Trusts 1 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. (memorize) o Elements (1) Property, (2) Beneficiary, (3) Trustee, (4) Intent, (5) Creation, (6) Legal Purpose • Property of the Trust, (aka Corpus) o RULE: any presently existing interest in property that can be transferred. o examples: (1) fee simple, (2) future interest, (3) life insurance policy, (4) bonds, (5) stocks. o Illusory Interests cannot be the subject matter of the trust. [i.e. future profits to a business; debt that settlor owes beneficiary (=liability, not property), a mere expectancy (what settlor expect to inherit), CP] • The Beneficiary o RULE: any ascertainable person or group of people can be the beneficiary of a private express trust. Corporation can be the beneficiary. Common Law: an unincorporated association could not be the beneficiary. Modern Law: an unincorporated association can be the beneficiary. o Watch out for the Rule Against Perpetuities. • The Trustee o RULE: a trust must have a trustee, but the court will not allow the trust to fail solely because there is no trustee or a trustee refuses to serve. o The court, in such case, will appoint a trustee. • Manifestation of Intent o There must be present manifestation of trust intent made by the settlor. You cannot manifest an intent for a trust to arise in the future. o Precatory words (wish, hope) are not sufficient to create a trust, BUT precatory words + parole evidence can create a trust. o Writing: statute of frauds only applies to real property, so a trust of personal property does not have to be in writing.********* • Creation o (1) Trust Created to Take Effect at Settlor’s Death Settlor is really a testator. Thus, a part of testator’s will has a provision for a testamentary trust, a trust which will take effect at testator’s death. o (2) Trust Created to Take (2 WAYS) Transfer in Trust: 3rd person is trustee when settlor delivers the corpus. There must be a Delivery. A promise to delivery in the future is not a trust. • Requirements= (1) Intent; (2) Delivery Declaration in Trust: Settlor herself is the trustee. No issue of delivery. So if settlor manifests an intent, there is a trust. • Legal Purpose o Rule: A trust may be established for any legal purpose o Illegality at Creation (or violative of Public Policy): try to excise the bad from the good, if it is not possible, the court will do whatever achieves the best result: (either a resulting trust or allow the trustee to keep the property for himself) o Illegality after Creation: allow the trustee to keep the property for himself. Trusts 2 Charitable Trust • Definition o Statute of Elizabeth: trusts fro education, alleviation of poverty, alleviation of sickness, to help orphans. o Restatement: any trust which confers a substantial benefit upon society. • Creation-same as private express trust. o (1) manifestation of intent; (2) presently existing interest in property; (3) legal purpose • Beneficiary o Society is the beneficiary of a charitable trust. There is no ascertainable person or group if persons. • Rule Against Perpetuities= does not apply to charitable trusts • Cy Pres “as nearly as possible” o if the court finds that settlor had a GENERAL charitable intent (i.e. to help the poor who are sick) and only the mechanism for effectuating that intent is not possible or practicable (i.e. free hospital), the court can modify the mechanism, cy pres, as nearly as possible, to effectuate settlor’s general intent. Here, the court can change the mechanism from a free hospital to a free outpattien clinic, if we stipulate that there is enough money to build and fund a free clinic. o If the intent was SPECIFIC, then the trust fails and we have a resulting trust to return the property back to the settlor or the settlor’s estate. o How to tell the difference? Introduce both intrinsic evidence (the trust instrument) & extrinsic evidence to ascertain the settlor’s intent. o ***Only the Court invokes Cy Pres, not the trustee. Pour-Over Wills • Settlor creates an inter vivos trust, with a provision in her will devising part or all of the estate to the trust. • We can validate a pour-over provision by (1) Incorporation by Reference (if in existence when will was executed); by (2) Independent Significance (trust is a fact of Independent Signifcance.); by (3) Uniform Testamentary Additions to Trust Act UTATA-(so long as the trust is valid, the pour over provision is valid.) Miscellaneous Trusts • Honorary Trust o = a trust which has no ascertainable beneficiary & confers no substantial benefit on society; it is simply a goal of the settlor. o The trustee is no required to carry out the settlor’s goal, but has the power to carry it out. o The trustee is on his honor only to carry out settler’s intent. BUT, if trustee fails to carry out the trust, the trust fails and we have a resulting trust in favor of the settlor. o Honorary Trusts almost always violate RAP o Examples: trust to further fox hunting; trust to take care of settlor’s pet. • Totten Trust o = tentative bank account trust, whereby the named beneficiary takes whatever is left in the account at death of the owner of the account. o It is not a true trust. Depositor/Trustee ownes the account during his lifetime and owes the named beneficiary NO FIDUCIARY DUTY whatsoever. (He can empty it out and leave nothing left if he wants.) Trusts 3 Restraints on Alienation • The Problem: The beneficiary of a private express