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Trusts

Terms in this set (43)

Types of Trusts
• Express
• Resulting
• Constructive

All trusts are presumed norevocable unless trust explicitly authorizes it
Express Trust
A legal device that allows an owner of property to make transfers of property and to have those assets managed on behalf of someone else

Two Kinds
o Lifetime Trust (Inter Vivos Trust)
Set up during the lifetime of the person who created the trust
o Testamentary Trust
Set up in Settlor's will

Eight Requirements
o 1) Settlor, who makes a
o 2) Delivery of legal title to
o 3) Property (Res) to
o 4) Trustee who holds legal title for the benefit of a
o 5) Beneficiary with
o 6) Intent to create a trust for
o 7) A Lawful Purpose
o 8) In a Validly Executed document

NO consideration necessary

If ANY of the above items are NOT satisfied (except naming a trustee), the Trust will FAIL
• A resulting trust is created (see below)
Settlor (Trusts)
Person creating the trust

Can be anyone over 18 with capacity to enter into a contract
Delivery of Title to Property to Trustee
Titled assets must be formally transferred in the name of the trust for delivery to be valid
Title Assets: real estate, bank accounts, stocks, cars
Property / Res (Trusts)
Also called, corpus, or principal

Can be almost anything, but must be property that the settlor owns, NOT just expectancy of ownership in the future

It must be identified property, NOT subject to future determination
• Eg, not, "whatever money comes from sale of ..."
Trustee
Person given legal title by Settlor to manage money

Lifetime Trust
• Almost ANYONE can be named
o No court involvement is needed

Testamentary Trust
• Anyone EXCEPT:
o People under 18
o Judicially declared incompetents
o Convicted felons
o Those incapable because of drunkenness, dishonesty, want of understanding, or improvidence

Non-Resident Aliens CAN be trustee ONLY if a NY resident serves as co-fiduciary

Failure to name at trustee just results in court appointing one
• Trust will NEVER fail for lacking this
Beneficiary of a Trust
People who have equitable title to enjoy the distributions from the trust
o Can compel distributions if within the settlor's purpose of the trust

Must be definite and ascertainable - NO ambiguity
• If ambiguous, trustee holds in a resulting trust for the residuary beneficiary of a will (or intestate heirs in absence of a valid will)

Exception: beneficiary listed as someone's "family" or "next of kin"
o Court will consult the state's intestacy statute for the names of the persons who fit the descriptions in the trust

Must be human, with exceptions: pet, cemetery, charity
Intent Required to Create Trust
Must be intent to create the trust immediately, not at some future time
- Intention must be manifested when settlor actually owns the property

Settlor must intend to create an enforceable obligation
• Precatory (non-binding) language is NOT enough
• Just using the word "trust" does NOT show intent to create one
o Look at the ALL of the language AND ALL of the facts to determine intent

Trustee must be given duties to perform
• If not, it is called a Passive Trust (ie, no trust)
Passive Trust
Trust created giving Trustee no duties to perform

NOT a valid legal trust
Unlawful Purposes for Trusts
Can NOT have trust calling for
• Commission of a crime
• Destruction of property
• Condition against public policy
• Marriage Restrictions

-Will be deemed INVALID if restricting marriage or prompting divorce
-Trust IS ok if it gives income to spouse until she remarries
-Religion or ethnic group restrictions on marriages are VALID
Requirements for Valid Execution of Trust
Lifetime Trust: Must be in writing signed by both settlor AND trustee and EITHER
• Acknowledged by a notary public OR
• Signed by two witnesses
Revocable Lifetime/Inter-Vivos Trusts
Requires at least ONE beneficiary who is NOT the settlor

Settlor's possible roles
o A trustee
o An income beneficiary for life
o His estate can be ONE of the beneficiaries so long as there is another
o Can retain the power to terminate or amend the trust

Three reasons for revocable trusts
1) Way to manage assets efficiently - especially using a professional trustee
2) Helps plan for possible incapacity by avoiding guardianship proceeding in the future
3) Avoids probate
- No part of the principal of a trust goes through settlor's estate in probate

