Trusts

Express trusts

There are two types of express trusts: (1) A private express trust (2) Charitable express trust

Duties of the Trustee

(1) A trustee is a fiduciary of the trust. (2) A trustee must be given some active duties to direct him with respect to the trust property in order for the trust to be valid. (a) If the trustee does not have active duties: it is a dry/passive trust and the trustee is required to transfer his legal title to the beneficiaries equitable title and the beneficiary's titles will merge and they will own it in free simple absolute (3) Duties do not have to be spelled out; (a) Need a direction so that a court can reasonable interpret what needs to be done. (4) The trustee is a fiduciary and duties of the trustee vary by trust; (a) Duties commonly assigned by statute or legally implied include the obligations: 1) Preserve property; 2) Invest property prudently; 3) Follow settlor's directions; 4)Operate fairly with the beneficiary.

Co-Trustees

(1) Deemed to own the trust as joint tenants and if one dies the other assumes the remaining duties unless the will says otherwise. (a) The will may override this and name a successor trustee. (2) Co-trustees who are unable to reach a unanimous decision may act by majority decision. (a) A dissenting trustee can protect self from liability of decision by formal decent

Settlor's Interests

1. A settlor has no interest in the trust unless he has reserved it or has made himself a beneficiary of the trust. a. A settlor cannot make his interest subject to a spendthrift provision. 2. Settlors often reserve the right to revoke the trust. a. If setlor reserves the right to revoke a creditor cannot force the settlor revoke the trust but a bankruptcy court could

Trustee's affirmative duties with respect to Trust Assets

1. A trustee has an affirmative duty to preserve and enhance trust property. a. Prudent Business Person Rule: Trustee must use the degree of skill, care and prudence that would reasonably used by a business person in his own business affairs. Need to keep the interests of the beneficiary and the remainderman in mind. That is why the court likes diversified investments. (1) Where a trustee possesses superior business expertise or is a professional fiduciary: The court will hold the trustee to a higher standard based on that increased expertise. b. The trustee is obliged to attempt to utilize trust property in a productive manner; subject, at all times, to the obligation to be prudent. c. A trustee should diversify the trust's portfolio. (1) Acceptable items include: Government bonds, blue chip stocks (2) Investments that will be questioned include: Penny stocks, commodities (very speculative), use of puts and calls, buying crappy investment properties.

Removal and Resignation of Trustee

1. A trustee may be removed for cause, such as a breach of duty or if he has become incapacitated. 2. Once a trustee has accepted the appointment to his position, he can resign at any time. a. A successor trustee: will have all the rights of the original trustee and wont change unless the instrument says otherwise.

Trustee's Duty of Good Faith and Loyalty

1. A trustee owes a duty of utmost loyalty and good faith to the beneficiaries in carrying out her obligations under the trust [UTC § 801]. 2. A trustee is prohibited from: a. Self dealing with the trust (trustee cannot benefit from his position as trustee in any way other than the compensation under the trust. b. This is true even if the trust would be better off (EXAMPLE: The trust needs cash to pay expenses and doesn't want to sell any assets, so the trustee decides he will lend $100,000 to the trust and charge only 1% interest. All of the banks will only lend at 3% interest. This is a breach of fiduciary duty since he is getting a 1% return.) c. No dealing between the trustee and the beneficiary on a personal basis with non trust assets. (1) This will only be allowed if: (a) Beneficiary knows all available facts; and (b) The transaction is fair

Trustee's Powers and Responsibilities- Source of Trustee's power

1. A trustee's powers arise from: a. The trust instrument; b. Implied powers that are reasonable necessary to exercise express powers (1) Unless expressly precluded by the trust instrument, a trustee has the power, inter alia, to: (a) Settle claims in the best interest of the trust; (b) To borrow money (not mortgages though); (c) sell trust assets; (d) incur reasonably necessary expenses to maintain trust property such as insurance. (2) The trustee has no implied power to invade trust principal for a beneficiary who has merely the right to receive income from the trust unless specifically authorized by the trust. 2. A trustee's actions pertaining to matters within his discretion are not subject to attack, unless he has abused his discretion in undertaking the conduct in question. a. A trustee's discretion is generally subject to the standard of: the beneficiaries health, education, maintenance and support

Limits on Trust Duration

1. All trusts must comply with the Rule Against Perpetuities. a. No interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest. 2. Most jurisdictions have modified the common law Rule Against Perpetuities in some way. a. Wait-and-see doctrine: Instead of determining at the testators death whether the rule was violated they wait and see if the interests vest within 21 years. b.Some states will reduce the age requirement to 21

Termination of a Trust By a Merger

1. If a sole trustee becomes the only beneficiary: The merger doctrine applies (look for trustee with a resulting trust or he is the sole beneficiary and sole trustee.

