Trusts

Trustee

• Holds legal title

• Owes fiduciary duties to beneficiaries

  • Duty of care and loyalty

  • Personally responsible if their conduct falls beneath required standards

Beneficiary

• Holds equitable / beneficial title to property

• Enforces fiduciary duties

Settlor

• Creates the trust

• May be called trustor, grantor, or donor

Trust Property Required

• May be called principal, corpus, trust estate, or res

Purposes and Uses of Trusts

1. Protect and provide for beneficiaries 

2. Flexibility of Asset Distribution

3. Protection Against Settlor’s Incompetence

4. Professional Management of Property

5. Probate Avoidance

6. Tax Benefits

Basic Classifications of Trusts

Express Trust

1. Trust created through express intent of settlor

   • Private → private beneficiaries

   • Charitable → charitable beneficiaries

Trusts created by Operation of Law

1. Resulting Trust

   • Attempt to carry out settlor’s intent

2. Constructive Trust

   • Equitable remedy

Trusts Validity

Trust not stated to be valid → ALWAYS start here

Requirements

1. Intent

2. Identifiable corpus

3. Ascertainable beneficiaries

4. Proper purpose

5. Trustee

6. Mechanics and formalities

Trusts Validity

Requirements

1. Intent

2 Types

1. Intent to split legal and equitable title

2. Intent to impose enforceable duties on holder of legal title

Issues

1. Settlor Must Have Capacity

   • Capacity required to create an inter vivos trust → same as to make an inter vivos gift

   • Capacity to make a testamentary trust → same as that required to make a will

2. Intent may be manifested by written or spoken words or by the conduct of the settlor

   • Unless the Statute of Wills or the Statute of Frauds applies

   • No formal words required

3. Communication of intent to the beneficiaries is not necessary

4. Settler must have present intent to create trust

5. Promise to create trust in future is unenforceable unless there is binding contract

6. Once an outright transfer of property occurs, it is too late for the alleged settlor to go back and claim the transfer was really one in trust

7. Precatory Language: expression of hope, wish, or suggestion

   • Generally doesn’t create trust

Trusts Validity

Requirements

1. Intent

   • Split of Title

Any split of title into legal and equitable portions is permissible if the same person doesn’t own all the legal and equitable title

Sole trustee and sole beneficiary are the same person → equitable and legal title merges → trust terminates

Example:

1. Yes

2. No

3. Yes

4. Yes

Trusts Validity

Requirements

2. Identifiable corpus

Property must be ascertainable with certainty

• Any property the settlor can transfer can be held in trust

• Property settlor can’t transfer or doesn’t yet own can’t be trust property

Must be separated from other property

• But it can be a portion of specific property

Trusts Validity

Requirements

3. Ascertainable beneficiaries

Qualified Beneficiary: beneficiary who is current or first line remainder beneficiary

• Any person or entity capable of taking and holding title to property

  • Need not be competent

• May disclaim interest if they haven’t accepted any benefits

Anti-Lapse Statutes

• Some States → apply to interest in trusts

• If requirements are met, trust interest will go to predeceased beneficiary’s descendants

Final Divorce

• Revokes all trust provisions in favor of ex-spouse

Class Gifts

• Beneficiaries may be unascertainable when trust created

  • But must be ascertainable when property is to be distributed

Settler may allow trustee or third party to select which class members receive benefits

• Failure to exercise the power gives rise to a resulting trust in favor of the settlor or their successors

Trusts Validity

Requirements

4. Proper purpose

Any purpose that is not

1. Illegal

2. Against public policy

3. Impossible to achieve

4. Intended to defraud the settlor’s creditors or based on illegal consideration

Doesn’t violate the Rule of Perpetuities

Trusts Validity

Requirements

5. Trustee

Trust will not fail for lack of trustee because court can appoint one

Acceptance of Trusteeship

• Must sign trust instrument or written acceptance

• If person starts acting like trustee, they will be deemed to have accepted

Must have real powers and duties

Compensation

• Trust instrument can indicate compensation

• If instrument is silent, trustee usually entitled to reasonable compensation

Removal

• Grounds for removal include:

  1. a serious breach of trust;

