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Trusts - Administration, Terms & Types, and Powers of Appointment
Administration; Will Substitutes; Creditor's Rights; Trusts by Operation of Law; Powers of Appointment
Terms in this set (50)
At common law, are trusts presumed revocable? How about under the modern rule (UTC)?
Common law - a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust
UTC/modern rule - a settlor can revoke or amend a trust during their lifetime unless the terms expressly state that it is irrevocable
Is a trust valid even if the settlor retains the power to revoke it/modify its terms?
Hypo: Settlor wants to create a trust where the trust is revocable during his life, where Settlor can be the sole trustee during his life, and where Settlor is the sole beneficiary during his life, but the trust will benefit specified others after the settlor's death. Would this be a valid trust?
Yes - even if the settlor is the trustee and sole beneficiary while alive with the power to revoke, so long as there are other beneficiaries whose interests are certain to take at some point (and not violative of the RAP)
What is a pour-over gift?
Gifts made in a will to an existing revocable trust
Is a pour-over gift into a trust valid?
Yes, so long as the will is valid
What is a Totten Trust?
A bank deposit account created by the trustee/depositor for someone who is to receive the money in the account at the time of the depositor's death. The depositor retains full control of the money in the account during his lifetime.
Note: a Totten trust is technically not a trust because it doesn't separate legal and equitable title and it's not technically a will because there are no will formalities required
How is a Totten trust revocable?
(1) depositor/trustee withdraws all funds
(2) any lifetime act manifesting the intent to revoke
(3) a specific contradictory provision in a will (but not under the UPC)
Can a creditor reach a settlor's Totten trust assets during the settlor's life?
Yes (because not a formal trust)
What is a spendthrift trust?
A trust in which the beneficiary is unable voluntarily or involuntarily to transfer his interest in the trust. The beneficiary cannot transfer their interest and the beneficiary's creditors cannot attach their claims against the trust income or principal.
What is required to form a spendthrift trust?
(1) all the normal trust requirements (e.g. res, trustee, beneficiaries) AND
(2) language in the trust document that shows an intent to protect the trust income and principal from the beneficiary's ability to transfer their interest in the trust and to protect the trust property from the beneficiary's creditors
creditors reach the beneficiary's interest in a spendthrift trust?
Generally, no. However, many states have exceptions for the following:
(1) debts for necessities provided to the beneficiary;
(2) alimony and child support claims (i.e. claims of beneficiary's
(3) claims by US or a state government
What is a support trust?
A support trust is a trust that directs the trustee to pay only so much of the income or principal or both as is necessary for the beneficiary's support. A support trust is a discretionary trust
with a support standard
What is a discretionary trust?
A trust where the trustee is given discretion whether to apply or withhold payments of income or principal or both to a beneficiary.
Hypo: Dale is a beneficiary of a discretionary trust. Tiffany has a valid judgment for a debt Dale owes Tiffany. What are Tiffany's rights in the trust property?
Tiffany can attach her claim to Dale's interest, but she may not compel the trustee to make a distribution. If the trustee has notice of Tiffany's attachment and the trustee makes a distribution, he must pay Tiffany directly unless Dale's interest is protected by a spendthrift provision.
What are a creditor's rights in a discretionary trust?
The creditor can attach their claim to the beneficiary's interest, but cannot compel the trustee to make a distribution. If the trustee has notice of attachment and makes a distribution, they must pay the creditor directly unless the trust is a spendthrift trust.
The only exceptions: A court can force a trustee to satisfy a judgment or order against the beneficiary for the support or maintenance of the beneficiary's child, spouse, or former spouse.
What are the beneficiary's rights in a discretionary trust?
No right to payment that he can enforce against the trustee
the trustee abuses his power (i.e. not acting in good faith)
What are the beneficiary's rights in a support trust?
(1) The beneficiary has a right to support payments. The amount of support required is determined by the settlor's intent of "support" and can account for the beneficiary's other resources. However, if the support is
, the court will usually not second guess the trustee's discretion, especially if the discretion is extended (e.g. "sole" or "absolute" discretion)
(2) The beneficiary cannot assign their interest in the trust.
Can a creditor of the
reach trust property?