Trustee Liability

1. If a trustee breaches duty he will always be liable for only loss that arose out of it and he must give back whatever profit he made from it. (disgorgement) a. If the trustee uses trust assets to buy property and it increases in value, he must return both the trust property and the appreciation in value. 2. When a trustee breaches his duty of care in investing: The trustee must personally recompense the trust for the lost value and he cannot offset any money lost by money gained. a. He cannot offset money lost by money earned.

Cy Pres

1. If the settlor's exact charitable purpose cannot be carried out, the court may direct the application of the trust property to another charitable purpose that approximates the settlor's intention. 2. Cy pres may be applied where: a. the purpose is accomplished or impossible; and b. the settlor displayed a general charitable intent (e.g., if it is clear he only wanted to set up a single hospital in a single place and nothing else cy press does not apply) 3. If the settlor has provided for a "gift over" in the event that the charitable purpose cannot be accomplished, this is ordinarily viewed as an indication that the settlor lacked a general charitable intent. a. A non-charitable gift-over will likely fail as violating the Rule Against Perpetuities. (1) If it comes back to the settlor as a resulting trust, it is vested at its inception and will not violate the Rule Against Perpetuities.

Administrative Deviations

1. If unforeseen circumstances frustrate the material purpose of the trust a court can allow a trustee to deviate from the trust terms but can never be done to deviate from the interests of the beneficiaries 2. The administrative deviance doctrine may not, however, be used to change the beneficial interests in the trust.

Alienability Of Trust Beneficiaries interest and creditors rights- Beneficiaries Interests

1. In the absence of a restrictive provision to the contrary: the interest is freely alienable. By gift, by devise, can be mortgaged and can be involuntarily attacked by creditors. 2. Types of Interests a. Support (1) As needed. It is an interest determined by the trustee as to the beneficiary's needs b. Discretionary (1) trustee is to pay to beneficiary as the trustee deems desirable (2) A creditor of the beneficiary could attack the trust and get a lien but the trustee would never have to pay out.

General Effects of Trust Creation

1. Rights of the settlor: the settlor has no rights unless reserved when setting up the trust. 2. Rights of the trustee: To use the prop according to the directions of the settlor 3.Rights of the beneficiaries: To use and enjoy the property as directed to the trustee by the setlor

Termination by Beneficiaries After Settlor's Death

1. The rule of Claflin v. Claflin is that: if the settlor is dead and cannot consent to termination, if all the beneficiaries agree and no material purpose of the trust has yet to be served the curt terminate the trust with distributions to the beneficiaries in their proportionate interest. Big issue, has the material portion of the trust been served? And Have all beneficiaries agreed? a. A material purpose of the trust may include: (1) Staggered distributions (withholding payments until beneficiary has reached a certain age) (2) Discretionary trust (3) Spendthrift trust

Trust liability Continued

3. A trustee will be responsible for any lost interest. 4. A trustee ordinarily has no liability for breaches of duty by the trustee whom he succeeds, except where the successor-trustee: a. is aware of the bad transaction; and b. does not take steps to rectify it 5. An exculpatory clause is a provision in the trust instrument that relieves the trustee of liability for potentially wrongful acts. a. Where a beneficiary has full knowledge of the material facts and expressly approves of the com-plained-of action by the trustee: the beneficiary can ratify the transaction and the trustee is not liable. There is also a rule of estoppl that is invoked if the beneficiary had been aware of the facts for a long time.

A trust is

A Trust is a relationship whereby the legal, and the equitable title to property in the trust, has been divided. One individual holds legal title who can only use it for the benefit of those who own equitable title. Distinct from a bailment which just requires transfer of possession but no division of title

Charitable Purpose

A charitable purpose can be broad as long as the trustee is constrained to use the trust exclusively for that objective. a. Distinguish between a charitable purpose and a benevolent purpose. (1) Merely helping others in a trust is not enough for it to be chartable. EXAMPLE: A trust that directs payments to be made directly to elementary school children at Christmas and Easter breaks "to be used by such child in the furtherance of his or her obtainment of an education" is not valid as a charitable trust because its structure does not support the alleged purpose. The form of payment (cash), the timing of payments (at holiday breaks), and the lack of any device for ensuring the funds are used for education suggest that the settlor's true intent was to bestow happiness on school children rather than to promote education.

