My Bar Prep Sets - Trusts

Trust Formation - Parties to a Trust

• Settlor = Creator

• Trustee = Holder of Legal Interest. Must accept trusteeship before anything actually begins

• Beneficiary = Holder of Equitable Interest

Trust Formation - Creation

To create a trust, the settlor must intend to do so. A trust is valid as long as there is a trustee, an ascertainable beneficiary, and assets in it.

Types of Trusts - Express Trusts (Private)

Clearly states intention of settlor to transfer property to a trustee for benefit of beneficiaries.

Created when settlor with capacity manifests a present intent to transfer ownership of property to a trustee who has duties to perform for the benefit of one or more ascertainable beneficiaries for a valid purpose.

Private Express Trust - Intent

Manifestation of intent must occur prior/simultaneous with transfer, either oral, writing, or by conduct. Using trust terms creates presumption of intent.

Private Express Trust - Trust Property

Must be identifiable, segregated, and described with reasonable certainty. Must also be funded (contains some party owned by settlor that was transferred to trust/trustee)

Private Express Trust - Valid Trust Purpose

Can be created for any purpose that isn’t illegal, is achievable, and beneficial to beneficiaries

Private Express Trust - Ascertainable Beneficiaries

Must be identifiable by name. May refer to acts of independent signifigance to identify them

Express Trusts - Types

1. Inter Vivos Trust → Lifetime transfers to a trust

   • Pourover Trust = Will provision directing any assets to be distributed according to trust

   • Totten Trust = Bank accounts in depositor’s name for named beneficiary

   • Life-Insurance Trust = Proceeds from life-insurance go to trust upon insured’s death

   • Living Trust = Settlor names himself trustee until death

2. Testamentary Trust → Terms of trust written into will, and take effect upon executor’s death

   • Secret Trust = Created in reliance on the named beneficiru’s promise to hold and administer property for another → Constructive trust created

   • Semi-Secret Trust = Will directs gift to be held in trust but no beneficiary named, or no terms/purpose of trust → Resulting Trust imposed

Types of Trusts - Charitable Trusts

Created for charitable purposes to benefit society.

Charitable purposes can include pretty much anything, such as relief of poverty, advancement of education, etc.

Charitable Trust - Cy Pres Doctrine

Courts may modify a charitable trust to provide alternative charitable purpose if original one becomes illegal, impracticable, or impossible to perform, so long as it aligns with the grantor’s original intent as much as possible

Types of Trusts - Remedial Trusts (Resulting Trust)

When a trust fails or incomplete disposition of trust property. Requires holder of property to return it to settlor/settlor’s estate

Types of Trusts - Remedial Trusts (Constructive Trust)

Imposed when court concludes person holding title would profit by a wrong/be unjustly enriched if allowed to keep it.

Types of Trusts - Remedial Trusts (Gift-over Clause)

Clause included in some trusts that provide for disposition if trust purpose fails.

Trust Modification and Termination - Revocable Trusts

Trust that may be amended/terminated by settlor. Today, trusts are presumed revocable unless otherwise stated.

Trust Modification and Termination - Methods

May revoke by terms of trust, or, if none:

• Later will/codicil expressly refering to trust and distributing property that would have passed through trust; or

• Any other method shown by clear and convincing evidence.

Trust Modification and Termination - Revocable Trust

Grantor is able to unilaterally modify trust if expressly reserved in trust.

If no right reserve, may still revoke trust so long as:

• All beneficiaries consent

• No interference with trust’s main purpose

If multiple grantors -→ depends on property of trust

• CP = Revoked by either, amended requires both

• Non-CP = Each may revoke/amend with regard to their portion

Trust Modification and Termination - Automatic

May terminate if:

• Trust expires/revoked according to terms

• No purpose remains

• Purposes have become unlawful/contrary to public policy/ impossible

If still serving some material purpose, termination may be blocked

Trust Modification and Termination - Irrevocable Trust

Can be terminated or modified by consent of all beneficiaries if:

• Continuance not necessary for any material purpose

• Modification not inconsistent with material purpose

If termination/modification inconsistent with material purpose, may still terminate with settlor’s consent.

Trustee may not modify/terminate unilaterally

Trust Modification and Termination - Material Purpose

Exists if trust has

• Spendthrift provision

• Discretionary distribution provision

• Provision keyed to the support of beneficiary

• Postponement-of-Enjoyment provision

• Future interest

Irrevocable Trust Modification and Termination - Termination by Beneficiaries and Trustee

After settlor’s death, may still be modified if

• All beneficiaries agree to modification consistent with material purpose

• Unforeseen event frustrated purpose

Trust Modification and Termination - Judicial Modification/Reformation/Termination

Court may modify/terminate a trust if:

• Due to unanticipated circumstances/inability to manage trust effectively

• Trust uneconomic

Or may also:

• Reform terms to correct mistakes

• Modify terms to achieve settlor’s tax objectives

Trust Modification and Termination - Revocation by Divorce

Modernly, a divorce functions to a trust like it does in a will, in that it will treat divorced spouse as if they have disclaimed the interest

Principal and Income Allocation - Types

Trust property is either principal or income.

Rights of Beneficiaries

A beneficiary’s interest is free transferable unless otherwise limited. This does mean that creditors are able to reach principal and income, but only when it becomes payable to beneficiary

Rights of Beneficiaries - Types of Trusts (Support Trust)

Directs trustee to pay income/principal as necessary to support beneficiary.

