Trusts (bar exam)

Revocable Trust - What if the T is both trustee and beneficiary?

-NO problem -while the sole beneficiary of a trust cannot be the sole trustee, (who would sue the trustee for a breach of trust?), this rule doesn't apply: (i) if there are two trustees, even though one of the trustees is the sole beneficiary; (ii) if there are two or more beneficiaries, even though the sole trustee is one of the beneficiaries -rule: if there is 1 beneficiary and 1 trustee, they can't be the same person

Creditor's Rights to the Beneficiary's Interest

-NO right to get at the trust assets → the beneficiary doesn't own them; the trustee does -the creditor can garnish the beneficiary's income from the trust

rule for trust property

-RULE: No trust fails for want of a trustee → If the intention to create a trust is clearly manifested but no trustee is named, or the named trustee dies or resigns with no provision for a successor trustee, the court will appoint a suitable trustee to execute the trust -EXCEPTION: powers personal to the named trustee (rarely invoked) if the court finds that the settlor intended for the trust powers to be personal to the trustee, such that the trust should fail if the named person is no longer capable of serving, then the trust would terminate

RULES for resulting trusts

-a sale or exchange by a trustee of a resulting or constructive trust to a bona fide purchaser for value cuts off beneficiary's rights to the transferred asset; BUT, trustee holds any consideration received on the transfer in trust for beneficiary, AND, if the sale is NOT to a bona fide purchaser, the beneficiary has choice of remedies: 1) impose trust on consideration received by trustee OR 2) impose trust on original asset in non-bona fide purchaser's hands

spendthrift clause

-a spendthrift clause in a trust makes the trust INDESTRUCTIBLE → there is a further trust purpose of the settlor to be served; to terminate the trust would defeat a material trust purpose of the settlor -EXCEPTION: a spendthrift trust can be terminated by the consent of all of its beneficiaries IF the settlor also consents

secret trusts

-absolute devise by will with oral promise to hold on trust -testimony is admissible to show the existence of a promise -have to establish the promise by clear, satisfactory and convincing evidence (more than a preponderance) → a constructive trust will be implied -when a will is involved, the Statute of Frauds is inapplicable -A constructive trust is imposed to prevent unjust enrichment -a note accompanying the will could also create a constructive trust

Purchase Money Resulting Trust

PRESUMED to arise when consideration for purchase of property is paid by person other than the person taking title

a constructive trust may be imposed where:

-fraud in inducement: no intention to perform promise -confidential relationship: grantee-trustee served in confidential relationship to the grantor-settlor

how to make a gift

-have to deliver the property to the donee or the donee's agent -delivery can be actual, constructive, OR, when actual and constructive are not possible, symbolic (e.g., delivering a signed writing evidencing the gift) -the gift must be IRREVOCABLE → if settlor intents to retain the right to revoke the delivery, NO GIFT OCCURS

2) surcharge (breach of trust)

-he can sue for the resulting loss -breach of a fiduciary duty is an automatic wrong; good faith, reasonableness is no defense or justification -the only issue: the measure of damages

charitable purpose - critical question

-how does the trust operate in fact? → MUST have a valid mechanism to ensure the money goes toward a charitable purpose -no mechanism = no trust

Honorary Trusts

-if settlor devises money to another to hold in trust, the income of which should be used to care for the settlor's pets, it is NOT a valid private trust -a trust for the care of a person's pets is NOT charitable -the problem → honorary trusts violate the rule against perpetuities -BUT, under the UTC, it is valid for the lifetime of the animals

powers of trustee and successor trustee

-if the instrument mentions the powers of the trustee, the instrument controls -if silent, the power to sell, improve, or lease (but not to borrow) is frequently IMPLIED by the courts -by statute, a corporate trustee may take title to stock in name of nominee → HOWEVER, trustee is liable for acts of nominee -trustee may invest in common trust funds

termination of trusts

-in many states, a settlor can revoke, terminate, or modify a trust only if settlor has expressly reserved the right to do so in the trust instrument -under UTC: ALL trusts are revocable UNLESS a stipulation in the instrument states that they are irrevocable

