MEE - Trusts

Other common trustee powers

(1) Power to revoke: if settlor names himself as trustee (2) Power to withdraw: many trusts give trustee power to withdraw income, principal, or both from the trust to carry out the trust's purpose (3) Power to modify: The settlor may include the power to modify in order to give the trustee the ability to change provisions of the trust to reflect the settlor's intent.

Parties to Trust

(1) Settlor (2) Trustee (3) Beneficiary

"Secret" trust

A "secret" trust is not a testamentary trust. It looks like a testamentary gift, but it is created in reliance on the named beneficiary's promise to hold and administer the property for another. The intended beneficiary is permitted to present extrinsic evidence to prove the promise. If the promise is proven by clear and convincing evidence, then a constructive trust is imposed on the property for the intended beneficiary, so as to prevent the unjust enrichment of the "secret" trustee.

"Semi-secret" trust

A "semi-secret" trust is also not a testamentary trust. A semi-secret trust occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust. In this situation, extrinsic evidence may not be presented, the gift fails, and a resulting trust is imposed on the property to be held in trust for the testator's heirs.

Totten Trusts

A Totten trust is not a true trust because there is no separation of legal and equitable title. Rather, it is a designation given to a bank account in a depositor's name as "trustee" for a named beneficiary. During the depositor's lifetime, the depositor retains control of the passbook and the ability to make deposits and withdrawals. A Totten trust can be revoked by any lifetime act manifesting the depositor's intent to revoke, or by will. In this way, a Totten trust is distinguishable from a joint bank account, the proceeds of which pass by law at the death of one joint tenant to the other.

Exceptions to Spendthrift

A beneficiary's creditors usually cannot reach the beneficiary's trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting a beneficiary's creditors from attaching the beneficiary's interest. Although generally valid, most states allow certain classes of creditors to reach a beneficiary's assets, notwithstanding the spendthrift clause. The spendthrift clause exception applies to: i) Children and spouses entitled to support; ii) Those providing basic necessities to the beneficiary; and iii) Holders of federal or state tax liens. NOTE: courts will not enforce spendthrift clauses if the settlor is also the beneficiary, because this would provide an easy way for individuals to avoid their creditors.

Alienation (beneficiary)

A beneficiary's equitable interest in trust property is freely alienable unless a statute or the trust instrument limits this right. Because a transferee cannot have a greater right than what was transferred to him, any transferee from a beneficiary, including a creditor, takes an interest identical to what was held by the beneficiary. Creditor's may reach trust principal or income only when such amounts become payable to the beneficiary or are subject to her demand (unless otherwise provided by statute or under the trust instrument)

Court Modification and Termination

A court may modify a trust if unanticipated events have caused its purposes to be frustrated by its terms. A court may prematurely terminate a trust if the trust's purpose has been achieved, or if it has become illegal, impracticable, or impossible. A court may not alter the rights of beneficiaries due to changed circumstances, no matter how compelling, but it may interpret certain changes as frustrating to the trust's purposes in order to make such modifications. Extreme fluctuations in market conditions and substantial changes to the tax law have both been used to justify trust modifications.

Class Gifts

A gift to a group of individuals with an automatic right of survivorship is a class gift. Upon the death of one class member, that member's share is redistributed among the remaining members of the class. A class remains open and may admit new members until (i) at least one class member is entitled to obtain possession of the gift, or (ii) the named person dies.

Allocation of Receipts - Liquidating Assets

A liquidating asset is one whose value diminishes over time because the asset is only expected to produce receipts over a limited period (e.g., patents or copyrights). Proceeds from liquidating assets are also allocated as 10% income and 90% principal.

Mandatory Trust

A mandatory trust is the most restrictive type of trust; it is essentially the opposite of a discretionary trust. The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed.

Mandatory vs. Discretionary Trusts

A mandatory trust requires the trustee to distribute all trust income. To protect the interests of the beneficiaries, a settlor may instead opt to create a discretionary trust, under which the trustee is given the power to distribute income at his discretion. The trustee does not abuse his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.

Benevolent trusts

A merely benevolent trust is not a charitable trust unless the acts called for therein fall under the acceptable charitable purposes listed above. Most courts no longer belabor the distinction between benevolent and charitable trusts.

Qualifications of the trustee

A named trustee must have the capacity to acquire and hold property for his own benefit and the capacity to administer the trust. Minors or insane persons will not qualify as trustees, as they can hold property but cannot administer it. Additionally, those eligible to serve as trustees may be limited by statute. A named trustee who fails to qualify will be replaced by the court, unless the trust names a successor trustee.

Pour-over trust

A pour-over devise is a provision in a will that directs the distribution of property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire trust.

Private Express Trusts

A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries.

Vested Remainder

A remainder is vested if the holder of the interest is ascertainable and there is no express condition precedent required before the interest becomes possessory. *Under the common law*, if a vested remainder is created by a trust, and the trust provides that should the beneficiary predecease the life tenant, the remainder should pass to the beneficiary's child, then the remainder divests only if the beneficiary has issue. In contrast, if the beneficiary dies without issue, the remainder does not divest, and it passes to the beneficiary's estate. *Under the UPC*, the result differs. Future interests under the UPC are contingent on the beneficiary surviving the distribution date. If the beneficiary does not survive the distribution date, then the interest does not vest and does not pass to either the beneficiary's issue or the beneficiary's estate.

