Trusts

Trust

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

Trustee

Holds legal title to property. Owes a fiduciary duty to the beneficiaries. 

What benefits a trustee gets

None. Maybe compensation, but you don’t get the property 

Duties owed by a trustee

Duties of care, loyalty, and liable for any lapses below the standard of care 

Beneficiary

Holds equitable/beneficial title to property. Can enforce fiduciary duties 

Settlor

The person who creates the trust. Also called the trustor, grantor, or donor 

Trust property requirement

A trust must have trust property. The trust property is also called the principal, trust, corpus, estate, or res

Functions of trusts

Legal title goes to the trustee, and equitable title goes to the beneficiary. The trustee administers and invests the property in accordance with their legal duties and instructions in the will. The trustee makes payments to the beneficiary or for the benefit of the beneficiary 

Why people create trusts

Protect and provide for beneficiaries; Flexibility of asset distribution; protection against the settlor’s incompetence; professional management of property; probate avoidance; tax benefits 

Different classifications of trusts

Express (private or charitable) or Trusts created by operation of law (resulting or constructive)

Express trusts

Trust created through the express intent of the settlor 

Private Express Trust

A trust someone creates on purpose to benefit specific people 

Charitable Express Trust

A trust created to benefit the public or a large group of people, not specific individuals 

Types of trusts created by operation of law

Resulting and constructive trusts

Resulting trusts

When a trust fails or doesn’t use up all the property, and the law sends the property back to the person who gave it

Constructive trusts

Not a real trust but a legal remedy the court uses to fix unfairness or stop someone from keeping property they got through wrongful means

Elements of a valid trust

Intent, identifiable corpus, ascertainable beneficiaries, proper purpose, mechanics and formalities 

“Intent” element of a valid trust

Two prongs: Intent to split legal and equitable title; and intent to impose enforceable duties on the legal title. No formal words required. An expression of hope, wish, or suggestion is NOT enough to create a trust

“Identifiable corpus” element of a valid trust

Specific, clearly described property to put into the trust. Property the settlor can’t transfer or doesn’t yet own can’t be trust property 

“Ascertainable beneficiaries” element of a valid trust

A trust cannot exist without someone to enforce it. They must be able to take and obtain title (they don’t have to be competent. But beneficiaries can disclaim 

Qualified beneficiary

Beneficiary who is current or first-line remainder beneficiary

Effect of a trust if the beneficiary has died first

Some states have anti-lapse statutes. If the trust doesn’t specify, it goes to beneficiary’s descendants 

Effect of divorce on a beneficiary

Divorces revoke all trust provisions in favor of the ex-spouse 

“Proper Purpose” element of a valid trust

A trust may be created for any purpose not illegal or against impossibility or impossible to achieve 

“Mechanics and formalities” element of a valid trust

The trust must follow the correct legal steps to be valid: delivery, writing, signature, clear terms

Effect of a trust when the trustee dies, refuses, or resigns

Usually nothing, the court can appoint a new one, you can’t force someone to be a trustee 

What accepting a trust means

Signed acceptance, substantially complying with the terms, accepting delivery of trust property, indicating acceptance 

Compensation to a trustee

The trust can indicate but if it’s silent, it’s reasonable compensation 

Grounds for removing a trustee

Serious breach of trust, serious lack of cooperation among co-trustees, unfitness, unwillingness, or persistent failure to administer, or a substantial change in circumstances 

Trustee disclaiming or refusing appointment

Can be done for any reason before acceptance. But they cannot accept in part. 

How a trustee can resign after accepting

Give 30 days notice to the qualified beneficiaries, settlor (if living), and co-trustees; or seek court approval 

Powers of a successor trustee

All the rights and powers as the original and is subject to all the same duties and liabilities 

Intervivos trust

AKA a living will. Made while the settlor is still alive. Two ways to divide (declaration of trust or transfer/conveyance in trust) 

Declaration of trust

A type of inter vivos trust. Settlor and trustee are the same person 

Transfer or conveyance in trust

A type of inter vivos trust. The settlor transfer legal title to someone else 

How a testamentary trust is created

By the testator’s will. A valid will must be effective first before determining whether a valid trust is satisfied 

Writing requirements of a trust

Some states allow oral trusts of personal property only by clear and convincing evidence. A trust of land must be in writing. 

Pour-over gift form will to trust

A settlor can make gifts by will to a trust. This can be the initial trust funding if the trust is identified in the will. 

Testamentary trusts

A trust that’s created in someone’s will and only takes effect after they die. 

Creating a testamentary trust

Clear showing a trust is being created, who the trustee and beneficiaries are, and what property goes into the trust. 

Types of testamentary trusts

Secret and semi-secret trusts

Secret trust

The settlor agrees with the beneficiary that the beneficiary will hold the property in trust for someone else. But the will doesn’t state the trust nature. Courts allow the trust beneficiary to present extrinsic evidence and seek constructive trust remedies 

Semi-secret trust

The will makes a gift in trust but fails to state the beneficiary. Courts say that doesn’t create a trust because there’s no ascertainable beneficiary. The gift goes back to the settlor’s successors in interest (the resulting trust)

Transferability in interests in trusts

Presumed freely transferable

Discretionary trust

The trustee is given discretion whether to apply or withhold payment of income or principal (or both) to a beneficiary. The trustee determines how much the beneficiary gets. Exception: Claims for child or spousal support can usually reach the trust 

Exceptions to discretionary trusts

Claims for child or spousal support can usually reach the trust 

Spendthrift provisions

Preclude the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims. 

