Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 1 of 25 Table of Contents TABLE OF CONTENTS 1 TRUSTS 3 1. INTRODUCTION 3 1.1 Two Broad Categories of Trusts 3 1.2 Trust Defined 3 1.3 7 Elements Of An Express Trust [Studying Trusts! Dammit, I’d Rather Be Vomiting & Puking!] 3 2. THE REQUIREMENTS FOR A TRUST 3 2.1 Settlor 3 2.2 Trustee – No trust fails for want of a trustee, courts will appoint one 3 2.3 Delivery 4 2.4 Intent – the critical element of trust creation 5 2.5 Res – the corpus, the principal, all synonyms for the subject matter of the trust 6 2.6 Beneficiaries: A Private Trust Must Have Ascertainable Beneficiaries 8 2.7 Valid Purpose – must NOT be against Public Policy 9 3. TRUSTS AS VALID WILL SUBSTITUTES: REVOCABLE TRUSTS AND BANK ACCOUNT TRUSTS 9 3.1 “Pour-Over” Clauses Are Valid – Where A Will Devises To Existing Inter Vivos Trusts 9 3.2 Totten Trust 10 4. ORAL TRUSTS: ORAL PROMISE TO HOLD IN TRUST – 10 4.1 Inter Vivos Trusts 10 4.2 Three Ways Around A Trustee Raising Statute Of Frauds. 11 4.3 Oral Promise (Supported by Consideration) to Make Devise in Will 13 4.4 Testamentary Trusts – 2 types 13 5. CHARITABLE TRUSTS – 4 DISTINCTIVE RULES 14 5.1 NOT Subject To Either Rule Against Perpetuities Or Rule Against Accumulations 14 5.2 Must Be for a Charitable Purpose 14 5.3 Must Be In Favor Of A Reasonably Large Number Of Unidentifiable Beneficiaries 17 5.4 Cy Pres 17 6. ALIENABILITY AND CREDITOR’S RIGHTS: SPENDTHRIFT AND SUPPORT TRUSTS 18 6.1 Rights to Income of a Trust 18 6.2 Spendthrift Clauses 18 6.3 Discretionary Support Trust – “To Support [Beneficiary]” 19 6.4 Pure Discretionary Trust – “To Accumulate Or Distribute To [Beneficiary]” 19 6.5 Creditors Of Settlor -(Maxim -You Cannot Escape Your Creditors By Placing Assets In Trust) 19 7. TRUST ADMINISTRATION 19 7.1 Prohibition of Self-Dealing by Fiduciary (Trustee) 19 7.2 Trust Investments: The Prudent Investor Rule 20 7.3 Powers of Trustee and Successor Trustee 20 7.4 Liability for Breach of Trust, Torts and Contracts 21 7.5 Trust Accounting 22 Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 2 of 25 8. MODIFICATION AND TERMINATION OF PRIVATE TRUSTS 22 8.1 Claflin Doctrine – (most states) – 22 8.2 California 23 8.3 A Settlor, Acting Alone, Can Terminate (Or Modify) If 23 9. TRUSTS IMPOSED BY OPERATION OF LAW: RESULTING AND CONSTRUCTIVE TRUSTS 24 9.1 Resulting Trusts – 2 types 24 9.2 Constructive Trusts – where we have wrongful behavior 24 10. POWERS OF APPOINTMENT 25 10.1 Vocabulary 25 10.2 Residual Clauses In Wills CANNOT Exercise Powers Of Appointment In CA 25 10.3 If Power Of Appointment Not Exercised, Can It Be Reached By Donee’s Creditors? 25 10.4 Anti-Lapse Statute In CA Applies To Powers Of Appointment 25 Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 3 of 25 Trusts 1. INTRODUCTION 1.1 TWO BROAD CATEGORIES OF TRUSTS 1.1.1 Express (the same rules UNLESS otherwise stated for both kinds) (90% PBQs) 1.1.1.1 Private 1.1.1.2 Charitable 1.1.2 Implied (not a true trust) (every time an express trust fails, implied is lurking) (really, these are remedies) 1.1.2.1 Resulting 1.1.2.2 Constructive 1.2 TRUST DEFINED Fiduciary relationship with respect to property whereby one party, the trustee, holds the legal “actual” title to the trust property called the res (race) for the benefit of another, the beneficiary, who is said to have an equitable title in the trust property. Trust is a way of owning property; A form of ownership 1.3 7 ELEMENTS OF AN EXPRESS TRUST [STUDYING TRUSTS! DAMMIT, I’D RATHER BE VOMITING & PUKING!] 1. Settlor 2. Trustee 3. Delivery 4. Intent 5. Res 6. Beneficiary 7. Valid Purpose 2. THE REQUIREMENTS FOR A TRUST 2.1 SETTLOR 2.2 TRUSTEE – NO TRUST FAILS FOR WANT OF A TRUSTEE, COURTS WILL APPOINT ONE 2.2.1 Arises when 2.2.1.1 Failure to state a named trustee 2.2.1.2 Named trustee dies, or resigns with no provision of successor trustee 2.2.2 Exception – powers personal to the “named trustee” 2.2.2.1 Theory – settlor’s intent was that create trust IF “X” is trustee 2.2.2.2 Rarely invoked 2.2.3 4. Must Have Trustee But Can Be Replaced 1. a. Cannot be controlled in his actions 2. If settlor tries to control it will likely be considered an agency Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 4 of 25 3. b. If trustee doesn’t keep accurate records all ambiguity is decided against him. 4. c. Discretion of Trustee: Held to a good faith and reasonable standard. 11/12/04 2.2.4 Keating v. Keating: 1. Facts: Brother will not give money to brother because he thinks he is incapable of handling it. In the trust, he was “given full discretion” to decide brother’s incompetency. 2. Analysis: Court found that the brother had been living as a responsible citizen and no foundation for trustee to keep property from him so he breached his duty of good faith/reasonable requirements. 3. Conclusion: Trust property to brother/beneficiary 2.2.5 Old Colony: 1. Facts: The trustees expended money for education of children of beneficiaries (but they were not direct beneficiaries) and they merely sent questionnaires to see what old people needed. 2. Analysis: Court requires trustees to give more money. Professor thinks court should have made them repay educational money and be replaced as trustee. 3. Conclusion: Trustees merely required to up disbursement 4. Note: Trustees are typically conservative with finds so if they are sued there will still be money in fund to pay defense and they will just have to up disbursement. 2.2.6 1st National Bank of Maryland: 1. Facts: Decedent had mentally incompetent daughter who was in institution. She left a trust and the income was to go to sustain her needs. The hospital keeps raising their fees and requiring trustee to dip into the principle. Trustee and other beneficiaries (bro) refuse to dip into principle to break the trust so that all the money can go to retardo. 2. Analysis: Trust has power of invasion clause but trustee has discretion and doesn’t want to invade principle which is in the best interest of retardo otherwise the entire interest will be drained and she will end up in the rat infested home. 3. Conclusion: No abuse of discretion. 2.2.7 Ware v. Goulda: 1. Facts: Louise has trust for herself and son is trustee. It is a self settled discretionary trust. Creditors want to break in. 2. Analysis: If you set up a trust with own assets and with you as beneficiary to keep from creditors, it won’t stand. Creditors can reach any asset that the trustee could allocate to the beneficiary/settlor. 3. Conclusion: Creditors can be paid. 2.2.8 Estoppel Upon Breach A trustee who wrongfully terminates a trust in cahoots with the beneficiaries then the beneficiaries are estopped from suing. 2.2.9 Hagerty: 1. Facts: Trust for kids until the age of 31. The aunt is the trustee and one of the grandsons bugs her and the beneficiaries until they agree to consent to terminate. 2. Analysis: Legally upheld because of above law and the beneficiaries were estopped from suing. 3. Conclusion: Disbursement is ok. 4. NOTE: Recommendation, it could have been argued that this flaky grandson was to be protected by the trustee so the trustee fell down on the job. Don’t rely on this; it won’t prevent a lawsuit; she just happened to win this one. 2.3 DELIVERY 1. No delivery requirement for self-declaration of trust (“I hereby declare myself trustee…”) Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 5 of 25 2. No delivery requirement for testamentary trust (b/c probate works for you there) 3. Delivery requirement for Inter vivos trust with third party as trustee a. There must be delivery of subject matter of the trust 4. Mere signing is not enough 2.4 INTENT – THE CRITICAL ELEMENT OF TRUST CREATION Title in one person’s name with duty to manage for others 1. Mandatory language 2.4.1 Precatory Words Doctrine Permissive language does NOT create a trust (wish and desire, etc.) a. Legally, “trustee” can take money and do whatever with it b. There is a moral obligation, but that’s it c. Could be seen as "polite commands" 2.4.2 Corbett 1. Facts: Reverend left remainder to 2 sisters and brother who all predeceased him. In will, he instructed them as to his charitable wishes. The two sisters have no issues so lapses into residue. Brother has issue so he inherits a portion of remainder. The two arguments: Testator suggested that the beneficiaries use the money for charitable purposes. 