Trusts

A spendthrift trust will not preclude certain creditors' claims from reaching the beneficiary's interest, including

(1) a child support claim; (2) an alimony claim; or (3) a claim by a judgment creditor for services provided to protect the beneficiary's interest in the spendthrift trust. These methods can be employed only after traditional methods of enforcing these claims are unsuccessf

A transaction involving trustee self-dealing is voidable by the beneficiary unless: (6 Circumstances)

(1) the transaction was approved by the court or authorized by the terms of the trust; (2) the beneficiary failed to bring the lawsuit within the prescribed time period; (3) the beneficiary consented to the trustee's conduct, ratified the transaction, or released the trustee; (4) the transaction involves a claim or contract entered into or claim acquired by the trustee before he became trustee; (5) the transaction was consented to in writing by the settlor while the trust was revocable; or (6) the transaction is one by a corporate trustee that involves a money market mutual fund, mutual fund, or a common trust fund.

What is a spend thrift trust?

A spendthrift trust is a trust that is created for the benefit of a person (often unable to control his spending) that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. Creditors of the beneficiary generally cannot reach the funds in the trust, and the funds are not actually under the control of the beneficiary

Which of the following accurately describes the restraints on alienation in a spend thrift?

A spendthrift trust prevents the beneficiary from both voluntary and involuntary transfer of his interest in the trust. Hence, he cannot transfer his rights to future income or capital. Likewise, his creditors cannot collect or attach such rights.

Trust Profits and duty of trustee:

A trustee must disgorge any profits made when transacting on his behalf and on behalf of the trust. Good faith on the trustee's part is irrelevant. Although this rule creates a harsh result for a well-intentioned trustee, it helps prevent interested trustees from making biased decisions. Additionally, there is no presumption of good faith by a trustee.

the following duties are implied from a trustee's duty to preserve and protect the trust property:

A trustee's duty to make the trust property productive, including the duty to invest. A trustee is charged with the duty to preserve and protect trust property. Generally, there is an implied duty to make the trust property productive, which includes the duty to invest.

Filling a Vacancy in the trusteeship

A vacancy in the trusteeship is filled in the following order of priority: (1) a person designated in the trust agreement as successor trustee; (2) a person appointed by unanimous consent of the qualified beneficiaries (for a noncharitable trust) or a person selected by the charitable organizations expressly designated to receive distributions from the trust (for a charitable trust); and (3) a court-appointed person or corporate fiduciary.

Which administrative duties may a trustee delegate to another person?

Although a trustee is under a duty to personally administer the trust, she may delegate duties only to the extent and in a manner that a reasonably prudent trustee would. Still, she generally cannot delegate discretionary functions such as whether or not to make distributions. A trustee's liability for her delegatee's incompetent administration of the trust is a separate issue, irrespective of whether or not the trustee has the authority to delegate.

When may a creditor collect against an income beneficiary?

Although creditors cannot reach the beneficiary's income interest while it is in a spendthrift trust, the restraint against creditor attachment is ineffective after the income interest has been paid out to the beneficiary. Consequently, property in the beneficiary's possession after distribution is subject to the claims of her creditors.

Standard to uphold a trust containing real property

For a trust of personal property, there is no writing requirement. However, when the subject matter of an inter vivos trust is real property, the trust must be memorialized in writing and signed by the person who has power over the trust property. Here, Stephanie's trust over her house will not be valid because it is not in writing.

Standard to Uphold an Oral Trust

Generally, trusts need not be in writing. Nonetheless, the creation of an oral trusts and the controlling terms must be established by clear and convincing evidence.

In Florida, which of the following powers may a settlor retain in a valid inter vivos trust?

In Florida, an otherwise valid inter vivos trust does not become invalid because the settlor retains certain powers, including but not limited to: the power to remove trustees and appoint new ones and the power to act as sole trustee.

Selena lives in Florida, which grants Desmond, her surviving spouse, a 30% "forced share" in Selena's estate upon her death. How can Selena prevent David from sharing in her property?

In most common law states, the surviving spouse is given a forced share (in Florida, 30%) in the decedent's estate at death. By putting her assets in a revocable inter vivos trust and removing them from her estate, a settlor (in some states) may prevent her spouse from sharing in her property. However, in most states, a revocable trust is considered to be an illusory transfer and can be set aside to the extent that it interferes with the surviving spouse's forced share.

Maintaining a trustee

Maintaining a trustee is an essential element of a valid trust. Nevertheless, courts will appoint a successor trustee when the original trustee is removed, incapacitated, resigns, or dies. However, in the unusual case where it is clear that the trust can continue only so long as the originally designated trustee serves, the court cannot appoint a successor trustee. Consequently, the trust will fail.

How can you overcome inference that mere "hope" or "wish" fails to create a trust?

Nevertheless, such inferences may be overcome by demonstrating that: (1) the directions are not vague; (2) the directions are addressed to the executor or administrator, or to one who occupies a fiduciary position under the will disposition; (3) failing to enforce the trust will result in an unnatural disposition by the testator (e.g. it will prevent a close relative from taking under the will); or (4) extrinsic evidence shows that the settlor had previously supported the beneficiary and that the beneficiary lacks the means to support himself absent a finding of the trust creation.

