Trusts Lecture Outline[1]

Trusts I. Private Express Trust: a fiduciary relationship 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 A. Property of the trust (corpus) 1. Any presently existing interest in property that can be transferred can be the corpus of a trust 2. Examples a. Fee simple b. Future interest (such as a contingent remainder) c. Life insurance policy d. Bonds e. Stocks 3. Illusory interests cannot be the subject matter of a trust a. Future business profits b. Debt that settlor owes beneficiary is not property and cannot be the corpus of a trust because debt is a liability, not property c. Mere expectancy: what settlor expects to inherit or receive as a gift is not property d. Community property cannot be the corpus if one spouse or domestic partner creates the trust unilaterally and gratuitously B. Beneficiary: any ascertainable person or group of people can be the beneficiary of a private express trust (includes legal persons) 1. Corporations 2. Unincorporated associations a. Common law: unincorporated associations could not be the beneficiary of a private express trust b. Modern law: an unincorporated association can be the beneficiary of a private express trust 3. Class gifts are valid a. Watch out for a class that is too big (e.g. all of the people in the state of CA) b. Even if ascertainable it simply cannot be administered c. But it might be a charitable trust 4. Child conceived when the interest was created and later born is deemed an ascertainable person 5. Rule Against Perpetuities a. O conveys to Bank in trust “To A, but if liquor is ever sold, then to B” b. B’s interest is stricken because it violates the Rule Against Perpetuities (it may vest too far into the future) c. A is left with a fee simple (trust may be terminated if A is the only beneficiary) C. Trustee 1. A trust must have a trustee, but a court will not allow the trust to fail solely because there is no trustee or because trustee refuses to serve 2. In such case, court will appoint a trustee 3. Until a trustee is appointed, settlor or settlor’s estate will hold legal title D. Manifestation of intent: there must be present manifestation of trust intent made by the settlor 1. Cannot manifest an intent for a trust to arise in the future 2. Settlor does not have to use the words “trust,” “trustee,” or “beneficiary” 3. Although no magic words are needed to create a trust, precatory words are not sufficient to create a trust a. Words of wish, hope or desire (not mandatory words) b. Examples S gives $100,000 to his brother, with “the direction and order that he use it for our sister” Words are mandatory, not precatory A trust has clearly been created S gives $100,000 to his brother, “with the hope and desire that he will use it for our sister” Not a trust Words used are not mandatory but precatory Precatory words by themselves are not sufficient to create a trust II. Same facts as in example (ii) but in addition, S was supporting his sister before transferring the money to his brother, but stopped supporting his sister after the money was transferred to his brother Precatory words plus parol evidence may equal a trust That S stopped supporting his sister after transferring money to his brother would be probative to show that S intended the money to be used in trust for the benefit of the sister S was merely using his words imprecisely but did intend to create a trust c. If words are precatory and parol evidence is not sufficient to find creation of a trust, then transferee owns the property in fee simple 4. Trusts of personal property do not have to be in writing (Statute of Frauds applies only to real property) E. Creation: how to create a private express trust Trust created to take effect at settlor’s death Settlor must comply with the Statute of Wills (i.e. local probate code) Thus, settlor is really a testator T’s will has a provision for a testamentary trust T’s will states: “I devise Blackacre to Bank to hold in trust for the benefit of my son for his life” Trust takes effect at T’s death Trust created to take effect during settlor’s lifetime Transfer in Trust: settlor manifests a present intent to create the trust and delivers the corpus to a 3rd person to serve as trustee i. Delivery can be actual, symbolic or constructive ii. If there is no delivery to trustee, there is no trust iii. A promise to deliver the corpus in the future is not a delivery Declaration in Trust: settlor manifests a present intent to create the trust and settlor is the trustee i. Because settlor is the trustee, there is no issue of delivery (one cannot deliver property to oneself) ii. Settlor executes a trust instrument that states: “I hold myself as trustee for this $100,000 for the benefit of A during A’s lifetime, then to B” F. Legal purpose A trust may be established for any legal purpose Trusts that have an illegal purpose or that violate