  2. serious lack of cooperation among co-trustees;

  3. unfitness, unwillingness, or persistent failure to administer; or

  4. a substantial change in circumstances

• Court has power to remove and appoint new one

  • Successor Trustee

    1. all of the rights, powers, and privileges of the original trustee

    2. subject to all of the original trustee’s duties, liabilities, and responsibilities

Trusts Validity

Requirements

6. Mechanics and formalities

   • Creation Methods

Inter Vivos Trust (Living Trust)

1. Declaration of Trust

   • Settlor and trustee are same person

2. Transfer or Conveyance in Trust

   • Settlor transfers legal title to someone else

Testamentary Trust (Created by Testator’s Will)

1. Secret Trust

   • Settlor agrees with will beneficiary that beneficiary will hold property in trust for someone else

     • Will does not state trust nature of gift

   • Courts allow trust beneficiary to present extrinsic evidence and seek constructive trust remedy

2. Semi-Secret Trust

   • Will makes gift in trust but fails to state beneficiary

   • Gift fails → trustee must give legal title back to settlor’s succession in interest (resulting trust)

Trusts Validity

Requirements

6. Mechanics and formalities

   • Requirement

Requirement: Convey the Property

Declaration of Trust

1. Personal Property → property segregated and identified

2. Real Property → deed land from settlor as individual to settlor as trustee

Conveyance in Trust

1. Real Property → deed land to trustee

2. Personal Property → physically deliver property to trustee

Pour Over Gift from Will to Trust

1. Will contains provision leaving property to inter vivos trust

2. Property governed by terms of trust → trust amendments govern poured-over property

3. Poured-over property can be initial trust funding if trust identified in will and trust executed before testator’s death

Trusts Validity

Requirements

6. Mechanics and formalities

   • Writing

But are there times when you can have a valid will without a writing?

• Most states do not require a writing for a trust of personal property.

  • Oral trusts may be established only by clear and convincing evidence

• If the holder of the legal title acts as if they are a trustee, part performance will preclude the Statute of Frauds defense

Transfer of Beneficiary’s Interest

General Rule: Interests freely transferable

• Voluntary Transfers—Gifts and Sales

• Involuntary Transfers—Creditors

Transfer of Beneficiary’s Interest

• Discretionary Trust

Trustee determines how much beneficiary receives

Beneficiary has nothing to transfer until trustee decides to distribute money

• So there is nothing for creditors to reach

• Exception: claims for child or spousal support

Transfer of Beneficiary’s Interest

• Spendthrift Provision

Characteristics

• Beneficiary can’t transfer interest

  • Once the trustee pays the beneficiary, the beneficiary may transfer the property received

• Creditors can’t attach beneficiary’s interest

  • Once the trustee pays the beneficiary, the creditors may reach the property

Limitations

• Ineffective if settlor is beneficiary

  • Minority Rule: allow self-settled spendthrift trusts

• Ineffective against certain claims such as child or spousal support

Transfer of Beneficiary’s Interest

• Support Trusts

Use of trust property limited to beneficiary’s support

• May be mandatory or discretionary

Impliedly spendthrift

Issues

• Standard of support if not in instrument → lifestyle to which beneficiary accustomed

Creditors of the trustee cannot reach trust property to satisfy their claims

• Have only a personal claim against the trustee

Modification and Termination of Trusts

General

• Terminate automatically upon

  1. the expiration of the term specified in the instrument OR

  2. when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve

Duty Of Trustee Upon Termination

• Trustee’s powers do not end immediately upon trust termination

  • May continue to exercise powers for a reasonable period of time necessary to wind up the affairs of the trust

  • Must then timely distribute trust property to the appropriate remainder beneficiaries

Modification and Termination of Trusts

Types

By express terms

By the settlor

1. May modify or revoke trust for any reason

   • Unless trust instrument expressly states it’s irrevocable

2. Some states → may revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests

By the beneficiaries

1. With settlor’s consent → permitted

2. Without settlor’s consent → may if

   • All beneficiaries agree

   • Changes would not upset material trust purpose

     • Examples:

