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Trusts outline Trusts outline Document Transcript

  • Trusts 1Private Express Trust = a fiduciary relationship with respect to property whereby one person, the trustee, holds legaltitle for the benefit of another, the beneficiary, and which arises out of a manifestation of intentto create it for a legal purpose. (memorize)o Elements (1) Property, (2) Beneficiary, (3) Trustee, (4) Intent, (5) Creation, (6) LegalPurpose Property of the Trust, (aka Corpus)o RULE: any presently existing interest in property that can be transferred.o examples: (1) fee simple, (2) future interest, (3) life insurance policy, (4) bonds, (5)stocks.o Illusory Interests cannot be the subject matter of the trust. [i.e. future profits to abusiness; debt that settlor owes beneficiary (=liability, not property), a mere expectancy(what settlor expect to inherit), CP] The Beneficiaryo RULE: any ascertainable person or group of people can be the beneficiary of a privateexpress trust. Corporation can be the beneficiary. Common Law: an unincorporated association could not be the beneficiary. Modern Law: an unincorporated association can be the beneficiary.o Watch out for the Rule Against Perpetuities. The Trusteeo RULE: a trust must have a trustee, but the court will not allow the trust to fail solelybecause there is no trustee or a trustee refuses to serve.o The court, in such case, will appoint a trustee. Manifestation of Intento There must be present manifestation of trust intent made by the settlor. You cannotmanifest an intent for a trust to arise in the future.o Precatory words (wish, hope) are not sufficient to create a trust, BUT precatory words +parole evidence can create a trust.o Writing: statute of frauds only applies to real property, so a trust of personal propertydoes not have to be in writing.********* Creationo (1) Trust Created to Take Effect at Settlor’s Death Settlor is really a testator. Thus, a part of testator’s will has a provision for atestamentary trust, a trust which will take effect at testator’s death.o (2) Trust Created to Take (2 WAYS) Transfer in Trust: 3rdperson is trustee when settlor delivers the corpus. Theremust be a Delivery. A promise to delivery in the future is not a trust. Requirements= (1) Intent; (2) Delivery Declaration in Trust: Settlor herself is the trustee. No issue of delivery. So ifsettlor manifests an intent, there is a trust. Legal Purposeo Rule: A trust may be established for any legal purposeo Illegality at Creation (or violative of Public Policy): try to excise the bad from thegood, if it is not possible, the court will do whatever achieves the best result: (either aresulting trust or allow the trustee to keep the property for himself)o Illegality after Creation: allow the trustee to keep the property for himself.
  • Trusts 2Charitable Trust Definitiono Statute of Elizabeth: trusts fro education, alleviation of poverty, alleviation of sickness,to help orphans.o Restatement: any trust which confers a substantial benefit upon society. Creation- same as private express trust.o (1) manifestation of intent; (2) presently existing interest in property; (3) legal purpose Beneficiaryo Society is the beneficiary of a charitable trust. There is no ascertainable person or groupif persons. Rule Against Perpetuities= does not apply to charitable trusts Cy Pres “as nearly as possible”o if the court finds that settlor had a GENERAL charitable intent (i.e. to help the poor whoare sick) and only the mechanism for effectuating that intent is not possible or practicable(i.e. free hospital), the court can modify the mechanism, cy pres, as nearly as possible, toeffectuate settlor’s general intent. Here, the court can change the mechanism from a free hospital to a free out-patient clinic, if we stipulate that there is enough money to build and fund a freeclinic.o If the intent was SPECIFIC, then the trust fails and we have a resulting trust to return theproperty back to the settlor or the settlor’s estate.o How to tell the difference? Introduce both intrinsic evidence (the trust instrument) & extrinsic evidence toascertain the settlor’s intent.o ***Only the Court invokes Cy Pres, not the trustee.Pour-Over Wills Settlor creates an inter vivos trust, with a provision in her will devising part or all of the estate tothe trust. We can validate a pour-over provision by (1) Incorporation by Reference (if in existence whenwill was executed); by (2) Independent Significance (trust is a fact of Independent Signifcance.);by (3) Uniform Testamentary Additions to Trust Act UTATA- (so long as the trust is valid, thepour over provision is valid.)Miscellaneous Trusts Honorary Trusto = a trust which has no ascertainable beneficiary & confers no substantial benefit onsociety; it is simply a goal of the settlor.o The trustee is no required to carry out the settlor’s goal, but has the power to carry it out.o The trustee is on his honor only to carry out settler’s intent. BUT, if trustee fails to carryout the trust, the trust fails and we have a resulting trust in favor of the settlor.o Honorary Trusts almost always violate RAPo Examples: trust to further fox hunting; trust to take care of settlor’s pet. Totten Trusto = tentative bank account trust, whereby the named beneficiary takes whatever is left inthe account at death of the owner of the account.o It is not a true trust. Depositor/Trustee ownes the account during his lifetime and owesthe named beneficiary NO FIDUCIARY DUTY whatsoever. (He can empty it out andleave nothing left if he wants.)