Reasons NOT to have revocable trust
o 1) does NOT avoid taxes
o 2) if a settlor keeps an income interest OR power to revoke, the full trust assets will be included in the settlor's gross income for federal tax purposes
Pour Over Gifts
Testamentary gifts to an existing revocable trust
o It avoids the formalities of a will, but still must be acknowledged by a notary OR executed by two witnesses
o Trusts can be changed during the lifetime of the settlor (often easier than changing a will)

Requirements
o Trust must be in existence; OR
o Executed before OR concurrently with the will

Notes
o NOT limited to trusts created by settlor
Can be to ANY existing trust, including those executed by OTHER persons
o VALID even if the trust was unfunded or partially funded during settlor's life

Life Insurance Trusts (or Pension Plans & Savings Accounts) can act as Pour Over Gifts
Life Insurance Trusts
Life Insurance Trusts (or Pension Plans & Savings Accounts) can act as Pour Over Gifts
o Can create a trust that a life insurance policy pays to (works as Pour Over Gifts)

Requirements
o Trust must be in existence; OR
o Executed before OR concurrently with the life insurance/pension plan or savings account

TWO ways an insured can make life insurance proceeds payable to a trust
1) Insured can create a unfunded revocable insurance trust and name trustee of the trust as the beneficiary
2) have the trust be a testamentary trust and have insurance policy name the "trustee named in my will" as the beneficiary
o Testamentary trustee must qualify within 18 months
Charitable Trusts
Requirements
1) Beneficiary (i) must be indefinite AND (ii) Must be a reasonably large group
• Can NOT have specific named beneficiaries
• Masses Exception: Trust for masses for your relatives
2) Trust MUST be for a charitable purpose
Health care, education, etc
- includes cemetery trusts

MAY be perpetual (not subject to RAP)

If stated purpose can no longer be accomplished for some reason or charity goes out of existence
o Cy Pres can be used to change the trust; OR
o Trust can be terminated and assets given outright to beneficiary ONLY IF
I) Market value of assets is less than $100,000 AND
II) Expense of administering is NOT economical

Attorney General has duty of representing beneficiaries of chartable trusts in the state
o He is an indispensible party to any suit on construction or enforcement
o AG AND donor (settlor) have standing to sue to enforce trusts' terms
Totten Trust
Not an actual trust (a bank account working like a trust)

A bank account in the depositor's name "as trustee for" a named beneficiary
o Eg, Account name: "Mary Smith as Trustee for John Smith"
o NO specific words are required to create a Totten Trust (eg, "ITF", meaning "In Trust For"-sufficient)

Ownership/Control of money
o Depositor makes deposits AND withdrawals as he/she wishes during depositor's lifetime
o Beneficiary has NO beneficial interest during depositor's life, but gets whatever is in the account when D dies

Revocation Methods
1) Withdraw all the money
2) Express Revocation (made during lifetime)
Requirements
• I) Make a writing naming the beneficiary AND the financial institution; AND
• II) Have revocation notarized and delivered to the bank
ANY missing element makes the revocation INVALID
3) Revocation in a Will
Must comply with same requirements for revocation during life (express revocation)
4) Death of Beneficiary
Money in account goes free and clear to the depositor
Beneficiary heirs get NOTHING

Changing beneficiary
o Can be made by depositor BUT must be done in the same way as an express revocation
Notarized statement sent to the financial institution, naming old beneficiary AND the new one

Creditors of the Depositor
o Can ALWAYS reach the totten trust account balance
EITHER before OR after the depositor's death
Joint Bank Accounts acting as a Trust
Multiple parties opening up a joint bank account with a Right of Survivorship
o "john and jane with right of survivorship"
o Joint bank accounts are NOT totten trusts
o If clear and convincing evidence shows that a survivorship account was NOT intended and account was opened ONLY as a matter of convenience to the depositor, then survivorship language can be set aside

After death of a JT, ALL the money goes to the other
o NO ONE can block the money from going to the survivor of the joint tenancy
• Each joint account owner owns 1/2 of the joint account
o Regardless of who deposits
o If one deposits more than half, excess is considered a gift to the account holder

