rule: No
    • Common law exceptions:
    • 1. Preferred creditors can attach. The key is that they are not typical creditors.
    • 2. Any creditor (even if not a preferred creditor) has the right to attach “surplus,” as measured by the beneficiary’s “station in life.”
    • 3. Self-settled spendthrift trusts are not valid as they violate public policy: attempt to insulate yourself from creditors. Trust is valid, but spendthrift provisions are not.
  37. Who is a preferred creditor?
    • 1. Govt creditors, such as IRS
    • 2. Those who provide necessities of life to beneficiary
    • 3. Child support
    • 4. Spousal support
    • 5. Ex spouse for alimony
    • 6. Tort judgment creditor (settlor created the spendthrift trust to insulate B from his spending ways, not for purpose of insulating B from negligently injuring someone)
  38. What is a beneficiary's "surplus" and "station in life"?
    • Station in Life: B's subjective standard of living
    • Surplus: any income the beneficiary receives from the trust above and beyond what he needs to maintain subjective standard of living (but only reasonable expenses included, gambling expenses not included)
  39. Self-settled spendthrift trust, is voluntary alienation allowed?
    • split of authority
    • 1. ignore the provision restricting voluntary alienation and allow the settlor to voluntarily alienate her interest
    • 2. enforce the provision, protect the settlor/beneficiary from himself
  40. Support Trust (support provision of a private express trust) - definition?
    • Trustee required to use only so much of the income or principal as is necessary for the beneficiaries health, support, maintenance or education
    • Terms of the trust will read just like this
  41. Support Trust, any restrictions on alienation?
    • 1. Beneficiary CANNOT transfer rights to future payments b/c would violate settlor’s intent
    • 2. Generally creditors CANNOT attach support payments either, but preferred creditors can
    • 3. Self-settled support trust - same rules as for spendthrift trust
  42. Discretionary Trust
    • Trustee given sole and absolute discretion in determining how much to pay the beneficiary, if anything, and when to pay, if ever
    • “Trustee shall have full, sole, and absolute discretion in determining when to pay the beneficiary and how much to pay the beneficiary.”
  43. Can there be Voluntary Alienation on discretionary trust?
    • On the one hand, no. Beneficiary cannot voluntarily transfer rights b/c nothing to attach. Trustee may never allocate anything to beneficiary.
    • BUT, on the other hand, if there was an assignment, then the assignee steps into the shoes of the beneficiary.
    • Because the beneficiary could not force payment by the trustee, neither can the assignee. However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.
  44. Can there be Involuntary Alienation on discretionary trust?
    • On the one hand, no. Creditors CANNOT attach rights to future payments b/c there is nothing to attach
    • But, on the other hand, if trustee has notice of a debt and judgment against beneficiary and does decide to pay out, must pay the creditor or he will be held personally liable
  45. Can settlor ever create a discretionary trust for herself?
    Same rules for spendthrift trusts.
  46. “Trustee in his sole and absolute discretion, shall pay the amount needed for the beneficiary’s support and mainenance.”
    • Because of the words sole and absolute, it can be a discretionary trust. (Apply discretionary trust rules).
    • Because of the words “support and maintenance” it could be a support trusts. (Apply rules for support trusts).
  47. Resulting Trust - definition?
    • Definition: implied in fact trust based on presumed intent of the parties
    • If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the settlor if the settlor is alive, and if not, to the settlor’s estate, i.e. to the residuary devisees if any, and if none, to the intestate takers (the heirs).
  48. When does a resulting trust arise?
    • 1. When a private trust ends by its own terms, and there is no provision for what happens to the corpus afterward (we presume settlor wants property back)
    • 2. When a private trust fails b/c there is no beneficiary (we presume settlor wants property back)
    • 3. Where a charitable trust ends b/c of impossibility/impracticability and cy pres cannot be used
    • 4. When a private express trust fails b/c after creation the trust becomes illegal
    • 5. When there is excess corpus in a private trust (more than enough corpus to accomplish the trust purpose)
    • 6. When there is a “purchase money resulting trust”
    • 7. When there is a semi-secret trust
  49. What is a "purchase money resulting trust"?
    • A pays consideration to B to transfer title to C.
    • 1. Rebuttable presumption that C is holding as a purchase money resulting trustee for the benefit of A (if A and C aren’t related)
    • 2. If C and A are related, then rebuttable presumption that A made a gift to C
  50. What is a semi-secret trust?
    • Arises when the will makes a gift to a person to hold as trustee, but does not name the beneficiary.
    • The will on its face shows a trust intention, but the beneficiary cannot be ascertained.
    • To admit in the evidence to establish the terms of the trust violates the Statute of Wills (the local probate code).