Oral Promise (Supported by Consideration) to make Devise in Will

-majority rule: if it is a contract to devise land, it is subject to the Statute of Frauds → MUST be in writing -UPC: contract to make a WILL, not to revoke a will, or to die intestate, can only be shown IF 1) the terms are in the will itself 2) the terms are in a written contract OR 3) the will refers to the contract and extrinsic evidence proves the terms -NOTE: the mere existence of joint or mutual wills does not imply a contract not to revoke

inter vivos trusts - rules

-oral inter vivos trusts of personalty are enforceable provided its terms can be established by clear and convincing evidence -trusts containing land (whether created by declaration of trust or by inter vivos transfer) must be evidenced by a writing that satisfies the Statute of Frauds -cannot have an oral trust of land

delivery

-requirement does NOT apply to self-declaration of trust ("I hereby declare myself trustee...") or testamentary trust (a trust, the terms of which appear in will, that doesn't exist until T dies) -for inter vivos trust with 3rd party as trustee, there must be DELIVERY of the SUBJECT MATTER of the trust

TRUSTS IMPOSED BY OPERATION OF LAW

-resulting trusts -constructive trusts

testamentary trusts

-secret trusts -semi-secret trusts

Trusts for the benefit of the settlor

-settlor can't put assets in a trust to escape creditors -spendthrift clauses are unenforceable so the creditor can reach any right to distributions the settlor has in the trust -if the settler has the power to revoke the trust OR (even if he doesn't) if the trustee has discretionary authority to make distributions to the settlor: the settlor's creditors may reach the actual trust property

discretionary support trust

-settlor gives trustee sole discretion in providing support for beneficiary out of the trust -under the Rest. Trusts, the trustee may take into account other resources available to the beneficiary for support -the beneficiary has NO right to payments →UTC EXCEPTION: children and ex-spouse CAN force trust to make payments -creditors cannot force a distribution from the trust to the beneficiary → BUT, they can notify trustee of the outstanding obligation and trustee can withhold payment to beneficiary until debt is settled

irrevocable trusts for 3rd persons

-settlor's creditors have no rights -EXCEPTION: fraudulent transfers doctrine

Revocable Trust - Is a gift by will to the revocable, amendable trust valid?

-yes -requirements: the trust must be identified in T's will AND its terms must be set out in a written instrument the instrument may be executed before, concurrently with, or after the will -the devised property is added to the trust as it exists at T's death, including any amendments after the will was executed

Requisites of a Trust

1) Creator (settlor) 2) delivers 3) legal title of trust assets (the res) 4) to trustee 5) for the benefit of beneficiaries 6) with INTENT to create a trust 7) for a valid purpose

4 Distinctive Rules that Apply to Charitable Trusts

1) Not subject to either Rule Against Perpetuities or Rule Against Accumulations (can last and accumulate income perpetually) 2) Must be for Charitable Purpose 3) must be in favor of a reasonably large number of unidentifiable beneficiaries 4) when specific charitable purpose can no longer be accomplished, may be reformed under the doctrine of cy pres (old French for "as near as possible")

Duty of Loyalty: No Self-Dealing by Fiduciary

1) Trustee cannot buy or sell trust assets to itself → they can trace and recover the stock for the benefit of the trust 2) Trustee cannot borrow trust funds 3) Trustee cannot sell assets from one trust to another trust 4) Corporate trustee cannot purchase its own stock as a trust investment. (But it can retain its own stock if a part of the original trust property -- provided it is a permissible investment; must meet the prudent investor standard) 5) Trustee cannot engage in any transaction in which she seeks to secure a personal gain

Special Rules Pertaining to Beneficiaries

1) law doesn't require that beneficiaries be alive 2) a trust with no living beneficiaries will be appointed a guardian ad litem to care for the trust 3) resulting trust: an implied reversion

Rights of the beneficiary of a Trust (spendthrift + support trusts)

1) the right to periodic distributions of that income 2) the right to ask for a court order directing trustee to distribute income → if trustee refuses to comply, the beneficiary can ask for removal of trustee for breach of trust RULE: an income interest in a trust is no less an interest in property