Severing
o If money is taken out before death, the tenancy is severed and destroyed
If more than that person's share is taken out, then he owes the excess to the other joint tenant
• Even though he would have gotten it ALL if he waited until the other person died
Uniform Transfers to Minors Act
Not an actual trust (beneficiary holds legal title)

Three reasons to make a gift to a minor under UTMA
o 1) avoids a guardian proceeding
o 2) avoids a trust
And hence court's supervision (and associated costs)
o 3) qualifies for the $14,000 per donee annual exclusion from fed and state gift tax

Requirements
I) Gifts must be made to a custodian; AND
II) Must specify that it is made under the New York Uniform Transfers to Minors Act

Duties of Custodian
• Can hold, manage, and invest property under a Prudent Person standard
• Pays over to the minor, or for the minor's needs directly, a portion of property he deems advisable
• Pays what is left of the property to the minor when he turns 21 years old

Gifts can be made in a will, so long as same required statutory language is used

Tax consequences
o If donor names himself as custodian, then amount of the gift is included in gross estate
o If donor names someone else, then amount is NOT included
Powers of Attorney (Trusts)
Types
Springing: where power to act arises only on the happening of a specified future event
Special: limited to specific transactions
General: covering all legal acts on behalf of the principal

Survives disability of principal (durable) UNLESS it expressly provides otherwise
o Must account to the guardian if appointed
o Durable power DOES terminate on death of the principal

Gift by Agent to Himself
o Raises presumption of improper self-dealing
Can be overcome ONLY by clear showing of the principal's intent to gift
Honorary Trusts
Not an actual trust

Where no human is the beneficiary of a private (non-charitable) trust
o Asking person to care for property only as matter of honor

When a person attempts to will specified money for the care of property, it falls in Residuary estate
Residuary Estate
whatever remains in the probate estate after the payment of specifically designated gifts of items or cash
Pet Trusts
Exception to requirement of human beneficiary

Valid pet trust can last no longer than lifetime of the pet
Someone designated in the will or appointed by the court can enforce trust's purpose and make sure it is carried out
Cemetery Trust
Exception to requirement of human beneficiary

For perpetual care and maintenance of cemeteries and burial plots

• Classified as charitable and are OK even though no humans
o Allows them to avoid RAP
Constructive Trusts
Not a trust, but an equitable remedy
o Trustee has no active duties to perform
o Beneficiary holds legal and equitable title and can compel transfer of assets

Flexible equitable remedy designed to disgorge unjust enrichment resulting from wrongful conduct
Eg, parties maliciously interfering with someone signing new will to exclude them
Eg, person kills a another and the murderer is in the will of the victim or an heir in intestate
• Conviction of murder/manslaughter is conclusive - otherwise, proof is needed

o Trustee's ONLY duty is to convey property to person who should have it in equity
Property in question goes into a constructive trust and wrongdoers have title to it
Wrongdoers have a duty to transfer title to the property to the intended/equitable party

In addition to wrongdoing, also utilized for "Secret Trusts"
Secret Trusts
When a will makes an absolute gift to one named beneficiary, but it was intended as a trust for a different intended beneficiary with the one named as trustee
• Trust may be enforced to prevent unjust enrichment to person holding gift
• Promise of a trust may have been after execution of the will

Intended beneficiary must prove by clear and convincing evidence of the intent
• A constructive trust will be imposed on the named beneficiary
• Extrinsic evidence is used for proof
• Not barred by SoF
Resulting Trusts
Not a trust, but an equitable remedy
o Trustee has no active duties to perform
o Beneficiary holds legal and equitable title and can compel transfer of assets

o Creation by default
1) Imposed any time an express trust fails for ANY reason
2) When settlor made an incomplete disposition of the assets transferred in an express trust

Examples:
o Purchase Money Resulting Trust (PMRT)
o Semi-Secret Trust
Purchase Money Resulting Trust (PMRT)
Recognized in majority of states but NOT NEW YORK
• Still need to know it so you can show that NY is very rare in that

