Docstoc

BarBri Trusts Outline

Document Sample
BarBri Trusts Outline Powered By Docstoc
					                                      Trusts Outline

I.    Trusts – Generally
      a. An arrangement under which the trustee holds legal title to property for the
         benefit of the trust’s beneficiaries. Trustee has burdens and fiduciary duties, and
         the beneficiaries receive the benefits of property ownership.
II.   Private Trust
      a. Requirements for a Valid Private Trust:
               i. A settlor who intends to create a trust
                      1. The use of the word “trust” in the instrument is not critical, but
                          there must be a clear intent by the settlor to create a trust and
                          impose a duty on the trustee to manage it for the beneficiaries
                              a. Sufficient: “$100,000 to A to be used for the education of
                                   X and Y”
                              b. Insufficient: “It is my desire, wish, and/or hope that A uses
                                   this property to look after X and Y” (language of suggested
                                   use, imposes no duty on A)
                                        i. Exception: Language of suggested use can create a
                                            valid trust if the settlor’s wishes are specifically
                                            described and his intent was not to suggest a use,
                                            but to require one
                                                1. Example: “It is my wish and desire that A
                                                    use the income for the support of X and Y
                                                    until both have attained the age of 18, at
                                                    which time A will distribute the principal of
                                                    this gift to X and Y outright”
              ii. Delivers Legal Title
                      1. This requirement does not have to be satisfied for self-declarations
                          of trust made by the settlor (“I hereby declare myself trustee”) or
                          for testamentary trusts (trusts created by will)
             iii. To the trust assets (“trust res”)
                      1. The subject matter of the trust to which the trustee’s duties relate
                          must be certain, identifiable, and segregated out
                              a. Example: A owes B $10,000. In writing, A states “I hereby
                                   declare myself trustee of the debt that I owe to B.” This is
                                   not a valid trust because A has not segregated out a specific
                                   interest in property to be held by the trust (A and B remain
                                   in a creditor/debtor relationship)
                      2. The subject matter of the trust can be an intangible property
                          interest (e.g., stocks, copyrights, patents, debts owed, etc.)
                              a. If B writes, “I hereby declare myself trustee of the debt that
                                   A owes me, said trust to be for the benefit of C,” this would
                                   create a valid trust because choses in action and accounts
                                   receivable are interests in property
                      3. An expectancy to inherit under a will or through intestacy is not a
                          recognized property interest (because an expectancy only ripens
            into a property interest if the testator dies without changing his will
            and the will is valid/admitted to probate)
                a. If someone attempts to create a trust with an expectancy, it
                     is considered a gratuitous (i.e., not supported by
                     consideration) promise to create that trust in the future
                     when and if the expectancy becomes a property right
                          i. Because it is a “gratuitous” promise, it is
                             unenforceable and no trust is created unless the
                             expectancy holder reaffirms his intent to create the
                             trust by word or conduct after the expectancy has
                             turned into a vested property right (e.g., through an
                             express statement of intent, distributing rents from
                             the property to the intended beneficiary, or crediting
                             the income to the beneficiary’s account and keeping
                             records like a trustee would)
                                  1. If a promise to hold property to be received
                                      in the future in trust is supported by
                                      consideration, the trust automatically
                                      attaches when the property is received
                                      (through contract law principles)
                b. Once a testator has died, a legatee under the will has an
                     interest that may be the subject matter of a trust, even if the
                     estate has not yet been distributed, the amount that the
                     legatee is to receive has not yet been ascertained, or she is
                     the legatee of the residuary estate (the actual assets in the
                     residuary estate are not yet known, but the legatee’s chose
                     in action against the estate is certain and identifiable)
        4. Future property interests (e.g., contingent remainders, executory
            interests) are interests in property that can be the subject matter of
            a trust, even if the interest could be defeated
        5. Empty Trusts
                a. An empty trust (i.e., a trust not containing any assets) will
                     be valid if the trust is named the direct beneficiary of a life
                     insurance policy, a pension plan death benefit, or the
                     settlor’s will
                          i. Example: F writes a trust instrument naming X as
                             trustee and providing that during F’s life, the
                             income is to be distributed to F, and at F’s death,
                             the income is to go to Wife for life, remainder to F’s
                             children. F does not actually transfer any assets into
                             the trust, but instead names the trust as beneficiary
                             under several of his insurance polices. This is valid.
iv. To the trustee
        1. An otherwise valid trust will not fail for lack of a trustee (e.g., no
            trustee is named; the named trustee dies or resigns), and the court
            will appoint one.
               a. Exception: Powers Personal to the Named Trustee
                        i. If the court finds that the settlor intended for the
                           trust powers to be personal to a named trustee, such
                           that the settlor would want the trust to fail if the
                           named trustee is no longer capable of serving, the
                           court will terminate the trust (rarely invoked)
      2. Trustee Discretion
               a. Discretionary Support Trust
                        i. Where the trustee to a trust set up for the support of
                           the beneficiary is given discretion to distribute the
                           income as he sees fit
                                1. Example: If a trust is set up for the purpose
                                   of supporting X, and the trustee has sole
                                   discretion to determine when and how much
                                   support is necessary, the beneficiary has no
                                   right to receive a set income and the trustee
                                   only has a duty to support X if he cannot
                                   support himself (no duty to pay for luxuries
                                   or bills X can pay himself).
               b. Pure Discretionary Trust
                        i. Where a trustee is given the sole discretion to
                           accumulate or distribute income to the beneficiary
                           (e.g., no standard of support)
                                1. Beneficiary has a right to an honest trustee
                                   who exercises his duties with good faith and
                                   a proper motive, but he has no right
                                   whatsoever to any distribution
      3. A trustee can also be a beneficiary, but the sole beneficiary of a
           trust cannot be the sole trustee (if there is only one trustee and one
           beneficiary, they cannot be the same person)
               a. Situations that are permissible:
                        i. Two or more trustees, even though one of the
                           trustees is the sole beneficiary
                       ii. Two or more beneficiaries, even though the sole
                           trustee is one of the beneficiaries
v. For the benefit of beneficiaries
      1. Beneficiaries must be human and ascertainable
               a. Naming “my friends” as the beneficiaries is not an
                   ascertainable standard (not objective), but naming
                   “members of my high school football team” as the
                   beneficiaries is sufficient because the members can be
                   established by objective criteria
               b. Naming “members of my immediate family” is a close call,
                   but most courts would uphold it and determine who would
                   take under the intestacy statute
              2. Giving Effect to a Trust That Fails for Lack of Ascertainable
                 Beneficiaries as a Power of Appointment (e.g., changing
                 “$100,000 to my friend Larry, in trust for my friends” to read
                 “$100,000 to my friend Larry, to appoint it to my friends”)
                     a. Majority Rule:
                              i. A trust that fails for lack of ascertainable
                                  beneficiaries cannot be given effect as a power of
                                  appointment, and the property is returned to the
                                  settlor’s estate by resulting trust (implied reversion)
                                      1. This is true because a trustee is under an
                                          obligation to perform, and a holder of a
                                          power of appointment is not
                     b. Minority (California) Rule:
                              i. When a trust fails for lack of ascertainable
                                  beneficiaries, it can be given effect as a special
                                  power of appointment (special because he cannot
                                  appoint the property to himself)
              3. Beneficiaries do not have to be living yet (e.g., “Tom’s future
                 children”), as long as they are described sufficiently.
                     a. A guardian ad litem will be appointed to represent their
                         interests
                     b. If the beneficiaries are never born, the property will be
                         returned to the settlor’s estate through resulting trust
                         (implied reversion)
     vi. For a valid purpose (doesn’t conflict with public policy)
              1. If an otherwise valid trust contains a condition that violates public
                 policy (e.g., puts an unreasonable restraint on marriage;
                 encouraging divorce; encouraging the commission of a crime;
                 restraining the free practice of religion), the trust will not fail, but
                 the condition will be void
                     a. Example: If a trust is set up for the benefit A, “provided,
                         however, that should A ever marry, she shall forfeit her
                         entire interest in the trust,” the trust remains valid, but A
                         will not forfeit her interest if she marries
                              i. A trust set up to provide support for someone until
                                  they marry, however, is permissible because this
                                  purpose does not impermissibly restrict the right to
                                  marry
b. Modification and Termination of the Trust
      i. California
              1. At the request of a trustee or beneficiary, a court may modify or
                 terminate a trust if:
                     a. The circumstances were unknown to and unanticipated by
                         the settlor; and
                     b. The continuation of the trust under its existing terms would
                         impair the initial purposes of the trust
                                        i. Example: A trust created for the support of the
                                            family provided that the settlor’s stock in the “NY
                                            World” should not be sold. However, once the “NY
                                            World” had heavy losses and the trustees had to use
                                            income from other trust assets to cover the losses,
                                            the court modified the trust terms to allow the sale
                                            of the stock because the primary purpose of the trust
                                            was to provide support for the family and using
                                            trust assets to cover heavy losses (continuing to
                                            maintain the specific direction of the trust)
                                            frustrated this purpose
               ii. Claflin Doctrine (most states)
                      1. Beneficiaries may terminate the trust only if:
                               a. All beneficiaries consent (this requirement cannot be met if
                                   any beneficiaries are not yet born); and
                               b. There is no further trust purpose to be served (a spendthrift
                                   clause poses a problem for this requirement)
              iii. A settlor acting alone can terminate or modify a trust if:
                      1. Majority Rule:
                               a. He has expressly reserved the right to revoke the trust (trust
                                   states that it is revocable); and
                               b. He complies with all provisions in the trust instrument
                                   pertaining to the form that revocation must take (e.g., in
                                   writing, delivered to trustee, etc.)
                      2. California Rule:
                               a. All trusts are presumed to be revocable unless the
                                   instrument explicitly states that it is irrevocable (so settlor
                                   does not have to expressly reserve the right to revoke);
                               b. If the trust contains provisions regarding revocation, the
                                   settlor must follow those provisions (unless the instrument
                                   states that the methods are not exclusive)
III.   Honorary Trusts (must meet the same requirements as private trusts, but they are set
       up for the benefit of non-humans (e.g., animals))
       a. Honorary trusts are valid for:
                i. Animals for the life of the animal(s) (not their offspring)
                      1. If any money is left over after the death of the animal(s) and the
                           trust instrument is silent as to who should receive it, the money
                           will be returned to the settlor’s estate through a resulting trust
                           (implied reversion)
               ii. Graves (maintenance) for 21 years
       b. The trust instrument or the court can appoint someone who will have standing to
           sue to enforce the trust
IV.    Charitable Trust
       a. Requirements:
                i. Must be for a charitable purpose (e.g., religion, medicine/health, science,
                   governmental, research, education, and other community activities)
              1. There must be an objective standard by which to ensure that the
                  money will actually go toward a charitable purpose
                       a. Example: “Trustee to distribute the income to grammar
                           school students in first and second grades, the said income
                           to be used by them for educational purposes” is not a valid
                           charitable trust because the money will go directly to the
                           school students and we have no way of ensuring that they
                           will actually spend the money on education
                       b. Example: “Trustee shall expend the income for educational
                           needs of the grammar school students in the first and
                           second grades” is valid because the trustee will spend the
                           income and he will spend it for the education of the
                           students.
      ii. Must be in favor of a reasonably large number of unidentifiable
           beneficiaries
              1. Example: A trust providing scholarships at the Florida State
                  University for all residents of Southwest Tallahassee (small city),
                  whose last name is Powell is invalid because the group of people
                  who would qualify is small and limited.
              2. Example: A trust providing scholarships at the University of
                  Chicago for all residents of Cook County (large county) whose last
                  name is Smith, with preference to be given to those persons named
                  Smith who are related to the settlor is valid because there are likely
                  to be many people who fit these requirements (and the mere
                  insertion of a preference clause is not fatal as long as it still allows
                  for a large group of beneficiaries to take)
b. Charitable trusts are not subject to the rule against perpetuities and the rule
   against accumulations (can last and accumulate income perpetually)
c. Modification of the Trust
       i. Doctrine of Cy Pres (“as near as possible”) (courts like to use)
              1. When a specific charitable purpose can no longer be accomplished
                  (because it is illegal, completed, or no longer capable of being
                  carried out), the trust may be reformed so that the money can be
                  allocated to a use “as near as possible” to the stated purpose, if:
                       a. The primary intent of the settlor was broader than the
                           specific purpose expressed in the trust instrument (e.g., if
                           the primary intent of the settlor to a trust stating income is
                           “to be distributed to do research for the prevention of
                           polio” was to research diseases in general); and
                       b. The court can locate the specific direction of the settlor’s
                           intent and reform the trust accordingly (e.g., a trust stating
                           income is “to be distributed to do research for the
                           prevention of polio” can be reallocated to research for
                           diseases that are as similar to polio as possible and have
                           similar symptoms)
                     2. If the court does not modify the trust under this doctrine, the trust
                         will be terminated and the balance will be distributed to the
                         settlor’s estate
             ii. Changed Circumstances
                     1. A court may deviate from the trust’s terms because of changed
                         circumstances when continuing to adhere to the specific direction
                         of the trust would frustrate the primary intent of the settlor
V.   Trusts as Valid Will Substitutes: Revocable Trusts and Bank Account Trusts
     a. Revocable Trusts
              i. Are valid, even though the settlor may retain:
                     1. The right to revoke, alter, or amend the trust;
                     2. An income interest or other interests in the trust as beneficiary;
                     3. A power of appointment over the trust corpus; and
                     4. Every day control over the trust either by naming himself trustee or
                         by retaining veto power over the trustee’s decisions
             ii. Pour Over Wills
                     1. A pour over trust results when the testator adds or “pours” his
                         estate into an inter vivos trust.
                     2. Case Law View:
                             a. While such trusts violate the requirement that title to the
                                  trust res be immediately delivered to the trustee, they will
                                  be upheld under the theories of:
                                       i. Incorporation by reference (if the trust is already in
                                           existence before the will is executed and is
                                           specifically referenced in the will, it can be
                                           incorporated); or
                                      ii. Independence Significance (if the trust’s purposes
                                           were more than to merely provide for distribution of
                                           property at the settlor’s death)
                     3. Uniform Testamentary Additions to Trusts Act
                             a. Pour over trusts are valid as long as:
                                       i. The will references the trust; and
                                      ii. The trust is already in existence when the will is
                                           executed or is created contemporaneously with the
                                           will
     b. Totten Trust (“to me in trust for X”; “Testator, trustee for X”)
              i. During the lifetime of the depositor he can withdrawal money for his own
                 use and doesn’t have to use it for the benefit of the beneficiary, but the
                 balance is paid to the beneficiary at the death of the depositer
             ii. May be reached by the depositer’s creditors during his lifetime and after
                 his death, but only to the extent the depositer’s probate assets are
                 insufficient to pay his creditors
            iii. Extrinsic evidence is admissible to show a trust was not intended despite
                 the designation on the signature card
            iv. Revocation
                     1. Totten trusts are revocable during the lifetime of the depositer by
                         any manifestations of intent to revoke, including making
                         withdrawals (partial withdrawals = partial revocation)
                     2. Can be revoked by the depositer’s will, but in order for the
                         revocation to be effective, the will must explicitly name the
                         account (cannot just state “all of my property goes to Debbie”)
                     3. If the beneficiary predeceases the depositer, there is an automatic
                         revocation of the trust (becomes a typical bank account), unless the
                         anti-lapse statute applies to pass the trust to the beneficiary’s issue
VI.   Oral Trusts (Oral Promise to Hold Property in Trust)
      a. Inter Vivos Trusts
              i. Oral trusts of personal property are enforceable, except that trusts
                 containing land must be in writing (to satisfy the statute of frauds)
                     1. Exception: An oral trust containing land will be enforced if part
                         performance has occurred
                             a. “Part Performance”
                                      i. Beneficiary must have done more than just her
                                         obligation under the agreement (e.g., enters into
                                         sole possession of the land or otherwise changes her
                                         position in detrimental reliance on the trust)
                                             1. Example: S promised X that he would
                                                  provide a home for her if she would keep
                                                  house and serve as hostess. Thereafter, he
                                                  handed his brother a deed naming the
                                                  brother as grantee, saying “hold this deed in
                                                  trust for X until her death in consideration of
                                                  services rendered by X.” Cannot be
                                                  enforced as a trust unless X has performed
                                                  more than her mere obligation under the
                                                  agreement (e.g., in addition to keeping
                                                  house and serving as hostess, she also sold
                                                  the house in reliance on the agreement)
                             b. If sufficient part performance has not been rendered, a
                                 constructive trust for the benefit of the beneficiary might be
                                 imposed where:
                                      i. There Was Fraud in Inducement: If the trustee had
                                         no intention to perform his oral promise, at the time
                                         he made the promise (very difficult to prove)
                                     ii. The grantee-trustee agreed to hold the property in
                                         trust, and he is in a confidential relationship with
                                         the grantor-settlor (attorney-client, business
                                         associates, husband-wife, father-child, siblings).
                             c. If no constructive trust is imposed, the intended beneficiary
                                 can sue the grantor-settlor’s estate in quantum meruit for
                                 the value of the services performed
      b. Oral Promise (Supported by Consideration) to Make a Devise in a Will
               i. If someone makes an oral promise (supported by consideration) to another
                  to devise him something in his will, but never actually makes the devise,
                  the other party can:
                       1. Sue to enforce the promise if there has been part performance (e.g.,
                          the person did more than just his mere obligation under the
                          agreement); or
                       2. Sue in quantum meruit to receive compensation for services
                          rendered
              ii. If the agreement had been written, the party could sue to enforce the
                  promise through a constructive trust
       c. Testamentary Oral Trusts
               i. Secret Trusts
                       1. When an absolute devise or gift is made in a will (e.g., “all my
                          stock to X”) in reliance upon the devisee’s oral promise that he
                          will hold that property in trust for another, the trust will be
                          enforced (for the benefit of the intended beneficiary) if sufficient
                          proof of the agreement is produced (extrinsic evidence is
                          permitted)
                               a. This is to prevent unjust enrichment by the devisee
                                        i. Example: Testator dies leaving a will that devises
                                           Greenacre to Jones. The will makes no mention of
                                           a trust, but testator’s son alleges that testator orally
                                           told Jones that he was to hold the land as trustee for
                                           the son and Jones agreed. The son can testify as to
                                           this agreement and a constructive trust will be
                                           imposed for her benefit if she can prove the promise
                                           by clear and convincing evidence
                       2. If the devisee never orally agreed to hold the property in trust (e.g.,
                          if the testator never asked the devisee to hold the property in trust,
                          but a note found with the will ordered the devisee to hold it in
                          trust), the devisee will take the property free and clear (because he
                          isn’t a wrongdoer who repudiated an agreement)
              ii. Semi-Secret Trusts
                       1. When a will devises something to the devisee “in trust,” but the
                          only evidence of who the intended beneficiaries are is in the form
                          of an oral agreement made between the testator and the devisee
                          (e.g., testator’s will devises land “to my good friend Steve, as
                          trustee, for purposes already communicated to him”), the court will
                          not enforce the trust for the intended beneficiaries, but will impose
                          a resulting trust for the testator’s heirs/residuary holders (otherwise
                          the Statute of Wills’ requirement that beneficiaries be named in the
                          will would be violated)
VII.   Alienability and Creditors’ Rights: Spendthrift and Support Trusts
       a. Beneficiaries
               i. Beneficiary’s Rights
              1. A beneficiary may freely sell or give away his interest in the
                  income of a trust or use it as security for a loan, unless the trust
                  contains a spendthrift clause (e.g., “No interest of any beneficiary
                  herein shall be assignable by such beneficiary nor shall it be
                  subject to the claims of the beneficiary’s creditors”)
                      a. If a trust contains a spendthrift clause and the beneficiary
                          breaches the clause by assigning his interests to creditors,
                          he is estopped from later suing the trustee if the trustee
                          actually does pay income to the creditors (a beneficiary
                          who participates in a breach is estopped from suing
                          thereon).
      ii. Beneficiary’s Creditors’ Rights
              1. Creditors cannot reach the trust property itself (because the trustee,
                  not the beneficiary, holds title), but creditors can reach the
                  beneficiary’s interest in the income. This interest can then be sold
                  and the proceeds can be applied to the debt
                      a. However, courts are more likely to enter an order directing
                          the trustee to give the beneficiary’s income to the creditors
                          until the debt is paid off
              2. If the trust contains a spendthrift clause, creditors cannot reach the
                  trust property itself or the beneficiary’s interest in receiving future
                  income (once the income is actually distributed to the beneficiary,
                  the creditors can attach, but they cannot attach to the beneficiary’s
                  interest to receive payments in the future)
                      a. Exceptions (creditors can still attach for):
                                i. Contracts for necessaries (food, shelter, clothing,
                                   and medical care);
                               ii. Alimony obligations;
                              iii. Child support obligations;
                              iv. Claims founded on tort; and
                               v. Claims of governmental entities (federal or state)
                      b. A spendthrift clause will only be valid if it forbids both the
                          beneficiary from assigning his interests and creditors from
                          attaching (will violate public policy if it allows the
                          beneficiary to sell his interest, but prevents creditors from
                          attaching).
b. Creditors of the Settlor
       i. A settlor cannot put money into a trust for the purposes of avoiding
          creditors, and creditors can:
              1. Attach to the settlor’s interest in the trust (spendthrift clauses are
                  unenforceable as against the creditors of the settlor); and/or
              2. If the creditors have proven that the settlor’s other assets have been
                  exhausted (there is no other source of payment) (last resort
                  remedies):
                      a. Force the settlor to revoke the trust (if the trust is
                          revocable); or
                                  b. Force the trustee to distribute income to the settlor (if the
                                      trustee has the authority to distribute to the settlor)
                ii. Settlor’s creditors have no rights as to irrevocable trusts that benefit third
                    parties
                         1. Exception: Fraudulent Transfers Doctrine
                                  a. If the trust was created with the intent of defrauding known
                                      creditors, it can be set aside
VIII.   Trusts Imposes by Operation of Law: Resulting and Constructive Trusts
        a. Resulting Trusts
                 i. Arises when an express trust fails for any reason (and the trust instrument
                    is silent as to what happens in this event) or when an express trust’s
                    purposes have been accomplished and the corpus is not exhausted
                    (equivalent to a reversion)
                         1. Example: A trust of $10 million is created to build a hospital. The
                             hospital is built for $8 million. The excess may be returned to the
                             settlor by resulting trust (or could go toward related purposes or
                             running the hospital if the court uses the cy pres doctrine)
                ii. Purchase Money Resulting Trust
                         1. A purchase money resulting trust is presumed to arise when
                             consideration for a purchase of property is paid by someone other
                             than the person taking title
                                  a. Exception: A trust is not presumed when the person
                                      providing consideration bears a close family relationship to
                                      the title holder (parent-child, husband-wife, grandparent-
                                      grandchild) (presumed a gift)
                         2. If the title-holder/trustee subsequently trades the property for
                             another piece of land (or sells the land to another), the original
                             payer of consideration/beneficiary can impose a trust on the new
                             property/funds received by the title-holder/trustee (the title
                             holder/trustee must hold any consideration received on the transfer
                             in trust for the beneficiary)
                                  a. The original payer of consideration/beneficiary cannot
                                      impose a trust on the original property (traded or sold to
                                      another) if the third party is a bona fide purchaser for value
                                           i. If the third party is not a bona fide purchaser, the
                                               original payer of consideration/beneficiary can
                                               choose to impose a trust on either the original
                                               property or the proceeds received by the title-
                                               holder/trustee
                         3. Defenses (raised by title holder/trustee)
                                  a. Gift; or
                                  b. Loan
                         4. Example: If A pays for property, but title is in B’s name, it is
                             presumed that B holds the property in trust for A. B will argue
                             against this presumption and say it was a gift or a loan.
        b. Constructive Trusts
              i. Arises where a person acquires title to property wrongfully (e.g., through
                 fraud, misrepresentation, duress, or mistake; through a breach of a
                 confidential relationship in the context of an oral trust of land; in the
                 context of a secret trust case; or through a semi-secret trust case under the
                 Restatements view) and we want to remedy the unjust enrichment
                     1. Example: A loaned B $10,000. Under an agreement, B was to
                         purchase Blackacre for A and put title in A’s name. B fraudulently
                         had title to the property put in his own name
IX.   Trust Administration
      a. Powers of the Trustee
              i. Sources of Power
                     1. The trustee can only exercise such powers as are expressly or
                         impliedly given to him
                             a. Express powers expressed in the terms of the trust or by
                                 statute or court order
                             b. Implied Powers
                                       i. Those powers “necessary or appropriate to carry out
                                          the purposes of the trust that not forbidden by the
                                          trust”
                                              1. Power of Sale; Power to Incur Necessary
                                                  and Ordinary Expenses; Power to Make
                                                  General Improvements on Trust Property;
                                                  Power to Lease Trust Property
                                      ii. There is no implied power to borrow money on the
                                          credit of the trust estate or mortgage (or otherwise
                                          encumber) the trust property
             ii. Joint Powers (co-trustees) (any action taken in violation is voidable)
                     1. Traditional Rule
                             a. When there are more than two trustees, the trust powers
                                 have to be exercised by unanimous agreement
                     2. Modern Rule (Uniform Trust Act/Uniform Trustees’ Powers Act)
                             a. Any power vested in three or more trustees may be
                                 exercised by a majority of them (but if there are only two
                                 trustees, they must act unanimously)
      b. Duties of the Trustee
              i. In managing the trust, the trustee must exercise that degree of care, skill,
                 and caution that would be exercised by a reasonably prudent person in
                 managing her own property
             ii. Duty of Loyalty
                     1. A trustee owes a duty of undivided loyalty to the trust and its
                         beneficiaries, and cannot act to benefit his personal interest at the
                         expense of the beneficiaries (self-dealing)
                     2. Trustee cannot act to benefit his personal interests at the expense
                         of the beneficiaries (self-dealing) (and good faith is no defense to a
                         breach of this duty)
                a. Cannot purchase trust assets for herself (or her relatives or
                    agents), even for full market value
                b. Cannot sell assets to the trust, even for a fair price
                c. Cannot sell assets from one trust to another trust she
                    manages
                d. Cannot borrow trust funds or make personal loans to the
                    trust
                e. Cannot use the trust assets to secure a personal loan
                f. Corporate trustee cannot invest in its own stock (but it can
                    retain its own stock if such stock was a part of the original
                    trust res)
                g. Cannot self-employ herself
                          i. Exception: Trustee can employ herself as attorney
                             for the trust, as long as the need for the attorney is
                             not based on a breach of trust (and the court will
                             determine reasonable compensation)
        3. Remedies for Breach
                a. Beneficiary can set aside the transaction and recover the
                    profit made by the trustee; or
                b. Beneficiary can ratify the transaction
iii. Duty to Physically Separate and Earmark Trust Property (no
     commingling)
        1. Exception: Trustee may invest in common trust funds (accounts
            created by corporate trust companies where several smaller trusts
            are combined for purposes of investment)
        2. If trust funds are commingles with the trustee’s personal funds, it is
            presumed that the trustee’s personal funds were expended before
            the trust’s funds
iv. Duty to Perform Personally (Delegation)
        1. A trustee cannot delegate the entire administration of a trust
                a. A trustee may seek advice of others on matters that she
                    may not delegate, but she must exercise her independent
                    judgment and make the final decision
        2. A trustee may delegate acts that would be unreasonable to require
            her to perform personally (e.g., mailing letters)
        3. A trustee may delegate investment decisions that a prudent trustee
            of comparable skills would delegate under the circumstances
                a. In delegating investment decisions, the trustee must use
                    reasonable skill, care, and caution in:
                          i. Selecting an agent;
                         ii. Establishing the scope and terms of the delegation;
                             and
                        iii. Periodically reviewing the agent’s actions
                b. The trustee is liable for the agent’s conduct only if the
                    trustee did not exercise reasonable skill, care, and caution
                    in selecting the agent
   v. Duty to Defend the Trust from Unfounded Attack
  vi. Duty to Account to the Trust Beneficiaries at Least Annually (and
      whenever a beneficiary or her representative requests it)
 vii. Duty of Impartiality
         1. Absent a trust provision permitting the trustee to prefer one
             beneficiary over another, a trustee must be fair to all beneficiaries
viii. Duty to Preserve Trust Property and Make It Productive
         1. Collect all claims due to the trust
         2. Lease land or manage it so that it is productive (or sell it if not
             productive)
         3. Record documents to protect title
         4. Invest trusts within a reasonable period of time following receipt
  ix. Duty to Take Trust Property in the Trustee’s Name
         1. Exception: Taking Title to Stock in the Name of a Nominee
                 a. By statute, a corporate trustee may take title to stock in the
                     name of a nominee, but the trustee is personally liable for
                     the acts of the nominee
   x. Duty With Regard to Investments (unless otherwise provided in the trust)
         1. Prudent Investor Rule (Under the Uniform Prudent Investor Act)
                 a. A trustee must invest and manage property as a prudent
                     investor would, taking into account the purposes, terms,
                     distribution requirements, and other circumstances of the
                     trust (and must still meet the minimum standards of
                     reasonable care, skill, and caution)
                          i. Exception: A trustee who possesses a special skill,
                             or who is named trustee on the basis of
                             representations of possessing special skills, is held
                             to a higher standard.
                 b. Prudence is evaluated as to the entire portfolio and overall
                     investment strategy (not each individual decision)
         2. Trustee must diversify the investments of the trust, unless the
             trustee reasonably determines, because of special circumstances,
             that the purposes of the trust are better served without
             diversification
         3. A trustee may invest with the objective of maximizing “total
             return” (ordinary income and capital appreciation), as long as it is
             what a prudent investor would do
                 a. If the testator’s decision to invest for total return results in
                     investments that produce significant capital gains, but little
                     or no ordinary income, the testator should use the
                     adjustment power to classify some of the capital gains as
                     income so a distribution can be made to the beneficiary to
                     comply with the duty of impartiality
         4. When faced with a “prudent investor” question, you should also
             mention whether statutory legal lists approve of the investment
                  made by the trustee or not (it is further support for your
                  conclusion)
                      a. Generally Improper Investments
                                i. Unsecured loans of trust funds and second
                                   mortgages
                               ii. Common and preferred stocks
                      b. Generally Proper Investments
                                i. Investments in mutual funds
      xi. Breach of a Trustee’s Duties
              1. A beneficiary may sue a trustee who has breached a duty, unless:
                      a. He affirmatively consented to the breach (mere knowledge
                          of a breach is not enough to prohibit the beneficiary from
                          suing); or
                      b. The trust is revocable and the trustee acted with the consent
                          of the settlor
              2. Each breach by a trustee is judged separately
                      a. This means that a trustee committing two or more separate
                          breaches cannot offset one breach that resulted in a loss to
                          the trust with another breach that resulted in a gain.
              3. A co-trustee can only be held liable for another trustee’s breach if
                  the trustee was at fault in some way (e.g., participated in the
                  breach; failed to use reasonable care to prevent the breach; or
                  neglected to take proper steps to compel his co-trustee to redress
                  the breach)
                      a. Inaction by a trustee (doing nothing) after becoming aware
                          of the breach is not an option (trustee must either sue the
                          co-trustee or compel him to redress the breach)
     xii. Third Party Liability for a Trustee’s Breach
              1. A third party who knowingly participates in a breach of trust is
                  liable for the resulting loss to the trust estate
              2. A third party who acquires the legal title to trust property for value
                  and without notice of the trust (bona fide purchaser) takes the
                  property free and clear of the interests of the beneficiaries
                      a. The third party will be deemed to have notice of the
                          existence of the trust if he knows of facts requiring an
                          inquiry (e.g., the existence of the trust appears on the face
                          of a document representing the property)
              3. An innocent donee of trust property (e.g., one who receives funds
                  from a trustee, but does not know that they are from trust proceeds)
                  must restore the property to the trust, but cannot be held liable for
                  damages
c. Trust Accounting
       i. All assets received, and all expenditures made, by the trustee must be
          allocated to the trust income or corpus (principal)
              1. Receipt of Assets
                             a. Interest, rents, and dividends on stock paid in cash should
                                 be allocated to income
                             b. Proceeds from the sale of trust assets, stock splits and stock
                                 profits, an increase in the value of an asset (capital gain),
                                 and dividends paid in stock should be allocated to principal
                             c. Expenditures
                                      i. Ordinary expenses incurred in the production of
                                          income (e.g., repairs, interest, taxes, etc.) are
                                          charged to the income account
                                     ii. Extraordinary items, capital improvements, and
                                          income taxes incurred on the sale of trust property
                                          are charged to principal
                                    iii. Trustee fees are charged half to income and half to
                                          principal
            ii. Power to Adjust (Revised Uniform Principal & Income Act)
                    1. A trustee has an adjustment power to reallocate investment
                         portfolio return if it is necessary to carry out the trust’s purposes
                         and the allocation is fair and reasonable to all of the beneficiaries
                         (duty of impartiality and duty of loyalty are implicated)
           iii. NOTE: When you see a trustee using rental income or other gains toward
                the improvement of a building owned by the trust, or when the question
                asks if the beneficiary “received all income/corpus to which he is
                entitled,” you should discuss accounting!
     d. Trustee’s Liability for Torts
             i. When a trustee, or her agent, commits a tort, the tort victim may sue the
                trustee in her individual capacity
            ii. The trustee can be reimbursed from the trust estate if:
                    1. The 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
     e. Trustee’s Contract Liability
             i. A trustee is personally liable on contracts he enters into unless a
                stipulation in the contract relieves her of personal liability
                    1. Trustee is entitled to indemnification if the contract was not a
                         breach of trust
X.   Power of Appointment
     a. A way for a settlor (“donor”) to give someone (“donee”) decision-making power
        with regard to distribution of the trust’s assets (“appointed property”) to
        “permissible appointees” without giving them legal title to the property as a
        trustee
             i. In the event that a donee fails to appoint property, the donor may assign
                “takers in default”
     b. General Power of Appointment
             i. Donee can appoint property to any of the following:
                    1. Himself;
                    2. His creditors;
                 3. His estate; or
                 4. The creditors of his estate
c.   Special Power of Appointment
         i. Donee is permitted to appoint property to any other permissible
            appointees, except for those allowed in a general appointment
d.   Powers Can Be:
         i. Presently exercisable by deed or will
                 1. When there is no condition precedent to the donee making an
                     irrevocable appointment
        ii. Testamentary
                 1. Power is exercised only by will at death (“upon the death of X, the
                     property shall be disposed of as X shall direct by his last will”)
       iii. Postponed
                 1. Exercisable during the lifetime of the donee, but only after some
                     condition precedent occurs
e.   Exercising the Power of Appointment
         i. Donee must manifest an intent to exercise the power, by:
                 1. Specifically stating he is exercising the power (appointing the
                     property to a permissible appointee, for example);
                 2. Attempting to make a transfer of the property (without actually
                     referring to it); or
                 3. Making a disposition of the property in his will in such a way that
                     it doesn’t make sense without finding a power of appointment has
                     been exercised
        ii. A general residuary/remainder clause put forth in a will does not exercise
            a power of appointment (“this asset to A, residuary to X”), and the will
            must mention the power in order to exercise it.
       iii. If the instrument creating the power of appointment (e.g., the donor’s will)
            states that the donee must “specifically refer to this power of appointment”
            in exercising the power, the donee must comply in order to exercise the
            power
                 1. A clause stating “I devise any property over which I have a power
                     of appointment to _____” is not sufficient to exercise the power in
                     this situation
f.   Creditor’s Rights
         i. If a donee holds a general presently exercisable or testamentary power of
            appointment, creditors can attach to the property:
                 1. If the donee appoints the property to her estate; or
                 2. Before the donee exercises the power, if the creditors can show
                     that they have exhausted all other assets of the donee first.
        ii. Creditors cannot attach to a special power of appointment.
g.   Lapse and anti-lapse statutes apply to powers of appointment

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:196
posted:7/13/2010
language:English
pages:17