Trusts: Intro and Validity

Trust Basic Definition

A trust is a fiduciary relationship created by a settlor in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Legal Interest of Trustee

The trustee receives no benefit other than a possible fee, but has the following fiduciary duties: (1) to deal with the property with reasonable care; (2) to maintain the utmost degree of loyalty; and (3) to be personally responsible if their conduct falls beneath the required standards

Beneficiary Equitable/Beneficial Interest

The beneficiaries usually have little or no control over the trust or trust property, but they do have the right to enforce the trust

Trust Property

A trust must have trust property. Other terms include principal, corpus, trust estate, and res/trust res.

Express Trusts

Private trusts and charitable trusts

Trusts Created by Operation of Law

Resulting Trust: these arise from the presumed intention of the owner of the property; and Constructive trusts: an equitable remedy to prevent unjust enrichment

Elements of a Valid Trust

(1) intent; (2) identifiable corpus; (3) ascertainable beneficiaries; (4) proper purpose; and (5) mechanics and formalities

Intent Required

The settlor must intend to create a trust. This intent must be to split equitable and legal title and to impose enforceable duties on the holder of the legal title

Trust: Communication to Beneficiary

A communication of intent to the beneficiary is not required; delivery of the property to the trustee is sufficient. If the settlor is also the trustee, the settlor must segregate trust assets or otherwise show trust intent

Manifestation of Intent

An intention to create a present trust must have been externally manifested by the settlor at the time they owned property and prior to its conveyance to another. However, conduct of the parties subsequent to conveyance may be evidence of an earlier intent

Intent and Timing of Trust

The intent must be that the trust take effect immediately, although a future interest can be trust property. A promise to create a trust in the future is not enforceable unless the promise is a binding contract

Precatory Expressions

A settlor’s expression of hope, wish, or mere suggestion that the property be used in a certain way is a precatory expression. Usually, theese do not create a trust because there is no imposition of a legal obligation on the transferee

Overcoming Precatory Expression Presumption Against Trust

The inference that a precatory expression does not create a trust can be overcome by: (1) definite and precise directions; (2) directions addressed to a fiduciary; (3) a resulting “unnatural” disposition of property if there is no trust imposed; or (4) extrinsic evidence showing that the testator previously supported the intended beneficiary

Split of Title

Any split of title is sufficient so long as the sole trustee is not the sole beneficiary. If the sole trustee is the sole beneficiary, the equitable and legal titles merge and the trust terminates

Sufficient Trust Property

The trust property must be an existing interest in existing property. A future interest may be held in trust, but an interest not yet in legal existence cannot. Future profits from an existing contract can be a trust res. The trust res must be existing property that the settlor has the power to convey, including intangibles in which the settlor has an assignable interest

Examples of Insufficient Trust property

property of another person, expected future income or profits not supported by a valid contract, and an expectancy to inherit from someone who is still alive

Debtors and Trusts

A debtor cannot hold their own debt in trust, but the debtor can declare himself trustee of a particular property from which the debt is to be paid, and the debt can be held in trust by another person

Eligible Beneficiaries

An ascertainable beneficiary is necessary to the validity of every trust except charitable and honorary trusts. Any person or entity capable of holding or taking title to property can be a beneficiary of a private trust.

Acceptance by Beneficiary

While notice is not required, acceptance is. It can be express or implied, and is generally presumed. It can take place after a trust has been created

Disclaimer of Trust

A beneficiary may disclaim an interest in a trust by filing a written instrument with the trustee (or a probate court for a testamentary trust). A valid disclaimer operates as if the disclaimant was dead as of the relevant date

Time Limits on Disclaiming Trusts

In general, a disclaimer is timely if made within nine months after (1) the interest’s creation or (2) the beneficiary attains age 21, if the beneficiary was less than 21 when the trust was created

Disclaimer: Estoppel

A beneficiary may be estopped from making a disclaimer if they have exercised any dominion or control over the interest or accepted any benefits under the trust.

Disclaimaint Creditors

Under most state statutes, a disclaimer relates back to the date of the transfer for all purposes. A disclaimer by an insolvent beneficiary can be used to defeat creditors’ claims but not a federal tax lien

Anti-lapse statutes

In some states and in the UPC, the anti-lapse statute applies to future interests created in trusts, even future interests expressly made contingent on survival, unless the trust makes an alternative gift in case of a beneficiary’s nonsurvival

Trusts and Divorce

A final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of the former spouse. The UPC and several states have extended this rule to beneficiary designations of individuals related to the ex-spouse but not the settlor.