When an expectancy ripens into a property interest:

1) the will naming the beneficiary remains unchanged at the settlor's death AND 2) the will is admitted to probate -so, when a beneficiary records a Declaration of Trust before the settlor dies, if these requirements are met, the law views the creation of the trust as a gratuitous promise to create that trust in the future

how to manifest intent sufficient to create a trust:

1) transfer legal title to another AND 2) impose on that person a duty to manage -Example: "To A, it is my wish and my desire that he look after X and Y." → not a trust b/c it is precatory language of suggested use -Example: "it is my wish and my desire that he use the income for the support of X and Y until both have attained the age of 18 at which time to distribute the principal of this gift to X and Y outright." --here, there is intent to create a trust --does it impose a duty? → if so, it's a trust

Res

The corpus, the principal, the subject matter of the trust. In order to have a trust, there must be a specific interest in property to which the trustee's duties relate, such that the beneficiary who is dissatisfied with the trustee's performance can say "You are not doing your job w/ respect to these assets."

exculpation clause

a clause relieving a trustee of liability for breach of trust is unenforceable to the extent it relieves the trustee of liability for reckless or bad faith actions or the clause was drafted by or at the direction of the trustee and the settlor was not represented by independent counsel

delegation of responsibility

a trustee MAY delegate the investment decisions provided the trustee exercises reasonable care, skill and caution in: (i) selecting the agent; (ii) defining the scope and terms of the delegation; AND (iii) periodically reviewing the actions and decisions of the agent

duty to account and inform

a trustee has a duty to account periodically (e.g., annually) to the beneficiaries and to keep them reasonably informed about the administration of the trust

duty of impartiality

absent a trust provision permitting trustee to prefer one beneficiary over another, a trustee must be fair and impartial to all beneficiaries

common trust funds

accounts created by corporate trust companies where several smaller trusts are combined for purposes of investment -- allows greater economy and diversification → no breach for commingling

Trust

an arrangement under which the trustee holds legal title to property for the benefit of the beneficiaries

special testamentary power of appointment

appointment power is restricted

What happens when the beneficiary of a totten trust predeceases the depositor?

automatic revocation

Claflin Doctrine

beneficiaries, all of whom are sui juris (of full age and capacity), can terminate the trust IF: 1) ALL beneficiaries consent AND 2) there is no further trust purpose to be served

Semi-Secret Trust

devise "in trust" with oral agreement as to beneficiaries

GENERAL testamentary power of appointment

donee is not limited in the class of beneficiaries to whom he/she can appoint; however, donee is limited to appointments by will (testamentary)

prudent investor rule

except as otherwise provided by the terms of the Trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill, and caution in making investment decisions.

Duty to Invest Prudently

have to be in compliance with the prudent investor rule

1) ratify (breach of trust)

he can ratify the transaction and waive the breach

portfolio view

how a trustee's compliance with the prudent investor rule is measured → the fact that one or more assets held by the trustee are underperforming is not a problem as long as the total return (income and capital appreciation) of the overall portfolio is reasonable

Constructive Trusts

implied in a variety of circumstances where a person acquires title to property wrongfully → a trust is implied to remedy unjust enrichment

3) trace and recover

in self-dealing cases, he can trace and recover the property for the trust (e.g., trustee or executor borrows trust funds and invests the proceeds, if value of purchased property goes up in value, beneficiary can claim the property for the trust)

Resulting Trusts

may arise upon failure of express trust or when express trust purposes are accomplished and the corpus is not exhausted

donee of power of appointment

person who receives the power of appointment

donor of power of appointment

person whose will created the power

main considerations when specific charitable purpose can no longer be accomplished (cy pres)

primary intent: have to understand settlor's mindset specific direction: this comes from the instrument

specific direction (rule + elements)

rule: if adhering to specific direction would frustrate the primary purpose of the trust, court will allow deviation from trust administrative terms because of changed circumstances elements: 1) primary intent 2) specific direction 3) unforeseen change in circumstances that frustrates primary purpose

Who has standing to enforce a charitable trust?

state attorney general settlor and any living beneficiary (under UTC)