Credits can not reach assets UNLESS providing a necessity, which can be paid directly by trustee

Rights and Distributions of Beneficiaries - Types of Trusts (Mandatory Trusts)

Gives trustee no discretion regarding income/principal payments to beneficiary.

Rights and Distributions of Beneficiaries - Types of Trusts (Discretionary Trusts)

Gives trustee complete discretion regarding payments. Because of this, beneficiary is unable to challenge trustee’s actions unless clear abuse of discretion

Rights and Distributions of Beneficiaries - Types of Trusts (Spendthrift Trusts)

Expressly restricts beneficiary’s power to (in)voluntarily transfer equitable interest while property remaining in trust in order to ensure creditors cannot reach it.

Exceptions:

• Children and Spouses entitled to support

• Holders of fed/state tax liens

• Providers of necessaries

Principal and Income Allocations - Types of Beneficiaries

1. Life Beneficiaries = Entitled to trust income

2. Remainder Beneficiaries = Entitled to trust principal

All assets must be allocated as one or the other by trustee, and may recharacterize items and reallocate as reasonably necessary to fulfill trust purpose.

Trust Administration - Trustee’s Powers

Includes those expressly granted in document itself, and those implicitly necessary to act as a reasonably prudent person managing the trust, including power to contract, sell/lease/transfer trust property, etc.

Trust Administration - Third Parties’s Liability to Trustee

Third party can be held liable in role in breach of trust, so must act in good faith and give valuable consideration, BUT not liable if they act without actual knowledge of such a breach

Trust Administration - Trustee’s Duties

1. Duty of Loyalty and Good Faith

2. Duty of Prudence

3. Duty to Inform and Account

4. Duty of Prudent Administration

5. Powers of Appointment

Trustee’s Duties - Duty of Loyalty and Good Faith

Must administer trust in good faith and act reasonably when investing and otherwise managing the trust in the best interests of the beneficiaries

Duty of Loyalty and Good Faith - Self-Dealing

When trustee personally engages in transaction involving trust property and the interest of themselves and the interest of the trust are in conflict.

Generally prohibited transactions

• Buying/selling trust assets themselves

• Selling property of one trust to another that they manage

• Borrowing from/making loan to the trust

• Using trust assets to secure personal loan

• Engaging in prohibited transaction with friends/relatives

• Otherwise acting for personal gain

Any of these create an irrebuttable presumption of the breach and there is no further inquiry required because per se.

May be authorized, transaction still must be reasonable and fair to avoid liability.

Duty of Loyalty and Good Faith - Conflict of Interest

If not self-dealing, must be assessed under reasonableness and good faith standard

Trustee’s Duties - Duty of Prudence

May delegate duty if it would be unreasonable for settlor to expect trustee to undertake. If it is a critical function concerning trust property, action is discretionary and not delegable.

Duty of Prudence - Special Skills

Trustee with special skills held to heightened standard, and must use those skills

Duty of Prudence - Trust Investment

Must act as a prudent investor would act when investing his own property, and excercise reasonable care/caution/skill when investing + managing assets.

Assessed by looking at total performance, and the following factors:

• Trust distribution requirements

• General economic conditions

• Investment’s rule in relation to trust’s overall investment portfolio

• Trust’s need for liquidity, income regularity, and preservation/appreciation of capital

Duty of Prudence (Prudent Investor) - Duties Regarding Investments

• Duty to Diversity → unless admin costs > benefits

• Duty to make property productive

• Duty to be Impartial when dealing with beneficiaries

  • Remain uninfluence by animosity/favortisim

  • Balance present and future interests by investing principal correct to get proper income

  • Sell trust property if not profitable

Trustee’s Duties - Duty to Inform and Accounty

Must disclose to beneficiaries complete and accurate information about nature and extent of trsut property, and provide notice if she plans to sell it. Also must periodically account for actions taken on behalf of trust

Trustee’s Duties - Duty of Prudent Administration

Must administer trust as a prudent person and excercise reasonable care, skill and caution, including securing possession within reasonable time, maintaining real property, and segregating personal property

Trustee’s Duties - Power of Appointment

Allows holder to direct trustee to distribute some/all property without provisions of trust

Trustee’s Liability - Beneficiary Right to Enforcement

Trustee responsible for lost profits/interests/other losses resulting from breach. May sue and seek damages, or removal of trustee

Trustee’s Liability - For Others’ Acts

Co-Trustees jointly liable for each other’s acts.

Not generally not liable for predeceasors breach, but must take reasonable steps to compel predecessor to delivery trust property to successor and redress any known breach

Generally liable for agent’s breach if trustee directed or concealed the agent’s act or failed exercise reasonable superivision over agent

Trustee’s Liability - Liability to Third Party

Trustee personally liable for contracts entered into/tortious acts committed while acting as trustee; can seek indeminty from trust if acting within scope

If improper transfer to third non-BFP, may have transaction set aside

Resignation and Removal of Trustee - Resignation

May resign from position by providing 30 days’ notice to qualified beneficiaries, settlors and co-trustee, or obtaining court approval.

Resignation and Removal of Trustee - Resignation

May be removed by court if:

• Incapable of performing duties

• Materially breaches one or more duties

• Conflicts of Interest

• Serious conflict develops between trustee and any beneficiary

• Trust perisistintly performing poorly because trustee action/inaction