Remedial Trusts

A remedial trust is an equitable remedy created by operation of law and therefore is not subject to the trust creation requirements, nor can it be challenged on Statute of Wills or Statute of Frauds grounds. Remedial trusts are passive in that the sole duty of the trustee is to convey the trust property to the beneficiary. After this has been accomplished, the trust terminates.

Spendthrift Trust (restrain on alienation)

A spendthrift trust expressly restricts the beneficiary's power to voluntarily or involuntarily transfer his equitable interest. (Note that a trust restricting only involuntary transfers would be void as against public policy.) Spendthrift provisions are often inserted into trusts to protect beneficiaries from their own imprudence. The spendthrift restriction applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary. An attempted transfer by the beneficiary in violation of the spendthrift restriction is effective only in that it provides authorization for the trustee to pay funds directly into the hands of the attempted transferee.

Support Trust

A support trust directs the trustee to pay income or principal as necessary to support the trust beneficiary. *Creditors cannot reach the assets of a support trust, except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.* The Internal Revenue Code set an "ascertainable standard" limiting distributions to amounts needed for a beneficiary's "health, education, support, and maintenance."

Liability of third parties

A third party can potentially be held liable for his role in a breach of trust. Common law presumed that the purpose of a trust was to preserve the trust property, requiring those dealing with trustees to carefully inspect the trust property before dealing with the trustee. The modern trend presumes that the purpose of a trust is to hold and manage the trust property, and it provides greater protection to third parties.

Trust Modification

A trust automatically terminates only when the trust purpose has been accomplished. Subject to the Claflin doctrine, a trust may terminate by consent if the settlor is deceased or has no remaining interest in the trust, and if all of the beneficiaries and the trustee consent to the termination. The trustee by herself cannot terminate a trust. If all of the beneficiaries wish to terminate, but the trustee objects, most courts allow the trustee to block the termination if she can show termination would violate the settlor's intent.

Valid Trust Purpose

A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or contrary to public policy. Trust provisions that restrain a first marriage have generally been held to violate public policy. However, a restraint on marriage might be upheld if the trustee's motive was merely to provide support for a beneficiary while the beneficiary is single. See Restatement (Third) of Trusts § 29 (2003).

Ongoing Transfers

A trust involves an ongoing series of transfers. Trust property is divided between income and principal, and the equitable interest is divided between the beneficiary holding the possessory estate and the beneficiary holding the future interest.

Trust (Generally)

A trust is a fiduciary relationship wherein one or more trustees are called upon to manage, protect, and invest certain property and any income generated therefrom for the benefit of one or more named beneficiaries. To create a trust, the grantor must have intended to create the trust. A trust is valid as long as it has a trustee, an ascertainable beneficiary, and assets. Trust interests are alienable, devisable, and descendible unless the terms of a trust expressly or impliedly provide otherwise. Trusts are classified according to the method by which they are created. There are three main types of trusts: express trusts, resulting trusts, and constructive trusts.

Class-gift exception

A trust to a reasonably definite class will be enforced. Even a trust that allows the trustee to select the beneficiaries from among the members of a class is acceptable, but a trust to an entirely indefinite class will not be enforced as a private trust.

Loss of trustee

A trust will not fail if a trustee dies, becomes disabled, resigns, or refuses to accept the office (once the appointment has been accepted, however, the trustee must obtain the court's permission to resign). Instead, the court will appoint a successor trustee, unless the settlor expressed an intent that the trust was to continue only as long as a particular trustee served.

Duty to be impartial

A trustee has a duty to balance the often-conflicting interests of the present and future beneficiaries by investing the property so that it produces a reasonable income while preserving the principal for the remaindermen.

Trustee's Power to Terminate

A trustee has no power to terminate a trust unless the trust instrument contains express termination provisions.

Duty of Loyalty and Good Faith

A trustee is bound by a broad range of fiduciary duties designed to ensure that she acts solely in the best interests of the beneficiaries when investing property and otherwise managing the trust. The trustee has a duty to administer the trust in good faith, in accordance with its terms and purposes, and in the interest of the beneficiaries. Any beneficiary has standing against the trustee if his interests are violated, and he can choose either to set aside the transaction or to ratify the transaction and recover any profits therefrom. Even if a trustee is granted complete discretion under the trust instrument, her actions are not immune from review if it can be shown that she failed to exercise good judgment. When the trustee's decision is based exclusively on personal reasons unrelated to the settlor's goals, the trustee's decision may be overturned. *NOTE*:On the exam, determine whether the trustee acted reasonably (objective standard) and in good faith (subjective standard). Good faith alone is not enough.

Trustee's liability for agents

A trustee is not liable for breaches committed by an agent unless the trustee: i) Directs, permits, or acquiesces in the agent's act; ii) Conceals the agent's act; iii) Negligently fails to compel the agent to redress the wrong; iv) Fails to exercise reasonable supervision over the agent; v) Permits the agent to perform duties that the trustee was not entitled to delegate; or vi) Fails to use reasonable care in the selection or retention of agents.