public policy a. Illegality at creation i. If possible to excise the bad from the good, trust will stand  Settlor creates a trust for A “on the condition that A divorce his spouse”  Such a trust violates public policy, so court will excise the illicit condition  Thus, A takes the trust free of the condition ii. If not possible to excise the illicit condition and sever the good from the bad, court has two options (whichever achieves the best result): (1) Resulting trust: an implied-in-fact trust based on the presumed intent of the parties o Resulting trustee has only one obligation: to transfer the property back to the settlor if the settlor is alive, and if settlor is not alive, to the setttlor’s estate (i.e. to the residuary devisee, if any, or to the heirs at law) o If settlor creates a trust to defraud settlor’s creditors, court will invalidate the trust, decree a resulting trust, and the property will go back to settlor so that settlor’s creditors can attach the assets (2) Allow the trustee to keep the property for himself or herself (as punishment to settlor) b. Illegality after creation: If the trust was legal at creation, but due to change in laws becomes illegal then there becomes a resulting trust and the property goes back to the settlor. Charitable Trust A. Definitions 1. Statute of Elizabeth: trusts for education, alleviation of poverty, alleviation of sickness, or to help orphans 2. Restatement: any trust which confers a substantial benefit upon society 3. Examples of charitable trusts 2 B. C. D. E. a. Help the poor b. Advance education c. Help the sick d. Promote religion Creation: same way that a private express trust is created 1. Manifestation of trust intent a. at T’s death by will or b. during settlor’s lifetime by declaration of trust or by transfer in trust 2. Presently existing interest in property that can be transferred 3. Legal purpose Beneficiary 1. Identification of the beneficiary: no ascertainable person or group of people who are the beneficiaries, as in a private express trust a. Society is the beneficiary of a charitable trust b. While an individual may receive incidental benefit, focus is on society (e.g. while a professor may receive a benefit from a trust to endow a chair at a university, the trust is not a private express trust, but a charitable trust because society benefits when education is advanced) 2. Where the beneficiary is of a small group of people, is it a charitable trust, or a private express trust (e.g. settlor creates a trust to alleviate poverty among his poor relatives)? a. May be a private express trust because only a few people are getting a benefit b. May be a charitable trust because whenever poverty is eliminated, society as whole benefits Rule Against Perpetuities: does not apply to charitable trusts 1. A trust to alleviate poverty among settlor’s poor relatives violates the Rule Against Perpetuities because it can vest more than 21 years after a life in being 2. A charitable trust, such as a university chair, can endure forever Cy Pres: “as nearly as possible” 1. If settlor manifests a general charitable intent, but the mechanism for effectuating that intent is not possible or practicable, the court can modify the mechanism cy pres (as nearly as possible) to effectuate S’s general charitable intent 2. What happens if a charitable trust is impossible to carry out? a. Settlor creates a charitable trust to build and maintain a free hospital for the poor but there is not enough money in the trust to accomplish this purpose b. 2 solutions i. Resulting trust: corpus is returned to settlor if alive, and if not, to settlor’s estate (to residuary devisees, if any, or to intestate takers) ii. Cy pres: if the court finds that settlor had a general charitable intent (to help the poor who are sick) and only the mechanism for effectuating that intent is not possible or practicable (a free hospital), the court can modify the mechanism, cy pres, as nearly as possible, to effectuate settlor’s general intent  Court can change the mechanism from a free hospital to a free out-patient clinic, if there is enough money to build and fund a free clinic 3. How do we know if settlor’s charitable intent was general (so that cy pres can be used), or specific (so that the trust fails and we have a resulting trust to return the property back to the settlor or settlor’s estate)? a. Introduce both intrinsic evidence (i.e. trust instrument) and extrinsic evidence to ascertain settlor’s intent b. If settlor has a specific charitable intent, cy pres cannot be used i. Settlor creates a charitable trust for Syracuse University Medical School (valid charitable trust) ii. After settlor’s death, the medical school ceases to exist iii. Syracuse University wants to use the trust for its health science school iv. Cy pres can be used only if settlor had a general charitable intent to help education or