Trusts – Lecture Review Flashcards

Core Definitions

• Trust = fiduciary arrangement where trustee holds legal title & manages property for beneficiaries’ equitable benefit.
• Valid trust requires: \text{(1) Settlor with capacity}, \text{(2) Present intent}, \text{(3) Identifiable trust res}, \text{(4) Trustee with duties}, \text{(5) Ascertainable beneficiary}, \text{(6) Lawful purpose}.
• Interests are freely alienable unless restricted (e.g., spendthrift).

Basic Mechanics

• Bifurcation: trustee = legal title; beneficiary = equitable title.
• No consideration required.
• Presumptions
– Majority/UTC: revocable unless stated otherwise.
– Minority: irrevocable unless stated otherwise.
• RAP applies to private trusts (wait-and-see in some states); NOT to charitable trusts.

Key Classifications

• Express trusts → inter vivos or testamentary (private vs. charitable).
• Resulting trusts → fail/partial fail; property returns to settlor/estate.
• Constructive trusts → equitable remedy to prevent unjust enrichment (e.g., homicide, fraud).
• Mandatory vs. Discretionary vs. Support vs. Spendthrift (income distribution & creditor rights vary).

Parties & Roles

• Settlor (grantor) – creates/funds.
• Trustee – holds legal title; must accept; cannot be sole trustee & sole beneficiary (merger).
• Beneficiaries – hold equitable interests; may also be settlor/trustee if no merger.

Express Trust Highlights

Private Express

• Intent may be oral, written, or conduct; writing required only if Statute of Frauds/Wills applies.
• Precatory language ("hope/wish") ≠ trust unless fiduciary instructions + unnatural disposition.
• Trust property must exist (expectancy insufficient) – except valid "pour-over" before funding.
• Beneficiaries must be definite; unborn children & reasonable classes OK.

Inter Vivos Devices

• Pour-over wills (UTATA compliant).
• Totten account = revocable bank designation; passes to named beneficiaries if undevised.
• UTMA/UCTA custodianships – not true trusts.
• Life-insurance & living (revocable) trusts – probate avoidance; no asset protection from settlor’s creditors.

Testamentary

• Must satisfy Statute of Wills.
• "Secret" trust → constructive trust for intended beneficiary (extrinsic evidence allowed).
• "Semi-secret" trust → resulting trust for heirs (extrinsic evidence barred).

Charitable Trust Essentials

• Must have charitable purpose + benefit indefinite public/class.
• Not subject to RAP; may be perpetual.
• Cy pres: court modifies if purpose illegal/impossible; rebuttable presumption of general charitable intent.
• Standing: state AG, special interest members, settlor.
• Statutory honorary trusts allowed for animals & noncharitable purposes (usually 21-year limit).

Beneficiary & Creditor Rights

• Equitable interests generally alienable; creditors reach only what beneficiary can demand.
• Spendthrift clause bars voluntary & involuntary transfers except: spouse/child support, taxes, some "necessaries"; invalid if settlor = beneficiary.
• Support trusts – limited to beneficiary’s \text{H.E.S.M.}; creditors supplying necessities paid directly by trustee.
• Discretionary trusts – creditor can reach only distributions actually made (absent spendthrift).

Trust Modification & Termination

• Revocable trust: settlor may revoke/amend via trust method or clear \text{C\&C} evidence.
• Noncharitable irrevocable:
– All beneficiaries + settlor ⇒ may modify even if material purpose unfulfilled.
– Beneficiaries alone ⇒ allowed only if no material purpose (Claflin doctrine).
• Court can modify/terminate for unanticipated changes, uneconomic (<50{,}000), mistake, tax objectives.
• Trust ends automatically when purposes fulfilled, unlawful, impossible, or terms expire.

Principal–Income Allocation (UPAIA)

• Default: life tenants = income; remaindermen = principal.
• Trustee may adjust (total-return approach) if fair & reasonable.
• Typical allocations:
– Stock dividends/splits = principal.
– Deferred compensation, liquidating assets: 10\% income / 90\% principal.
• Ordinary expenses split 50\% income / 50\% principal; debt principal, estate taxes, environmental costs chargeable to principal.

Trustee Powers & Duties

Powers

• All powers granted by instrument + those necessary/prudent (modern trend).
• May sell/lease/contract unless expressly barred.

Core Duties

• Loyalty (no self-dealing; per se breach – no further inquiry).
• Prudence (UPIA "prudent investor": diversify, monitor, total-portfolio, special skills heightened standard).
• Impartiality between current & future beneficiaries.
• Inform & account (provide instrument, statements, notice of significant actions).
• Segregate, secure, insure, earmark assets; enforce & defend claims.

Delegation

• Permitted for ministerial or investment functions if prudent selection, instruction, monitoring.

Breach Consequences

• Remedies: damages (lost profits, appreciation, interests), disgorgement, tracing, removal.
• Beneficiary consent or participation bars relief (unclean hands, laches).
• Co-trustees jointly liable unless innocent & exercised reasonable care.
• Third parties liable if not bona fide purchaser or knowingly assisted breach.

Trustee Resignation / Removal

• Resign: \ge 30-day notice to settlor (if living), qualified beneficiaries, co-trustees or court approval.
• Court may remove for incapacity, breach, conflict, hostility, persistent poor performance.
• Departing trustee must promptly deliver property; retains duties until transfer.

Future Interests in Trusts

• Grantor: reversion, possibility of reverter, right of entry.
• Beneficiary: vested/contingent remainders, executory interests.
• UPC: survivorship presumed; beneficiary must survive distribution date unless instrument states otherwise.
• Class gifts remain open until first member entitled to possess or prior interest ends; adopted children included absent contrary intent.
• Disclaimer: written within 9 months of indefeasible vesting (state) & creation (federal tax).

Powers of Appointment

• Allows donee to direct trustee to distribute irrespective of trust terms.
• Special power excludes donee, donee’s creditors, and estate.
• Ineffective/lapsed power → taker-in-default; if none, property to permissible appointees alive at lapse (if defined & limited class).

Quick Issue-Spot Checklist

1. Creation elements met? Funding? Intent?
2. Revocable vs. irrevocable? Material purpose?
3. Spendthrift/support/discretionary language?
4. RAP violation? Charitable + cy pres?
5. Trustee actions = self-dealing/conflict/breach of prudence? Diversification?
6. Appropriate remedy: surcharge, constructive/resulting trust, removal.
7. Modification/termination route (beneficiary consent, court, uneconomic, changed circumstances).