       1. Support of beneficiary

       2. Spendthrift provision

       3. Payment at certain ages

       4. Payment at certain dates

       5. Discretionary trust

By operation of law

• Property has been exhausted or if the legal and equitable titles have merged

By the court

1. Trust’s purpose accomplished, illegal, or impossible

2. Unanticipated circumstances

3. Value of trust too low

4. Some States → fix mistake if shown by clear and convincing evidence

By the trustee

• Terminate uneconomic trust

  • Trust property is less than $50,000 and the amount is insufficient to justify the cost of administration

• Combine or divide trusts

Powers of the Trustee

Sources of the Trustee’s Power

1. Express powers granted by settlor in trust instrument

2. Powers provided by state statute

3. Powers granted by court

4. Implied powers necessary or appropriate to carry out terms of trust

   • Examples:

     1. Sell trust property (How else invest?)

     2. Lease trust property (How else earn income?)

     3. Incur reasonable expenses (How else carry out trust?)

     4. Hire agents (How else carry out trust?)

     5. Mortgage trust property (How else borrow money?)

     6. Repair (How else keep trust property valuable?)

Joint Powers

• Trustees can exercise power by majority decision

Types of Powers

1. Mandatory Power → trustee must exercise it

2. Discretionary Power → trustee may exercise power as trustee sees fit

   • Trustee liable only for abuse of discretion or failure to exercise discretion

   • No such thing as absolute discretion

Duties of the Trustee

Duty to Administer Trust

• Duty to administer trust in good faith and in a prudent manner, according to its terms

Duty of Loyalty

• Avoid self-dealing

• Trustees cannot

  1. Personally benefit from trust

  2. Purchase property from trust

  3. Sell own property to trust

     Borrow from trust

  4. Claim excessive compensation

• Trustee’s good faith or fairness irrelevant

Duty to Report

1. Provide the qualified beneficiaries with the trustee’s name, address, and telephone number and

2. Respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested; and

3. Furnish an annual accounting of the trust

Duty to Separate Trust Property and Keep Records

• No Commingling

• “Earmark” trust property by labeling it as trust, rather than individually owned, property

Duty to Enforce Claims and Defend Trust from Attack

Duty to Preserve Trust Property and Make It Productive

Investments

Prudent Investor Rule

Trustee must invest in same manner as prudent investor

• Reasonable care, skill, and caution when investing and managing trust assets

• Following phrases in a trust invoke the prudent investor rule:

  1. “Prudent person rule”

  2. “Prudent man rule”

  3. “Legal investments”

• What if the trustee has higher or lower skills?

  1. Higher skills → duty to use those skills

  2. Lower skills → must comply with prudent investor rule

Portfolio Approach: view investments together in context of entire trust portfolio and part of overall investment strategy

• Factors considered in making investment decisions

  1. Trust purposes

  2. Economic conditions

  3. Tax consequences

  4. Role of each investment in portfolio

  5. Income and appreciation

  6. Other resources of beneficiaries

  7. Need for liquidity, regularity of income, or preservation of capital

  8. Asset’s special relationship to beneficiary

• Must diversify investments

  • Unless trust purposes are better served without diversification

• Duty to review trust property

Review of Conduct

• Facts and circumstances existing at the time of the trustee’s decision or action

Loyalty and Impartiality

• Must administer trust exclusively for beneficiary’s interest

• Must act impartially and not favor one beneficiary over another

Delegation

• May delegate investment and management functions

• Protected from liability if acted prudently in

  • Selecting agent

  • Establishing scope and terms of delegation

  • Periodically reviewing agent’s actions

Liabilities of Trustee

• Remedies

Damages Recoverable for Breach (Money Damages - Most Common)

1. Lost profits

2. Depreciation in value of trust property

3. Trustee’s profits from breach

Remedies for Self-Dealing

1. Affirm transaction if trust profitied

2. Set aside transaction if trust lost money

3. Trace profits from trustee

Removal of Trustee (Common Remedy)

• Grounds

  1. Incompetence

  2. Unfit

  3. Serious breach of duty

  4. Serious conflict of interest

  5. Insolvency

  6. Extreme hostility between trustee and beneficiaries

  7. Refusal to post bond

  8. Refusal to account

• Courts will consider the settlor’s intent

Liabilities of Trustee

• Trustee Not Liable for Breach When:

1. Reasonably relied on terms of trust

2. Beneficiaries consented or ratified transaction

3. Settlor or instrument allowed conduct

4. Exculpatory clause relieves trustee from liability for breaches

   • Generally exculpate only negligent conduct

Liabilities of Trustee

• Liability of Co-Trustees

Not liable for act of co-trustee if

• trustee did not join in the action and exercised reasonable care in preventing the breach or compelling the co-trustees to redress it

Liabilities of Trustee

• Trustee’s Liability to Third Parties

Contracts → trustee personally liable

• But can avoid liability by contract provision or indicating role as trustee by signature

  • Trustee entitled to indemnification or reimbursement from trust

Tort → liable if personally at fault

Liability Of Third Parties To The Trust

Court can set aside transactions that are breaches of trust if

• the property is not in the hands of a bona fide purchaser

Knowing participant in a breach of trust is liable for the resulting loss

Allocation Of Receipts And Expenses Between Income And Principal Accounts

Uniform Principal and Income Act

• Describes how principal and income should be allocated

• Settlor can alter rules

• Trustee has adjustment power

  • Must consider many factors

  • Can’t be made if

    1. Prohibited by trust instrument

    2. Trustee is also beneficiary

    3. It would cause adverse tax consequences

Allocation of Receipts

• Principal

  1. Money from selling asset

  2. Eminent domain awards

  3. Insurance proceeds if principal is destroyed

  4. Stock dividend, stock split, or shares received because of reorganization

  5. Sale of underproductive property

• Income

  1. Rent

  2. Interest on trust investment

  3. Cash stock dividend

• Both

  • “Wasting assets” → 10% Income & 90% Principal

Allocation of Expenses

• Principal

  • Capital gains tax

  • Extraordinary repairs and capital improvements

• Income

  • Ordinary income tax

  • Ordinary repairs

  • Depreciation

• Both

  • Trustee compensation and accounting expenses → 50% income & 50% Principal

Charitable Trust

Must have a purpose considered to benefit the public

• Charitable purposes include:

  1. The relief of poverty

  2. The advancement of education or religion

  3. The promotion of health

  4. The accomplishment of government purposes (such as parks, museums, and playgrounds)

• Settlor must be sufficiently altruistic in supplying benefits

  1. May not be so narrow as to only benefit a few individuals whom the settlor wishes to aid personally

  2. Just because some family members might be benefited does not keep the trust from being charitable.

• Court can select a charitable purpose or beneficiary if none is specified in the trust instrument

  • So long as the selection is consistent with the settlor’s ascertainable intention

Cy Pres (“as near as possible”) Doctrine

• If charitable purpose cannot be carried out, court may select alternate by ascertaining settlor’s primary purpose

• Rule Against Perpetuities does not apply to charitable trusts

Enforcement

• State AG enforces

Honorary Trust

No human beneficiaries and not for charitable purpose

• Common example: trust to care for pet

Resulting Trust

Arise by implication from settlor’s conduct

• Beneficiaries: settlor or settlor’s successors in interest if settlor has died

• Purpose is to do what settlor would have done

Situations Giving Rise to Resulting Trust

• Failure to create express trust

• Express trust corpus and no provision for remainder

• Purchase money resulting trust: supplier of purchase money gives money to seller who gives title to property to third party

  • Explanations why 3rd Party has title instead of purchaser

    1. Gift

       • Law presumes gift when parties closely related

    2. Loan

    3. Purchase money resulting trust

Constructive Trust

Not a trust

• But an equitable remedy to prevent unjust enrichment resulting from wrongful conduct

• Must be requested as remedy in court action

  • Must show particular property was involved in improper conduct

Constructive Trustee’s Duty

• Give legal title back to person who would have owned it but for wrongful conduct

Grounds to Impose

1. Fraud, duress, mistake, or breach of fiduciary duty

2. Homicide

   • In states that lack slayer statute

3. Abuse of confidential relationship

   • Can include attorney-client, doctor-patient, business partners, family relations, and friendships

4. Breach of promise