2. Analysis: He created a charitable trust and if so we don’t know what public purpose it is for so it would fail and go by intestacy. Then the distribution would be 1/3 each to the issue of the brother and the two children of the Patrick, another brother but who was not named in the Will. a. If the intent was to create a trust he would not have fractionalized the gift. But mere use of the words won’t be dispositive as to precatory status. When in doubt, precatory words do not create a trust. 3. Conclusion: No trust, rather a gift that drops to the residue, so James the issue takes it all. 2.4.3 Levin v. Fisch 1. Facts: Decedent leaves property to son and daughter and the will says “it is my desire for kids to pay sister $200 month” is this precatory or mandatory. 2. Analysis: Two years prior to her death she was paying $200 per month to sister and she went on in detail about contingencies if land not profitable etc.. 3. Conclusion: Language is mandatory and it’s a trust. 2.4.4 Permissive Language With Additional Details, Intent Becomes Clearer d. Where there are details as to use, disposition, etc. an intent to impose a duty does arise e. Bailment does not transfer title only possession f. Apartment manager is an agent g. Brokerage house has title to the stock but still an agent because we own interest in the stock and have control. h. CD is a debtor/creditor and title never changes i. If bank holds specific bills in trust and they are robbed I am SOL 2.4.5 Fox v. Faulkner (Ken. Ct. App. 1928) 4. Facts: Deed for the use and benefit of Moses. 5. Analysis: Court says it’s a trust even if settlor didn’t exactly say that. 6. Conclusion: Trust Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 6 of 25 2.4.6 Jiminez v. Lee (Or. 1976) 1. Facts: Father is sued by dancing daughter for breach of trust. Her grandmother and dad’s client gave $ to dad for her education. The whole amount in controversy was about $3k. Daughter clearly was not suing for the $; she wanted to teach Dad a lesson. 2. Analysis: Was the settlor trust minded? Did Mrs. Diercks intend a trust? Did grandma intend a trust? Why does it matter? It matters because if the money was given in trust, the tru Under Uniform Gift to Minors Act (UGMA), a minor cannot control property so she needs a custodian. Custodian never get title but has control. Statute of limitations on custodian is two years after majority. Statute on trust starts when the trustee gives an accounting. Court decides it is a trust and he tries to give accounting which includes ticket for himself and his own personal payment info. Remanded for property accounting. 3. Conclusion: Daughter will get all the money and interest. He gets no fees. 2.4.7 Wills v. Trusts 2.4.8 Knagenhelm v. Rhode Island Hospital Trust Co. (R.I. 1921) 1. Facts: Rich guy creates trust for his best friend’s daughter so she could marry a Norwegian. He originally gave her 497 shares, but he took out 100 share for her dad, and added back 50 shares, and took out 25 shares for the butler. He paid the daughter more money than the dividends collected but he said the dividends he included. The question is whether his intent to create a will so he keeps all until he dies or was he creating a trust when he relinquished equitable title? 2. Analysis: If it is a will it fails because he did not adhere to formalities of a will but it looks like a trust because he was making a wedding “present” which would mean he was giving up something during life. His life motive was the determining factor. It also helps that he calls himself a trustee. He’s a lawyer and should know what “trust” means. But it cuts two ways. His actions afterward were highly violative of a trust relationship (withdrawing shares from the trust and giving them to others; commingling assets). This improper behavior opened up an opportunity for the residuary legatees to challenge the status of the trust. His behavior indicated that T did not intend a trust. 3. Conclusion: It is a trust 2.4.9 Unthank v. Rippstein (Tex. 1964) 1. Facts: Decedent sent letter to friend promising to send $200 every month. Writes in the margins that this “binds” his estate. 2. Analysis: Not a will because operative now so no testamentary intent. a. Not a gift because no delivery for future monthly payments so enforceable. b. Not a contract because no consideration c. Not a trust because no “res” d. He does not say where $200 will come from because he didn’t designate property for it, this showed no intent 3. Conclusion: No trust 2.5 RES – THE CORPUS, THE PRINCIPAL, ALL SYNONYMS FOR THE SUBJECT MATTER OF THE TRUST 2.5.1 There Must Be A Specific Interest In Property To Which The Trustee’s Duties Relate If there is no certain and identifiable trust property, there is no trust! 2.5.2 Subject Matter Must Be Certain And Identifiable 1. “Chose-in-Action” and “Accounts Receivable” are interests in “property” even though they are intangible (including stocks, bonds, etc.) 2. Expectancies are NOT interests in property Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 7 of 25 a. Gratuitous promises to create trusts in the future (such as declaring trust over property promised to be devised by will – where T has not died – no vested interest) b. Prospective heirs in bills and intestate estates (b/c no vested interest until T’s death) c. Once such interest is vested, there must be some reaffirmation of intent to create trusts based on gratuitous promises in wills 2.5.3 Funding (Creating) The Trust 1. General Rule – Where a promise to create a trust is gratuitous (i.e., not supported by consideration), a trust arises when all elements of a valid trust have been met if, but only if, at that subsequent time the settlor manifests an intention then to create the trust. 2. Such manifestation of intention to trust may be express or implied (through conduct – acting as if in trust) 2.5.4 Contrast -When Promise To Create A Trust Is NOT Gratuitous (Supported By Consideration), Then Contract Principles Apply And The Trust Automatically Attaches When The Property Is Received 2.5.5 General Rule 1. Legatees have more than a mere expectancy once their T has died, although estate has not yet distributed 2. The property interest is certain and identifiable, the interest is the focus, not the dollar amounts 2.5.6 Future Interests In Property Are Sufficient To Support A Trust 2.5.7 An Otherwise Empty Trust Is Valid If It Is Named The Direct Beneficiary Of A Life Insurance Policy Or A Pension Plan Death Benefit 1. CA – Also For Trusts Named The Direct Beneficiary Of The Settlor’s Will 2. CA – 3 types of Empty Trusts a. Life Insurance b. Pension Plan Death Benefit c. Will 2.5.8 Three Main Categories That Can’t Be A Trust Res 1. Future Earnings Unsupported By Contract a. If contract exists then this future earning res is transferable even if the subject of the contract doesn’t exist 2. Mere Expectancy Of Inheriting From A Will Or Intestacy Before The Death Of The Testator Cannot Be Res. 3. Trustee Could Not Hold His Own Debt (Note Obligation) As A Res Of A Trust (Can Have The Trustee Holding The Note Of The Settlor If They Are Not One In The Same). a. A corporate trustee may hold their own corporation stock in trust as long as it comes to them and they don’t solicit for that arrangement. 2.5.9 Brainard v. IRS: Facts: Guy tries to get around tax by creating a trust for mom, wife and kids he declared himself trustee of all profits he’s going to make next year. Analysis: Trust did not exist because no res at the time, only expectancy. But he did ratify declaration when at the end of next year he deposited money in accountant. Unfortunately, taxes calculated during the year. Conclusion: No trust till ratification because no res so he pays tax 2.5.10 Estate of Brenner: Facts: Decedent wanted to create a trust of land that he hadn’t yet gotten by opening a trust with a one dollar bill. Five days later he got title to the land. Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 8 of 25 Analysis: He didn’t have a trust when he created it with a dollar, but when he started acting like it was a trust he ratified it. The trust came into effect when the property transferred. It is a declaration of a trust. Conclusion: Trust. 2.5.11 Farmers Loan and Trust: Facts: Decedent was inheriting husband’s estate and she created a trust for the benefit of her children and grandchildren. She gave power of attorney to the trustee, letter of authorization, and a letter of introduction to the trustee. They attempted to get the whole of the husband’s estate into the trust but were only able to get $800k into the trust before she died. Analysis: The remaining 1.4 million will not be part of the trust because delivery was not made prior to decedent’s death. Therefore it will be distributed according to her will. Conclusion: 1.4 million is not part of the trust. Recommendation: Helen should have deeded all rights and interest to the trustee, a symbolic delivery or she could declared herself to be trustee. 2.6 BENEFICIARIES: A PRIVATE TRUST MUST HAVE ASCERTAINABLE BENEFICIARIES 2.6.1 Contrast Charitable Trusts, Must Be Charitable Purpose, AND Reasonably Large And Unidentifiable Segment Of Public At Large 2.6.1.1 “Friends” Is NOT Ascertainable 2.6.1.2 “H.S. Football Team” Is Ascertainable 2.6.1.3 “Immediate Family” – Yes, Use Intestacy Statute To Determine 2.6.2 Majority Rule A trust, invalid for want of ascertainable beneficiaries cannot be given effect as a Power of Appointment (where you don’t need ascertainable beneficiaries), therefore, property returned to estate by resulting trust 2.6.3 Minority – “Special Power Of Appointment” CA appears to use, though you can’t appoint power to self – this allows the effect of the trust being carried out via the Power of Appointment 2.6.4 Trustee Discretion For Class Gifts If a class of potential beneficiaries is ascertainable, then shares of each may be left to discretion of trustee 1. Questions of ascertainable beneficiaries turn on whether it is a charitable or private trust 2. If charitable, then the lack of ascertainability is no longer an issue 3. If private, lack of ascertainability is fatal 2.6.5 Failure Of Living Beneficiaries Is NOT fatal, so long as they’re described to identify them when born 2.6.6 Guardian Ad Litem Courts will administer Guardian ad litem to administer trust pending births 2.6.7 Resulting Trust If No Birth If parent never issues, then remedy is a court ordered resulting trust (resulting trust is really just an implied reversion) (to T’s estate – if will, then residuary beneficiaries, if no will, then to heirs) 2.6.8 Honorary Trusts: Trust For Graves & Pets 1. They Are Valid For Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 9 of 25 a. Graves (for 21 years), AND b. Animals of a particular person (until the death of the last animal) i. For All Animals, Likely Fulfills Charitable Trust 2. If Instrument Silent As To Someone Having Standing To Enforce The Trust, Court Will Appoint Someone To Fulfill This Need 3. Resulting Trust For Proceeds Left Over After 21 Years Or Last Animal Dies Respectively When Instrument Is Silent; Otherwise, Instrument Will Specify 2.7 VALID PURPOSE – MUST NOT BE AGAINST PUBLIC POLICY 2.7.1 Marriage: Forfeiture conditions based on marriage are VOID as against public policy 2.7.2 Divorce or Crime: Provisions encouraging divorce, commission of crime and restraining religion are VOID, if they are the primary purpose for the trust 2.7.3 Primary Intent of Settlor: Focus must be on T’s primary intent/purpose (is it to prevent marriage? Or to provide until marriage?) Motive of T is key to determining whether there is a trust 2.7.4 Purpose of A Charitable Trust: A charitable trust is a non-private trust and the purpose is for the benefit if public not individual. 2.7.5 4 Situations Where A Trust Fails For Invalid Purpose 1. No active duties for trustee to perform and property is already distributed to beneficiaries. 2. Purpose has been accomplished 3. Trust subsequently become illegal e.g. Prohibition 4. Trust never comes into being because it is initially illegal (read broadly) e.g. Against rule of perpetuity or offends public policy. 2.7.6 Contrast Will Provisions And Trust Provisions That Do NOT Impose Conditions If no condition, then no problem (Theory -you can’t give something, then take it away; however, you can forego giving it in the first place) 3. TRUSTS AS VALID WILL SUBSTITUTES: REVOCABLE TRUSTS AND BANK ACCOUNT TRUSTS 3.1 “POUR-OVER” CLAUSES ARE VALID – WHERE A WILL DEVISES TO EXISTING INTER VIVOS TRUSTS 3.1.1 Three Things To Discuss – 3.1.1.1 T May Be Both The Trustee Of The Trust, As Well As A Beneficiary Of Same Trust (Just Not The Sole Trustee And Sole Beneficiary) a) If there are two trustees, even though one is the sole beneficiary; b) If there are two or more beneficiaries, even though sole trustee is one of them c) INVALID -Sole beneficiary of a trust cannot be the sole trustee 3.1.1.2 Revocable Trusts Are Valid, Even Though a) Settlor retains the right to revoke, alter, or amend the trust, b) Settlor keeps and income interest or other interests in the trust as beneficiary, c) Settlor retains a power of appointment over the trust corpus or retains every day control over the trust by naming himself as trustee, or holding a veto power over the trustee’s decisions Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 10 of 25 3.1.1.3 Gifts Of Wills To Revocable, Amendable Trust (“Pour Over” Clause) Are Valid a) ONLY requirement – for trust to be in existence before or be executed concurrently with the will (a) Devised property added to trust as it exists at T’s death (b) Including amendments after will executed, even though (c) Trust amendments not executed with testamentary formalities b) Formerly, such revocable, amendable trust would operate to modify the will and therefore was formerly in violation of the Statute of Wills 3.2 TOTTEN TRUST 3.2.1 Definition -Bank accounts, where signature card indicates trust, and T draws on interest, but not principal 3.2.2 Rules 1. These are revocable during T’s lifetime by ANY manifestation to revoke, including withdrawals of funds (partial withdrawals = partial revocation) 2. Reachable by depositor’s creditor’s during life, and in CA, after death if necessary 3. Extrinsic evidence admissible to show a trust was NOT intended despite signature card 3.2.3 MAJORITY Revocation Rule – Totten trusts are revocable by depositor’s will, but the will must EXPRESSLY state the revocation (i.e., will gives the account to someone else – not the named beneficiary of the trust) 3.2.4 Anti-Lapse Consideration If beneficiary predeceases depositor, check anti-lapse statutes, otherwise automatic reversion 3.2.4.1 Family Member Exemption From Anti Lapse Family members under anti-lapse are saved 4. ORAL TRUSTS: ORAL PROMISE TO HOLD IN TRUST – When do we need a writing? And what happens when we don’t have one? 4.1 INTER VIVOS TRUSTS 4.1.1 Oral Trusts Of Personal Property Are Enforceable 4.1.2 Trusts Containing Land, Must Be In Writing And Satisfy SOF (Enforceability Is Key) 4.1.2.1 UNLESS, Part Performance, May Make It Enforceable And Remove From SOF a) Beneficiary enters into sole possession or otherwise changes position in detrimental reliance of trust b) CA – the key to partial performance is detrimental reliance to the extent that other remedies will be inadequate (1) Doing more than their part of the bargain 4.1.3 German v. German 1. Facts: Parents conveyed property to daughter so she could build the house on the lot. She started to go through bankruptcy proceeding and quickly conveyed property back to her parents. The creditors want that property. 2. Analysis: Court says that it is a valid oral trust because the trustee, daughter, didn’t raise SOF. Creditors then tried to argue that she preferred one creditor over another ie the parents over them. The courts said “nope” the parents were the equitable owners and not a creditor. Lastly the creditors say they can object to the trust even though the trustee doesn’t raise statute of frauds and the court says that they can’t because the creditors didn’t rely on this title for collateral. 3. Conclusion: Oral trust valid and property goes back to the parents. Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 11 of 25 4. Note: If she had transferred the property after the bankruptcy proceedings it would not have worked because the creditors would now be empowered with the authority to raise or not raise the statute of frauds. 4.1.4 Fairchild 1. Facts: Rasdall shot a neighbor and skips town leaving property to brother for $2,000. In actuality it was an oral trust for wife and kids. Rasdell dies. 2. Analysis: Brother raises statute of frauds so wife and kids have only two shots because preexisting relationship didn’t exist at the time. a. Equitable Part Performance Doctrine: Unfortunately they would have to in possession of property and they weren’t in possession. b. Constructive Trust For Promissory Fraud: He can’t be guilty of not carrying out a promise unless there is first proof that the oral trust existed and you can’t get proof that the oral trust existed without proving the trust. 3. Conclusion: No trust because of statute of frauds by trustee the brother. 4.1.5 A Constructive Trust (Equitable Remedy) May Be Imposed Where (1) Fraud in inducement – if, at time land was deeded, trustee orally promised to serve as trustee without intent to perform such promise (2) Confidential Relationship – grantee-trustee served in confidential relationship to the grantor-settlor, (the concern is that breach of relationship to enrich oneself outweighs SoF), AND must agree to hold property in trust (basis for the breach) Attorney-client Business associates Husband-wife Brother-sister Father-child 4.1.5.1 Tort Remedies For Intended Beneficiaries Intended Beneficiaries May Sue The Estate In Quantum Meruit For Value Of Services Rendered When/If Trust Fails And She Is Left With Nothing a) Beneficiary will get value for services but not benefit of bargain 4.2 THREE WAYS AROUND A TRUSTEE RAISING STATUTE OF FRAUDS. 4.2.1 Equitable Part Performance Doctrine: You can admit evidence to prove equitable part performance and then you can admit evidence to prove the existence of an oral trust when: 1. The alleged beneficiary is in possession AND 2. He has relied or made improvements to the land. 3. Note: Possession coupled with reliance are merely description of things not the only thing required for the court to consider equity. 4.2.2 Heuer 1. Facts: Father conveys his property to his son but hangs on to title. He collects money for eminent domain for piece of property. He also puts a lien on property so he can buy another piece of land. Son lives on land and makes improvements and pays taxes (with eleven kids). The father borrowed money from his brother and now the brother wants land to pay off debt. 2. Analysis: If you have an oral trust it cannot defeat a creditors claim, however the brother cannot use this argument because he knew land was given to the son. This is still doesn’t prove an oral trust. Since the trustee was the father, it now passes to the executor, who is probably the brother and he raises the statue of frauds. However the court grants the exception of equitable part performance since the son was in possession of the land and relied on the property eventually being his. 3. Conclusion: Trust and brother cannot get to it for payment of debt. Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 12 of 25 4.2.3 Constructive Trust For Promissory Fraud: When someone does not intend to keep their side of the promise from the beginning. Note: We usually have to rely on them bragging for evidence. 4.2.4 Constructive Trust For Breach Of Promise When There’s A Pre-Existing Confidential Relationship: There is nothing because you are dealing with family members and there’s inherent trust. 4.2.5 Purdy 1. Facts: Purdy is a court clerk with real property. All his criminal friends kept wanting him to bail them out. So he conveyed his property to listen in an oral trust for himself. He then tells a niece that if she takes care of him during her dying years he will give her the property. He dies and she gets squat. 2. Analysis: He had a c contract to make a will so niece sues for breach. She gets word of an oral trust and ask aunt to waive the statute of fraud and the aunt says “no.” So niece is left with proving breach of a promise in a pre-existing confidential relationship. Because of pre-existing confidential relationship, the court allows evidence of oral trust to come in. 3. Conclusion: Oral Trust, she get it. 4.2.6 Pappas 1. Facts: Old guy marries a 23 year-ol who is going to divorce him so he conveys property to kids saying it is for payment of debt. One week after the divorce, two of his kids waive the statute of frauds and re-convey the property back to him. However one son will not waive statute of frauds and refuses to re-convey the property back to him. 2. Analysis: Equitable part performance won’t work because no reliance because he knew it was fake, promissory fraud. Obviously breach of promise because so soon after but no other evidence and you cannot use the breach to prove itself. Pre-existing relationship is proveable however the dad is coming with unclean hands so thief in possession keeps it. 3. Conclusion: No oral trust because of statute of frauds. G. Secret and Semi Secret Trust: A devise in the will where the testator pre-arranged with the devisee to hold the property either personal or realty in trust for someone else. 1. Secret Trust: In CA you need clear and convincing/overwhelming evidence that a trust exists otherwise it is handled like a sham will and the devisee keeps the gift. 2. Semi-Secret Trust: You know there is a trust but you don’t know who the beneficiary is. • California and growing minority will let in compelling evidence to say who beneficiary is. H. Equitable Title: A property right that unless restricted can be sold or a creditor can take the this equitable interest. • If a creditor attaches your interest, they get alien and are paid before beneficiary 1. Three methods to prevent creditor attachment and alienation: a. Spendthrift Trust: A trust where one or more of the beneficiaries equitable interest is protected 1) Beneficiary is not subject to voluntary/involuntary alienation 2) Creditors cannot attach Note: Can never establish spendthrift trust for self, actually can but will not impair creditors. • Five Exceptions When Creditors May Break Into The Spendthrift Trust: 1. Supremacy Clause Exception: IRS for back taxes 2. Necessity of Life Exception: Creditors who have provided necessary food, shelter, clothing, and medical care. 3. Preferred status exception: claims of children/spouse for support CA Rule: To the extent the judge determines its equitable, these debts will be paid. Does not matter if it is alimony, child support, or property settlement. §15305 Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 13 of 25 4. Creditors who have preserved the beneficiaries interest may make claims: eg. Attorney fees 5. Station in Life Rule (statutory): You cannot protect any more money than what benefit needs to support self in accustomed lifestyle. i. Dupont: Husband sets up spendthrift trust for wife for her life with residual to kids and wife does the same thing. They are reciprocal self settled spendthrift trusts. Analysis: Since consideration is provided for spendthrift trust in the form of another spendthrift trust, it is like a settlor setting up a spendthrift trust for self which isn’t valid. Conclusion: Spendthrift trust not honored. b. Support Trusts: A trust where beneficiaries interest is limited by objective and a ascertainable standard, ie education, support, medical etc… 1. Beneficiaries cannot alienate because defeats purpose 2. Creditors cannot break in unless the provide present support for the objective and ascertainable standard. Example of “not a support trust”: Trustee shall pay the income of the trust for the beneficiaries support. • Beneficiary is entitled to all income so support is a motive and not a support trust because no limitations Example of Support Trust: Such portion of income as beneficiary needs for their support. c. Discretionary Trust: All trustees have some discretion but in a discretionary trust the trustee has the ability to freeze out one of the beneficiaries forever so there is not guarantee of an interest. 1. Alienation: Beneficiary cannot sell because the trustee would simply stop paying that interest. 2. Creditor Attaches: The trustee will simply stop paying that beneficiary. However the creditor will still be able to stand in front of the trustee and prevent him getting any funds. i. Hypo: If there are three beneficiaries and the trustee is withholding from one they could all conspire together and sell because the trustee has to pay at least one of the beneficiaries. • Prevent selling 1. Put in a clause that says that the trustee can name another beneficiary 2. Put in an inalienable clause 4.3 ORAL PROMISE (SUPPORTED BY CONSIDERATION) TO MAKE DEVISE IN WILL 4.3.1 NO Part Performance -Quantum Meruit Relief Only In absence of part performance, intended beneficiary’s only claim is as quantum meruit suit 4.3.2 Written Agreement -Breach of Contract & Constructive Trust Sue for breach of will contract, remedy is Constructive Trust 4.4 TESTAMENTARY TRUSTS – 2 TYPES 4.4.1 SECRET TRUST Absolute devise by will with oral promise to hold on trust – Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 14 of 25 4.4.1.1 Rule In CA you need clear and convincing/overwhelming evidence that a trust exists otherwise it is handled like a sham will and the devisee keeps the gift. 4.4.1.2 Extrinsic Evidence Extrinsic evidence is admissible to show the existence of the “secret” promise, that trustee seeks to deny 4.4.1.2.1 Clear & Convincing Standard is clear, satisfactory and convincing evidence (more than preponderance of the evidence) 4.4.1.2.2 Constructive Trust Constructive Trusts will be implied for benefit of intended beneficiary 4.4.1.3 Rationale In equity, the concern that one should not be unjustly enriched by violation of promise outweighs the Statute of Wills concern that beneficiaries should be identified by language in the will; the constructive trust is imposed to prevent unjust enrichment 4.4.1.4 Trustee Refuses Fiduciary Duty Watch for situation where trustee never agrees, if he doesn’t, or it isn’t alleged, then he wins 4.4.2 SEMI-SECRET TRUST Devise “in trust” with oral agreement as to beneficiaries – You know there is a trust but you don’t know who the beneficiary is. 4.4.2.1 Rule California and growing minority will let in compelling evidence to say who beneficiary is. 4.4.2.2 Issue To Discuss On Exam Issue – heirs will contest that invalid trust, property to them, for failure to identify beneficiaries in will 4.4.2.3 Remedy: Constructive Trust (Min) or Resulting Trust (Maj) Minority: Restatement of Trusts – Impose a Constructive Trust, intent to create trust clear, therefore better to give to intended beneficiaries v. heirs Overwhelming Majority Rule – results in Resulting Trust for T’s heirs – rationale, it violates Statute of Wills to have unidentified beneficiaries 4.4.2.4 Contrast Situations Where The Actual Devise Is Either “In Trust” Or “Absolute” “In Trust” – clear that trustee has no beneficial enjoyment of property “Absolute” – case of unjust enrichment, as trustee seeking to deny own promise 5. CHARITABLE TRUSTS – 4 DISTINCTIVE RULES 5.1 NOT SUBJECT TO EITHER RULE AGAINST PERPETUITIES OR RULE AGAINST ACCUMULATIONS USRAP (Uniform Statutory Rule Against Perpetuities) – if an interest violates the RAP, it is valid for 90 years, if it is still contingent at that point, then it is reformed into a vested interest 5.2 MUST BE FOR A CHARITABLE PURPOSE If they ask, the issue is not whether it’s charitable or not, the real question is what turns on whether or not the purpose is charitable 5.2.1 There Are Six Areas Of Charity The issue is controlled by how the trust operates, not what it says Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 15 of 25 1. Religion 2. Medicine 3. Science 4. Governmental 5. Research 6. Education 7. Any Purpose Of Sufficient Value to the public to justify holding the property in perpetuity. • Animal cruelty, neutering pets. Almost never used; Courts won’t approve these. Last time one of these exceptions was allowed was in 1890 when the ASPCA was allowed charitable status for preventing animal cruelty. • Care of lost animals or a class of animals is OK; • Care of a single pet is not OK -won’t get charitable status • British Zoo Trust Case in 1880: Yes, because the zoo gave elephant rides to children; it was the petting zoo part that saved the charity. Back then zoos were thought of as rich persons’ domain, so it was a close case. • Trust to teach kids to shoot at moving objects: Yes • Trust to foster sports (In re Knottige) NO • Trust to support an educational program at a university: Yes • Trust to teach chess: Yes because quasi mathematical. • Trust to maintain a hotel in Virginia City Montana as a memorial to testatrix and to hold out the hotel as a museum (it was a brothel): No • Mere financial enrichment is not enough • The broadest charitable trust is for “charitable purposes” • You can make the trusts as restrictive as you like, but you make the trust less useful by defining it too narrowly • Only use the terms from the statute of Elizabeth • “Worthy Purposes” can be charitable or not; therefore no charitable trust. • Don’t use synonyms. 5.2.2 Shenandoah (Henry Trust) Facts: Wife and daughter killed in fire so he became itinerant produce seller. He created a trust for 1st, 2nd, and 3rd graders to receive equal shares two times a year during Easter and Christmas. Analysis: The motive does not matter. It has to operate for the benefit of the public. No assurances that kids would use for educational purposes so it is gift that violates RAP. Conclusion: Intestacy. 5.2.3 Kidd Facts: Left a trust for the discovery of the soul and lower court gave it to Barrow Neurological Institute which upset actual soul finders. Analysis: Appellate court did not feel that this society would be capable of effectuating the testator’s intent of soul discovery so recommended two psychic organizations. Conclusion: Remanded to determine which psychic organizations were most suitable to carry out testator’s intent. 5.2.4 Wilson v. Flowers Facts: Attorney uses the word philanthropic instead of charitable so the heirs try to break the trust saying that it is not valid. Analysis: Attorney was simply using elegant variations. They are interchangeable. Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 16 of 25 Conclusion: Trust valid 5.2.5 In re Hummeltenberg Facts: Testator left money in trust for spiritualistic mediums. Is this trust for the benefit of the public? Analysis: If a testator by stating or indicating his view that a trust is beneficial to the public can establish that fact beyond question, trusts might be established in perpetuity for the promotion of all kinds of fantastic (though not unlawful) objects, of which the training of poodles to dance might be a mild example Conclusion: No charitable trust because in England the only religious trust accepted is for the state religion, Church of England. In the U.S. it would be OK. 5.2.6 Enforceability Must also look to whether the purpose of the trust can be enforced to keep it charitable 5.2.7 RaP: If Not In Compliance, 90 Year Waiting Vesting Period Watch for RAP violations, in CA, USRAP controls changing any RAP violation to a 90 year interest, at which time, it is reformed to be vested 5.2.8 Motive vs. Purpose Settlor must have a charitable purpose but need not have a charitable motive [Reason] 5.2.8.1 Purpose: How the trust operates. The public has to receive enough to hold it in perpetuity. 5.2.8.2 Motive Irrelevant 5.2.9 Wilber 1. Facts: Creates trust so that his notes will be edited and distributed for $15,000 and gave 150k to a list of institutions to give out his work. 2. Analysis: Trustee brings in experts from Rutgers and Princeton to say writings are irrational. 3. Conclusion: Waste of money so they don’t have to spend the $15,000. Judges like to hide behind experts. Is it a benefit to the public? 4. NOTE: Not a charitable trust so didn't have to petition for Cy Pres. 5.2.10 Butler v. Shelton 1. Facts: Landowner took swamp land and turned into a park for a subdivision of development. 2. Analysis: Group that will benefit because of entry restriction is not big enough group to be considered public. Court noted the motive of tax deduction for unsaleable land and an incentive for buying homes in developments. 3. Conclusion: Not a charitable trust. 5.2.11 Trust For Illegal Purposes Would the benefits of the trust motivate someone to commit a crime they wouldn’t commit. 5.2.12 Robbins 1. Facts: A trust to asset minor black kids whose parents have been incarcerated for political purposes (his motive was to encourage civil discord) 2. Analysis: If it is against public policy then illegal. There is a difference between inducing a crime and being affected by a crime. The benefits outweigh any risk of someone being induced. 3. Conclusion: It is a trust 5.2.13 Remote Divesting: When expressed in the trust, the original trust ends and a new trust begins eg. Franklin trust after… Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 17 of 25 5.2.14 Charitable Remainder Trust A charitable trust starts after an expressed private trust ends. 5.2.15 Mixed Trust A private & Charitable trust that can't be divided because there is no objective standard for dividing fails and reverts back to estate. 5.3 MUST BE IN FAVOR OF A REASONABLY LARGE NUMBER OF UNIDENTIFIABLE BENEFICIARIES 1. Watch for identity (e.g., surnames) and localities (cities, blocks, etc.) 2. Look to how the trust operates in fact 5.4 CY PRES Only used when the attorney general or the trustee want to alter the terms of an already valid CHARITABLE TRUST. Cannot be used to correct deficiencies in a charitable trust. Exception: a gift w/restrictions to a charitable trust or a non-profit organization must use Cy Pres also. 5.4.1 Must Allege/Prove Two Things: 1. 1. The specific purpose of the settler can no longer be carried out because illegal impracticable, or impossible UNLESS the trustee changed conditions which frustrated the donor's intentions. 2. There is a general purpose of the settler that will still be accomplished. 5.4.2 Thomas Breton 1. Facts: Trust for paying ransom to captured sailors during pirate wars. 2. Analysis: Trust becomes impracticable because not enough people to kidnap. 3. Conclusion: Cy Pres allowed and turned into trust to promote welfare of soldiers in field. 5.4.3 Connecticut College 1. Facts: $300K to West Point toward building an alum center called Cozier Hall in a particular spot w/in 5 yrs of my death. Otherwise, it goes to Connecticut College. 2. Analysis: Petitioned for Cy Pres cuz not enough $ & the exact location is not available so would like to use the $ for a wing on an existing building. Court says it's only impossible because you made it impossible by your own acts. 3. Conclusion: No grant of Cy Pres cuz they can raise other funds. 5.4.4 Oregon Trail Trust 1. Facts: Dude in 1800 (or so) left zillions to pay for provisioning for anyone who wanted to go from Missouri up the Oregon Trail in a Conestoga wagon. 2. Analysis: Took 8 trips to the Missouri Supreme Court until finally in 1932 they agreed that no f*ing body in their right mind would take a f*ing covered wagon instead of the train. 3. Conclusion: So they cy pres’d the money to help fund travelers’ aid societies. 5.4.5 Gift With Restrictions A beneficiary must adhere to restrictions or decline the gift. 5.4.6 St. Joseph’s Hospital 1. Facts: CTEK Testator left property to St. Joseph’s for ordinary maintenance. Hospital wants to pay off mortgage instead. 2. Analysis: Hospital argues it is a gift rather than a charitable trust which court buys however, it is a gift with restrictions and hospital must respect them. When a charity Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 18 of 25 solicits funds for a specific purpose it only has 3 choices: (1) use it as designated; (2) give the money back; or (3) apply for Cy Pres deviation 3. Conclusion: Must use money for maintenance. NOTE: If the restricted gift is to a charitable trust OR non-profit corp, then they must apply for Cy Pres to deviate from the restriction. 6. ALIENABILITY AND CREDITOR’S RIGHTS: SPENDTHRIFT AND SUPPORT TRUSTS 6.1 RIGHTS TO INCOME OF A TRUST 6.1.1 Creditors' Rights To Income, NOT Property This is a refrigerator -Creditor’s can have interest rights in income from a trust, NOT property (because the trustee owns) 6.1.2 Subject To Discretion of the Court Here though, the interest is difficult to valuate for purposes of selling to apply proceeds to the creditors claim 6.1.3 Creditors' Right of Priority Over Devisees Courts more likely to enter order directing trustee to pay creditors directly until satisfied, before paying beneficiary 6.2 SPENDTHRIFT CLAUSES 6.2.1 Protection From Creditors Trust language stating benefits are NOT assignable OR reachable by creditors 1. Beneficiary CANNOT assign 2. Creditor CANNOT reach 6.2.2 Five Exceptions When Creditors May Break Into The Spendthrift Trust: 1. Supremacy Clause Exception: IRS for back taxes 2. Necessity of Life Exception: Creditors who have provided necessary food, shelter, clothing, and medical care. 3. Preferred Status Exception: claims of children/spouse for support a. CA Rule: To the extent the judge determines its equitable, these debts will be paid. Does not matter if it is alimony, child support, or property settlement. §15305 4. Creditors Who Have Preserved The Beneficiaries Interest may make claims: eg. Attorney fees 5. Station in Life Rule (statutory): You cannot protect any more money than what benefit needs to support self in accustomed lifestyle. 6.2.3 Dupont 1. Facts: Husband sets up spendthrift trust for wife for her life with residual to kids and wife does the same thing. They are reciprocal self settled spendthrift trusts. 2. Analysis: Since consideration is provided for spendthrift trust in the form of another spendthrift trust, it is like a settlor setting up a spendthrift trust for self which isn’t valid. 3. Conclusion: Spendthrift trust not honored. 6.2.4 Public Policy Exceptions These are valid and enforceable, EXCEPTIONS (public policy reasons) 1. Contracts for necessities (minimal food, shelter, clothing, medical care) Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 19 of 25 2. Alimony obligations 3. Child support obligations 4. Claims founded on tort 5. Claims of governmental entities 6. Involuntary alienation (effect -give away voluntarily, but creditor’s can’t reach) 6.2.5 Estoppel on Breach Beneficiaries who participate in breaches of trust are ESTOPPED from suing on the breach of trust by the trustee who pays the creditor 6.3 DISCRETIONARY SUPPORT TRUST – “TO SUPPORT [BENEFICIARY]” Applying trust income to support beneficiary in trustee’s discretion 1. Right To Support For Beneficiary Is Only If They Are In Need 2. Discretionary, Therefore Trustee Can Pay And Should Pay If Beneficiary Cannot 3. Underlying Theory, Rights Of Beneficiaries Are Viewed Also As Duties Of Trustee 6.3.1 If NOT Support, Then Do NOT Pay 6.4 PURE DISCRETIONARY TRUST – “TO ACCUMULATE OR DISTRIBUTE TO [BENEFICIARY]” 1. Sole discretion of trustee a) Can choose not to pay for support 2. ONLY requirements are good faith and honesty 6.5 CREDITORS OF SETTLOR -(MAXIM -YOU CANNOT ESCAPE YOUR CREDITORS BY PLACING ASSETS IN TRUST) 6.5.1 Settlor Cannot Evade Creditors As to trusts for the benefit of the settlor (necessarily inter vivos trusts) a) Spendthrift clauses are unenforceable against settlor’s creditors b) If settlor can revoke trust, then creditors can force him to revoke (1) Last resort remedy – no other means available to meet obligations c) Even if irrevocable and trustee has power to distribute to settlor, creditors can force this too (1) Last resort remedy – no other means available to meet obligations 6.5.2 Third Party Beneficiaries Trusts: Settlor & Beneficiary May Evade Creditors As to trusts for benefit of third party beneficiaries. Settlor’s creditors have no rights 6.5.2.1 EXCEPTION – Fraudulent Transfers Doctrine – Intending To Defeat Creditors 7. TRUST ADMINISTRATION 7.1 PROHIBITION OF SELF-DEALING BY FIDUCIARY (TRUSTEE) 1. Trustee CANNOT buy or sell trust assets to itself (even for full value) 2. Beneficiaries can trace and recover such assets for the benefit of the trust 3. Trustee CANNOT borrow trust funds 4. Trustee CANNOT sell assets from one trust to another Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 20 of 25 5. Corporate trustee CANNOT purchase its own stock as a trust investment (it can retain own stock if part of initial trust property, if it’s a permissible investment – Prudent Investor Standard) 6. Trustee CANNOT engage in any transaction in which he seeks personal gain 7. EXCEPTION – By CA statute – trustee who employs herself as attorney for the trust is entitled to reasonable compensation, determined by the court, for services rendered, provided the need for an attorney is not due to a breach of trust 7.2 TRUST INVESTMENTS: THE PRUDENT INVESTOR RULE 7.2.1 Verbatim Response – RULE – Except as otherwise provided by the terms of the trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill and caution in making investment decisions. A trustee who possesses special skill o who is named trustse3e on the bases of representations of possessing special skills is held to a higher standard. 7.2.2 7 Elements To This Standard – What Do Trustees Have To Do? 1. Duty to keep trust productive 2. Duty to balance return with potential risk 3. Duty to diversify investments (spread the risk) 4. Duty NOT to commingle 5. Duty to delegate investment decisions only as permitted by statute (No common law) a. CA Statute – allows such delegation, but requires reasonable care in selecting delegate 6. Duty to safeguard and maintain trust property 7. Duty to account to trust beneficiaries (at least annually) 7.2.3 California Portfolio Rule CA adopts a “portfolio” view of investments – one may be a bad decision, but is the trust in general doing well is the issue 7.2.4 Duty of Impartiality Absent a trust provision permitting trustee to prefer one beneficiary over another, trustee must be fair to all beneficiaries 7.3 POWERS OF TRUSTEE AND SUCCESSOR TRUSTEE 1. Always start with the instrument itself – for express powers 2. Common Law – powers of sale, improvement, leasing are implied 3. CA and many other states have statutes to provide such power (all 4) 4. Corporate trustee may take title to stock in name of nominee, however, trustee is liable as guarantor 5. Trustee may invest in common trust funds (several smaller trusts are combined for convenience by large trusting organizations) a) Therefore no breach for commingling here 6. CA statute – trustees may operate by majority, NOT unanimous a) If multiple trustees and one or more die, resign, etc., do they need to be replaced? (1) Look to instrument 7.3.1 Trustee Powers (From Debbie's Outline) 1. Common Law/Inherent 2. By statute: Uniform Trustee Powers Act 3. Listed in Trust Document Itself 4. Administrative Deviation: Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 21 of 25 7.3.2 Administrative Deviation When a trustee goes to the court and gets administrative powers (cannot use this to change beneficial power) not expressed in the trust on behalf of the beneficiaries. Power to loan or borrow money; to abandon property. NOT to change the interests of the beneficiaries, realign their benefits, or take from one and give to another. 7.3.2.1 a. Petition for Administrative Deviation: You allege: 1) Situation was not anticipated by the testator has arisen that requires the exercise of a power that the trustee doesn’t have; (Oil found under your property); and 2) It is in the best interest of the beneficiaries for the trustee to have this power; (Trustor probably would want you to drill for the oil); and 3) There is no reason to believe that the settlor would have objected to this power. (Most troubling and often ignored) 7.3.3 Pulitzer: 1. Facts: Trustee could sell any asset except for Press Publishing Company. Yet its value was plummeting. So the trustee would like to sell. 2. Analysis: 1) Settlor didn’t anticipate 2) Best interest of beneficiaries 3) The court finds that this element even though the testator says “from higher motives than mere gains” 3. Conclusion: They can sell 7.3.4 Colonial Trust v. Brown 1. Facts: Trust with restrictions of no lease greater than a year and no building higher than three stories. Trustee is getting sub-normal rents and wants to rebuild. 2. Analysis: 1) Settlor knew the effect of these restrictions and he thought it was good business 2) Best interest of the beneficiaries depends on the future but they think it’s good so we give it to them 3) Settlor would have not allowed this deviation. However the court finds his restriction peculiar and most of all detrimental to the neighborhood and growth of the city so it is against public policy. The law on the books does not reflect what the courts actually do. This is a very dishonest Court opinion. 3. Conclusion: They can rebuild and rent for longer than a year. 7.3.5 Wolcott 1. Facts: Given income to wife for life and remainder to living issue. However the money for Mrs. Getty is insufficient and kids want to give her the principal as well. 2. Analysis: There is a spendthrift provision so there is a still an MCP. However they ask for administrative deviation to invade but cannot use it for that purpose. The court decides that all beneficiaries have been given notice and none object and it is ok because of compelling need. 3. Conclusion: Ok to break the trust even though it is against the black letter law. This is the WOLCOTT EXCEPTION; typical of what Courts actually do but rarely document in their holdings. 7.4 LIABILITY FOR BREACH OF TRUST, TORTS AND CONTRACTS 7.4.1 Breach of Trust b) Definition – when a trustee breaches fiduciary duty (self-dealing, improper investment, etc.) beneficiary has a choice of options (1) Ratify – ratify transaction and waive breach (2) “Surcharge” – sue for resulting loss (a) The breach of fiduciary duty is an automatic wrong – good faith and reasonableness are not defenses (b) Only issue is measure of damages (3) Trace – in self-dealing beneficiary may trace and recover property for trust Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 22 of 25 7.4.2 Tort c) Third parties may sue trustee in individual capacity for torts committed by trustee or agent; trustee may be reimbursed by estate when this occurs if: (1) Trustee was not personally at fault; OR (2) Liability is a risk that is a normal incident of the type of activity in which the trustee was properly engaged 7.4.3 Contract d) Trustee is personally liable on contracts UNLESS stipulation in contract relieves her of personal liability e) Trustee is entitled to indemnification if: (1) Contract was not a breach of trust f) ALWAYS address each breach separately (1) I.e., investing in two stocks when restricted to CDs, there’s two breaches – each stock invested