Trusts

Question 1

Requirements For a Trust - Three Types

Answer 1

1. Express Trust
2. Resulting Trusts; and
3. Constructive Trusts

The express T is the only real T; the other two are just EQUITABLE REMEDIES

Question 2

Requirements For a Trust - Express Trust

Answer 2

A legal device that allows an owner of property to make transfers of property and have those assets managed on behalf of someone else (rather than beneficiary have manage the $ by oneself).

Legal Way of Saying It:

The settlor (creator) of the T gives legal title to manage the money to the trustee, while the income and remainder beneficiaries (take principal) have equitable title to enjoy the distribution from the T.

Question 3

Requirements For a Trust - Two Types of Express Trust

Answer 3

Lifetime T, set up during the lifetime of the person who created the T, who we call the settlor of the T (inter vivos trust).

Testamentary T, set up in settlor’s will.

Question 4

Requirements For a Trust - Eight Requirements

Answer 4

Valid Express T:

1. Settlor who makes a…
2. Delivery of legal title to…
3. Prop (res, corpus, or principal) to a…
4. Trustee who holds legal title for the benefit of a…
5. Beneficiary (or beneficiaries) with…
6. Intent to create a T for…
7. A lawful purpose…
8. In a validly executed document.

NO CONSIDERATION IS REQUIRED TO MAKE T

Question 5

Requirements For a Trust - Settlor

Answer 5

Settlor can be anyone 18 or older with the capacity to enter into K’s.

Question 6

Requirements For a Trust - Delivery

Answer 6

Assets must be placed out of the control of the settlor for delivery to be valid (unless S is the trustee).

Question 7

Requirements For a Trust - Property

Answer 7

Property can be almost anything, but must be prop that S owns, not mere expectancy of ownership in the future. Identified prop not subject to future determination or a promise (“whatever $ or prop that I may choose to put into T”).

Question 8

Requirements For a Trust - Trustee

Answer 8

Anyone who has capacity to acquire or hold title to prop for his own benefit can be a t’ee. Failure to name a t’ee in the T doesn’t matter, court can appoint someone.

Question 9

Requirements For a Trust - Beneficiaries & Exception

Answer 9

1. Must be definite and ascertainable; no ambiguity.
2. If ambiguous, the t’ee holds in a resulting T for the residuary beneficiary of a will (intestate heirs in absence of a valid will).

Residuary beneficiary takes on the will, catch-all for remaining prop.

Exception - Ben. listed as the unborn descendant of a name individual IS considered definite and ascertainable and the T DOESN’T FAIL

Question 10

Requirements For a Trust - Intent

Answer 10

1. S must intend to create an ENFORCEABLE obligation; precatory language doesn’t bind and is insufficient.
2. T’ee must be given duties to perform; if t’ee has no duties to perform it is called a passive T and is void.
3. Merely saying “T” doesn’t show intent, look to lang. and facts to determine.

Question 11

Requirements For a Trust - Lawful Purpose & Exceptions

Answer 11

T can’t call for a crime, destruction of prop, or have a condition against public policy.

Condition Against Public Policy:

1. Restricting marriage OR divorce.
2. It is okay to give $ until someone remarries b/c it is meant to take care of a widow.

Marriage: Restrictions to members of a certain religious or ethnic group are valid as permissible PARTIAL restraints (carves out a % of a pool of candidates) on marriage

Ex - Conditioning principal going to son provided that he marry Jewish is OK.

Question 12

Requirements For a Trust - Trust Execution

Answer 12

T’s of land must be in writing (SOF) and signed by the S.

Question 13

Types of Trusts - ILLINOIS

Answer 13

In Illinois ALL T’s are presumed to be IRREVOCABLE unless T explicitly states it may be revoked.

Question 14

Types of Trusts - Revocable Lifetime T’s (inter vivos T’s)

Answer 14

1. At least one ben. who is not the S; S can’t be the sole ben. when also named the sole t’ee.
2. S can play many roles:
   (i) S can be a t’ee.
   (ii) S can be an income ben. for life. Assets will be included in S’s gross estate for Fed. estate tax purposes.
   (iii) S’s estate can be one of the ben.’s of the principal so long as there is at least on other ben. No part of the principal of a T goes through the S’s estate in probate.
   (iv) S can retain the power to terminate or amend the T. Assets will be included in S’s gross estate for Fed. estate tax purposes.

