bella trust

The Beneficiary

(Label)

Generally the Beneficiary

holds equitable title

enforces fiduciary duties against trustee

Beneficiary capacity

ability to take and hold property (be alive)

no requirement to have capacity to manage or transfer property.

thus minors and incomepents may be beneficiaries

Description of Beneficiaries

Must be clearly ascertainable

Multiple beneficiaries allowed

Settlor transferred $100,000 to Timothy, in trust, "to distribute those individuals whom my trustee so desires." Is this a sufficient beneficiary designation?

NO. If this was power of appointment, it would work

Settlor transferred $100,000 to Timothy, in trust, "to distribute to those of my children whom my trustee so desires." Is this a sufficient beneficiary designation?

Yes, no problem at all, class gift

Settlor transferred $100,000, to Timothy, in trust, "to distribute to those of my friends whom my trustee so desires." Is this a sufficient beneficiary designation?

No!

Multiple beneficiaries allowed

Concurrent (several people can be the beneficiaries (co-tenants with regard to equitable title currently))

Successive (beneficiaries now, and beneficiaries later; to you and upon your graduation from school to your children)

Class Gifts

Define class gift membership, especially children and grandchildren

Non-martial, adopted, ART?

Talk to your client about how to define class members, children, grandchildren

Goal for class gifts

whatever your client wants

Honorary (Purpose) Trusts

Trusts lacking an ascertainable human beneficiary or charitable purpose

Care for pet, say masses, erect monuments, run business

Traditional Approach for Honorary Trusts

Invalid

Not private, as no human beneficiary with standing to enforce

Not charitable as lacking a charitable purpose

Modern Trend for Honorary Trusts

Pets= all States plus D.C. recognize statutory pet trusts

Other purposes= allowed under UPC and UTC

Any other purpose not against the law or public policy

Incidental Beneficiary

Person who has no equitable title but benefits from the trust nonetheless

Typically, unable to enforce trust. Perhaps fit as "interested person" under affected by language of 111.004(7)

Example of an Incidental Beneficiary

Trust says, you must invest 50 stock in Blockbuster

Blockbuster would be mad but they do not have standing to sue (they are the incidental beneficiary)

Beneficiaries have standing but they will not get mad if you do not follow the trust and get 50 shares of trust

Normal rule, incidental beneficiaries

DO NOT HAVE STANDING

Disclaimer

saying no to being a beneficiary

A disclaimer cannot

exert dominion, control, or accept benefits

may cherry-pick (partial disclaimers allowed)

Irrevocable and unconstitutional

Disclaimer Formalities

In writing

Declare the disclaimer

Describe what is being disclaimed

Indicate whether disclaimaint owes child support, which would then prohibit the disclaimer (cannot disclaim to avoid IRS or child support)

Signed by beneficiary

Properly delivered

Get it notarized (not required but prudent practice)

Only big difference here is what you DO with it

Disclaimer-Delivery Testamentary Trust

Trustee

If none, personal representative of decedent's estate

If neither, file in public records where decedent domiciled or owned real property

Disclaimer-Delivery Inter Vivos Trust

Trustee

If none, court with jurisdiction to enforce the trust

If neither, file in public records of situs trust administration or where settlor domiciled

Disclaimer-Delivery Inter Vivos Trust

If trust is revocable,

also to the settlor

Settlor might want to revoke it

Disclaimer Passage of Property

Under specific terms of trust. If A disclaims, then the property passes to X

Under terms of trust as if beneficiary predeceased trust creation

Characterization of Distributions

Issue arises if beneficiary is married

Assume trust is not created by one or both spouses

Principal Distributions

Beneficiary's separate property (gift)

Undistributed Trust Income

Not yet able to classify until beneificary has the right to demand distribution

Discretionary Income Distributions

SEPARATE (like gifts, were not entitled to it, trustee had discretion whether or not to make that distribution)

Mandatory income distributions

Case law all over the place

Commentors disagree and case law not definitive

Are mandatory income distributions separate or community property???

We don't know. Beyer says prob community

Settlor's divorce from beneficiary

This only applies if trust is REVOCABLE

Cannot undue a irrevocable gift

Trust is written

Trust is revocable

Settlor named his/her spouse or other ex-relative as beneficiary or trustee

Trust is silent as to impact of divorce

Settlor's divorce from the beneficiary

Statutory revocation of the following provisions:

Ex-spouse as beneficiary

Ex-spouse as trustee

Other ex-relative

Settlor's divorce from the beneficiary

Effect (where does it go)

Property passes as if the ex-spouse or ex-spouse's relative disclaimed

Fiduciary designations interpreted as if ex-spouse or ex-relative died before marriage terminated

Settlor's divorce from the beneficiary

Statute Exceptions

Trust executed after divorce

A court order

Express language in the trust

Express language in marital agreement

Key here is that it must be

a revocable trust. If you have an irrevocable trust, make sure to apply a condition that you MUST be married

Beneficiary Review

Holds equitable title

Must be clearly ascertainable (per and purpose trusts allowed) (incidental beneficiaries unlikely to have standing)

The beneficiary may disclaim prior to acceptance

Distribution to married beneficiary (separate or community depending on situation)

Divorce voids provisions of revocable trust (ex-spouse, other ex relatives)

What can the Beneficiary Do?