trust can voluntarily alienate his interest in property (transfer his right to future payments), and creditors can involuntarily alienate a B’s interest in property (attach or seize a beneficiary’s right to future payments.) • Certain types of trust prevent alienation • Spendthrift Trusts o = the beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attach the beneficiary’s rights to future payments. o Voluntary Alienation: Beneficiary cannot voluntarily transfer his right to future payments, but sometimes courts will recognize the assignment on the ground that the beneficiary merely has given trustee a direction or order to pay the beneficiary’s agent (assignee). But that would only be when beneficiary himself would take. o Involuntary Alienation (Attachment by Creditors): Creditors generally cannot attach beneficiaries right to future payments. Common Law Exceptions: Preferred Creditors can attach the beneficiary’s right to future payments nothwithstanding the spendthrift provisions. (i.e. IRS, those that provide necessities of life, child for child support, wife for spousal support, alimony, a tort judgment creditor) In addition to Common Law, may jurisdictions say that Any Creditor has the right to attach “SURPLUS” as measured by the beneficiary’s needs. (need $25k, get $30k-any creditor can go “attach” the $5k). o Settlor cannot create a spendthrift trust for himself (split as to Voluntary alienation-some courts allow, some say settlor is estopped) • Support Trusts o = trustee is required to use only so much of the income or principal as is necessary for the beneficiaries Health, Support, Maintenance, & Education. o Voluntary Alienation: the beneficiary cannot voluntarily alienate because to do so would defeat the purpose of the trust and violate settlor’s intent. o Involuntary Alienation: beneficiary cannot transfer his right to future payments in a support trust. Same rule for Spendthrift trusts. o Settlor cannot create a support trust for himself. Same rules for spendthrift. • Discretionary Trusts o = in a discretionary trust, the trustee is given sole & absolute discretion in determining how much to pay the beneficiary, if anything, and when to pay the beneficiary, if ever. o Voluntary Alienation: on the one hand, no. Beneficiary cannot voluntarily transfer his right to future payments because, the question may be asked, what is the beneficiary assigning? He may not get anything. On the other hand, if in fact there was an assignment, the assignee steps into the shoes of the beneficiary. Because the beneficiary cannot force payment by the trustee, neither can the assignee. But if trustee has notice of the debt and decides to pay, he has to pay the assignee or be personally liable o Involuntary Alienation: on the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach, on the other hand, if the trustee has notice of the debt and decides to pay, he must pay the creditors or be held personally liable. • “Trustee in his sole and absolute discretion, shall pay the amount needed for the beneficiary’s support and maintenance. = hybrid of a discretionary and support trust. Trusts 4 Resulting Trusts • = implied in fact trust and is 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, and if not, to the settlor’s estate, i.e. to the residuary devisees if any, and if none, to the intestate takers. • How Resulting Trust Arises: 7 Situations o (1) When a private express trust ends by its own terms, and there is no provision for what happens to the corpus thereafter. o (2) When a private express trust fails, because there is no beneficiary. o (3) When a charitable trust ends because of impossibility or impracticability & Cy Pres cannot be used. o (4) When a private express trust fails because it is an illegal trust. o (5) When there is excess corpus in a private express trust. o (6) When we have a “purchase money resulting trust” Example: “A pays consideration to B to have title to property transferred to C”. If A & C are not closely related: there is a presumption that C is holding as a purchase money resulting trustee for the benefit of A. If A & C are closely related, there is a presumption that A simply made a gift to C. o (7) Semi-Secret trusts= arises when the will makes a gift to a person to hold as trustee, but does not name the beneficiary. Example: “I devise $100,000 to Able in trust” To admit in the evidence to establish thje terms of the trust violates the Statute of Wills. Constructive Trusts • =A remedy to prevent fraud or unjust enrichment. (not a trust). o Wrongdoer must transfer the property to the intended beneficiary as determined by the court. • How a Constructive Trust Arises: 4 Situations o (1) When the trustee of a private express trust or a charitable trust makes a profit at the expense of the beneficiaries because of self-dealing. o (2) With respect to the law of wills, when there is fraud in the inducement or undue influence. o (3) Secret-Trusts in the law of Wills 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. In this case, A would have to deliver to B (i.e. constructive trust). If it is a semi-secret trust, you do not have a constructive trust, rather a resulting trust.