Question 15

Types of Trusts - Revocable Lifetime T’s - Pour-Over Gifts

Answer 15

1. Testamentary gifts to an existing revocable T are okay.
2. This is called a pour over gift.
3. Such a gift avoids will formalities in the T.
4. T’s can be changed during lifetime of S; somewhat easier than changing a will.

Question 16

Types of Trusts - Revocable Lifetime T’s - Pour-Over Gifts - Validity

Answer 16

1. The T must be in existence; OR
2. Executed concurrently with the will; and
3. The T must be identified in the will.

Subset Points:

1. Pour-over isn’t limited to T’s created by the S, but it can be to any existing T, including those executed by other persons.
2. Pour-over gifts are valid even if T was unfunded or only partially funded during S’s lifetime.

Question 17

Types of Trusts - Revocable Lifetime T’s - Pour-Over Gifts - Life Ins. Proceeds

Answer 17

Two ways to make life ins. proceeds payable to a T:

1. Insured can create an unfunded revocable ins. T and name the t’ee of the existing T as policy ben.
2. Have the T be a testamentary T and have the life ins. policy K name “the t’ee named in my will” as the life ins. policy ben.

Illinois permits directing ins. proceeds to a testamentary t’ee, whether or not the will w/ the T is in existence at the time of the designation pending the probating of the will.

Proceeds of savings acct or pension plan can be handled the same way as life ins. proceeds.

Question 18

Types of Trusts - Revocable Lifetime T’s - Totten T (T-like Option)

Answer 18

Also called a bank acct T. This is a bank acct in the depositor’s name “as t’ee for” a named ben.

Mary Smith opened bank acct and the account name is “Mary Smith as t’ee for John Smith.”

Question 19

Types of Trusts - Revocable Lifetime T’s - Totten T

Answer 19

3 Keys:

1. Depositor makes deposits and withdrawals as he or she wishes during the depositor’s lifetime.
2. Ben. has no beneficial interest during the depositor’s lifetime, but gets whatever is in the account when the depositor dies.
3. No particular words are required to create a Totten T acct.

Question 20

Types of Trusts - Revocable Lifetime T’s - Totten T - Revocation

Answer 20

Four Ways to Revoke:

1. Withdraw all $ in the acct.
2. Manifest an explicit intent to revoke during lifetime.
3. Revoke in a will.
4. Death of ben. also results in having the Totten T revoked and the $ in the account goes free and clear to depositor.

Question 21

Types of Trusts - Revocable Lifetime T’s - Totten T’s - Other Considerations

Answer 21

Change of ben can be made by depositor BUT it must be done the same way as revocation, i.e. notarized statement sent to the financial institution, naming the old ben. and the new one.

Creditors of the depositor can always reach the Totten T acct. balance EITHER before OR after the depositor’s death since it is a form of revocable trust, revoked partially each time a withdrawal is made.

Question 22

Types of Trusts - Revocable Lifetime T’s - Joint Bank Accounts That Aren’t Totten T’s (T-like Option)

Answer 22

“John and Jame w/ right of survivorship” - Issue is after one of the parties to the acct dies, can anyone block the $ from going to the survivor of the J.T.

Standard:
1. If clear and convincing E shows that a survivorship wasn’t intended when the acct. was established and that the acct. was opened only as a matter of convenience to the depositor, then the survivorship can be set aside. Hard to satisfy.

Ownership:

1. Each joint owner while alive owns 1/2 (if 2 people) of the joint acct., no matter who deposits the $, and if one person makes the entire deposit, it is considered a gift of one-half to the other account holder.
2. Can be forced to return $ that exceeded your share.

Question 23

Types of Trusts - Revocable Lifetime T’s - Uniform Transfers To Minors Act (T-like Option)

Answer 23

DOESN’T CREAT A T - SPECIAL STATUTORY CONSERVATORSHIP WHERE CUSTODIAN DOESN’T HOLD LEGAL TITLE (MINOR HOLDS THIS)

Qualifies for the $14k per donee annual exclusion from federal and state gift tax.