Trustee's duties

A trustee must be given specific duties to perform, or the trust will fail and legal and equitable title will merge in the beneficiary. The expressed intention of the settlor to create a trust along with the identification of trust property and beneficiaries is usually sufficient for the court to infer duties to be performed by the trustee.

Trust Property

A valid trust must contain some property that was owned by the settlor at the time the trust was created and was at that time transferred to the trust or to the trustee. Put differently, the trust must be "funded." Any property interest, including real property, personal property, money, intangibles, partial interests, or future interests (whether vested or contingent) will suffice, although a mere expectancy will not. If a trust that is invalid for lack of assets is later funded, a trust arises if the settlor re-manifests the intention to create the trust. The exception is a "pour-over" gift (see § II.A.2.a.4). infra), which is valid even if made before there is identifiable trust property.

Acceleration into Possession

A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder(s), whereas a contingent remainder does not vest until all conditions precedent have been satisfied.

Method of Revocation

Absent language within the instrument prescribing the method of revocation, any action manifesting the settlor's intent to revoke will suffice. The revocation becomes effective when the action manifesting the intent occurs, rather than when the trustee or beneficiaries learn of the action.

Disclaimer

Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. In most states, a disclaimer is not effective unless it is reduced to writing within nine months after the future interest would become "indefeasibly vested." When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.

Generation-skipping transfer tax

An estate tax may be owed when a decedent passes property at his death. When a decedent passes property to remote descendants, a generation-skipping tax may be owed.

Express Trusts

An express trust is created as a result of the expressed intention of the owner of the property to create a trust relationship with respect to the property. There are two categories of express trusts: private express trusts and charitable trusts.

Honorary Trusts

An honorary trust is one that is not created for charitable purposes but has no private beneficiaries. The most common example is a trust for the care of a beloved pet. In the case of an honorary trust, the trustee is on her honor to administer the trust because there are no beneficiaries capable of enforcing its terms. Should the trustee fail to do so, a resulting trust may be imposed for the benefit of the settlor's estate.

Charitable Trusts - RAP

Are not subject to the Rule Against Perpetuities and may continue indefinitely. A trust can be created that calls for transfers of interest among charities, but it cannot direct the transfer of interest between a charitable beneficiary and a noncharitable beneficiary.

Additions Clause

As a general proposition, a trustee's duties cannot be unilaterally enlarged by the settlor after the trustee has accepted his office. A well-drafted trust instrument will therefore include an additions clause if the settlor contemplates enlarging the trustee's responsibilities with additional trust assets. Even then, a trustee may be able to reject additions.

Pour-over trust (beneficiary)

Assets that are poured over from a will into an inter vivos trust pass outside of the reach of the testator's creditors as long as the trust was executed before or simultaneously with the will. The same is true of life insurance or other contract proceeds that are payable to the trustees or the trust as named beneficiary, except in these cases, some courts will not require that the trust be in existence at the time the beneficiary is named.

Rule in Shelley's Case

At common law, the Rule in Shelley's Case prevented remainders in a grantee's heirs by merging present and future interests so that the grantee would take in fee simple absolute. Most jurisdictions have abolished the Rule in Shelley's Case, and the parties now take the present and future interests according to the language in the deed.

Constructive Trust

At common law, the Statute of Frauds requirement was strictly applied. The modern trend (adopted by the Restatement (Third) of Trusts, § 24) imposes a constructive trust when the required writing is lacking and orders the purported trustee to distribute the real property to the intended beneficiaries outright, rather than in trust.

Transferability - Remainders

At common law, vested remainders were transferable, and contingent remainders were not. The modern trend allows the transfer of both vested and contingent remainders.

Rule Against Perpetuities

Because future interests are trust components, trusts are subject to the Rule Against Perpetuities, meaning that a trust may fail if all interests there under may not vest within the applicable period of perpetuities (usually a life in being plus 21 years). Some jurisdictions take a "wait and see" approach to the application of the rule, refraining from invalidating future interests until it is clear that they will not vest within the perpetuities period.

Allocation of Receipts -- from an entity

Cash money received from an entity is characterized as income unless the money is a capital gain for federal income tax purposes or is received following a partial or complete liquidation of the entity. All property other than cash money received from an entity (e.g., stock dividends) is characterized as principal.

Co-trustee liability

Co-trustees are jointly liable, although the liability may be limited if only one trustee acts in bad faith or benefited personally from the breach. A co-trustee may be liable for breach for: i) Consenting to the action constituting the breach; ii) Negligently failing to act to prevent the breach; iii) Concealing the breach or failing to compel redress; or iv) Improperly delegating authority to a co-trustee.

Powers of Trustee

Common law grants powers to the trustee outside of those authorized within the trust document. Judicial authorization: The trustee can petition the court to obtain powers not expressly authorized in the trust. Modern trend: The modern trend is for the court to grant the trustee all those powers necessary to act as a reasonably prudent person in managing the trust.