Syracuse University in general 3 III. IV. If settlor graduated from Syracuse University Medical School, taught there, was a dean there, gave much money to Syracuse University Medical School during his lifetime and seldom gave money to any other charity, then the court would not invoke cy pres because settlor had a specific charitable intent vi. Resulting trust more appropriate 4. Only the court invokes cy pres, not the trustee on his own (trustee may petition the court, but only court has cy pres power) Pour-Over Wills A. Settlor creates an inter vivos trust, with a provision in her will devising part or all of her estate to the trust B. Pour-over provisions are effectuated in three ways 1. Incorporation by reference 2. Facts of independent significance 3. Uniform Testamentary Additions to Trusts Act (UTATTA) Miscellaneous Trusts Honorary trusts have no ascertainable beneficiary and confer no substantial benefit upon society (simply a goal of the settlor) Because there is no beneficiary, it cannot be a private express trust Because there is no substantial benefit to society, it cannot be a charitable trust Trustee is not required to carry out settlor’s goal, but has the power to carry it out (trustee is on his honor only to carry out settlor’s intent) Examples a. Trust to further foxhunting b. Trust to take care of settlor’s pet c. Trust to advance an unusual political ideology Problems a. Honorary trust may fail if trustee refuses to carry out settlor’s wishes b. Resulting trust arises in favor of the settlor or settlor’s estate if settlor is dead c. On the other hand, if trustee of a private express trust or charitable trust refuses to serve, the court simply appoints a new trustee d. Rule Against Perpetuities i. Honorary trusts virtually always violate the Rule Against Perpetuities because there is no measuring life ii. Some courts strike an honorary trust at its inception, and a resulting trust arises iii. Approach of the Restatement of Trusts and the Uniform Probate Code: honorary trusts may endure for 21 years and then a resulting trust follows to end the trust Totten trusts: named beneficiary takes whatever is left in an account upon death of the owner of the account (also referred to as tentative bank account trust) Misnomer because it is not a true trust Depositor/trustee owns the account during the depositor’s lifetime and owes the named beneficiary no fiduciary duties whatsoever Really just a will substitute A Totten trust or Totten account is always a type of savings account with a bank or other financial institution Example: “Mary Smith as trustee for JJ” Mary Smith is the settlor/depositor Mary Smith has full control and can do with the money anything she wants to during her lifetime Mary Smith does not owe JJ any fiduciary duty whatsoever JJ takes whatever is left, if anything, on Mary Smith’s death How a depositor/trustee can transform a Totten trust to a private express trust a. Look to the actions of the depositor/trustee for a manifestation of trust intent b. No magic words are necessary to create a private express trust c. Thus, if Mary Smith tells JJ, “I have created this trust for you,” or words to that effect, Mary has manifested an intent to create a trust and has elevated the lowly Totten account to a full-blown private express trust, with full range of fiduciary duties 4 v. V. Restraints on Alienation A. Generally, a beneficiary’s interest in property under a private express trust is subject to voluntarily and involuntarily alienation 1. Voluntary alienation: right to sell or transfer property interests (e.g. future payments) 2. Involuntary alienation: attachment or seizure by creditors after proper legal proceedings B. Spendthrift trusts: beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attach beneficiary’s right to future payments of income or principal 1. Terms of the trust must include the definition 2. Although the beneficiary of a spendthrift trust cannot voluntarily alienate his interest in the trust, a court sometimes will recognize an assignment Beneficiary merely has given the trustee a direction or order to pay the beneficiary’s agent or representative (i.e. the assignee) Prior to the time of payment, beneficiary has the right to revoke the order or direction 3. Although creditors cannot attach a beneficiary’s right to future payments under a spendthrift trust, certain preferred creditors can attach such beneficiary’s interest notwithstanding the spendthrift provisions a. Common law exception for preferred creditors Government creditors (e.g. IRS) Those who provide necessities of life to beneficiary Child for child support Spouse for spousal support Ex-spouse for alimony Tort judgment creditor  Beneficiary (B) negligently injures X  X can satisfy his judgment against B by proceeding against B’s interest in a spendthrift trust and attach B’s right to future payments  Settlor