Requirements

A charitable trust must have a charitable purpose. a.The major categories of charitable purposes are: 1. For the relief of poverty; 2.advancement of education (scholarships); 3. advancement of religion (trust for church); 4. promotion of health (trusts for cancer research); 5. performance of a governmental/municipal purpose; 6. Other purposes beneficial to the community

Spendthrift Provisions

A spendthrift provision is one that says: The beneficiary cannot voluntarily transfer his property and a creditor cannot attack it. Makes it inalienable. a. These are not absolute and cannot be used to defeat a claim of: (1) Alimony or child support (2) Someone who has furnished necessities (3) U.S. or state Governments

Types of Trusts- Testamentary Trusts

A testamentary trust is created by the testator's valid will. (need to determine if will is valid, if not valid the trust is not valid) a. Even if a will is valid, there may be problems with the trust. (EXAMPLE:A will devises Blackacre to Tom as trustee. There are no other provisions in the will relating to that trust nor is there any document that can be incorporated by reference into the will that relates to the trust. The trust must fail. Blackacre will pass through the residue. If the residuary estate had been left to Tom as trustee, it would result in intestacy.) b. Wills frequently contain "pour over" provisions that direct the transfer of the decedent's property into a trust established either by the testator during his lifetime or by another person.

Termination of Trust by Operation of Law

A trust is terminated by operation of law where: a. There is no trust property (destroyed or fully distributed) b. If the trust purpose becomes illegal. c. If the trust purpose becomes impossible or impractical to achieve.

Trustee's affirmative duties with respect to Trust Assets (Part II)

A trustee generally may not delegate his duties. a. IF he has been picked based on his expertise he cannot delegate. But he must delegate where he does not have the requisite expertise or at least get professional advice. (1) The trustee must be diligent in selecting his advisor. (2) A trustee must inform the beneficiaries of the delegation.

Removal of Trustee or Termination of Trust

A trustee may resign or be removed for cause. (1) The trust will not terminate and another trustee will be appointed When the trust terminates: (1) The trustee will transfer title to beneficiary and the trustee will have no remaining duties except to wrap up

Elements Necessary to Create a Trust

A valid trust requires [UTC § 402]: a. Settlor with a present intent to create a trust b. Delivery of the trust property to the trustee. c. Ascertainable beneficiaries - Need to know at least one a tall times d. Active duties imposed on the trustees e. Proper trust purpose (cannot violate the law) f. A trustee

Elements of a Trust- Intent to Create a Trust

A. There are no set words needed. But do need evidence from document/statement that the testator made it clear that he was establishing a trust. B. The intent to create the trust must be a present intent to create the trust. EXAMPLE: "I will put $5000 in trust for Terry next week" does not create a trust. It is a mere promise not supported by consideration. C. If the trust states that it will name the beneficiaries later, it is a resulting trust. (1) The settlor still owns the equitable title in a resulting trust. (2) Generally the trustee will pass title down to the beneficiary (settlor) and the titles will merge. D. If the settlor does not own the trust property and then subsequently buys the property, there is no trust created. Does not matter if test says "going to my lawyer" because it can be created orally.

Trustee's Duty of Loyalty and Good Faith Continued

A. Trustee cannot get a personal benefit other than compensation (EXAMPLE:Obtaining a personal commission, bonus, finder's fee, or other benefit for placing trust business with others is strictly prohibited.) B. Trustee cannot compete with the trust or have conflicts with assets. Any profits made from the trust goes to trust. EXAMPLE: A bank acting as trustee cannot buy its own stock with the trust funds. (1) Trusts may contain exculpatory clauses that may allow the trustee to compete without running afoul of their fiduciary duties. (a) Courts will closely scrutinize and narrowly construe these clauses to make sure the trustee does not violate the fair dealing standard (2) Any profits earned from self-dealing with the trust belong to the trust.

Types of Trusts- Totten Trusts

An arrangement with a bank that allows the depositor to open a bank account in his own name, as trustee for other parties. (1) The only right the beneficiary has is: to take whatever is in the account when you die if the beneficiary is alive.

Implied Trusts

Any time a resulting or constructive trust arises, it means: (OL VI. A.) That the trust will end because the resulting rust just has a trustee with no beneficiaries and no duties on the trustee. So it becomes a dry trust.

Beneficiaries

Beneficiaries are the equitable owners of the trust property. Example: Pay the income to A and B for the next 10 years, then pay the income to John if living. If John is not then alive, or if he is, then upon his death, distribute the property to X, Y and Z. A, B, John, X, Y and Z are all beneficiaries of the trust.

Natural Expiration

Can end based on the terms of the instrument or when the trust property is destroyed.