Constructive Trust

Courts use constructive trusts to prevent unjust enrichment if the settlor causes: fraud, duress, undue influence, breach of duty, or detrimental reliance by a third party on a false representation. There must have been wrongful conduct in order to impose a constructive trust. The tracing doctrine may be applied if trust property has already been sold or otherwise disposed of, allowing the beneficiary of the constructive trust to pursue the sale proceeds or other property received. In such a case, the constructive trust may be imposed either against the seller or against the buyer. However, a breach of a promise will not give rise to a constructive trust unless the promise is fraudulent, the breach is related to the devisee's or heir's promise to hold property for a third party, the breach is one in a confidential relationship, or there is a breach by the buyer to the debtor at a foreclosure sale. The burden of clear and convincing evidence is on the party seeking the constructive trust. A constructive trust will almost always be imposed when one individual commits homicide and thereby benefits from his victim's estate. A party with unclean hands will usually be estopped from arguing for the creation of a constructive trust.

Settlor

Creator of the trust (sometimes referred to as the grantor)

Abuse of Discretion

Even if a trustee has complete discretion over a trust, she must still act in the best interests of the trust and its beneficiaries.

Uniform Transfers to Minors Act (UTMA) accounts

Every state has enacted the UTMA, which provides a convenient method by which an account can be set up for a minor with a custodian who is required to manage the account until the minor reaches age 21. Such an arrangement is not a true trust because the custodian does not hold legal title to the account.

Charitable Trusts

For a trust to be considered charitable, it must have a stated *charitable purpose* and it must exist for the *benefit of the community at large or for a class of persons the membership in which varies*. For public-policy reasons, charitable trusts are usually construed quite liberally by the courts. Neither the settlor nor a potential beneficiary has standing to challenge a charitable trust. Only the state attorney general possesses such a right. *NOTE*: If a trust fails as a charitable trust, it still may be valid as a private express trust. *Modern Trend*: to validate as charitable if possible

Parol Evidence Rule (INTERPRETING? PER NOT IMPLICATED)

Generally, evidence outside of the written agreement is permitted to show the settlor's intent only if the written agreement is ambiguous on its face. A few states allow the introduction of parol evidence even if the writing is unambiguous.

Allocating principal and income - traditional approach

Generally, life beneficiaries are entitled to the trust income, and remaindermen are entitled to the trust principal. The traditional approach assumed that any money generated by trust property was income and that any money generated in connection with a conveyance of trust property was principal. The traditional approach serves as the starting point for the modern approach.

Trustee

Holds legal interest or title to the trust property (same individual cannot serve as sole trustee and sole beneficiary of a trust)

Beneficiary's future interest

If a beneficiary is given a future interest, then it is either a remainder or an executory interest.

Precatory Trusts

If a donor transfers property to a donee using language that expresses a hope or wish (rather than creating a legal obligation) that such property be used for the benefit of another, then the gift may be considered a precatory trust and not an outright gift. To be considered a precatory trust, the transfer must meet two requirements. First, it must contain specific instructions to a fiduciary. Second, it must be shown that, absent imposition of a trust, there would be an unnatural disposition of the donor's property because of familial relations or a history of support between the donor and the intended beneficiary.

Duty of Prudence (Care)

If a function goes to the heart of the trust or constitutes a critical function concerning the property, then the function is discretionary and is not delegable. Otherwise, the function is merely ministerial and can be delegated. These same rules apply when a trustee delegates to a co-trustee.

Grantor's Future Interest

If a grantor retains a future interest, then it is a reversion, a possibility of reverter, or a right of entry.

Statutory Limitation - Spendthrift

If a trust contains a spendthrift clause, then the beneficiary's interest is not reachable in bankruptcy proceedings. Further, the Employee Retirement Income Security Act (ERISA) mandates that an employee's pension benefits cannot be reached by creditors.

Commingling trust funds

If a trustee commingles trust assets with his own property and some property is lost or destroyed, however, there is a presumption that the lost or destroyed property was the trustee's and that the remaining property belongs to the trust. Additionally, if one part of the commingled assets increases in value and another part decreases in value, there is a presumption that the assets with increased value belong to the trust and that the assets with decreased value belong to the trustee.

Liability for predecessor and successor trustees

If a trustee knew of his predecessor's breach and failed to address it or was negligent in delivering the property, then the trustee will be liable for his predecessor's breach. Successor trustees can maintain the same actions as the original trustees.

Conflicts of Interest

If an alleged conflict of interest arises that cannot be characterized as self-dealing, then the "no further inquiry" standard is inapplicable, and the transaction is assessed under the "reasonable and in good faith" standard.

Executory Interests

If someone other than the grantor holds an interest that is followed by either a vested remainder subject to divestment or a fee simple subject to an executory limitation, then that person holds an executory interest.

Remainder as class gift

If the class is vested as to some but still open so that others can join it, then new members partially divest the previous members of the class in order to share the property equally.

Discretionary Trust

If the trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary, then a discretionary trust exists. If the trustee exercises his discretion to pay, then the beneficiary's creditors have the same rights as the beneficiary, unless a spendthrift restriction exists (discussed infra at § IV.F.). If the discretion to pay is not exercised, then the beneficiary's interest cannot be reached by his creditors. The beneficiary of a fully discretionary trust lacks standing to challenge the actions or inactions of the trustee unless there is a clear abuse of discretion.