created spendthrift trust to insulate B from his spendthrift ways, not for the purpose of insulating B from his negligent acts b. In many jurisdictions, any creditor (even if not a preferred creditor) has the right to attach any “surplus” from a spendthrift trust, as measured by the beneficiary’s “station in life” i. Beneficiary’s station in life is a subjective, not objective test ii. Only reasonable amounts are considered (thus, gambling expenses would not be considered) 4. Self-settled spendthrift trust: settlor attempts to create a spendthrift trust for himself or herself a. As to involuntary alienation i. In every jurisdiction, the trust itself is valid, but the spendthrift provisions are not recognized ii. To recognize a self-settled spendthrift trust for the purpose of insulating oneself from one’s own creditors violates public policy b. As to the voluntary alienation: split of authority i. Some jurisdictions will ignore provisions restricting voluntary alienation and allow settlor to voluntarily alienate her interest ii. Other jurisdictions will not allow settlor to transfer her right to future payments based on estoppel  settlor cannot deny the validity of her own instrument C. Support trusts: trustee is required to use only so much of the income or principal as necessary for beneficiary’s health, support, maintenance or education 1. Terms of the trust must include the definition 2. A beneficiary cannot voluntarily alienate or transfer his right to future payments under a support trust because doing so would defeat the purpose of the trust and violate settlor’s intent 3. Although creditors cannot attach a beneficiary’s right to future payments under a support trust, certain preferred creditors can attach such beneficiary’s interest notwithstanding the support provisions 4. Settlor can never create a self-settled support trust for himself or herself to prevent involuntary alienation D. Discretionary trusts: trustee is given sole and absolute discretion in determining how much to pay the beneficiary, if anything, and when to pay the beneficiary, if ever 1. Terms of the trust must include the definition 5 VI. VII. 2. Voluntary alienation: beneficiary cannot transfer his right to future payments because beneficiary does not have a vested property interest in future payments from a discretionary trust, only a mere expectancy (beneficiary may not get anything) a. If there’s an assignment, the assignee steps into the shoes of the beneficiary b. Since beneficiary cannot force payment by trustee, neither can assignee c. However, if trustee has notice of the assignment and does decide to pay, then trustee must pay the assignee or be held personally liable 3. Involuntary alienation: creditors cannot attach beneficiary’s right to future payments because there is nothing to attach a. Trustee may never distribute anything to the beneficiary b. Since beneficiary cannot force payment, neither can his creditors c. On the other hand, if trustee has notice of the debt and creditor’s judgment against the beneficiary, and trustee does decide to pay, he must pay the creditors or be held personally liable 4. Settlor can never create a self-settled discretionary trust for himself or herself to prevent involuntary alienation 5. “Trustee in his sole and absolute discretion, shall pay the amount needed for the beneficiary’s support and maintenance” a. Because of the words “sole and absolute discretion” it could be a discretionary trust b. In the alternative, it could be a support trust because of the words “support and maintenance” Resulting Trusts Resulting trust is an implied-in-fact trust based upon the presumed intent of the parties If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the settlor if the settlor is alive If the settlor is dead, the resulting trustee will transfer the property to the settlor’s estate (i.e. to the residuary devisees if any, and if none, to the intestate takers) 7 situations in which a resulting trust arises 1. Private express trust ends by its own terms and there is no provision for what happens to the corpus thereafter a. Settlor creates a trust to enable her daughter to obtain a law school education b. Trust instrument is silent as to what happens to the property after settlor’s daughter gets a law school education c. Once daughter gets a law school education, the trust ends and we presume that the settlor wants the property back (either to settlor if she is alive, and if not, to her estate) 2. Private express trust fails because there is no beneficiary 3. Charitable trust ends because of impossibility or impracticability and cy pres cannot be used a. Settlor creates a trust to build and maintain a free hospital and there’s not enough money b. If cy pres cannot be used, a resulting trust back to settlor 4. Private express trust fails because it is an illegal trust 5. Excess corpus in a private