Power to Transfer or Assign

Power to Transfer or Assign

Presumption

Able to transfer

Inter vivos= by gift or sale

At death= via intestacy or by will

Power to Transfer or Assign

Restrictions (reality)

Life interest= beneficiary only received a life interest so nothing to transfer at death

Spenthrift provision= beneficiary prohibited from transferring so nothing to transfer while alive

Extremely rare for

beneficiary to transfer beneficiary interests!

Priority of Assignment

English View

Notice trustee necessary to complete the assignment as against a subsequent assignee

Pure race approach

Older minority approach

Priority of Assignment

American View

First assignee prevails as nothing to give second assignee

Likely to be the TX approach

First assignee wins, because settlor had nothing to give the second one.

Example Problem

Settlor created a trust which provides that the trust terminates in the year 2020 and the trustee is then to distribute all remaining trust property to Randy. Randy's interest indefeasibly vested when Settlor created the trust, because Settlor did not place any condition on Randy taking the property; he does not even need to be alive in 2020. Additionally, Settlor did not include a spendthrift provision. In 2015, Randy sold his remainder interest to Florence. In 2018, Randy sold the same interest to Sam. To whom should the trustee distribute the remaining trust property when the trust ends in 2020?

If it was the English view, it would be the first assignee (Florence or Sam) who gave notice.

If it was the American view, Florence would prevail because Florence was the first person to receive an assignment.

All he wants us to know in the extremely rare case

beneficiary transfers their interests, these are the two approaches

Spendthrift Provisions

A provision that typically prohibits

Beneficiary from transferring right to future payments of income or principal (cannot transfer interest)

Beneficiary's creditors from subjecting the beneficiary's interest to the payment of their claims (creditors cannot reach interst)

Spenthrift Provisions

Purposes

Protect beneficiary (asset protection)

Allow the settlor to have trust property used as the settlor intended

No requirement that the beneficiary actually needs protection

Spendthrift provisions work for

everyone you do not have to be a spendthrift to get the benefit

Spenthrift Provisions

Time of Protection

Interest protected only while in the trust

Once the trustee pays beneficiary, beneficiary may transfer and creditors may reach

So what should trustee be authorized to do?

Have a provision that says you are to pay the income once a month, or for the benefit of the beneficiary

Just putting a spendthrift provision is NOT good enough

Extremely common to say "pay to or for the benefit of"

Can pay all their bills directly

To protect beneficiary need spendthrift provision coupled with

"pay for the benefit of" as opposed to "pay to" so money is protected even when it is distributed. This language would be in the distribution provision

Spenthrift Provisions

Methods of Creation

No particular language needed as long as settlor's intent is clear

"The beneficiary's interst shall be held subject to a spendthrift trust"

Exceptions to Enforceability of Spendthrift Provision

1. Settlor is the Beneficiary

2. Necessaries

3. Child Support

4. Federal Tax Claims

5. Compliance with the agreement settling trust issues

6. Other Jurisdiction

Settlor=Beneficiary

A settlor cannot protect his or her own property from his or her creditors

Booth v. Chadwick

Court said being in prison was a punishment

However, may be able to restrict voluntary transfer

Many offshore countries and some states

allow self-settled spendthrift trusts

There are a lot. Top two are Nevada and South Dakota

Necessaries

Food, shelter, clothing, medical are, etc.

Not codified but some pre-Code cases may support this exception

Child Support

Court has discretion to break spendthrift protection for child support obligation of beneficiary

If distribution mandatory, up to mandatory amount

If distribution discretionary, up to entire income

Child Support

If distribution discretionary, up to entire income

This is the scary situation

What if you have a degenerate sibling. Delinquent with child support. Could be a lot more kids or the grandkids

Child Support

Impact of Exception

Methods of drafting to avoid impact

Make distributions mandatory (people do not like that, idea of trust is trustee to make decisions at the time things are happening)

Set up different trusts. Separate trust for each kid (not the best option either!)