Brandon, the beneficiary of a spendthrift trust, assigns his income interest to Abigail. Can Abigail sue the trustee to enforce this assignment?

No. Abigail cannot sue the trustee, but the trustee can choose to honor the assignment and pay Abigail. An assignee cannot sue a trustee to enforce an assignment on a spendthrift trust because such assignments are unenforceable. Nevertheless, the trustee can elect to honor such an assignment and pay the assignee. Still, the beneficiary can always withdraw his order to pay the assignee, and the trustee can also choose to stop paying the assignee.

Is mere hope that a trust be created sufficient?

No. To create a valid express private trust, a settlor must state in definite and precise terms that she is instructing a trustee to hold onto her property for the benefit of an ascertainable beneficiary. Sarah's mere desire that a trust be created by using words such as "hope" or "wish" constitute precatory expressions that ordinarily will fail to create a trust because of their indefiniteness.

In 2012, a settlor created a revocable inter vivos trust that controls the disposal of property after his death. This trust will be upheld if it conforms with:

Statute of Wills. A revocable inter vivos trust created on or after July 1, 2007 that controls the disposition of trust property on the settlor's death is ineffective unless the trust instrument and any amendments comply with the Statute of Wills.

When is a trust void?

The creation, amendment, or restatement of a trust that is procured through fraud, mistake, duress, or undue influence is void. Negligence does not void the creation of a trust

A settlor dies and the trustee and beneficiaries unanimously agree to modify the terms of an irrevocable private trust. How will a spendthrift clause and a provision that prohibits an amendment or a revocation effect this purported modification?

The modification is valid even if the trust contains a spendthrift clause and a provision that prohibits an amendment or a revocation. Nonjudicial modification allows a trustee and beneficiary to unanimously agree to modify the terms of an irrevocable private trust after the death of the settlor. Modification is permitted even though the trust contains a spendthrift clause or a provision that prohibits amendment or revocation.

Who receives the trust property when an express trust fails because it lacks a beneficiary?

The settlor or his successors. When an express private trust is rendered invalid because it does not contain a definite beneficiary, a resulting trust in favor of a settlor or his successors is presumed

Under a private trust, what happens when there are no definite beneficiaries?

The trust will fail, as there must be definite beneficiaries in a private trust. Courts do not have the discretion to assign a beneficiary in a noncharitable trust, nor can they assume that the settlor intended for the trustee to become a beneficiary. Defeasible estates are subject to real property law, and as a result are inapplicable to trusts.

Trust Res:

Trust res must be existing property that the settlor actually has the power to transfer. The trust res need not be tangible so long as the settlor has an assignable interest. Therefore, contracts, promissory notes, and future interests can all be the subject matter of a trust. An interest that has not yet come into legal existence, however, cannot be held in trust. Therefore, the mere possibility of inheriting property cannot be subject matter of a trust.

Non-vested property in a trust:

Under Florida's Uniform Statutory Rule Against Perpetuities, nonvested property in a trust is valid if either: (1) when the interest is created it is certain to vest or terminate within 21 years after the death of a life in being; or (2) it actually vests or terminates within 360 years after its creation. Because the trust was created in 2010, if it actually vests before 2370 (360 years after creation), the trust will not violate the Rule Against Perpetuities. Additionally, trusts created before December 31, 2000 must actually vest within 90 years of creation. Here, the trust was created in 2010, and is not constrained by the 90-year vesting period.

How are investment returns measured under the Uniform Prudent Investor Act ("UPIA")?

Under the UPIA, investment returns are measured by overall return on the investment, not merely the production of ordinary income. For example, assets such as corporate bonds that create a consistent income stream may decline in real value because of inflation. In contrast, other investments such as common stock generate little or no dividend income, but produce ample profits in the form of capital gains.

Cy Pres Doctrine

Under the cy pres doctrine, when it is impossible to give the settlor's original intention effect, the court may redirect the trust to a purpose "as near as possible" to the charity initially designated by the settlor. The "last clear chance" rule is a theory of negligence in tort law, and is inapplicable to trusts.

What constitutes impermissible self-dealing by a trustee?

Unless articulated in the trust provision or the court approves, a trustee cannot transact on her individual behalf and on behalf of the trust. The primary reason behind the prohibition to self-deal is the concern that a trustee's personal interest may taint her ability to judge whether or not the transaction is beneficial to the trust estate. Bad faith or fraud need not be demonstrated, and even an objectively fair transaction can trigger a breach of a trustee's fiduciary duty of loyalty not to self-deal.

Billy is a beneficiary of a spendthrift trust. He attempts to terminate the trust, asserting a common law right. Is he correct?

Unlike other beneficiaries (who possess a common law right to terminate a trust), a beneficiary of a spendthrift trust is not permitted to terminate the trust in this manner. The rationale behind this is that the settlor's material purpose was to give the beneficiary an income interest that will protect against the beneficiary's indiscretions and the reach of creditors. Thus, Billy had no common law right to terminate the spendthrift trust.