Constructive Trusts

Constructive Trusts (OL VI. C.)- raised anytime a wrongdoer ends up with title as a result from the wrongdoing. 1. A constructive trust is an equitable remedy, whereby a trust is erected on the holder of specific property to redress wrongdoing or prevent unjust enrichment. a. It is typically imposed when property has been wrongfully obtained. b. The purpose of a constructive trust is to oblige the holder of property to divest himself of it and transfer it to the person entitled to that asset. 2. Say that a court will "raise," "erect," or "Impose" a constructive or resulting trust

Types of Trusts- Inter Vivos Trusts

Creation of an inter vivos trust requires present intent. a.The trust property has to go into the trust in order for the trust to exist. (trust property, trust corpus, principal)

Charitable Trusts- Distinguishing Trusts

Distinguishing Characteristics (OL VII. A.) 1. A charitable trust cannot have ascertainable beneficiaries 2. Can violate rule against perpetuities 3. When the trust purpose has been accomplished or made impossible it does not necessarily end. The ct can allow it to continue under a similar charitable purpose under the cy pres doctrine (sp) a. A court could allow the trust to continue with a similar charitable purpose under the cy pres doctrine.

Creating an Express Trust- Parties to a Trust

Every trust has three parties, though these parties need not be three different people and there can be more than one of each. a. The Settlor: The person who sets up the trust b. The Trustee: The person who runs the trust, has legal title to the trust. c. The Beneficiary: The person who uses and enjoys the property from the trust. The person with equitable title. (1) Income Beneficiary: Has present interest in trust (2) Remainder Beneficiary: Has remainder interest of trust

Trust Beneficiaries

Every trust must have ascertainable beneficiaries. (1) Don't need to know every beneficiary at all times but do need to know who they are when it is time for them to collect the interest, EXAMPLE: S gives income to A for life, remainder to A's children. When A dies, we will be able to ascertain who his children are. Income to A for life, remainder to those students who graduate from XYZ Law School in the year 2010. We will know by the time A dies, who graduated in 2010. (2) "To my friends" is too vague. (3) "To my family" is also vague, but the courts will interpret it to mean heirs.

Types of Trusts

Express trusts and Implied Trusts

Standards for Determining Benficiaries

If the settlor provides some objective standard by which to identify beneficiaries, then those beneficiaries are ascertainable. (a) The criteria must provide a reasonable basis for identifying beneficiaries (EXAMPLE: Hold the property in trust for "the person who provided the best health care for me before my death.") (b) The court will defer to the trustee's discretion unless: he was arbitrary, capricious or used bad faith. 1) A trust may give the trustee the right to invade the trust corpus for the benefit of the beneficiary subject to his discretion. a) The trust may give partial or total discretion.

Implied trusts

Implied trusts, which arise by operation of law. A. There are two types of implied trusts: (1) Resulting trust (2) Constructive trusts which arise when someone has engaged in wrong doing. E.g., unjust enrichment (B) A resulting trust may also arise when: There is no wrongdoing. There is an innocent reason someone has title when they should not. Any time a person gives away full legal title but not their entire equitable interest that person has a reversion in the interest. C. Implied trusts are equitable remedies.

Types of Trusts

Inter Vivos Trusts Testamentary Trusts Totten Trusts

Intent to Create Trust- Mandatory vs. Percatory Language

Mandatory vs. Precatory Language (1) Mandatory language: "shall" language. Creates a trust and requires a trustee to do something. (2) Precatory language: "with the hope", "desire", "wish" language. Give money to someone that does not require how the beneficiary use the money. Exception: If it is so much specificity that the court will read the language as mandatory. EXAMPLE: $5000 to Carl. A would like Carl to invest the money in an annuity that will pay $200/month to A's sister. Even though the language is precatory, there is so much specificity, the courts will interpret it as mandatory.

Purchase Money Resulting Trusts

Purchase Money Resulting Trusts a. Where one party pays the purchase price and someone else gets the property. Comes up when giving someone in a way that looks like a gift but was simply given to someone to hold onto for business reasons. That is a PM Resulting trust. When providing consideration and a gift is to a family member it is presumed. If given to a stranger it is presumed to be a PM resulting trust b. This is typically a question of whether a gift was intended. (1) When title goes to a close relative: Presumed gift (2) When title goes to a stranger: Presumed Purchase money resulting interest

Resulting Trusts

Resulting trusts arise when: Express trust creates an incomplete distribution of equitable interest or the equitable interest fails after the property is given to the trustee. When that happens the only person with an equitable interest is the settlor and that person holds it in a resulting trust. Courts are looking for remedies to ensure that the rightful parties get the property. Can have a remainderman resulting trust interest that is interrupted by a life estate The only person left holding the equitable interest is the settlor, and they do so in resulting trust.