Cy Pres Doctrine

In an effort to carry out the testator's intent, under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform. The court must determine the settlor's primary purpose and select a new purpose "as near as possible" to the original purpose. Because the Rule Against Perpetuities is not applicable to charitable trusts, courts are called upon to apply cy pres often. The settlor's intent controls, so if it appears that the settlor would not have wished that an alternative charitable purpose be selected, the trust property may instead be subject to a resulting trust for the benefit of the settlor's estate.

Duty to maintain

In caring for real property, the trustee must take whatever steps an ordinary owner would take, including insuring, repairing, and otherwise maintaining the property.

Settlor's Intent - modification/termination

In most states, a settlor must expressly reserve the right to modify or terminate a trust in order to be granted such powers. In the absence of such a reservation, modification or termination can occur only with the consent of all beneficiaries and if the proposed change will not interfere with a primary purpose of the trust. Under the third Restatement, for a trust to be terminated, there must be a finding that the trust grantor intended the spendthrift provision to bar premature trust termination.

Adopted Children

In the absence of a specific provision addressing whether adoptive children are to be considered children for the purpose of taking under a written instrument, the transferor's intent controls. *NOTE*:If a fact pattern indicates that a child is adopted, consider it a hint that the bar examiners want to see at least one sentence discussing that the adopted child is treated as a biological child for the purpose of a trust. In many cases, the date of the adoption is also a factor, in which case a discussion about when a class closes is likely warranted.

Inter vivos trusts

Inter vivos trusts are lifetime transfers in trust. Although a simple declaration of trust will usually suffice if the settlor is also the trustee, delivery must accompany the declaration if a third-party trustee is named, whereby the settlor parts with dominion and control over the trust property. An inter vivos trust can be either revocable or irrevocable. Often, inter vivos trusts are used to avoid the costs and delays of the probate process. Other perceived advantages of inter vivos trusts include lifetime asset management by a third party, privacy, and choice of law.

Life-insurance trusts

Life-insurance trusts are established to provide a vehicle for the payment of the policy upon the settlor's death. Therefore, they are not funded at their creation. Despite this lack of significant res, these trusts have been upheld.

Beneficiaries' right of enforcement

Lost profits, lost interests, and other losses resulting from a breach of trust are the responsibility of the trustee, and beneficiaries may sue the trustee and seek damages or removal of the trustee for breach. The trustee is also not allowed to offset losses resulting from the breach against any gains from another breach. If the beneficiaries joined the breach or consented to the trustee's actions, however, equity will prevent the beneficiaries from pursuing an action against the trustee. Note, though, that a beneficiary's failure to object to the breach does not rise to the level of consent.

Allocation of Receipts - Mineral Rights

Oil, gas, mineral, and water rights payments are also allocated as 10% income and 90% principal.

Charitable-trusts exception

Only private trusts must have ascertainable beneficiaries. Because, by definition, charitable trusts exist for the good of the public at large, charitable trusts must not have individual ascertainable beneficiaries.

Allocation of Receipts -- Contract Proceeds

Proceeds from life insurance policies or other contracts in which the trust or trustee is named as a beneficiary are allocated to principal unless the contract insures the trustee against loss, in which case the proceeds are allocated to income.

Charitable purposes

Purposes considered to be charitable include: i) The relief of poverty; ii) The advancement of education or religion; iii) The promotion of good health; iv) Governmental or municipal purposes; and v) Other purposes benefiting the community at large or a particular segment of the community.

Gifts to Heirs

Qualification as an heir is determined upon the death of the transferor or at the time of distribution.

Third party liability under Uniform Trustees' Powers Act (UTPA)

The UTPA obligates third parties to act in good faith and to give valuable consideration. Under the UTPA, third parties are protected as long as they act without actual knowledge that such action constitutes a breach of trust.

Allocation of Receipts -- Deferred Compensation Plan Proceeds

Receipts from a deferred compensation plan (e.g., a pension plan) are considered income if characterized as such by the payor and likewise are principal if so characterized. If the payor does not characterize the payment as income or principal, then 10% of the payment is income and the rest is principal.

Duty to sell

Regardless of what the trust document says about the trustee's ability to retain trust assets, a trustee has a duty to sell trust property within a reasonable time if a failure to diversify would be inconsistent with the modern portfolio approach. Any delay in disposing of under-performing or over-performing property creates a duty in the trustee to reallocate sale proceeds to those beneficiaries who were adversely affected by the delay.

Removal of a trustee

Several grounds exist through which the court may remove a trustee. These include conflict of interest, old age, serious breach of trust, and habitual drunkenness, among others. However, if the settlor knew of the grounds for removal when she created the trust, then the court may allow the trustee to continue. The court's primary concern is ensuring the integrity and continuity of the trust. Beneficiaries may also be able to remove a trustee if the trust instrument specifically grants them this power of removal.

Gift-Over Clause

Some trusts include gift-over clauses, which provide for a disposition of the trust property in the event the trust purpose fails. Jurisdictions are mixed as to the treatment of such clauses, but many will honor such a clause before imposing an equitable remedy.