express trust 6. Purchase money resulting trust a. A pays consideration to B to have title to property transferred to C b. If A and C are not closely related  rebuttable presumption that C is holding as a purchase money resulting trustee for the benefit of A c. If A and C are closely related  rebuttable presumption that A simply made a gift to C 7. Semi-secret trusts: will makes a gift to a person to hold as trustee, but does not name the beneficiary a. Example: “I devise $100,000 to A in trust” b. On its face, the will shows an intention to create a trust, but the beneficiary cannot be ascertained c. To admit extrinsic evidence to establish the terms of the trust would violate the Statute of Wills d. Courts typically decree a resulting trust and property goes back to settlor’s estate (residuary devisees, if any, or the heirs at law) Constructive Trusts Constructive trust is not a trust but simply a remedy to prevent fraud or unjust enrichment 1. When a court decrees a constructive trust, the wrongdoer’s only obligation is to transfer the property to the intended beneficiary as determined by the court 6 VIII. 2. Therefore, a constructive trust disgorges a wrongdoer of his ill-gotten gains 4 situations in which a constructive trust arises 1. Trustee of private express trust or charitable trust makes a profit at the expense of beneficiaries because of self-dealing a. With respect to those ill-gotten profits, trustee will be a constructive trustee b. Trustee must turn those profits over to the intended beneficiaries of the trust, as decreed by the court 2. With respect to the law of wills, when there is fraud in the inducement or undue influence a. Court can probate the will as it is but simultaneously decree that the wrongdoer is a constructive trustee 3. Secret trusts in the law of wills a. Secret trust: the will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B b. T tells A that T will devise $100,000 to A if A promises to use the money for B’s benefit i. A promises to T that A will comply ii. Thereafter T executes his will that states: “I devise $100,000 to A” iii. When T dies, from the four corners of the will, it seems that A owns the $100,000 for himself, free of any trust iv. Parol evidence is admissible to show that intended beneficiary was B v. To prevent unjust enrichment, A will not be allowed to keep the property vi. A will become a constructive trustee who has obligation to transfer the property to B vii. Courts will impose a resulting trust, not a constructive trust for semi-secret trusts 4. Oral real estate trusts (breach of promise) S tells A that S will transfer Blackacre to A if A holds Blackacre for the benefit of B, and A agrees Thereafter S executes a deed in favor of A and delivers it to A From the four corners of the deed, A seemingly owns the property in fee simple absolute, free of any trust If B claims the property, A can raise the Statute of Frauds as an affirmative defense to keep the property for himself 3 situations in which a transferee will not be allowed to invoke the Statute of Frauds to keep the property (and consequently will be decreed a constructive trustee) i. Fiduciary relationship between transferor and transferee (e.g. S and A) ii. Fraud in the inducement by the oral real estate trustee: A agrees to hold the property for B’s benefit but does not intend to do so iii. Detrimental reliance by the intended beneficiary: if B relied to his detriment on the existence of the oral real estate trust, then B will get the property from A via constructive trust Detrimental reliance: taking possession and making improvements Possession alone is not enough Trustee Powers and Duties A. Trustee powers 1. Enumerated powers 2. Implied powers: helpful and appropriate to carry out trust purpose a. Sell trust property b. Incur expenses c. Lease d. Borrow (modern view)  under common law, trustee had no implied power to borrow B. Trustee duties owed to the beneficiary and remedies for breach 1. Duty of loyalty: trustee must administer the trust for the benefit of the beneficiaries, having no other consideration in mind a. Trustee is not allowed to engage in self-dealing b. Examples of self-dealing i. Trustee prefers one beneficiary, his child, over other beneficiaries ii. Trustee sells trust property to trustee’s spouse iii. Trustee-lawyer hires himself c. Remedies for self-dealing i. Surcharge: trustee is personally liable for any loss 7 Constructive trust: with respect to ill-gotten profits, trustee must turn over personal profits to intended beneficiary 2. Duty to invest (3 alternatives) a. State lists of good investments in the absence of trust directions i. Federal government bonds ii. Federally-insured certificates of deposit iii. First deeds of trust in real estate iv. Sometimes, stocks of publicly-traded corporations v. Never invest in a new business vi. Never invest in second deeds of trust b. Common law reasonably prudent person test: trustee must act as reasonably prudent person investing his own property, trying to maximize income while preserving corpus i. If trustee holds himself out as having greater skill, trustee is held to that higher standard ii. Each individual investment is scrutinized iii. Good investments  Federal government bonds  First deeds of trust  Federally-insured certificates of deposit  Blue chip stocks  Mutual funds may be OK  Never invest in a new business  Never invest in second deeds of trust c. Uniform Prudent Investor Act: trustee must invest as a “prudent investor” (adopted by most states) i. Unlike above rules, each individual investment is not scrutinized ii. Performance is measured in the context of the entire trust portfolio iii. Thus, no investment is per se invalid iv. Even derivatives or futures contracts (investments absolutely prohibited under the state lists standard or the common law reasonably prudent investor standard) may be appropriate in the context of an entire portfolio d. Miscellaneous rules i. Under any standard, trustee has duty to diversify so that a loss will not destroy the entire portfolio ii. Under the state lists standard and the common law reasonably prudent person test, no speculating allowed iii. Remedies for breach of duty to invest  In any jurisdiction, trustee must make good the loss  If there is a profit, beneficiaries affirm the transaction  If trustee makes two investments that breach the duty to invest, and one makes money and the other loses money, trustee is surcharged for the loss while beneficiaries affirm the transaction that made money  no netting allowed by trustee 3. Duty to earmark: trustee must label trust property as trust property a. Common law approach: if trustee fails to earmark and there is a loss, trustee is personally liable i. No causal relationship required between loss and failure to earmark ii. Thus, if stock market crashes and there is a loss, trustee is held personally liable, even though failure to earmark did not cause the loss (i.e. the market would have crashed even if trustee had earmarked) b. Modern approach: if trustee fails to earmark and there is a loss, trustee is held personally liable only if the loss was caused by failure to earmark i. If trustee failed to earmark by holding trust property in her own name, and trustee’s personal creditors subsequently attached and seized trust property, then failure to earmark caused the loss ii. Under either the common law or modern approach, trustee would be held personally liable 4. Duty to segregate: trustee cannot commingle own personal funds with trust funds a. Trustee must not commingle the funds of Trust A with the funds of Trust B 8 ii. IX. b. If trustee breaches the duty to segregate, trustee can be removed and held liable for any loss 5. Duty not to delegate: trustee may rely on professional advisors in reaching a decision, but trustee cannot delegate decision-making authority to such advisors a. Under common law, a trustee could not delegate the duty to invest to a professional money manager b. Modernly, a trustee can delegate this duty (e.g. to a manager of a mutual fund) c. Trustee also cannot delegate to another trustee (co-trustee) d. Under common law, in the absence of a contrary provision in the trust instrument, co-trustees must act unanimously e. Modernly, co-trustees can act by majority decision 6. Duty to account a. Trustee must give beneficiaries a statement of income and expenses of the trust on a regular basis b. If the trustee fails to render an accounting to the beneficiaries, the beneficiaries could file an action for an accounting 7. Duty of due care: trustee must act as a reasonably prudent person dealing with his own affairs 8. Remedies for breach of trustee duties a. Damages b. Constructive trust c. Tracing and equitable lien on property d. Ratify a good transaction e. Remove trustee C. Trustee duties owed to third persons 1. Liability in contract a. Common law rule: trustee sued in trustee’s personal capacity Trustee’s personal assets are at stake But trustee can get indemnification from trust assets if trustee acted within his powers and was not personally at fault The only time trustee would be sued in his representative capacity is if the contract itself so provided in the event of breach by trustee Not enough that trustee signed the contract, “as trustee of the ABC Trust” b. Modern rule: if promisee knows that trustee is entering into the contract in his representative capacity, then trustee must be sued in his representative capacity i. Trustee’s personal assets are not at stake ii. Thus under the modern rule, if trustee signs the contract “as trustee of the ABC Trust,” trustee must be sued in his representative capacity 2. Liability in tort a. Common law rule: trustee sued in trustee’s personal capacity i. If trustee was