Resulting Trusts (Examples)

S makes a transfer to trustee, T. "I give Blackacre to T as trustee in trust for Carla," it is a simple dry passive trust. "I give Blackacre to T as trustee" without naming a beneficiary, S is beneficiary under resulting trust. T holds legal title, which he will transfer to S. "I give Blackacre to T as trustee to pay income to A for life." A is a beneficiary. S is the remainderman in resulting trust because he had full equitable title and only gave away the income interest, retaining the remainder interest. When A dies, T will transfer title to S and the titles merge. If S dies before A, his interest will be transmitted to his heirs, residuary legatees or whoever is named in his will. "S to T in trust, income to A for life, remainder to S's heirs." S does not have heirs while he is alive. If S survives A, this is a resulting trust back to S since there is no one else to take.

Modification or Termination of Trust- Termination by Setlor

Termination by Settlor (OL V. A.) 1. A trust will be irrevocable unless the terms of a trust expressly provide that the settlor may revoke or amend the trust. a. The Uniform Trust Code reverses this presumption. Under the UTC, unless the terms of the trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust after the effective date of the code. 2. A settlor may terminate an irrevocable trust: if all of the beneficiaries are in existence and agree to the determination

Requirements Pt 2

The beneficiaries must be indefinite. a. Cannot name the specific beneficiaries e.g., your heirs. Does not matter if it is for a small group though.

The Settlor

The settlor creates the trust by transferring assets to a trustee with manifest intent to create a trust relationship. (intent is important) a. A settlor can set up two types of trusts: All that matters is when the trust is created (1) Inter vivos (during life) Treated like a gift (2) Testamentary trust- In the will b. When a settlor makes himself trustee, the trust is created by declaration of trust. (declared trust) (1) Normal trust rules apply. Need to state what assets you have declared self a trustee over. (2) The declaration can be oral unless: It is for real property, generally will need to satisfy SOF.

The Trustee

The trustee is the legal owner of trust property, who holds it for the benefit of the beneficiaries. Legal title to, and responsibility for, the management of the trust property resides in the trustee. a. There must always be a beneficiary in existence who can enforce the trust against the trustee (1) A settlor can be the trustee so long as there is a beneficiary in existence who can enforce the trust against the trustee; (2) The settlor may also be the beneficiary of the trust. EXAMPLE: A gives his property to Mike as trustee and Mike shall hold the property and pay the income to A for the rest of his life. A is the settlor and the beneficiary. (3) If a sole trustee is the sole beneficiary, the trust will collapse because the interests will merge. Cant be sole trustee and sole beneficiary. b. A trust must have a trustee, but failure to designate or appoint a qualified trustee will not necessarily cause the trust to fail.

Trust Purpose

a. A trust can be created for any purpose except those that are: illegal, fraudulent or violate public policy (1) A purpose that is against public policy may include: (a) Provisions designed to encourage divorce. (b) Provisions designed to prevent marriage (2) You must determine the intent of the settlor. Cause it might not actually have the intent to cause divorce. b. When there is a trust purpose that violates public policy: (1) Delete the objectionable language (2) Try y to determine what the settlor would have wanted to happen had the settler known the trust would violate public policy from the 4 corners of the K

Active Duties of the Trustee

a. A trustee must know what to do with the trust, without it the trust becomes dry/passive b. If he the trust becomes passive then the titles merge in the beneficiary and the trust ends.

Elements of a trust (2)- Trust Property

a. Property must be transferred to a trustee. It must be a present intent to do so. Cant say "I hear-by establish a trust and will give the trustee the property next week." Trust is only established at time of transfer b. Almost everything can be subject to a trust. (1) Exceptions: (a) Mere expectation. E.g., prop I might get from my uncle (EXAMPLE: A will give all of the profits he will earn from his sales of IBM and ATT stock in trust. A still owns the stock, so there are no profits. When the stock is sold, those profits are not in trust.); (b) unearned profits or debts owed by the trustee c. There must be some certainty over what is the trust property. (EXAMPLE: If A declares himself trustee over "some of the stocks" he owns, it is not a valid trust; If A declares himself trustee over all the stocks he owns in his E-trade account, he does not have to identify the stocks because he has identified where they are; A could declare himself the trustee over 40% of Blackacre. If he owns the whole thing, he is trus-tee over 40% and will be tenant in common with himself)