    • Courts typically decree a resulting trust: the property goes back to testator’s estate: the residuary devisees, if any, and if none, the heirs at law.
    • This outcome is to be distinguished from “secret trusts” where the courts allow in parol evidence to establish the identify of the beneficiary (see material on constructive trusts).
  51. Constructive Trusts - definition
    • Misnomer, not really a trust.
    • Remedy to prevent fraud or unjust enrichment. When created trustee (wrongdoer) has only one obligation: to transfer property.
    • Constructive trust is a means of disgorging wrongdoer of ill-gotten gains.
  52. When does a constructive trust arise?
    • 1. Trustee makes a profit from self-dealing (must turn over profits to the intended beneficiaries)
    • 2. When there is fraud in the inducement or undue influence (the heir who improperly received the benefit can be made a constructive trustee to transfer property to intended beneficiaries)
    • 3. Secret Trusts
    • 4. Oral Real Estate Trusts
  53. What is a secret trust?
    • Will on its face makes a gift to A but the gift is given on basis of an oral promise by A to use the property for the benefit of B.
    • Consequence: Parol evidence admissible to show B was intended beneficiary
    • Note the distinction:
    • Semi-secret trusts (“I devise $100,000 to Abel as trustee” with no named beneficiary), court will issue a resulting trust (to T or T's estate)
    • Secret trusts (“I devise $100,000 to Abel,” but really intended for Brad), court will declare a constructive trust for the intended beneficiary
    • Bar exam: discuss the rules for both secret trust and semi-secret trust, then distinguish and apply proper rules.
  54. What is an Oral Real Estate Trust? Who gets to keep the property?
    • S says to A “I’ll transfer blackacre to you if you hold it in trust for B”
    • Looks like A owns it in fee simple, and if B tries to claim the property, A can claim statute of frauds as a defense to keep the property
    • Three situations where A won't be able to keep the property, and will be deemed a constructive trustee
    • 1. fiduciary relationship between S and A
    • 2. fraud in the inducement on A’s part
    • 3. detrimental reliance by B (look for B taking possession AND making improvements)
  55. Trustee Powers?
    • Enumerated: in the words of the trust
    • Implied: To be helpful and appropriate in carrying out trust purpose
    • Implied Powers Examples: sell trust property, incur expenses, lease the property, and (modernly) to borrow
  56. Trustee's fiduciary duties to beneficiary?
    • 1. Duty of Loyalty
    • 2. Duty of Care
    • 3. Duty to invest
    • 4. Duty to Earmark
    • 5. Duty to Segregate
    • 6. Duty NOT to delegate
    • 7. Duty to Account
  57. Trustee's Duty of Loyalty
    • Administer the trust for the sole benefit of the beneficiaries, impartially
    • No self-dealing or conflicts of interest
    • e.g., preferring one beneficiary over another, sells trust property to his spouse, trustee-lawyer hires himself
    • Consequence of breach:
    • 1. the trustee must make good on any losses
    • 2. trustee must return any profits to the intended beneficiaries (constructive trust)
  58. Trustee's Duty of Care
    • Must act as a reasonably prudent person (RPP) dealing with his own affairs
    • Always an issue, make sure to discuss.
  59. Trustee's Duty to Invest
    • 1. State Lists: in the absence of trust directions, trustee must invest in the listed “good investments" (govt bonds, blue chip stocks, mutual funds; never in a new business or 2nd deed of RE)
    • 2. Prudent investor: trustee must act as a RPP investing his own property, trying to maximize income while preserving the corpus (each investment is scrutinized!! same list as above)
    • 3. Uniform prudent investor: must invest as a prudent investor (no individual investment is invalid per se, performance is measured in the context of the entire trust portfolio)
    • *all 3 include duty to diversify portfolio
    • *first 2, no speculating allowed
    • Consequence of breach: Trustee must make good the loss. If there is a profit, the beneficiaries affirm the transaction. No netting! (the losses owed are not offset with the gains made)
  60. Trustee's Duty to Earmark
    • Rrustee must label the trust property (John Smith, as trustee of the ABC trust.)