  • Trusts 3Restraints on Alienation The Problem: The beneficiary of a private express trust can voluntarily alienate his interest inproperty (transfer his right to future payments), and creditors can involuntarily alienate a B’sinterest in property (attach or seize a beneficiary’s right to future payments.) Certain types of trust prevent alienation Spendthrift Trustso = the beneficiary cannot transfer his right to future payments of income or principal andcreditors cannot attach the beneficiary’s rights to future payments.o Voluntary Alienation: Beneficiary cannot voluntarily transfer his right to futurepayments, but sometimes courts will recognize the assignment on the ground that thebeneficiary merely has given trustee a direction or order to pay the beneficiary’s agent(assignee). But that would only be when beneficiary himself would take.o Involuntary Alienation (Attachment by Creditors): Creditors generally cannot attachbeneficiaries right to future payments. Common Law Exceptions: Preferred Creditors can attach the beneficiary’s right tofuture payments nothwithstanding the spendthrift provisions. (i.e. IRS, those thatprovide necessities of life, child for child support, wife for spousal support,alimony, a tort judgment creditor) In addition to Common Law, may jurisdictions say that Any Creditor has the rightto attach “SURPLUS” as measured by the beneficiary’s needs. (need $25k, get$30k- any creditor can go “attach” the $5k).o Settlor cannot create a spendthrift trust for himself (split as to Voluntary alienation- somecourts allow, some say settlor is estopped) Support Trustso = trustee is required to use only so much of the income or principal as is necessary forthe beneficiaries Health, Support, Maintenance, & Education.o Voluntary Alienation: the beneficiary cannot voluntarily alienate because to do so woulddefeat the purpose of the trust and violate settlor’s intent.o Involuntary Alienation: beneficiary cannot transfer his right to future payments in asupport trust. Same rule for Spendthrift trusts.o Settlor cannot create a support trust for himself. Same rules for spendthrift. Discretionary Trustso = in a discretionary trust, the trustee is given sole & absolute discretion in determininghow much to pay the beneficiary, if anything, and when to pay the beneficiary, if ever.o Voluntary Alienation: on the one hand, no. Beneficiary cannot voluntarily transfer hisright to future payments because, the question may be asked, what is the beneficiaryassigning? He may not get anything. On the other hand, if in fact there was anassignment, the assignee steps into the shoes of the beneficiary. Because the beneficiarycannot force payment by the trustee, neither can the assignee. But if trustee has notice of the debt and decides to pay, he has to pay the assigneeor be personally liableo Involuntary Alienation: on the one hand, creditors cannot attach the beneficiary’s rightto future payments because there is nothing to attach, on the other hand, if the trustee hasnotice of the debt and decides to pay, he must pay the creditors or be held personallyliable. “Trustee in his sole and absolute discretion, shall pay the amount needed for the beneficiary’ssupport and maintenance. = hybrid of a discretionary and support trust.
  • Trusts 4Resulting Trusts = implied in fact trust and is based upon the presumed intent of the parties. If a resulting trust isdecreed by the court, the resulting trustee will transfer the property to the settlor if the settlor isalive, and if not, to the settlor’s estate, i.e. to the residuary devisees if any, and if none, to theintestate takers. How Resulting Trust Arises: 7 Situationso (1) When a private express trust ends by its own terms, and there is no provision for whathappens to the corpus thereafter.o (2) When a private express trust fails, because there is no beneficiary.o (3) When a charitable trust ends because of impossibility or impracticability & Cy Prescannot be used.o (4) When a private express trust fails because it is an illegal trust.o (5) When there is excess corpus in a private express trust.o (6) When we have a “purchase money resulting trust” Example: “A pays consideration to B to have title to property transferred to C”. IfA & C are not closely related: there is a presumption that C is holding as apurchase money resulting trustee for the benefit of A. If A & C are closelyrelated, there is a presumption that A simply made a gift to C.o (7) Semi-Secret trusts= arises when the will makes a gift to a person to hold as trustee,but does not name the beneficiary. Example: “I devise $100,000 to Able in trust” To admit in the evidence to establish thje terms of the trust violates the Statute ofWills.Constructive Trusts =A remedy to prevent fraud or unjust enrichment. (not a trust).o Wrongdoer must transfer the property to the intended beneficiary as determined by thecourt. How a Constructive Trust Arises: 4 Situationso (1) When the trustee of a private express trust or a charitable trust makes a profit at theexpense of the beneficiaries because of self-dealing.o (2) With respect to the law of wills, when there is fraud in the inducement or undueinfluence.o (3) Secret-Trusts in the law of Wills Secret Trust = the will on its face makes a gift outright to A, but the gift is givenon the basis of an oral promise by A to use the property for the benefit of B. Inthis case, A would have to deliver to B (i.e. constructive trust). If it is a semi-secret trust, you do not have a constructive trust, rather aresulting trust.*o (4) Oral Real Estate Trusts (aka Breach of Promise) Normally, one would invoke the statute of frauds to keep the property, but if 1 of3 situations occur, they will still lose: (1) fiduciary relationship; (2) fraud in theinducement; (3) Detrimental reliance by the intended beneficiaryTrustee Powers and Duties Trustee Powerso Trustee has all enumerated powerso Trustee has implied powers (helpful and appropriate to carry out the trust purpose). Examples: power to sell trust property; power to incur expenses; power to lease;power to borrow (modern view only).
