Trust Formation
Formation of a valid trust requires: SPIRIT-B 1. A Beneficiary; 2. A Settlor; 3. Intent to create a trust; 4. A Trustee; 5. A valid Purpose; 6. Res; 7. Compliance with any state formalities. The trust does not need to have a named trustee at formation (the court may assign); and the trustee may not be the sole beneficiary.
Trust types
Most trusts are inter vives trusts that are created during the lifetime of the settlor. If provisions to create a trust are contained in a Will, this trust is called a Testamentary Trust. Trusts are revocable during the Settlor’s life; however, upon death, the trust is irrevocable.
Express Trust
An express trust is a fiduciary relationship where a settlor transfers property to a trustee to hold for the benefit of an ascertainable beneficiary.
Inter-vivos trust
An inter-vives trust is created during the settlor’s lifetime, either by transfer or declaration.
Resultant Trust
When a trust fails or there is incomplete disposition of trust property, a court may create a resultant trust to return property to the settlor. This trust’s goal is to avoid unjust enrichment, and is appropriate when a beneficiary is not using the money as the trust dictates.
Discretionary Trust
When a trustee has authority to distribute trust assets at their own discretion, as long as it’s done in good faith.
Support Trust
In a support trust, distributions are limited to the beneficiary’s basic needs, and creditors generally cannot reach trust assets, except for necessities (e.g., food, housing, medical care).
Charitable trust
A trust is deemed charitable when it has a stated charitable purpose and exists for the benefit of the community at large, or a class of persons with continually changing membership.
Cy Pres
A charitable trust’s beneficiary may be designated by a court in situations where the original beneficiary ceases to exist. The court will attempt to assign a charitable beneficiary whose goals are as close to the original beneficiary as possible - if none, the trust res returns to the estate.
Duties of trustee
Trustee standard of care - If the trustee has special skills that are applicable to trust administration, they will be required to use such skills and will be held to that higher standard.
Trustee duty of care
The trustee must exercise that degree of care, skill and caution exercised by a reasonably prudent person in managing their own affairs. This duty requires the trustee to prudently invest assets, including diversifying assets, making real property productive, and making informed investment decisions.
Duty to perform personally
A trustee must personally perform trust functions and may only delegate duties if reasonable under the circumstances and the agent is properly selected and supervised.
Prudent investor rule
A trustee must take reasonable steps to safeguard and maintain trust property, including securing insurance and defending claims.
Duty to segregate trust property
Trust property must be kept separate from the trustee’s personal property to avoid commingling.
Trustee duty of loyalty
A trustee is required to remain loyal to the beneficiaries, to refrain from self-dealing the trust assets, administer the trust in the best interest of the beneficiaries, and act impartially towards each beneficiary.
Duty to diversify assets
A trustee is required to invest trust assets in varying classes of investments to minimize risk.
Duty to distribute IAW the trust instrument
A trustee has a duty to invest and expend trust resources only in accordance with the trust instrument.
Making property productive
A trustee is required to invest trust assets to produce income relative to the assets invested.
Making informed decisions
A trustee must perform responsibilities with the due diligence required to invest trust assets only after developing the requisite knowledge of the investment landscape.
Duty to perform and account
A trustee must annually report to the beneficiaries regarding the value, employment and usage of all trust assets. Additionally, beneficiaries are entitled to accounting upon requests.
Personal liability of a Trustee
A trustee is personally liable on contracts unless they disclosed they were acting as trustee. For torts, a trustee is personally liable unless acting within scope and not personally at fault.
Remedies against a trustee
- The trustee may be removed
- The trustee maybe held liable for any loss or depreciation in the value of the trust.
- The trustee may be disgorged of any profit made by the trustee due to personal use of trust assets, and
- The trustee may also be held liable for any missed profits caused by a breach of their fiduciary duties to the trust.
Liability of beneficiaries
A beneficiary may be liable to the trust if they misappropriate trust property, receive distributions through fraud, or knowingly participate in a breach of trust.
Liability of 3rd parties
A third party who knowingly participates in a trustee’s breach of trust may be held liable under constructive trust or restitution theories.