    • Breach (failure to earmark):
    • CL: if there is a loss, trustee is held personally liable (no causation required between breach and loss)
    • Modern: if there is a loss, the trustee is held personally liable ONLY IF the loss was caused by the failure to earmark
    • Ex: trustee fails to earmark and she holds the trust property in her own name and her own personal creditors attach and the trust loses money, trustee is personally liable
  61. Trustee's Duty to Segregate
    • Trustee cannot co-mingle his own funds with the trust money
    • Must keeps trust A separate from trust B as well
    • Breach: trustee may be removed and may recover funds lost
  62. Trustee's Duty NOT to Delegate
    • The trustee MAY rely on professional advisors in reaching a decision BUT the trustee can’t delegate the authority to actually make the decisions
    • CL: couldn’t delegate duty to manage money, either
    • Modern: a trustee may delegate duty to a money manager
    • Also if multiple trustees, at CL must be unanimous decision, modernly can be majority
  63. Trustee's Duty to Account
    • Must give beneficiaries a statement of income and expenses of trust on a regular basis
    • Beneficiaries can file an action in court to force accounting
  64. Remedies for Trustee's Breach of Fiduciary Duties?
    • 1. Damages
    • 2. Constructive Trust
    • 3. Tracing and Equitable Lien on the property
    • 4. Ratify the transaction if its good for the beneficiary
    • 5. Remove the trustee
  65. If sued by a third party in contract, is Trustee sued in personal or representative capacity?
    • CL: Trustee is sued in his personal capacity (his assets are at stake). Trustee would only be sued in representative capacity if the contract itself provided that the trustee is to be sued in his representative capacity, not enough that trustee signed the K "as trustee," in the name of the trust.
    • Modern Rule: If the other person to the contract, the promisee, knows that the trustee is entering into the contract in his representative capacity, then the trustee must be sued in his representative capacity.
  66. Can trustee get indemnification from trust assets if he's sued by a third party?
    Yes, if the trustee acted within his or her powers and was not personally at fault.
  67. If sued by a third party for tort, is trustee sued in personal or representative capacity?
    • CL: trustee sued in personal capacity, but can get indemnification if without fault (agent committed the tort, or it was a SL tort)
    • Modern Rule: trustee is sued in his personal capacity but is personally liable only for torts where the trustee is personally at fault. Thus, if an agent committed the negligent act the trustee is sued in representative capacity
  68. Does the Settlor have power to modify the trust?
    • Yes, if the settlor expressly reserves the right to modify
    • Power to modify implicit in power to revoke (if he has power to revoke, also has power to revoke)
  69. When will a court modify a trust?
    • 1. Charitable trusts with cy pres
    • 2. Deviation Power (Doctrine of Changed Conditions)
  70. What is Deviation Power (Doctrine of Changed Condition)?
    • The court changes admin or management provisions of the trust, but NEVER changes beneficiaries
    • Elements:
    • 1. Unforeseen circumstances on the part of the settlor AND
    • 2. Necessity (deviation needed to preserve the trust)
  71. When can a settlor terminate a revoke a trust? (When does settlor have power to revoke?)
    • Majority Rule: settlor must expressly reserve the power to revoke in the trust instrument, if it’s silent, presumption it’s irrevocable
    • Minority Rule: Settlor has the power to revoke, unless the trust is expressly made irrevocable
  72. When can an irrevocable trust be terminated?
    • Three ways for irrevocable trust to terminate prematurely
    • 1. Settlor and ALL beneficiaries agree to terminate (must include contingent remaindermen, so a guardian ad litem must be appointed to represent those incapacitated by infancy or otherwise)
    • 2. ALL beneficiaries agree to terminate and the all material purposes of the trust have been accomplished (court will make certain that sufficient assets are set aside to accomplish insignificant purposes; must include all future interest holders w/ guardian ad litems; ie, unborn beneficiaries)
    • 3. By operation of law (passive trusts and the Statute of Uses)
  73. What is the Statute of Uses?
    • Private express trust with a corpus of real property, and the trust is passive. Trustee has no active duties, and is just holding bare legal title.
    • Rule: beneficiaries get legal title by operation of law, and thus the trust terminates.
    • Not all jurisdictions recognize Statute of Uses.
  74. Passive trust of personal property?
    • Passive trust of stock or other personal property, statute of uses does not apply.
    • By analogy, same principles apply, beneficiaries get legal title by operation of law, and trust terminates.
    • Equity should not see a useless act done.
  75. Income and Expenses Allocated to the Life Tenant?
    • 1. Cash dividends
    • 2. Interest income
    • 3. Net business income
  76. LT’s interest PAYS for the following expenses?
    • 1. Interest on loan indebtedness
    • 2. Taxes
    • 3. Minor repairs (e.g. paint job)
  77. Income and Expenses Allocated to the Remainderman?
    • 1. Stock dividends
    • 2. Stock splits
    • 3. Net proceeds on the sale of a trust asset
  78. Remainderman’s interest pays for the following expenses?
    • 1. Principal part of loan indebtedness
    • 2. Major repairs or improvements (new wing on a building)
  79. What is adjustment power of the trustee?
    • Trustee can disregard the above stated rules regarding allocation of income to life tenant and remainderman if a different allocation is necessary to administer the trust fairly
    • Ex: If the only income from the trust is from the sale of trust assets, the trustee may allocate some of the income to the life tenant

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