  • Trusts 5 Trustee Duties Owed to the Beneficiary and Remedieso DUTY OF LOYALTY: requires the trustee to administer the trust for the benefit of thebeneficiaries, having no other consideration in mind. Trustee cannot engage in self-dealing. Consequences: (1) if loss- trustee must make good on loss; (2) if profit- trusteemust turn over profits to the intended beneficiary (constructive trust)o DUTY TO INVEST: Split Authority: there are 3 alternative rules of the duty to invest (1) State Lists: some states have lists which trustee must following the absence ofdirections (i.e Govt Bonds; never a new business) (2) Common law Reasonably Prudent Person Test: requires the trustee to act asa reasonably prudent person investing his own property, trying to maximizeincome while preserving corpus. (If trustee holds himself out as having greaterskill, he is held to a higher standard.) (3) Uniform Prudent Investor Act: adopted by most states: the act simplyprovides that the trustee must invest as a “prudent investor” DUTY TO DIVERSIFY: under any standard, trustee has a duty to diversify, so ifthere is a loss, the loss will not destroy the entire portfolio. Consequences: trustee must make good on the loss.o DUTY TO EARMARK: the duty to earmark requires the trustee to label trust propertyas trust property. Consequences: (Common Law= trustee is personally liable; Modern= trustee ispersonally liable only if the loss was caused by the failure to earmark.)o DUTY TO SEGREGATE: Trustee cannot Commingle his own personal funds with thetrust funds. Consequence: trustee can be removed and be held liable for any loss.o DUTY NOT TO DELEGATE: the trustee can rely on professional advisors in reachinga decision, but the trustee cannot delegate decision-making authority to these advisors. At common Law, trustee could not delegate the duty to invest to a professionalmoney manager Modernly, a trustee can delegate this duty.o DUTY TO ACCOUNT: requires trustee on a regular basis to give beneficiaries astatement of income & expenses of the trust. Consequence: beneficiaries file an action for an accountingo DUTY OF DUE CARE: trustee must act as a reasonably prudent person dealing with theaffairs of the trust.o Remedies of Beneficiary for Breach of Duty or Duties (1) damages; (2) constructive trust; (3) tracing and equitable lien; (4) ratify thetransaction if good for beneficiary; (5) remove trustee. Trustee Duties Owed to 3rdPersonso Liability in Contract Common Law: trustee is sued in his personal capacity (can get indemnification iftrustee acted within his powers and was not personally at fault). Modern Rule: if the other person to the contract knows trustee is acting in hisrepresentative capacity, must sue trustee in his representative capacity (personalassets are not at stake)o Liability in Tort Common Law: trustee is sued in his personal capacity (indemnification) Modern Rule: Trustee is sued in his personal capacity and is personally liable onlyif the trustee is personally at fault (i.e. negligent).
  • Trusts 6Modification and Termination of Trusts Modification by Settloro Settlor can modify the trust if the settlor expressly reserves the power to modify the trust.o Settlor can Also modify if he has the Power to Revoke*** Modification by Courto Court can modify charitable trusts or private trusts under its Deviation power= doctrineof changed Circumstances (court changes the administrative or management provisionsof the trust. Court is not changing beneficiaries).o Cy Pres- when court modifies for the settlor’s charitable general intent. Termination of REVOCABLE TRUSTSo Majority Rule: To retain the power to revoke, the settlor MUST EXPRESSLYRESERVE the power in the trust instrument.o Minority Rule: Trust is revocable, unless the trust is expressly made Irrevocable. Termination of IRREVOCABLE TRUSTSo 3 Ways to terminate Prematurely (1) Settlor and all the beneficiaries agree to terminate Must account for beneficiaries who are incapacitated (infants, etc.) with aguardian ad litum. (2) All beneficiaries agree to terminate and all the material purposes have beenaccomplished. (3) Operation of Law: Passive Trusts & the Statute of Uses Statute of Uses comes into play when you have a private express trust witha corpus of real property, and the trust is passive (the trustee has no activeduties and is just holding bare legal title).Income & Principal (Uniform Principal and Income Act) Income and Expenses allocated to the Life Tenanto Cash Dividendso Interest Incomeo Net Business Incomeo LT must pay (1) interest on loan indebtedness, taxes, minor repairs Income and Expenses allocated to the Remaindermano Stock Dividendso Stock Splitso Net Proceeds on the Sale of Trust Asseto Remaindermen must pay Principal part of loan indebtedness, major repairs orimprovements Allocation Power of Trusteeo Trustee can disregard the above stated rules regarding allocation if income to life tenantand remainderman if a different allocation is necessary to administer the trust fairly.o Example: if the only income from the trust is from the sale of trust assets, trustee mayallocate some of the income to the life tenant.