without personal fault, trustee can get indemnification from trust assets ii. Thus, if an agent committed the negligent act, or if it was a case of strict liability, then trustee can obtain indemnification b. Modern rule: trustee is sued in his individual capacity and is personally liable for torts only if trustee is personally at fault (i.e. acted negligently or otherwise committed a tort) i. Thus, if an agent committed the negligent act or if it was a case of strict liability, trustee is sued in his representative capacity Modification and Termination of Trusts A. Modification by settlor 1. Settlor can modify the trust if settlor expressly reserves the power to modify 2. Settlor also has the power to modify if the settlor has the power to revoke a. Power to revoke is the greatest power a settlor can have b. It would make no sense if settlor had power to revoke a trust but not the power to modify it i. If settlor has power to revoke, settlor can revoke and then set up a newly constituted trust modified as the settlor wants it ii. Thus, power to revoke includes, by implication, the power to modify B. Modification by court 9 X. 1. Cy pres power and charitable trusts: court can change the mechanism in a charitable trust to further settlor’s general charitable intent 2. Deviation power (also known as Doctrine of Changed Circumstances) a. 2 elements i. Unforeseen circumstances on the part of settlor ii. Necessity: deviation needed to preserve the trust b. Exercise of deviation power i. Court changes administrative or management provisions of the trust  Charitable trusts or  Private express trusts ii. Court does not change beneficiaries  Settlor creates a valid private express trust, the corpus of which is an apartment building  Trust instrument provides that trustee shall enter into only residential leases  Settlor could not foresee that after many years, the area no longer would be suitable for residential property  Property could easily be changed into a commercial building  If trustee can no longer secure any residential tenants, court may exercise its deviation power and allow commercial tenants even if expressly prohibited by the lease  Without income, the building will fall into disrepair, its property taxes cannot be paid, and trust property will be lost C. Termination of revocable trusts Majority rule: settlor retains the power to revoke when settlor expressly reserves such power in trust instrument Minority rule: settlor has the power to revoke unless trust is expressly made irrevocable D. Termination of irrevocable trusts: 3 ways an irrevocable trust terminates prematurely 1. Settlor and all beneficiaries agree to terminate a. Must account for contingent remaindermen b. Guardian ad litum (a guardian appointed to represent parties to a suit who are incapacitated by infancy or otherwise) must be appointed 2. All beneficiaries agree to terminate and all material purposes have been accomplished a. Equity will not see a trust continue to carry out a minor or insignificant purpose b. Insignificant purposes that have yet to be accomplished i. Court will make certain that sufficient assets are set aside to accomplish such purposes ii. However, a $100 million trust need not be kept alive to accomplish a $100 purpose c. Must account for unborn beneficiaries with a guardian ad litum 3. By operation of law: passive trusts and the Statute of Uses a. Under Statute of Uses, if a private express trust with a corpus of real property is passive (trustee has no active duties and is just holding bare legal title), beneficiaries get legal title by operation of law, and the trust terminates b. Not all jurisdictions recognize the Statute of Uses c. Statute of Uses does not apply to a passive trust of stock or other personal property, but the principle of Statute of Uses should apply by analogy because equity should not see a useless act done Uniform Principal and Income Act A. Income and expenses allocated to the life tenant 1. Life tenant gets the following income: a. Cash dividends b. Interest income c. Net business income 2. Life tenant’s interest pays for the following expenses: a. Interest on loan indebtedness b. Taxes c. Minor repairs (e.g. paint job) B. Income and expenses allocated to the remainderman 1. Remainderman gets the following income: 10 a. Stock dividends b. Stock splits c. Net proceeds on the sale of a trust asset 2. Remainderman’s interest pays for the following expenses: a. Principal part of loan indebtedness b. Major repairs or improvements (e.g. new wing on a building) C. Allocation power of trustee 1. Trustee can disregard above-stated rules regarding allocation of income to life tenant and remainderman if a different allocation is necessary to administer the trust fairly 2. Example: if the only income from the trust is from the sale of trust assets, trustee may allocate some of the income to the life tenant 11