What happens if if the beneficiary of a trust performs services in compliance with trust conditions, and the trust does not fulfill a promise (which served as consideration for those services)?

the beneficiary can sue in quantum merit for the VALUE OF HER SERVICES

Revocable Trust - What happens if T revokes the trust before she dies?

the gift in the will lapses, fails

escrow

the settlor executes a valid deed naming a grantee, then hands deed to 3rd party with instructions to hold and record the deed if the grantee survives settlor

duty to preserve and protect trust property

the trustee must insure trust property against casualty losses

to exercise power of appointment

the will must specifically refer to such power

takers in default

those who take property upon death of donor if power of appointment is NOT exercised

co-trustees and breaches

when one co-trustee breaches the trust, the other co-trustee is NOT liable UNLESS there is an element of fault

preference clauses and charitable trusts

when there is a preference clause, the preference is problematic IF relatives only experience the benefits

breach of trust

whenever trustee breaches fiduciary duty, beneficiary has a choice of options: 1) ratify 2) surcharge 3) trace and recover

Rest. Trusts

where a promise to create a trust is gratuitous (i.e., not supported by consideration), a trust arises when all elements of a valid trust have been met if, but only if, at that subsequent time the settlor manifests an intention then to create the trust → need a REAFFIRMATION of intent

Revocable Trust - Are revocable trusts valid?

yes → even though the settlor retains the right to revoke, alter, or amend the trust, keeps an income interest or other interests in the trust as beneficiary, retains a power of appointment over the trust corpus or retains every day control over the trust either by naming herself trustee or by retaining veto power over the trustee's decisions

Defenses to Purchase Money Resulting Trust

(1) Gift; or (2) Loan GIFT, and NOT trust, presumed when person provided consideration bears close family relationship to title holder

totten trust

-T creates a savings account at a bank, then executes a will devising the account to another -it is revocable during life by any manifestations of intent to revoke, including withdrawals -the account is reachable by the depositor's creditors during life, and in many states, it may also be reached after death to the extent the depositor's probate assets are insufficient to pay his creditors -extrinsic evidence is admissible to show a trust was not intended despite the designation on the signature card majority rule: a totten trust can be revoked by the depositor's will BUT, under the UPC, no revocation by will

spendthrift trust

-a clause in the trust provides that the trust is not subject to the claims of the beneficiary's creditors these are valid and enforceable -so the beneficiary's interest in the trust is beyond the creditor's reach EXCEPTIONS: 1) claims for necessities of life: minimal food, shelter, clothing and medical care 2) alimony and child support obligations 3) claims by U.S. or a state (usually for taxes)

main requirements for res

-the subject matter of the trust must be CERTAIN and IDENTIFIABLE → if there is no certain and identifiable trust property, there is no trust the settlor has to segregate out a specific interest in property -HOWEVER, intangible property (e.g., accounts receivable) IS sufficient to support a trust

liability for tort

-traditional rule: a trustee is personally liable on all torts of self and agents → but, can be reimbursed from trust estate if the trustee was not personally at fault -UTC change: clamant must sue the trustee in his representative capacity; trustee may be sued personally only if the trustee was personally at fault

liability for contract

-traditional rule: trustee is personally liable on contracts unless stipulation in the contract relieves her of personal liability -UTC change: claimant must sue the trustee in her representative capacity; trustee may not be sued personally UNELSS she failed to reveal her representative capacity when she entered into the contract

co-trustees

-traditional view: trustees required to act unanimously modern (majority rule): trustees are allowed to act by majority vote -when a co-trustee dies, he only needs to be replaced if the instrument calls for it

legatee's interest in trust property

-where the T has died, although her estate has not been distributed, a legatee has more than a mere expectancy → she has an interest which may be the subject matter of a trust or a gift -the legatee's right to receive the property satisfies the "certain and identifiable" requirement

Elements of Prudent Investor Rule

1) duty to keep trust productive → have to earn a reasonable rate of return on investments 2) duty to balance return with potential risk 3) duty to diversify instruments → spread the risk 4) duty not to commingle → take title to trust property in name of trust and keep it segregated