Testamentary trusts

Testamentary trusts occur when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will. Testamentary trusts must comply with the applicable jurisdiction's Statute of Wills. If a testamentary trust does not meet the requirements of the Statute of Wills, it may still be deemed a constructive trust or a resulting trust, depending on whether it is "secret" or "semi-secret."

Doctrine of Worthier Title

The Doctrine of Worthier Title is a rule of construction similar to the Rule in Shelley's Case, except that it prevents remainders in the grantor's heirs, and it still applies in some states. The presumption is of a reversion to the grantor.

Failed Gifts

The Restatement (Third) of Trusts rejects the argument that a failed gift can be saved by a re-characterization of the donor's intent.

Uniform Prudent Investor Act

The UPIA, adopted by the Restatement (Third) of Trusts and the Trustee Act 2000, requires the trustee to act as a prudent investor would when investing his own property but puts less emphasis on the level of risk for each investment. The trustee must exercise reasonable care, caution, and skill when investing and managing trust assets unless the trustee has special skills or expertise, in which case he has a duty to utilize such assets.

Modern Approach

The Uniform Principal and Income Act (UPAIA), adopted in most states, focuses on total return to the trust portfolio, regardless of classifications of income or principal. Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. The trustee may not make adjustments under the UPAIA if he is also a trust beneficiary.

Standing to Enforce - Charitable Trusts

The attorney general of the state of the trust's creation and members of the community who are more directly affected than the general community usually have standing to enforce the terms of the trust and the trustee's duties. Under UTC §405, a settlor also has standing to enforce the trust, even if she has not expressly retained an interest.

Ascertainable beneficiaries

The beneficiaries of a private trust must be ascertainable (i.e., identifiable by name) so that the equitable interest can be transferred automatically by operation of law and directly benefit the person. The settlor may refer to acts of independent significance when identifying trust beneficiaries. Under the Uniform Trust Code (UTC), a trustee can select a beneficiary from an indefinite class, unless the trustee must distribute equally to all members of an indefinite class. See UTC § 402(c). If a beneficiary has died without the settlor's knowledge prior to the creation of the trust, then the trust will fail for lack of a beneficiary. In this case, a resulting trust in favor of the settlor or his successors is presumed.

Beneficiary

The beneficiary holds equitable title to the property and therefore possesses the power to enforce the trust instrument. To be valid, a trust must name at least one beneficiary. Such beneficiary may be unborn at the time the trust is created, provided such beneficiary will be identifiable by the time he comes into enjoyment of the trust property. Notice is not required, but acceptance by the beneficiary is required. The beneficiary, however, has the option of renouncing his rights within a reasonable time. Any individual or entity can be named as a trust beneficiary, provided the individual or entity is capable of taking and holding title to property. A named beneficiary is required to expressly or impliedly accept his interest for the trust to commence for his benefit.

Charitable Trusts - Indefinite Beneficiaries

The community at large, or a class comprising unidentifiable members, not a named individual or a narrow group of individuals, must be the beneficiary of a charitable trust. It is possible that a very small class could still qualify as a charitable beneficiary. Further, even though the direct beneficiary may be a private individual, a charitable trust may be found when the community at large is an indirect beneficiary of the trust; for example, when a trust is established to put a beneficiary through law school, but it stipulates that the beneficiary must spend a certain number of years of legal practice in the service of low-income clients.

Removal of Trustee

The court has the power to refuse to appoint or to remove a trustee if the purposes of the trust would be frustrated by the trustee's appointment or continuance in office. Absent an express provision in the trust instrument to the contrary, neither the settlor nor the trust beneficiaries are entitled to seek the removal of a trustee.

Bifurcated Transfer

The creator or settlor transfers property to a second-party trustee to be managed for the benefit of a third-party beneficiary. The trustee holds legal title, and the beneficiary holds equitable title. No consideration is required.

Self-Dealing

The following are generally prohibited transactions with trust property: i) Buying or selling trust assets (even at fair market value); ii) Selling property of one trust to another trust that the trustee manages; iii) Borrowing from or making loans to the trust; iv) Using trust assets to secure a personal loan; v) Engaging in prohibited transactions with friends or relatives; or vi) Otherwise acting for personal gain through the trustee position. When self-dealing is involved an irrebuttable presumption is created that the trustee breached the duty of loyalty Transaction must be reasonable and fair (even with proper approval) to not violate duty of loyalty

Testamentary trusts -- Modern trend

The majority of courts still respect the common-law distinction between "secret" and "semi-secret" trusts. However, the *modern trend* and that adopted by the Restatement (Third) of Trusts, § 18, calls for the imposition of a constructive trust in favor of the intended beneficiaries (if known) in both "secret" and "semi-secret" trust situations.

Reversion

The most common future interest in the grantor is a reversion, in which the grantor has the right to possess the property after a finite estate ends. At common law, the three finite estates were the life estate, the estate for a term of years, and the fee tail. If the grantor does not convey his entire interest but does not explicitly retain an interest, then a reversionary interest is implied.