Put a provision that says, if you are delinquent in child support you are NOT a beneficiary. PUT A CONDITION. You are forfeited your position to be a beneficiary

Federal Tax Claims

Spendthrift provisions not going to win over the IRS

Compliance with agreement settling trust issues

If you are switching around interests because of a settlement agreement that is okay

Other Jurisdiction

Tort claimants. Many states allow tort claims to get stuff out of spendthrift provisions

Always ineffective. Some states are very non debtor protection. TX is very high debtor protected state

Merger Prevented

If settlor is not the beneficiary, merger will not occur with spendthrift trust even if trustee conveys legal title to the beneficiary

Court will appoint new trustee to keep title split

Discretionary Trusts*

(Label)

Discretionary Trusts

Need to contrast with the opposite, mandatory provisions

Must pay a certain amount of money or expense

Trust requires trustee to make payments

Basic Idea of Discretionary Trusts

Substituted Judgment

Trustee has discretion regarding: which beneficiaries to pay, and/or how much to pay each beneficiary

May (or may not) be subjected to a stated standard

Allows trustee to exercise substituted judgment for settlor who is likely deceased or incompetent

Also called a spray or sprinkle trusts

Interest of Beneficiary

No interest income or principal until the trustee exercises discretion

In effect, beneficiary hopes to receive property under a power of appointment the settlor placed into the trust

Availability of Interest to Creditors

General Rule

not reachable until paid

Advice= "pay to or for benefit of"

Availability of Interest to Creditors

Exceptions to General Rule

(same as spenthrift)

Settlor and beneficiary same person (unless that state allows DAPT)

Child support under Family Code (court may order from income, but not principal (court can order all income from a discretionary trust))

What does discretion mean?

Trust Code 113.029(a)

Unicorn! There is not such a thing as absolute discretion. If there was absolute discretion there would be no enforceable duties. With no enforceable duties no trust

Code says Trustee must always act

in good faith in accordance with the terms of the trust and purposes of the trust and beneficiaries' interest

Courts are very reluctant to say

there is an abuse of discretion. Pretty extreme facts to show an abuse of discretion

fraud, misconduct, or clear abuse of discretion

Key:

No such thing as absolute discretion

Estate of Dillard

What is the key language of the trust that is in debate here?

"Should he be in need of additional funds for maintenance and support"

This is a discretionary trust, and it has a standard

First standard money can only be used for maintenance and support

Second standard if he is in need of ADDITIONAL funds Relationship between trustee and beneficiary Same person!

Trustee thinks they need it! Wants additional funds

Estate of Dillard

Court said:

if it is ambiguous can look at extrinsic evidence. Court says no this is very clear. You need additional funds, so must look at what they have (bank accounts). Only if you actually NEED IT.

Intent was clear and property only goes to B if it is something the B actually needs

Problem with good faith is

it is SUBJECTIVE

Support Trusts*

(Label)

Support Trusts

Use of trust funds limited to the beneficiary's support

Health, education, maintenance, support (HEMS)

Support Trusts

Distributions for support may be

mandatory OR discretionary

Support Trusts

Mandatory Support

Trustee must pay for HEMS

Support Trusts

Discretionary Support

Trustee may pay for HEMS

Support Trust Goal is to

carry out the client's (settlor) intent

General Rule of Support Trusts

The beneficiary of a support trust may not convey the beneficiary's interest

Drafting Considerations

1. Define Support

2. Are the beneficiary's other resources to be considered?

Define support

Default=Level of support to which beneficiary accustomed before becoming a beneficiary

Is this what the settlor intends? Safety net? Enhance lifestyle?

Does support of beneficiary include support of beneficiary's dependents?

General Rule:

Yes, if you are legally obligated to support someone (minor kids/spouse) then you support them too

What if the kid comes back when they are an adult?

Support is not for them. Not legally obligated to support adult children

Are beneficiary's other resources to be considered?

Client can say yes, no, or optional to consider

Are beneficiary's other resources to be considered?

IF client says yes

BEcause trust intended only to function as a safety net (second most common)

Are beneficiary's other resources to be considered?

IF client says NO

Because trust intended to pay expenses and elevate beneficiary's lifestyle.

Least common because most people do not want trust fund babies

Are beneficiary's other resources to be considered?

IF client says it is OPTIONAL

Trustee decides based on beneficiary's situation (most common)

If a beneficiary's other resources are to be considered, how are they considered?

Keisling Case

Keisling Case

Husband made a trust for his wife. Super wealthy lifestyle.

Standard of living is taken care of, but the standard of when you can distribute for that lifestyle is:

Only if her own income and other financial resources (not the trust) are not sufficient to maintain her in this lifestyle

Does she now have to sell all of her fancy stuff to get money from the trust?

And then buy back everything with the trust money

A vicious circle!

Keisling Case

Court said

The trust language was clear, and it should help maintain her OG financial living

Court got the definition from financial assets from Restate of Trusts

Income and other periodic receipts such as pension. Essentially NOT YOUR ASSETS

Court looked at the comment of the restatement to determine meaning of "other financial resources."

which means income and pension, retirement plan, social security, etc., payments.

As a precaution, should

specifiy what other financial resources mans in the trust itself

Settlor is the

person who creates the trust by manifesting trust intent.

Also called:

Trustor (old term), Grantor (tax, overbroad as applies to all transferors) Donor (overbroad as applies to all gift givers)

Corporations, partnerships, etc can be

settlors

Capacity 112.007

Inter vivos trust

=inter vivos gift

Be an adult

Be competent enough to understand the nature of what is going on.

Similar to testamentary capacity

Capacity 112.007

Testamentary trust=

testamentary capacity

Texas has no capacity rules, nothing new