Gifts under UTMA must be made to a custodian and it must specify that it’s made under the UTMA.

Can be made in will so long as statutory lang. is used.

Question 24

Types of Trusts - Revocable Lifetime T’s - Uniform Transfers To Minors Act (T-like Option) - Duties of UTMA Custodian

Answer 24

1. Hold, manage, and invest the prop under a RPP standard;
2. Pay over to the minor or for the minor’s needs what part of the prop that the custodian deems advisable; and
3. Pay what is left of the prop to the minor when the minor turns 21.

Question 25

Types of Trusts - Revocable Lifetime T's - Uniform Transfers To Minors Act (T-like Option) - UTMA Tax Consequences

Answer 25

1. If donor names himself or herself as custodian, then the amount of the gift is includible in the custodian's gross estate for federal and state estate taxes. 2. If donor names someone else as custodian, then the amount of the gift isn't includible.

Question 26

Types of Trusts - Revocable Lifetime T's - Charitable Trusts

Answer 26

Five Keys: 1. C.T.'s must have indefinite ben.'s; 2. Must be reasonably large group; and 3. Ben.'s cannot be specifically named persons; and 4. Must be for a charitable purpose (health, education). May be perpetual and avoid RAP. Cy Pres can be used to change T if the stated purpose of CT can no longer be accomplished or designated charity goes out of existence court may use cy pres to make T AS NEAR AS POSSIBLE to what S intended. Atty General has duty of representing ben.'s of CT in the state: 1. AG is indispensable party to any suit on construction or enforcement of a CT. 2. AG has standing to sue to enforce CT's terms.

Question 27

Types of Trusts - Revocable Lifetime T's - Non-T's - Honorary T's

Answer 27

Called T's but aren't. Honorary T's: 1. Where no human being is the ben. of a private (non-CT) T. 2. Ex - giving T income to care for garden. Result: 1. T prop falls into residuary estate.

Question 28

Types of Trusts - Residuary Estate

Answer 28

Whatever remains in the probate estate after the payment of specifically designated gifts of items or cash (private T's must have a human ben.)

Question 29

Types of Trusts - Revocable Lifetime T's - Non-T's - Honorary T's - Pet Trusts

Answer 29

Illinois: 1. A valid pet T can be created and will be exempt from RAP. 2. When pet dies, the T ends and the balance of the T prop is distributed to either the residuary estate, if there is one, or if none, to the S's heirs through intestacy.

Question 30

Types of Trusts - Revocable Lifetime T's - Non-T's - Honorary T's - Cemetery T's

Answer 30

Illinois T's for perpetual care and maintenance of municipal cemeteries and burial plots are classified as charitable T's and are OK even though they have no human ben.'s. No RAP problem.

Question 31

Types of Trusts - Revocable Lifetime T's - Non-T's - Constructive T's

Answer 31

Equitable remedy designed to disgorge: 1. Unjust enrichment that results from wrongful conduct. 2. T'ee's only duty is to convey the prop to the person who, in equity, should have prop. WIll Context (T isn't even created by will): 1. Illinois Slayer Statute gives title to hold on a CT to wrongdoer, but they have a duty to transfer title to rightful party. 2. Hypo on pg 21; title goes to Girl Scouts b/c sons wrongfully caused mother to have stroke that killed her (even though sons named in her will). ``` Intestacy Context (Remember, no T created in will): 1. Illinois Slayer Statute treats wrongdoer as if he predeceased testator, prop goes to wrongdoer's heirs through intestate laws. ```

Question 32

Types of Trusts - Revocable Lifetime T's - Non-T's - Resulting T's

Answer 32

Not a T, but equitable remedy arising in two scenarios: 1. When express T fails; and 2. When a Purchase Money Resulting T is created .

Question 33

Types of Trusts - Revocable Lifetime T's - Non-T's - Resulting T's - PMRT

Answer 33

Only arises when a purchaser buys prop but has title put in another's name (not a relative. Later, purchases claims no gift was intended and asks title holder for title to the prop and the title holder refuses. PMRT created with allows purchaser to compel title holder to give up title.

Question 34

Types of Trusts - Revocable Lifetime T's - Spendthrift Rule and Protection from Creditors

Answer 34

Both income and principal ben.'s covered. Protects a T ben.'s interests from creditors by prohibiting voluntary or involuntary transfer of ben.'s interest. Ben. can't sell/transfer interest and creditors can't get to it. Clause must be expressly stated in the T.

Question 35

Types of Trusts - Revocable Lifetime T's - Spendthrift Rule and Protection from Creditors - Language Used

Answer 35

Exam won't say spendthrift, instead: 1. No ben of this T shall have the power to assign his interest, nor shall such interest be reachable by the ben.'s creditors by attachment, garnishment, or other legal process. 2. Keeps creditor's at bay until $ actually paid out.

Question 36

Types of Trusts - Revocable Lifetime T's - Spendthrift Rule and Protection from Creditors - Exceptions

Answer 36

1. Creditors who furnish necessities can avoid spendthrift (food, clothing, porn). 2. Child support and alimony. IL counts child support arrearages, but not future. 3. Federal tax liens.

Question 37

Types of Trusts - Revocable Lifetime T's - Spendthrift Rule and Protection from Creditors - Self-Settle T Rule

Answer 37

Big limit on spendthrift clauses 1. Spendthrift protection doesn't apply to any interest retained by the S. 2. S can't hide out from their own creditor's but they can protect ben.'s. 3. All revocable T's are fair game for S's creditors; even if the S has no immediate financial interest in the T, but S retains power to revoke then the T offers no protection at all against creditors of S.

Question 38

Modification & Termination of T's

Answer 38

T modification by t'ee and/or ben.'s: 1. Appropriate only when all of ben's consent AND the objective of the T would be defeated or substantially impaired if the T is not modified. 2. The material purpose of the T comes first, overriding any specific directions in the T. Clafflin doctrine.

Question 39

Modification & Termination of T's - Modification Test

Answer 39

ILLINOIS IRREVOCABLE T'S CAN BE TERMINATED IN THIS MANNER: 1. Find out the material purpose of the S regarding the T purposes. 2. Look at specific directions in T to determine whether b/c of change in circumstances those specific directions in T would not frustrate material purpose. 3. If so, directions can be changed by court.

Question 40

Modification & Termination of T's- T Termination by Settlor (DOENS'T APPLY TO BEN.'S)

Answer 40

In Illinois T's are hard to terminate b/c they're IRREVOCABLE and UNAMENDABLE unless the power to revoke and amend is expressly reserved in the T instrument. S can amend if revocable.

Question 41

Trust Administration - T'ee's Powers

Answer 41

Powers of t'ee pursuant to: basically same as executor of administrator 1. Terms of T; 2. Terms of a statute; or 3. Court decree.

Question 42

Trust Administration - T'ee's Powers - General Approach

Answer 42

T'ee can do almost anything w/ some exceptions. T'ee Can: 1. Can sell any real or person prop; 2. Mortgage prop; 3. Lease prop; 4. Make ordinary repairs; 5. Contest, compromise, or settle claims; OR 6. Do almost anything to manage the corpus of the T.

Question 43

Trust Administration - T'ee's Powers - T'ee Forbidden

Answer 43

T'ee Cannot: 1. Engage in self-dealing; 2. Borrow $; 3. Continue a business (i) T's is liable for losses incurred by the business unless t'ee has got court approval to continue the business. (ii) When 3 or more t'ee's, t'ee's who dissent from decision of majority t'ee's will not be liable.

Question 44

Trust Administration - T'ee's Powers - T'ee Forbidden - Self Dealing

Answer 44

Five Prohibitions: 1. T'ee cannot buy or sell T assets to himself. Absolute rule. 2. T'ee cannot borrow T funds. Absolute. 3. T'ee cannot lend $ to the T. Absolute. Any interest earned must be returned to T and any security given for loan is invalid. 4. T'ee cannot profit from serving as t'ee. Fees are okay. T'ee cannot take advantage of confidential info received while t'ee. 5. Corp t'ee cannot buy its own stock as a T investment.