g) Co-Trustees – if one breaches, can others be held liable? (1) ONLY if there’s some element of fault (a) Neglect (b) Affirmative conduct (c) Notice of breach requires action h) Trustee agents impose liability upon trustee if T (1) Improperly delegates responsibility to agent (2) Fails to take proper steps to remedy improper actions by agent (3) Failed to use reasonable care in selection of agent (4) Even if T notifies beneficiaries of delegation, T can still be liable 1. As long as a trust is revocable, a trustee who acts with the consent of the settlor CANNOT be sued for breach by the beneficiaries 7.5 TRUST ACCOUNTING 1. Basic Idea – the income beneficiaries get the net income while the remaindermen are entitled to trust corpus at the termination of the trust. a) Thus, items of receipts and expenditures must be allocated to the correct account (1) Income or (2) Corpus (principal) 2. Receipts a) Interest, rents, dividends on stock paid in cash are all income b) Proceeds from the sale of trust assets, stock splits and dividends paid in stock are principal 3. Expenditures a) Ordinary expenses incurred in the production of income are charged to the income account b) Extraordinary items, capital improvements and income taxes incurred on the sale of trust property are charged to principal c) The trustee’s fee is charged half to income and half to principal 4. Power to Adjust – Under Revised Uniform Principal & Income Act (CA), a trustee has the power to adjust the normal classification rules above, if necessary to comply with the trustee’s duty of impartiality as to both accounts (income or corpus) 8. MODIFICATION AND TERMINATION OF PRIVATE TRUSTS 8.1 CLAFLIN DOCTRINE – (MOST STATES) – Beneficiaries, all of whom are sui juris (of age), can terminate the trust only if 1. All beneficiaries consent, AND a) ALL BENEFICIARIES (unborn kids, minors, etc.) Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 23 of 25 2. There is no further trust purpose to be served (Material Continuing Purpose Doctrine). a) Spendthrift clauses prevent this 3. As a result, VERY HARD to do 8.1.1 Estate of Andrew Brown 1. Facts: Trust is to pay income to education of kids and then support Wolfson and wife in manner they have grown accustomed. Remainder to Wolfson’s kids in equal shares. Wolfson and wife want to terminate the trust and got all to agree. 2. Analysis: The court says there is a material continuing purpose of support if Wolfson and wife. 3. Conclusion: No termination 8.1.2 Claflin v. Claflin 1. Facts: One third of minor son’s inheritance is a trust that is to be given to him at the age at 21, 25 and the remainder at age 30. He wants it all after his 21 birthday because he runs out money after the first disbursement. 2. Analysis: Court says that the settlor’s purpose was to prevent his son from blowing all his money at once. This trust is about allowances and defeat the educational purpose. 3. Conclusion: Can’t terminate trust. 8.1.3 Bayley 1. Facts: The trust was continuing to pay small annuities to two family members and certain charities. The residue was supposed to go to the Boston Museum of Fine Arts. The Boston Museum negotiated with all the other beneficiaries and asked the court to terminate the trust. 2. Analysis: One of the purposes was to provide continuing income for the family members but the museum bought them a bond and gave them more money. So the material purpose would still be accomplished 3. Conclusion: Terminated the trust. 8.2 CALIFORNIA At the request of the trustee or a beneficiary, a court my modify the administrative or dispositive terms of a trust, or may terminate a trust altogether, if 1. Due to circumstances unknown to and unanticipated by the settlor, 2. The continuation of the trust, under its existing terms, would impair the initial purposes of the trust 8.3 A SETTLOR, ACTING ALONE, CAN TERMINATE (OR MODIFY) IF 1. He has expressly reserved the right to revoke (majority rule), AND 2. She complies with all provisions in the trust instrument pertaining to the form that revocation must take a. Most states, all trusts irrevocable, UNLESS otherwise stated b. CA – all trusts revocable UNLESS otherwise stated 8.3.1 Barnett 1. Facts: Husband fills out form to create a trust. In it were ways to revoke. But he didn’t use these means to revoke so wife wants her portion. 2. Analysis: Note: He didn’t change property to the trust name. However, the trust was still valid because it was done by declaration and not transfer as opposed to Helen Bostick who tried to transfer and lost 1.4 million. Court finds that he tells attorney that he doesn’t want ex wife to get anything and drafts new will. He also tells divorce Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 24 of 25 attorney. Court says the three ways to revoking trust weren’t exclusive so his communication with third party was ok. 3. Conclusion: Revocable so wife get no money. 8.3.2 Pernod 1. Facts: Mom sets up an irrevocable trust giving her daughter a life estate and the remainder to her daughter’s issue. Daughter freaks out and mom tries to revoke. 2. Analysis: No illegality, frustration, consent of parties and attorney says the mom’s purpose was to keep it out of the daughter’s hands so the court says there is no mistake. 3. Conclusion: Irrevocable because no mistake 9. TRUSTS IMPOSED BY OPERATION OF LAW: RESULTING AND CONSTRUCTIVE TRUSTS 9.1 RESULTING TRUSTS – 2 TYPES 1. Failure of Express Trust or when express trust purposes accomplished and the corpus is not exhausted – always gives rise to resulting trust a. In some instances, cy pres is a counter argument to resulting trust 2. Purchase Money Resulting Trust – presumed to arise when consideration for purchase of property is paid by person other than the person taking title a. Defenses 1. Gift – presumed when person providing consideration is close family 2. Loan 3. A sale or exchange by a trustee of a resulting or constructive trust to a BFP for value cuts off beneficiary’s rights to the transferred asset a. BUT, trustee holds any consideration received on the transfer in trust for beneficiary AND if the sale is not to a BFP, the beneficiary has choice of remedies: 1. Impose trust on consideration received by trustee; OR 2. Impose trust on original asset in NON-BFP’s hands 9.2 CONSTRUCTIVE TRUSTS – WHERE WE HAVE WRONGFUL BEHAVIOR 1. Implied in a variety of circumstance where a person acquires title to property wrongfully 2. Trust implied to remedy unjust enrichment – it is a generic remedy a. Title To Property Acquired By Fraud, Misrepresentation, Duress Or Mistake b. Oral Trust Of Land Under Fraud In Inducement And Breach Of Confidential Relationship c. Secret Trust Case d. Semi-Secret Trust Case Under Restatement View (Minority) 1. Majority Is Resulting Trust For T’s Heirs Study Guide for TRUSTS Trusts Outline More Free Outlines: http://c.finamore.home.comcast.net or http://finamore.net $ASQLaw School Outline -Trusts Outline.doc Ted Finamore Page 25 of 25 10. POWERS OF APPOINTMENT 10.1 VOCABULARY 1. Donor – person who gives the power of appointment 2. Donee – person to whom power of appointment is given 3. General Power of Appointment – NOT limited in the class of beneficiary to whom one can appoint 4. Triggering language – power to appoint to self, personal estate, or creditors of either 5. If no such language, then all power is “Special” 6. Specific Power of Appointment – limited in the class of beneficiary to whom one can appoint 7. Testamentary Powers of Appointment – created/limited by will, therefore no inter vivos power 8. Takers in Default – those who take upon failure of power of appointment 10.2 RESIDUAL CLAUSES IN WILLS CANNOT EXERCISE POWERS OF APPOINTMENT IN CA To exercise power of appointment, such power must be mentioned in will 10.3 IF POWER OF APPOINTMENT NOT EXERCISED, CAN IT BE REACHED BY DONEE’S CREDITORS? In CA, Yes, But Only If The Probate Estate Is Insufficient 10.4 ANTI-LAPSE STATUTE IN CA APPLIES TO POWERS OF APPOINTMENT