Trusts

Question 1

Splitting Ownershp

Answer 1

Trusts split legal and equiatable interests

Legal interest (held by trustee) - responsibilities of ownership

Equitable interest (held by beneficiary) - benefits of ownership

Question 2

Elements of a Valid Trust

Answer 2

1. Settlor with capacity to convey
2. Intent to create a trust
   
   • Splitting equities and imposing duties on trustee
3. Trustee with capacity
4. Identifiable Corpus
   
   • Ascertainable with certainty
5. Ascertainable Beneficiaries
   
   • Any person who can hold title; class gifts okay as long as ascertainible when they are to benefit
6. Proper Purpose

Question 3

Mechanics and Formalities of a Trust

Answer 3

1. Creation Methods
   
   • Inter Vivos/Living Trusts
   • Testamentary Trust - Created in Settlor’s Valid will
2. Designate a Trustee
   
   • Capacity of trustee = take, hold, and manage property
3. Transfer property to trust
   
   • Declaration of trust - settlor keeps legal title (settlor = trustee); real property should be conveyed to settlor as trustree
   • Transfer in trust - settlor transfers legal title
4. Statute of Frauds
   
   • Trust may be oral unless it involves real property

Question 4

Private Express Trust (Definition)

Answer 4

A fiduciary relationshp with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

• Manifestation of Intent: precatory words (of hope) are insufficient to create a manifestation of intent; otherwise, no special words are needed
• Legal Purpose: Any Legal Purpose
  
  • But distinguish:
    
    • Illegality at creation: try to excise the illegal parts
      
      • if not possible court may invalidate the trust or allow trustee to keep the property
    • Illegality after creation: a resulting trust is decreed to transfer property back to settlor or his estate
      *

Question 5

Creation of a Private Express Trust

Answer 5

1. Testamentary (at death)
   
   • Must comply with Will Formalities
2. Inter Vivos (during life)
   
   1. Transfer in Trust (third person trustee)
      
      • Delivery of property to trustee (real property must be deeded)
   2. Declaration in Trust (Settlor is trustee)
      
      • Look for present manifestation of trust purpose; but if it involves real property it must satisfy SoF

Question 6

Charitable Trusts

Answer 6

Like a private express trust but with a charitable purpose

• Society is the beneficiary
• RAP does not apply to charitable trusts
• Cy Pres: if the settlor has a general charitable intent but the mechanism fails, the court will exercise cy pres and try to effectuate the settlor’s intent as nearly as possible
  
  • Does not apply if the charitable intent was specific

Question 7

Spendthrift Trust (or Clause)

Answer 7

Benefeiciary cannot transfer his right to future payments of income or principal and creditors cannot attach the beneficiary’s right to same.

RESULT:

• Beneficiary cannot voluntarily transfer his rights
• Creditors cannot generally attach (involuntary alienation); but preferred creditors can (government, necessities, or tort judgments); or, any creditor can attach to surplus as measured above beneficiary’s station in life

Question 8

Support Trust

Answer 8

The trustee is required to use only so much of the income or principal as is necessary for the beneficiary’s health, support, maintenance, and education.

• No voluntary alienation
• No involuntary alienation, except for preferred creditors or to surplus
• standard: what beneficiary was accustomed to before trust

Question 9

Discretionary Trust

Answer 9

The Trustee is given sole and absolute discretion in determining how much to pay the beneficiary, if anything, and when to pay the beneficiary, if at all.

• Alienable? Courts are split, argue both ways
  
  1. There is nothing to transfer
  2. But if there is a transfer, transferee gets distributions, if any

Question 10

Resulting Trust

Answer 10

An implied in fact trust based on the presumed intent of the parties, or can be decreed by the court, generally to transfer trust property back to the settlor.

• Generally used results when a trust fails in some way.

Question 11

Constructive Trusts

Answer 11

A constructive trust is a remedy to prevent fraud or unjust enrichment; the wrongdoer must transfer the property to the intended beneficiary

​Examples:

• Where trustee makes a profit through self-dealing
• Secret trust (where the will on its face makes a gift outright, but the gift is given on the basis of an oral promise that it be used to benefit someone else); parol evidence is alloed to show existence
  
  • Compare semi-secret trust: Gift to A as trustee, but no beneficiary (this creates a resulting trust and property goes back to settlor)

Question 12

Trustee Duties (owed to Beneficiaries)

Answer 12

1. Duty of Loyalty: administer for the benefit of beneficiaries; no self-dealing
2. Duty to Invest: Prudent Investor
   
   • Portfolio approach considering goals and terms of trust
   • Diversifiction required
3. Duty to Earmark: mark trust property as trust property
4. Duty to Segregate:
   
   • If breached, trustee can be removed
5. Duty to Account: provide statements of income/expense regularly
6. Duty of Due Care: act as an RPP (always discuss)

Question 13

Remedies for Breach of Trustee’s Duties

Answer 13

1. Damages
2. Constructive Trust
3. Equitable Lien
4. Ratify the transaction if it was good
5. Remove the Trustee

Question 14

Trustee Liability to 3rd Persons (contract and tort)

Answer 14

1. Liability in Contract:
   
   • Trustee personally liable, unless contract provision excludes liability
2. Liability in Tort:
   
   • CL: trustee sued in personal capacity; but if trustee was without personal fault, he can be indemnified (indemnification for negligence of an agent or strict liability)
     MOD: trustee sued in personal capacity only if personally at fault (negligent or intentional tort)

Question 15

Modification of Trusts

Answer 15

• By Settlor: can modify if he expressly reserves the right to modify
• By Benificiaries: if all agree AND settlor’s intent not frustrated
• By Court:
  
  • Cy pres (charitable trusts)
  • Deviation Power: when (1) unforeseen circumstances and (2) necessary, thr court may modify the trust

Question 16

Termination of Trusts

Answer 16

• Revocable Trusts: Settlor can revoke unless trust expressly made irrevocable
• Irrevocable Trusts: can terminate early if:
  
  • Settlor and Beneficiaries agree (must account for all contingent remaindermen), written consent of all

Question 17

Income and Principal

(Trusts)

Answer 17

• Income and expenses allocated to life tenant:
  
  • Income: Cash dividends, interest income, net business income
  • Expenses: interest on loan indebtedness, taxes, minor repairs
• Income and expenses allocated to remaindermen:
  
  • Income: stock dividends; stock splits; net proceeds on the sale of a trust accound
  • Expenses: principal part of loan indebtedness; major repairs and improvements
• Trustee can adjust the above rules if necessary to adminster the trust fairly

Question 18

Purchase-Money Resulting Trust

Answer 18

When one pays the consideration for the transfer of proeprty (real or personal) bu has the title taken in the name of another.