Question 45

Trust Administration - T'ee's Powers - T'ee Forbidden - Self Dealing - Affirmative Duties

Answer 45

1. Duty to segregate T assets from personal assets. Remedy: 1. If commingled funds are used to buy an asset and the asset goes down in value, conclusive presumption personal funds were used. T'ee takes loss. 2. If they go up, presumption is that T funds were used. T benefits. 2. Duty to earmark T assets by titling them in t'ee's name.

Question 46

Trust Administration - T'ee's Powers - Remedies for Breach of Fiduciary Duty

Answer 46

1. Ben. can sue to remove t'ee. 2. Ben. can ratify the transaction and waive the breach. 3. Ben. sue for any loss. 4. Surcharge - action to recover losses to the T.

Question 47

Trust Administration - T'ee's Powers - Further Inquiry Rule

Answer 47

Breach of F.D. by engaging in self-dealing is an automatic wrong and no further inquiry is needed. Good faith and reasonableness are NOT a defense.

Question 48

Trust Administration - T'ee's Powers - Actions Against 3rd Party When T'ee Engages in Self-Dealing

Answer 48

If t'ee engages in a prohibit transactions, such as self dealing, and sells T prop to a 3rd party, ben. cannot sue the purchaser of prop from the t'ee IF that purchases was a bona fide purchaser (BFP) for value w/o notice. No BFP creating 3rd party liability the purchaser only has to know that he was dealing with a t'ee and that the t'ee was engaged in self dealing.

Question 49

Trust Administration - T'ee's Powers - Indirect Self-Dealing

Answer 49

Self-dealing rules apply to loans or sales to a relative of the t'ee or to a business of which the t'ee is an officer, employee, partner, or principal shareholder. No BFP defense.

Question 50

Trust Administration - T'ee's Powers - Exculpatory Clauses

Answer 50

Clauses that attempt to relive a t'ee of liability for a breach of a F.D. Can't shield against all liability for public policy reasons. Can't be used: 1. Bad faith, 2. Intentional breach of T, 3. Recklessness, 4. Abuse of confidential relationship.

Question 51

Liability of T'ee In K or Tort - K

Answer 51

Personal Liability in K: 1. Unless K explicitly shields t'ee, t'ee is personally liable to 3rd parties on K's the t'ee entered into related to T property. 2. Even if so, t'ee will be reimbursed by the T IF: (i) K was w/in powers of t'ee AND (ii) T'ee was acting in the course of proper administration of T.

Question 52

Liability of T'ee In K or Tort - Tort

Answer 52

T'ee is personally liable for all torts by t'ee or tee's employees. ABSOLUTE. T'ee should buy liability insurance and charge cost to T. T'ee can get reimbursed if: 1. T'ee must have been acting w/in t'ee's powers only taking risks that are a normal incidence to t'ee conduct, AND 2. T'ee wasn't personally at fault. Hypo on pg 35 where t'ee's employee was driving w/ T files going to a storage facility and neg. hit someone. T'ee liable in tort but can be reimbursed. Not so if t'ee had been driving.

Question 53

Liability of T'ee In K - T'ee's Investment Power

Answer 53

1. T'ee must manage the prop of the T on behalf of ben. and this means the investment of the corpus of T. 2. Uniform Prudent Investor Act gives broad latitude to choose investments. 3. T'ee can pursue what UPIA calls modern portfolio theory of invest, where the t'ee creates a custom-tailored investment strategy for particular T. Keys: 1. T'ee must consider role each investment plays w/in overall T portfolio. 2. T'ee must consider the expected total return from income and capital gain. 3. T'ee doesn't have to justify PRUDENCE of each investment looked at at by itself, can balance risky investments against safe ones. 5. PRUDENCE isn't measured by hindsight, look at the decision to invest when made, not later. 6. T'ee can exercise adjustment and allocated capital gains to income. T'ee can switch capital gains into the income category if necessary to protect the income ben and vice versa. Goal is fairness to ben.'s. 7. Key to UPIA is flexibility to shape investment strategy for maximum total return, along w/ flexibility to adjust income b/w the income and remainder beneficiaries to be fair to each of them.

Question 54

Types of Trusts - Revocable Lifetime T's - Spendthrift Rule and Protection from Creditors

Answer 54

Absence of spendthrift provision a creditor can reach a beneficiary's present interest in a T. DOESN'T APPLY TO FUTURE INTEREST