Class Gifts and Beneficiaries to Trusts

Beneficiaries may be designated by generic descriptions such as “children.” Beneficiaries may be unascertainable when the trust is created so long as they are ascertainable when they are to benefit. The trustee must be able to determine who belongs to the class. The class must be reasonably definite

Remedy for Failure in Lack of Beneficiary

If a trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or their successors is presumed

Honorary Trusts

An honorary trust is a trust set up to provide benefits for a non-human, non-charitable purpose, such as a pet. Pet trusts are authorized in all states

Invalid Trust Purposes

(1) illegality; (2) performance of the trust purpose requires a criminal or tortious act; (3) the purpose is otherwise contrary to public policy; and (4) it violates the RAP

Remedy if Condition is Against Public Policy

(1) the settlor’s alternative desire controls if expressed; (2) if the illegal condition is a condition subsequent, the condition is invalidated and the trust is validated; or (3) if the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence the settlor’s wish would be to void the interest altogether if the condition is unenforceable

RAP and Trusts

Common law: a nonvested property interest is invalid unless it is certain to vest or fail no more than 21 years after the death of a person who is alive when it is created. Many states have adopted a “wait and see” approach, or a 90 year vesting period, or simply abolished RAP in regard to trusts.

Dynasty Trust

States that have abolished RAP as it pertains to trusts permit the creation of “dynasty trusts”

Inter Vivos Trusts

Created while the settlor is alive. Settlor can be trustee. Present intent must be declared via words or manifested by conduct (delivery). If a present trust is not established for lack of trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent

Inter Vivos Trust: Settlor as Trustee

A trust can be created by a settlor declaring themselves trusee of specific property for a beneficiary, The settlor keeps legal title

Inter Vivos Trust: Settlor is not trustee

The settlor creates the trust by transferring legal title of property to a trustee. The settlor may retain or transfer equitable title

Failure of Trustee

Once established, a trust cannot fail for lack of a trustee if the trustee dies, refuses to accept appointment, or resigns. The court will appoint a successor trustee unless it is clear that the settlor intended the trust’s existence to depend on that particular trustee. The absence of a trustee may however cause an attempted inter vivos trust to fail for lack of delivery

Passive Trusts

A passive trust where the trustee has no duties is void, and the beneficiaries take legal title. In many jurisdcitions, the duty to convey title to the benficiaries is enough to make the trust “active”

Qualifications of Trustee

Anyone with capacity to acquire and hold property for their own benefit and has capacity to administer that property may be a trustee. Minors and insane persons can hold property but not administer. State statutes limit the rights of some persons or corporations to serve as trustee

Removal of a Trustee

A court can remove a trustee or refuse to confirm an appointment. Grounds for removal include: (1) serious breach of trust; (2) habitual drunkenness; (3) conflict of interest; etc. Basic factor is: whether continuation in office would be detrimental to the trust. If the settlor knew of the grounds for removal at the time the trust was created, the court may choose not to remove a trust

Beneficiary Power to Remove Trustee

Absent actual grounds, beneficiaries cannot remove the trustee unless the power is specifically granted to them in the trust instrument

Relation Back of Trustee Acceptance

A testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date. This allows a trustee to become liable in their fiduciary capacity on tort claims arising prior to their actual acceptance

Resignation of Appointed Trustee

Once appointed, a trustee cannot resign without court permission, unless all beneficiaries consent or the trust provides otherwise

Delivery to Trustee: Declaration

If a trust was created by declaration, no conveyance of personal property is needed as long as the property is identified and segregated. Real property should be conveyed from the settlor as an individual to the settlor as a trustee

Trusts and Statute of Frauds

Most states do not require a writing for a trust of personal property, but a trust for land requires a written instrument signed by the person entitled to impress the trust upon the property. If the holder of the legal title acts is if they are a trustee, part performance will preclude the SoF defense.

Trusts and Parol Evidence

Most states allow extrinsic evidence where an ambiguity appears on the face of the writing

Pour-Over Gift from Will to Trust

A settlor can make gifts by will to a trust, even an amendable and revocable trust, established during their lifetime. The trust must be clearly identified from the language of the will. The property goes into the testamentary trust at the date of the testator’s death

Pour-Over and Trust Funding

The trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the initial trust funding if; (1) the trust is identified in the will; and (2) the trust is executed before the testator’s death

Secret Trusts

In a secret trust, the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else, and relies on the beneficiary’s promise, but the will does not state the trust nature of the gift. The intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust. If the promise can be proven by clear and convincing evidence, a constructive trust is imposed on the property in favor of the intended trust beneficiary

Semi-Secret Trust

In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest