Trusts

Question 1

Trust

Answer 1

• entity property that involves separation of management and benefit
• separation of legal title (trustee) and equitable/beneficial title (beneficiary)

Question 2

Parties Involved in Trust

Answer 2

• settlor
• trustee
• beneficiary
• individual can function as more than one persona (can be settlor and trustee, or trustee and a beneficiary) BUT can’t create own trust in which you’re both trustee + beneficiary

Question 3

Trust - Basic Process of Formation

Answer 3

• Settlor makes a declaration, either by deed of trust during life or by will, that the assets are subject to a trust -> declaration conceptually splits assets into two components: legal and equitable
• legal title goes to trustee -> retains possession of the assets + is charged w/ their management
• equitable title belongs to beneficiary - entitled to enjoy the benefits of the trust

Question 4

General Duty of Trustee

Answer 4

• must manage the property for the sole benefit of the beneficiary subject to restrictions put in by settlor
• off-the-rack (default) fiduciary duties

Question 5

Numerus Clausus Safety Valve

Answer 5

• complexities of trusts are contained w/in the trust itself + largely irrelevant to third parties (makes it easier to overcome numerus clausus)

Question 6

Trust Assets

Answer 6

• usually fully alienable, b/c legal title in trustee

- third parties only take subject to beneficial interest if they have notice or did not give value

Question 7

Broadway National Bank v. Adams

Answer 7

• deals w/ trust where there’s a spendthrift clause (creditors can’t reach the trust assets before they’re dispensed to the beneficiary) -> says valid (not an unreasonable restraint on alienation)

Question 8

Fiduciary Duties of Trustees

Answer 8

• trustees are hard to monitor + beneficiary often vulnerable -> strict fiduciary duties
  includes duties of loyalty, impartiality, and prudence

Question 9

Duties of Loyalty

Answer 9

• preclude trustee from self-dealing or engaging in transactions that create conflict of interest w/ obligations to settlor + beneficiaries

Question 10

Duties of Impartiality

Answer 10

• require that trustees act fairly towards all beneficiaries, not favoring one class of beneficiary over another

Question 11

Duties of Prudence

Answer 11

• require that trustee invest + manage the trust assets in a fashion that entails an appropriate degree of risk, given the circumstances of the beneficiaries + the nature of the trust property

Question 12

Rothko v. Reis - Facts

Answer 12

• Reis persuades Rothko to write will naming Reis + two others as executors + leave all 798 of his unsold paintings to a foundation with a rather vague purpose
• After Rothko’s death, the three executors move to sign contract w/ Marlborough Gallery - gallery gets exclusive right to sell the paintings at 50% commission (Reis is placed on retainer + made director of the gallery in exchange, + controller of the gallery Frank Lloyd dangles favorable sales arrangements for Stamos, an artist, third executor goes along b/c his lawyer says its permissible)
• the executors sold all of the paintings to the gallery w/in three weeks of probate
• Daughter + son take 50% forced share of the estate + file suit charging breach of fiduciary duty

Question 13

Rothko v. Reis - Procedural Posture

Answer 13

• trial court entered temporary restraining order against further disposition of the paintings -> Lloyd violated this by having an additional 57 paintings shipped out of the country

Question 14

Rothko v. Reis - Ruling

Answer 14

• trial court rules for the children -> makes Lloyd + executors jointly liable for up to $9.2 million in damages, computed on the basis of the value of the paintings sold in violation of the restraining order as of the time of the trial
• NY Court of Appeal affirms

Question 15

Cy Pres Doctrine

Answer 15

• deals w/ issue of changed circumstances not anticipated by settlor - allows courts to revise trusts in light of these changes
• American courts initially applied very restrictive version - required that the specific charitable purpose be impossible or illegal + that the instrument of trust reflect a “general charitable intent” in addition to the specific purpose
• BUT courts more willing to invoke the doctrine recently - Restatement of the Law Third Trusts went so far as to say that cy pres should be available when carrying out the original trust would be “wasteful”

Question 16

Wilber v. Owens - Facts

Answer 16

• Bamford dies leaving no relatives closer than 1st cousins - writes elaborate will establishing a trust, the income of which is to be devoted to “continue and carry forward to a completion + publish for popular understanding” a set of materials written by Bamford (his own musings)
• not enough money to fully fund the trust described in paragraph 10 - if this is funded, the subsequent bequests (including trust for extended relatives) would be unfunded

Question 17

Wilber v. Owens - Procedural Posture

Answer 17

• executor asks probate court for construction of the will
• Princeton, as potential trustee under paragraph 10 trust, argues the trust should be reformed under cy pres (argued there was a more general philosophical purpose behind the papers)

Question 18

Wilber v. Owens - Decision + Reasoning

Answer 18

• court reconstructs trust under cy pres (Bamford’s notes unintelligible + irrational) -> express purpose of the trust is impossible, but testator had general charitable intent so trust = valid charitable trust -> judge proposes reformulating the paragraph to provide the money be used by Princeton Philosophy Dept. “in some fitting manner for scientific or philosophical research”
• B technically wrote of his notes something along the lines of “if they prove to be of value” -> court basically uses this false modesty to say B had general intent

Question 19

Traditional Test for Cy Pres

Answer 19

Two components:

• first, court must determine that the settlor of the trust has a general charitable intent
• second, the court must find that the specific charitable intent specified by the settlor is impossible to fulfill, would violate public policy, or has been rendered problematic by changed circumstances