* o (4) Oral Real Estate Trusts (aka Breach of Promise) Normally, one would invoke the statute of frauds to keep the property, but if 1 of 3 situations occur, they will still lose: (1) fiduciary relationship; (2) fraud in the inducement; (3) Detrimental reliance by the intended beneficiary Trustee Powers and Duties • Trustee Powers o Trustee has all enumerated powers o Trustee has implied powers (helpful and appropriate to carry out the trust purpose). Examples: power to sell trust property; power to incur expenses; power to lease; power to borrow (modern view only). Trusts 5 • Trustee Duties Owed to the Beneficiary and Remedies o DUTY OF LOYALTY: requires the trustee to administer the trust for the benefit of the beneficiaries, having no other consideration in mind. Trustee cannot engage in self-dealing. Consequences: (1) if loss-trustee must make good on loss; (2) if profit-trustee must turn over profits to the intended beneficiary (constructive trust) o DUTY TO INVEST: Split Authority: there are 3 alternative rules of the duty to invest (1) State Lists: some states have lists which trustee must following the absence of directions (i.e Govt Bonds; never a new business) (2) Common law Reasonably Prudent Person Test: requires the trustee to act as a reasonably prudent person investing his own property, trying to maximize income while preserving corpus. (If trustee holds himself out as having greater skill, he is held to a higher standard.) (3) Uniform Prudent Investor Act: adopted by most states: the act simply provides that the trustee must invest as a “prudent investor” DUTY TO DIVERSIFY: under any standard, trustee has a duty to diversify, so if there is a loss, the loss will not destroy the entire portfolio. Consequences: trustee must make good on the loss. o DUTY TO EARMARK: the duty to earmark requires the trustee to label trust property as trust property. Consequences: (Common Law= trustee is personally liable; Modern= trustee is personally liable only if the loss was caused by the failure to earmark.) o DUTY TO SEGREGATE: Trustee cannot Commingle his own personal funds with the trust funds. Consequence: trustee can be removed and be held liable for any loss. o DUTY NOT TO DELEGATE: the trustee can rely on professional advisors in reaching a decision, but the trustee cannot delegate decision-making authority to these advisors. At common Law, trustee could not delegate the duty to invest to a professional money manager Modernly, a trustee can delegate this duty. o DUTY TO ACCOUNT: requires trustee on a regular basis to give beneficiaries a statement of income & expenses of the trust. Consequence: beneficiaries file an action for an accounting o DUTY OF DUE CARE: trustee must act as a reasonably prudent person dealing with the affairs of the trust. o Remedies of Beneficiary for Breach of Duty or Duties (1) damages; (2) constructive trust; (3) tracing and equitable lien; (4) ratify the transaction if good for beneficiary; (5) remove trustee. • Trustee Duties Owed to 3rd Persons o Liability in Contract Common Law: trustee is sued in his personal capacity (can get indemnification if trustee acted within his powers and was not personally at fault). Modern Rule: if the other person to the contract knows trustee is acting in his representative capacity, must sue trustee in his representative capacity (personal assets are not at stake) o Liability in Tort Common Law: trustee is sued in his personal capacity (indemnification) Modern Rule: Trustee is sued in his personal capacity and is personally liable only if the trustee is personally at fault (i.e. negligent). Trusts 6 Modification and Termination of Trusts • Modification by Settlor o Settlor can modify the trust if the settlor expressly reserves the power to modify the trust. o Settlor can Also modify if he has the Power to Revoke*** • Modification by Court o Court can modify charitable trusts or private trusts under its Deviation power= doctrine of changed Circumstances (court changes the administrative or management provisions of the trust. Court is not changing beneficiaries). o Cy Pres-when court modifies for the settlor’s charitable general intent. • Termination of REVOCABLE TRUSTS o Majority Rule: To retain the power to revoke, the settlor MUST EXPRESSLY RESERVE the power in the trust instrument. o Minority Rule: Trust is revocable, unless the trust is expressly made Irrevocable. • Termination of IRREVOCABLE TRUSTS o 3 Ways to terminate Prematurely (1) Settlor and all the beneficiaries agree to terminate • Must account for beneficiaries who are incapacitated (infants, etc.) with a guardian ad litum. (2) All beneficiaries agree to terminate and all the material purposes have been accomplished. (3) Operation of Law: Passive Trusts & the Statute of Uses • Statute of Uses comes into play when you have a private express trust with a corpus of real property, and the trust is passive (the trustee has no active duties and is just holding bare legal title). Income & Principal (Uniform Principal and Income Act) • Income and Expenses allocated to the Life Tenant o Cash Dividends o Interest Income o Net Business Income o LT must pay (1) interest on loan indebtedness, taxes, minor repairs • Income and Expenses allocated to the Remainderman o Stock Dividends o Stock Splits o Net Proceeds on the Sale of Trust Asset o Remaindermen must pay Principal part of loan indebtedness, major repairs or improvements • Allocation Power of Trustee o Trustee can disregard the above stated rules regarding allocation if income to life tenant and remainderman if a different allocation is necessary to administer the trust fairly. o 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.