Support trusts

The trustee must use the trust money only to support the beneficiary’s basic needs (food, shelter, medical, education). The trustee has a duty to provide for the support but can’t give more than that 

What kind of title a trustee has

Legal title. So a trustee’s personal creditors, heirs, or will beneficiary have no claim to the property because they only have legal title 

The most common way a trust ends

By express terms

Beneficiary modification

Can do it with settlor permission or without beneficiaries' permission if: All beneficiaries agree; and changes would not upset the material purpose of the trust 

How a beneficiary can modify without the settlor’s consent

All beneficiaries agree and it would not upset the material purpose of the trust

Trusts terminated by operation of law

If the property has been exhausted or if the legal and equitable titles have merged

When a court may modify or terminate a trust

If the trust’s purposes are accomplished, illegal, or impossible; Unanticipated circumstances may require changes to help still get to the intent; the value of the trust is too late; in some states, you can fix mistakes through clear and convincing evidence 

Modification by trustee

Trustees can only change how they manage or distribute trust property only if the document allows it or the law permits it. Trustees generally cannot change the terms of the trust itself but they can adjust investments and take reasonable actions to protect the trust 

Duty of the trustee upon termination

The trustee’s powers do not immediately end; their powers continue for a reasonable period of time necessary to “wind up” the affairs of the trust 

Sources of the trustee’s powers

Expressly granted by the settlor in the trust instrument; provided by state statute; powers granted by the court; implied powers necessary or appropriate to carry out the trust (implied powers); powers under the UTC 

What happens when co-trustees can’t come to a unanimous decision

Act by majority.

If a co-trustee cannot perform

The remaining trustees may act for the trust 

Mandatory powers

Something a trustee MUST exercise. If they fail or refuse, a court will, upon petition, order the trustee to exercise the power (provided it wouldn’t violate the law or public policy) 

Discretionary Powers

The trustee MAY exercise power as the trustee sees fit. Only liable for abuse of discretion or failure to exercise discretion. Must act in good faith. 

Duties of the trustee

Duty to administer the trust according to the terms, duty of loyalty to the beneficiary to exercise good faith, Duty to report, keep records, loyalty and impartiality, and review trust property

Duty to administer the trust according to the terms

Bound to follow the terms of the trust and be liable for noncompliance, act impartially, and administer in good faith

Prudent Investor Rule

The trustee must invest in the same manner as a prudent investor unless the trust instrument says otherwise. 

Portfolio approach

View investments together in the context of the entire trust portfolio. Don’t all need to be completely safe investments, you can take some risks 

Facts considered in making investment decisions

The trust’s purpose, the economic conditions, tax consequences, need for liquidity 

Delegation

A trustee can hand off certain tasks to someone else but only if it’s something a reasonable trustee would delegate and they use care in picking the helper. Trustee’s are protected from liability if they acted prudently in: selecting the agent; establishing the scope and terms of the delegation; and periodically reviewing the agent’s actions 

Damages recoverable for a breach of fiduciary duty

Lost profits, depreciation in value of trust property, trustee’s profits from the breach

Remedies for breach of trust (or about to commit)

The court may: Enforce specific performance; compel the trustee to pay money or restore property; or suspend or remove the trustee 

Remedies for self-dealing

Affirm the transaction if the trust profited; set aside the transaction if the trust lost money; trace profits from the trustee if the trustee profited 

When the trustee isn’t liable for breach of trust

Reasonably relied on the terms of the trust; the beneficiaries consented to the conduct and released the trustee from liability 

Removal of the trustee

A court can remove on its own or by request by the settlor, beneficiary, or co-trustee 

Reasons for removing a trustee

Incapacity, unfitness, commission of a serious breach of trust, serious conflict of interest, insolvency, extreme hostility, refusal to post any required bond, lack of cooperation among co-trustees

Legal status of a trust

It’s not a legal entity so it can’t sue or be sued. So sue the trustee or the representative 

Trustee’s liability to third parties for contracts

The trustee is personally liable but can avoid liability by contract provision or indicating role as trustee by signature 

Trustee’s liability to third parties for tort liability

Trustee is liable if they’re personally at fault, but not by reason of respondeat superior 

Charitable trusts

Helps society in general (you could have a specific organization, but look at the people that are benefited). The court determines whether the purpose is charitable; it’s not on the settlor 

Cy Pres Doctrine

If a charitable purpose cannot be carried out, the court may select an alternative by ascertaining the settlor’s primary purpose. This applies to outright and charitable gifts/trusts

RAP and Charitable Trusts

Doesn’t apply

Enforcing charitable trusts

The state attorney general enforces the charitable trust

Honorary or purpose trusts

No human beneficiaries, no charitable purpose, but still has a purpose (taking care of a pet, maintaining a monument). Many states specify what kinds of purposes but all allow pets. 

identifying a resulting trusts

Based on the settlor’s conduct. Three types: purchase money resulting trust; resulting trusts arising on failure of an express trusts; resulting trusts arising from an incomplete disposition of trust assets 

Situations giving rise to a resulting trust

Failure to express trust; No provision for a remainder and the trust corpus is larger; purchase money resulting trust 

Constructive trust

Not a trust, it’s an equitable remedy to prevent unjust enrichment resulting from wrongful conduct. It’s a remedy so you have to ask for the court to act and prove the evidence

Grounds to impose a constructive trust

Fraud, duress, breach of fiduciary duty, homicide, abuse of confidential relationship, breach of promise