How can a trust be modified or terminated by the court? (5 Possible Circumstances)

Upon petition of the trustee or qualified beneficiary, the court may modify or terminate a trust under the following circumstances: (1) modification or termination is not inconsistent with the settlor's purpose; (2) modification or termination is in the best interests of the beneficiaries; (3) continuation of the trust would be uneconomical; (4) modification would achieve the settlor's tax objectives; or (5) reformation is necessary to correct a mistake.

What may the court do when a trustee has breach his duties?

When a trustee commits (or is about to commit) a breach of her trust duties, the court may enforce several remedies including: (1) specific performance of the trustee's duties; (2) an injunction against the trustee from committing the breach; (3) compelling the trustee to pay money or restore the property; and (4) suspending the trustee. Cannot hold a trustee in contempt of court

What happens when the sole trustee and the sole beneficiary are the same person?

Where the sole trustee and sole beneficiary are the same person, there is a merger of legal and equitable title. Consequently, the trust is terminated and the trustee-beneficiary will collect the entire amount in fee simple absolute.

Tony Trustee makes a risky investment. Under the Uniform Prudent Investor Act ("UPIA"), was Tony's investment prudent?

Yes, if the risky investment is undertaken in relation to other, more conservative investments. The UPIA analyzes each investment decision in the context of the entire trust portfolio and as part of an overall investment strategy that has risk and return strategies reasonably suited to the particular trust. Thus, an investment that by itself appears to be too risky and imprudent may actually be prudent if undertaken in relation to other, more conservative investments. A beneficiary's consent or lack thereof does not implicate the UPIA's prudent investment standards.

A trustee elects to terminate a trust because it is no longer economically viable. Does this termination also apply to a spendthrift trust?

Yes. A trustee may terminate a spendthrift trust unless expressly prohibited by a clause in the trust. Upon providing proper notice to the qualified beneficiaries, a trustee may terminate a trust whose property is less than $50,000 and the amount is insufficient to justify the cost of administration. This power to terminate also applies to spendthrift trusts unless the clause in the trust explicitly prohibits such termination. Although spendthrift provisions are set up to protect a beneficiary from voluntary and involuntary transfer of trust income, when it is no longer economically feasible to maintain the trust, the trustee may revoke a spendthrift trust.

When deciding whether to modify or terminate a trust so that is not inconsistent with the settlor's purpose, will the court consider the existence of a spendthrift provision as a factor in reaching its decision?

Yes. The court must consider a spendthrift provision, but the court is not precluded from modifying or terminating the trust.

Tom is the trustee of a trust whose terms state that Tom will be paid $5 million per year, which is far more than the average compensation of other trustees. Will the court uphold Tom's salary?

Yes. Tom is entitled to compensation per the terms of the trust, but the court has the discretion to lower it. In addition to being entitled to reimbursement for expenses incurred in the trusts' administration, a trustee is also entitled to receive reasonable compensation or to be compensated an amount specified in the trust agreement. However, the court can adjust the compensation amount when necessary. While Tom's $5 million annual salary for serving as trustee appears exorbitant and unreasonable, its terms will be upheld unless the court finds it necessary to alter them.

Samantha creates a charitable scholarship trust at a university for "needy students." Is this a valid trust?

Yes. Unlike private trusts, charitable trusts do not need to have definite beneficiaries.

A named trustee's refusal to accept an appointment to serve as the trustee will destroy the following trust:

An inter vivos trust. A present and effective transfer is needed in order to create a trust by deed. Thus, a trustee's refusal to accept an appointment will result in an attempt to create an inter vivos trust (a trust created while the settlor is still alive). This trust fails as there is no delivery and transfer of the deed from the settlor to the trustee. In contrast, a testamentary trust (a trust created by a will) whose named trustee refuses to accept the trusteeship will not fail. A resulting trust is implied when a settlor creates a semi-secret trust that does not identify the intended beneficiaries. A constructive trust is an equitable remedy where the court instructs a person to hold onto property for the benefit of a beneficiary to prevent unjust enrichment.

Expression of "charitable purposes"

Charitable purposes can be expressed in very general terms. Therefore, when a settlor directs a trustee to apply funds for a "humanitarian" cause that the trustee deems appropriate, the court will find a valid charitable trust. Other very general terms such as a "benevolent" cause will be upheld only if it can be limited to charitable objectives. If it cannot be construed for such a charitable purpose, the trust will fail.

Charitable v. Private Trusts

Charitable trusts (except those designated for a specified charitable agency) must be in favor of a reasonably large class of indefinite beneficiaries. In contrast, private trusts must be for definite and ascertainable beneficiaries.

A settlor may revoke or amend a trust:

created on or after July 1, 2007 unless the terms expressly state that it is irrevocable. Once revoked or amended, the trustee must distribute the property according to the terms of the settlor's revocation or amendment.

A trustee has the duty to administer the trust in:

good faith AND in a prudent manner, in accordance with the terms and purposes of the trust and the interests of the beneficiaries.