Intent for Valid Private Express Trust

The settlor must intend to make a gift in trust. The use of common trust terms (such as "in trust" or "trustee") will create a presumption of intent to create a trust, but these words are not required. The settlor's intent may be manifested orally, in writing, or by conduct. Intent is only required to be expressed in writing when the Statute of Wills (i.e., the jurisdiction's requirements for the execution of a will) or the Statute of Frauds (UCC § 2-207) applies. To determine a settlor's intent, both in creating and administering a trust, the courts consider: i) The specific terms and overall tenor of the words used; ii) The definiteness or indefiniteness of the property involved; iii) The ease or difficulty of ascertaining possible trust purposes and terms, and the specificity or vagueness of the possible beneficiaries and their interests; iv) The interests or motives and the nature and degree of concerns that may be reasonably supposed to have influenced the transferor; v) The financial situation, dependencies, and expectations of the parties; vi) The transferor's prior conduct, statements, and relationships with respect to possible trust beneficiaries; vii) The personal and any fiduciary relationships between the transferor and the transferee; viii) Other dispositions the transferor is making or has made of his wealth; and ix) Whether the result of construing the disposition as involving a trust or not would be such as a person in the situation of the transferor would be likely to desire.

Revocation by will - termination

The traditional rule required a trust to expressly provide for its revocability by will. The UTC authorizes trust revocation by will unless the trust expressly provides for another method of revocation.

Duty to Diversify Assets

The trustee must adequately diversify the trust investments to spread the risk of loss. Under the UPIA, investing in one mutual fund may be sufficient if the fund is sufficiently diversified.

Duty to make property productive

The trustee must preserve trust property and work to make it productive by pursuing all possible claims, deriving the maximum amount of income from investments, selling assets when appropriate, securing insurance, paying ordinary and necessary expenses, and acting within a reasonable period of time in all matters.

Duty to secure possession

The trustee must secure possession of the property within a reasonable period of time. In the case of a testamentary trust, the trustee must monitor the executor's actions to ensure that the trust receives all of that to which it is entitled.

Duty to segregate

The trustee must separate his personal property (such as money and stocks) from trust assets to ensure that they cannot be switched if one outperforms the other. An exception to this duty to segregate applies when a trustee invests in bearer bonds. The modern trend holds the trustee liable only when the breach causes the damage to the trust property.

Types of property - inter vivos trust

To transfer real property to a trust, the declaration of trust must be in a writing that satisfies the Statute of Frauds. However, a writing is not required to transfer personal property to a trust, and extrinsic evidence generally is allowed to clarify ambiguities. The trustee takes legal title upon the delivery of a deed or other document of title for real property, or upon the delivery of personal property.

Revocation by Divorce - Termination

Traditionally, a spousal interest created by a trust, unlike one created by a will, was not revoked upon divorce. However, the trend now is to treat a spousal interest under a trust similarly to one under a will.

Allocation of Expenses - Expenses Charged to Income

Trust income will be charged with the following expenses: i) One-half of the regular compensation to the trustee and to those who provide investment, advisory, or custodial services to the trustee; ii) One-half of accounting costs, court costs, and the costs of other matters affecting trust interests; iii) Ordinary expenses in their entirety; and iv) Insurance premiums that cover the loss of a trust asset.

Expenses Charged to Principal

Trust principal will be charged with the following expenses: i) The remaining one-half of the regular compensation to the trustee and to those who provide services to the trustee; ii) The remaining one-half of accounting costs, court costs, and the costs of other matters affecting trust interests; iii) All payments on the principal of any trust debt; iv) All expenses of any proceeding that concerns an interest in principal; v) Estate taxes; and vi) All payments related to environmental matters

Segregation

Trust property must be identifiable and segregated. The property must be described with reasonable certainty.

Legal Attacks on Trusts

Trustee must defend the trust against legal attacks

Unborn children exception

Trusts for the benefit of unborn children will be upheld even though the beneficiaries are not yet ascertainable at the time the trust is created.

Distributions of stock

Under UPAIA § 6(a), a distribution of stock, whether classified as a dividend or as a split, is treated as a distribution of principal. This is also true under the Revised Uniform Principal and Income Act (RUPIA). The RUPIA gives a trustee a limited power to allocate the stock dividend between income and the principal when the distributing corporation made no distributions to shareholders except in the form of dividends paid in stock.

"Surviving" - common law v. upc

Under common law, the remainder is divested only if the remainderman has a child; otherwise, the remainder is not divested and passes to the remainderman's estate. Under the UPC, however, the remainder divests only if the remainderman survives the testator. If he does not, then the remainder does not vest in him and therefore does not pass to the remainderman's estate.

Revocable vs. Irrevocable Trusts

Under the *majority rule*, a trust is presumed to be irrevocable unless it expressly states otherwise. Under the Uniform Trust Code (UTC), however, and in a *minority* of jurisdictions, the presumption is just the opposite—a trust is presumed revocable unless it expressly states that it is irrevocable.

Termination - Unfulfilled material purpose

Under the Claflin doctrine, a trustee can block a premature trust termination—even one to which all of the beneficiaries have consented—if the trust is shown to have an unfulfilled material purpose.

Class Gift - Restatement

Under the Restatement (Third) of Trusts, the share of a deceased class member is paid to that class member's surviving issue.

Validity (pour-over trust)

Under the UTATA, a will may "pour over" estate assets into a trust, even if the trust instrument was not executed in accordance with the Statute of Wills, as long as the trust is identified in the will, and its terms are set forth in a written instrument. Furthermore, if these requirements are met, the pour-over bequest is valid even if the trust is unfunded, revocable, and amendable. Revocation: If both the trust and the will are revoked, so too is the pour-over trust. If only the trust is revoked, then the pour-over provision in the will must fail.

Unproductive property rule

Under the traditional approach, if a trust asset produced little or no income upon the asset's sale, then an income beneficiary was entitled to some portion of the sale proceeds under the theory that such portion represented delayed income thereon. With the emphasis having shifted to the total return from the entire portfolio and away from individual investments, this rule is now seldom applied.

Trustee power to sell or contract

Unless otherwise provided in the trust instrument, a trustee generally has the implied power to contract, sell, lease, or transfer the trust property. If the settlor specifies that the trustee may not sell certain property, then such property may not be sold without a valid court order permitting the sale, which order will be granted only if selling is necessary to save the trust.

Trustee's liabilities to third parties

Unless otherwise specified in the trust instrument or in the governing contract, a trustee is personally liable on contracts entered into and for tortious acts committed while acting as trustee. If he acted within the scope of his duties, then he is entitled to indemnification from the trust.

Gifts to Surviving Children

Unless the governing instrument provides otherwise, the general rule is that the gift is expressly limited to the transferor's surviving children, so that the surviving issue of a deceased child does not take.

Powers of appointment

Usually given to a beneficiary, a power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust. A special power of appointment allows the donor to specify certain individuals or groups as the objects of the power, to the exclusion of others. The power can be limited as to recipient and time of exercising.

Resulting Trust

When a trust fails in some way or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to the settlor's estate. When a testamentary trust fails, the residuary legatee succeeds to the property interest. The purpose of a resulting trust is to achieve the settlor's likely intent in attempting to create the trust. Resulting trusts may be imposed when there is: i) A purchase-money resulting trust (i.e., title is taken in the name of one party (the holder), but some other party supplied the consideration), which creates a rebuttable presumption of unjust enrichment of the holder, unless: a) There is a close familial relationship between the holder of the property and the purchaser; or b) The purchaser manifests an intention to make a gift or loan to the holder; ii) A failure of an express trust, either because the trust is void or unenforceable or because the beneficiary cannot be located, unless the trust provides for disposition of the trust property in cases in which the trust may fail; or iii) There is an incomplete disposition of trust assets due to an excess corpus.

Implied Gifts

When a trust that creates a class gift fails to specify the recipients of the gift in a contingency that actually occurs, e.g., the gift is made to "grantor's nieces and nephews if grantor dies without issue" and the grantor in fact dies with issue, some courts will infer a gift to the issue, while others will simply revert the gift to the settlor's estate.

Liability of Third Parties to a Trust

When property is improperly transferred as a result of a breach of trust to a third party who is not a bona fide purchaser—one who takes for value and without notice—the beneficiary or successor trustee may have that transaction set aside. If, on the other hand, the third party is a knowing participant in the breach, then he is liable as well for any losses suffered by the trust. Because only the trustee is allowed to bring a cause of action against the third party, the beneficiary is limited to bringing a suit in equity against the trustee to compel the trustee to sue the third party. In a situation in which (i) the trustee is a participant in the breach, (ii) the third party is liable in tort or contract and the trustee fails to pursue a cause of action, or (iii) there is no successor trustee, the beneficiary is given the option of directly suing the third party.

Possibility of Reverter

When the grantor conveys a fee simple determinable estate, he is deemed to have retained a possibility of reverter, wherein the right to possession reverts to the grantor, and the fee simple estate automatically ends, upon the happening of a specified condition or event.

Right of Entry

When the grantor conveys a fee simple estate subject to a condition subsequent, then upon the happening of the condition subsequent, the grantor is deemed to have retained the right to enter or retake possession, but the fee simple does not end automatically.

Factors considered in allocation

i) The intent of the settlor and the language of the trust instrument; ii) The nature, likely duration, and purpose of the trust; iii) The identities and circumstances of the beneficiaries; iv) The relative needs for regularity of income, preservation and appreciation of capital, and liquidity; v) The net amount allocated to income under other sections of the act and the increase and decrease in the value of principal assets; vi) The anticipated effect of economic conditions on income and principal; and vii) The anticipated tax consequences of the adjustment.

Circumstances to allow removal of trustee by court

i) The trustee becomes incapable of performing his duties; ii) The trustee materially breaches one or more of his duties; iii) A conflict of interest arises; iv) A serious conflict between the trustee and one or more beneficiaries, or between cotrustees, develops; or v) The trust is persistently performing poorly as a result of the trustee's actions or inactions. *NOTE*:If any of the foregoing circumstances exist at the time the trustee is named and are known by the settlor, they will not necessarily suffice as grounds for removal.