No, so long as a valid trust,
spendthrift trust in the settlor's benefit
(2) the trust is
by the settlor; OR
(3) the trustee has
discretionary authority to make distributions to the settlor
(4) the trust was a
(created with the intent of defeating known creditors)
Can a beneficiary assign their interest in a trust to another?
their interest is limited by a spendthrift provision OR distributions to them is discretionary with the trustee
Can a trustee's creditors reach trust property that are within the trustee's control?
What are the trustee's duties?
A trustee the following common law fiduciary duties (e.g. loyalty and duty of care) and statutory duties:
(1) duty of loyalty (i.e. no self-dealing)
(2) duty to administer the trust in good faith and in a prudent manner
(3) duty to invest prudently
(4) duty to report
(5) duty to preserve and protect trust property
(6) duty of impartiality to all beneficiaries
To whom does a trustee owe their duties?
It depends on the revocability of the trust:
In a revocable trust, the trustee owes her duties to the settlor.
In an irrevocable trust, the trustee owes her duties to the trust beneficiaries
What is the trustee's duty of loyalty?
A trustee cannot enter into any transaction in which she is dealing with the trust in her individual capacity (unless court approval or an express waiver in the trust instrument). In other words,
self dealing, regardless of good faith or actual benefit to the trust.
What is the trustee's duty to invest prudently? (i.e. the Prudent Investor Rule)
The trustee must manage property as a reasonably prudent investor would under the circumstances and trust terms, as measured by the overall trust portfolio. This is a standard of
reasonable care, skill, and caution
in making investment decisions.
Specifically, the trustee must:
(1) not commingle trust funds with other trusts' funds
(2) balance return with potential risk
(3) diversify investments (unless reasonably determines that trust purposes are better served without diversification)
(4) keep the trust productive
Can a trustee delegate investment responsibilities?
she acts prudently in
(1) selecting the agent;
(2) establishing the scope and terms of the delegation; and
(3) periodically reviewing the delegate's actions
Can a trustee make nondiverse investments when the settlor of a revocable trust instructs them to?
Yes, because the trustee of a revocable trust owes her duties to the settlor and the directive relieves the trustee of the duty to diversify.
What can a trustee invest trust property in?
Subject to expansion or limitation by the trust's terms, a trustee must always make prudent investments.
In a state with a mandatory "legal list", the trustee is further limited by the approved investments on the "list"
What are the trustee's powers?
Those powers expressly or impliedly conferred on her by the trust terms (generally, anything the trust terms say plus the kinds of actions an ordinary individual has over their property and actions appropriate to achieve proper investment).
Remember, these powers are constrained by the trustee's duties to the settlor of a revocable trust or the beneficiaries of an irrevocable trust.
If there are multiple co-trustees, can a single trustee act to bind the trust?
Modern (majority) rule - a majority of trustees must agree to the course of action
Traditionally - except in emergencies, the trustees must act unanimously
What can a beneficiary do if the trustee breaches a fiduciary duty?
Any of the following:
(1) ratify the transaction and waive the breach;
(2) sue for the resulting loss in
(3) in self-dealing cases, the beneficiary can trace and recover the property for the trust
What is a trust exculpation clause and when is it effective?
A clause relieving a trustee of liability for a breach of trust. Generally enforceable. But not enforceable if it relieves the trustee for reckless or bad faith actions OR the clause was drafted by/at the direction of the trustee and the settlor was not independently represented by counsel
What damages is a trustee liable for if they breach a fiduciary duty?
The greater of:
(1) the amount necessary to restore the trust property and distributions to what they would've been but for the breach OR
(2) the trustee's profit from the breach
How can a trustee accused of breach of trust defend themselves?
A trustee won't be liable if
(1) she acted in reasonable reliance upon the trust terms;
(2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the action; OR
(3) there is a valid and applicable exculpatory clause (but not for self-dealing breaches)
Can a trustee be personally liable for torts committed in the course of trust business?
Traditionally - yes for torts of self and agents, but trustee can be reimbursed from trust estate if they weren't personally at fault
UTC - generally, no - trustee can only be sued personally if they were personally at fault; otherwise the claimant must sue the trustee as a representative of the trust
Can a trustee be personally liable for contracts executed in the course of trust business?
Traditionally - yes unless a stipulation in the contract to the contrary
UTC - no (claimant must sue trustee in representative capacity) unless the trustee failed to reveal her representative capacity
Is a trustee liable for the acts of co-trustees?
