REVOCABLE vs IRREVOCABLE
TRUSTS
- Revocable - can be amended or terminated by settlor
- Irrevocable - generally can’t be amended or terminated by settlor
REVOCABLE TRUSTS
- Presumption = trust is revocable unlessstated otherwise
- How to Revoke = any action that demonstrates settlor’s intent to revoke (look for instructions in trust)
- Effective upon the act of revoking
- May be created w/o formalities unless trust has testamentary aspects and does not involve real property (Statutes of Frauds, Wills)
ELEMENTS OF A PRIVATE EXPRESS TRUST
- A settlor who has CAPACITY to create a trust (at time created)
- Clearly expresses a PRESENT INTENT to transfer ownership of
- PROPERTY to
- A TRUSTEE who has DUTIES TO PERFORM
- For the benefit of one or more DEFINITE BENEFICIARIES**
- For a VALID PURPOSE - must be lawful, not contrary to public policy, and possible to achieve
**OR Charitable
SETTLOR CAPACITY
- Revocable - same capacity as required to make a will
- At least 18 or emancipated minor; and
- Of sound mind at time of signing
- Ability to understand nature and extent of property being placed in trust;
- The persons who are the natural objects of one’s bounty; and
- The effect of disposition of property
- Irrevocable -
- slightly higher standard:
- legal capacity to transfer property
- Must understand how transfer may affect his / dependents future financial security
SETTLOR INTENT
To transfer ownership off property
- Present Intent- must have intent for trust to take effect immediately, not in the future::
- Language used by settlor
- Relationships among transferor and other parties
- Degree of specificity in transferor’s instructions
- NO Precatory Language- language that expresses hope or wish rather than creating a legal obligation
- (1) Language contains specific instructions to fiduciary
- (2) Either b/c familial relations or history of support (b/w donor / intended beneficiary), there would be an unnatural disposition if a trust was not imposed
QUALIFIED BENEFICIARY
Rights to notice and consent
Qualified = living beneficiary currently eligible to get a distribution of trust income or principal
TRUST PROPERTY (RES)
No minimum amount BUT must be addressed w/reasonable certainty
Because Trust property must be identifiable and kept separate
(“my money” does not work)
CREATING A PRIVATE EXPRESSTRUST
(1) Transfer of property to one who is trustee during settlor’s life;
(2) Will or disposition taking effect when settlor dies;
(3) Declaration that property owner holds the identifiable property as trustee or exercising a power of appointment in favor of the trustee
ORAL TRUST
Writing requirement depends on Statute of Frauds (real property) or Statute of Wills (testamentary)
- Oral trust of personal property= OK
- Must have clear and convincing evidence of settlor’s intent and the terms of the trust
TESTAMENTARY TRUST
trust terms are contained in a will
“Secret Trust” - when devisee promises Settlor to hold and manage devised property for benefit of another AND promise absent from will
- Proof: Requires C&C evidence from beneficiary
- Effect: constructive trust to prevent unjust enrichment of devisee
“Semi-Secret” Trust: will provides for devisee to use devised property for benefit of person (does not ID that person)
RULES OF CONSTRUCTION
General - settlor’s intent controls: Court will rely on text of document
- Ambiguity - evidence of surrounding circumstances is admissible to explain/determine (not to contradict) meaning/intent
- Conflicting Provisions ➔ most recent controls
- Jurisdiction - if not specified, then where settlor reside
- “No Challenge” Provision - unenforceable
BENEFICIARY’S INTEREST+ CREDITORS
General Rule: voluntary transfer of interest in trust property is allowed (unless trust prohibits)
Mandatory Distributions - creditors may reach
Discretionary Distributions -Beneficiary’s creditors generally may not reach interest before it is made; If trustee does not make distribution, then creditors must wait (only B can sue T for distribution)
Without discretionary provision - court may authorize B’s creditors to reach the beneficiary’s interest by attachment of present or future distributions
SPENDTHRIFT PROVISION
Expressly restricts beneficiary’s power to voluntarily or involuntarily transfer trust interest: creditors cannot attach BUT Only valid if restrict both voluntary and involuntary transfers
JUDICIAL MODIFICATION OR TERMINATION OF A TRUST
Court may modify an irrevocable trust if:
- settlor’spurpose - restricts actions (cannot be inconsistent with) ALSO compels actions if modifying to reflect settlor’s intent where mistake shown by clear/convincing evidence (Reformation)
- In the beneficiaries’ best interest, due to unanticipated changes,
- to correct mistakes of fact or law, or
- accomplish settlor’s tax objectives
- Uneconomic Trust (value insufficient to justify cost of admin)
MODIFICATION & TERMINATION - IRREVOCABLE TRUSTS
Q - Whether Trust has a material purpose that would be violated by termination/amendment (spendthrift other discretionary distribution)
NO - Consent of all beneficiaries
YES - Consent of All beneficiaries AND settlor (trustee if settlor dead)
TRUSTEE DUTIES
- Duty of Good Faith (cannot be waived)
- Duty of Loyalty (owed to beneficiaries) (misappropriate opportunities, self-interested transcations)
- Duty of Impartiality
- Duty of Reasonable Care (Special Skills, Prudent Investor)
- Duty of Control & Protection of Trust Property
- Duty to Separate and Identify Trust Property
- Duty to Inform
- Duty to Account
TRUSTEE’S POWERS
All powers over trust property that an unmarried competent owner has over individually owned property
- Invest assets
- Operate a business
- Buy, sell, lease or encumber trust assets
- Insure assets
- To vote securities
- Prosecute and defend action involving the trust
Discretionary Powers- trustee can decide whether exercise of power is appropriate (subject to judicial review); and subject to Mandatory Powers & Mandatory Limitations on Powers
REVOCABLE INTER VIVOSTRUST -
As WILL SUBSTITUTE
Powers that Settlor MAY Retain
Power to revoke, amend, alter, or modify the trust;
Power to add to, or withdraw from, the trust principal or income; Power to remove a trustee and appoint a successor trustee
Pour-Over Devise to Trust
Will devise can be to trustee of trust IF trust was executed prior to or contemporaneously w/ the will
Trust may remain unfunded during settlor’s lifetime
BREACH OF TRUST - TRUSTEE
REMEDIES:
- Compel specific performance of duties
- Enjoin trustee from committing breach
- Compel payment of money /restoring property by other means
- Order accounting
- remove, suspend, or reduce/deny compensation
- *DAMAGES**
- greater of*
- Amount to restore value of res and trust distributions absent the breach (lost income, capital gain, appreciation à from proper administration)
- Profit gained by breach