Generally no so long as the trustee did not join in the action and he exercised reasonable care in preventing the breach or compelling the co-trustee to redress the breach
What's the basic idea of trust accounting (i.e. accounting for the trust property and who gets what)?
The income beneficiaries get the net income (income receipts minus income expenditures) while the remaindermen are entitled to the principal at termination (principal receipts minus principal expenditures)
What trust revenue (i.e. "receipts") goes to income?
Generally - any benefits from ordinary use or investment of trust property and 10% of some types of proceeds
Specifically - interest, rents, dividends paid in cash, proceeds from trustee insurance, 10% of proceeds from all three of the following: deferred compensation plans (e.g. pensions), a liquidating asset (e.g. patents or copyrights), a working interest (e.g. mineral rights)
What trust revenue (i.e. "receipts") goes to principal?
Generally - "extraordinary" receipts and 90% of certain types of proceeds
Specifically - sale of trust property, dividends paid as stocks, proceeds from life insurance where trust/trustee is the beneficiary, 90% of proceeds from all three of the following: deferred compensation plans (e.g. pensions), a liquidating asset (e.g. patents or copyrights), a working interest (e.g. mineral rights)
What trust expenditures are paid from trust income?
Generally ordinary expenses incurred in producing income (e.g. repairs, interest, taxes), 50% of trustee's regular compensation and of expenses for accountings, judicial proceedings, etc., and insurance premiums covering principal asset losses
What trust expenditures are paid from trust principal?
Generally, payments on the principal of a trust debt, estate taxes, capital improvements, expenses and taxes incurred on the sale of trust property, and 50% of trustee's regular compensation and of expenses for accountings, judicial proceedings, etc.
What are the types of trusts imposed by operation of law and what differentiates them?
(1) resulting trusts - arise upon failure of an express trust and are for settlor's benefit
(2) constructive trusts - implied where a person acquires title to property wrongfully and are for the benefit of the person who wrongfully lost the property
When will a constructive trust be implied? What is needed to prove one?
To prevent unjust enrichment from wrongful evidence (e.g. fraud, undue influence, or breach of a fiduciary duty - generally
a mere breach of promise). The challenger must prove the necessary facts by clear and convincing evidence.
What are the obligations of a trustee of a constructive or resulting trust?
duty is to convey legal title to the beneficiary and account for profits taken from the property or fair rental value of the trustee's use from the time of the occurrences raising the implied trust.
When will a resulting trust arise?
Any of the following:
(1) a purchase money resulting trust
(2) failure of an express trust - e.g. an express trust is void or unenforceable
or the beneficiary of an express trust cannot be located or is dead (unless an express provision for the trust property upon termination)
(3) the trust purpose is fully satisfied and trust property remains (unless an express provision for the trust property upon termination)
What is a purchase money resulting trust?
Where one person (beneficiary) puts up consideration to purchase property but title is taken in another's name (the trustee) with beneficiary's consent.
The beneficiary must prove by clear and convincing evidence to establish a presumption of a resulting trust. The trustee can rebut. No presumption where beneficiary and trustee are closely related (a gift presumed), when the purpose of the arrangement was illegal, or when the trustee wrongfully obtained title.
What is a power of appointment?
Where the property-holder (the donor) allows another (the donee) to distribute the donor's property at some later point and at the donee's discretion, within the bounds of the power of appointment.
What are the four general categories of powers of appointment?
(1) general power - allows the donee to appoint in favor of herself, her estate, her creditors, or her estate's creditors
(2) special power - does not allow the appointments in a general power
(3) inter vivos power - the donee has the power to appoint during their lifetime
(4) testamentary power - the donee can only appoint by their will
What is required to validly exercise a power of appointment?
The appointment must
(1) be to a valid recipient (i.e. is this someone the instrument creating the power of appointment allows the appointment for?);
(2) reference the power of appointment; AND
(3) the reference must be specific if the instrument creating the power so requires
If the donee of a power of appointment fails to make an appointment, what happens to the property that was subject to the power?
If the power of appointment instrument provides a disposition - do that (the recipients are the "takers in default")
If not, the property would revert to the donor. If they're dead, it passes by the terms of their will or by intestacy (if no will provision providing for the property).
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