When a purchaser buys property and puts title in someone else's name (not a relative)
• Later, purchaser claims no gift was intended and asks title holder for title to the property and the title holder refuses
• Most states would find this situation to create a PMRT (Resulting Trust) which allows purchaser to compel the title holder to give up title

NY LAW:
• If there is clear and convincing evidence that the grantee had expressly or impliedly promised to reconvey the land to the purchaser, then a constructive trust CAN be imposed to benefit the purchaser
Semi-Secret Trust
A will makes a gift "in trust" without specifying beneficiaries
• NO trust is created

Resulting trust created for settlor's heirs or residuary legatees
• Because intent was a trust, the trustee does NOT get the property
Statutory Spendthrift Rule
Prohibits voluntary OR involuntary transfer of the beneficiary's interest
o Protects beneficiary's interest from creditors
If interest is not alienable by beneficiary, creditors can NOT reach it
Creditors can NOT get income money in trust UNTIL beneficiary gets money in hand
o NOTE: Revocable trusts have NO protection from creditors
Does not apply to any interest retained by Settlor (Self-Settled Trust Rule)

Creation
Typically by insertion of a spendthrift clause in the trust
"No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary's creditors by attachment, garnishment, or other legal process."

NY LAW: Automatically have one UNLESS you assert that you do NOT
Automatic application does NOT apply to principal
• To provide the protection to Remainder Beneficiary (who gets principal), clause MUST be expressly stated in the trust
Exception: If the annual income exceeds $10,000, do not automatically get this
• Income beneficiary CAN shift annual income to spouse, grandparent, or issue (heirs) of grandparent

Exceptions (Creditors who CAN reach the interest)
o 1) Creditors who furnish Necessities
o 2) Child Support and Alimony
o 3) Federal Tax Liens
o 4) Excess income beyond that needed for support and education (subjective analysis)
o 5) 10% Levy under CPLR §5205(e) (judgment creditors - all combined share the 10%)
Self-Settled Trust Rule
o Limitation on a spendthrift clause
o Clause does NOT apply to any interest retained by the settlor
Regardless if express spendthrift clause was in trust and extended to his income interest
o Settlors cannot hide out from their own creditors, but they CAN protect other beneficiaries
Trust Modification by Trustee and/or Beneficiary
Modification appropriate ONLY when the objectives of the trust would be defeated or substantially impaired if the trust is not modified
o Law designed NOT to impact settlor's original plan
o Claflin Doctrine: Purpose of the trust comes first, overriding ANY specific directions in the trust
o Interests of justice do NOT give grounds for modification

• Two Level Modification Test
1) Find out the primary intent of the settlor regarding trust purposes
2) Determine whether specific directions in the trust would now frustrate the primary intent due to changes in circumstances
If so, then those directions can be changed by the court

Court can authorize the invasion of the principal if the income is not enough to carry out settlor's purpose of the trust
Trust Termination by Settlor
All trusts are irrevocable AND unamendable UNLESS power to do so is expressly reserved in trust

Exception: Settlor can terminate if
I) No material purpose of the trust would be frustrated; AND
II) ALL beneficiaries in being consent

• Often impossible because no one can consent to this for a minor or incompetent
• Beneficiaries must be born alive to count
o Child in gestation is NOT regarded as a person

• If trust gives property to heirs or next of kin, that interest is NOT beneficial and NO consent is needed (cannot be ascertained until death)

NOTE: requires Settlor's participation
• Exception does NOT apply if Settlor is dead or it is a testamentary trust
Trustee's Powers
Controlled by New York Fiduciary Powers Act (FPA)

Trustees CAN
o Sell any real or personal property
o Mortgage property
o Lease property
o Make ordinary repairs
o Contest, compromise, or settle claims, OR
o Do almost ANYTHING needed to manage corpus of the trust

Trustees CANNOT (powers NOT granted by statute, thus deemed prohibited)
1) Borrow money on behalf of the trust

2) Continue a business
Liable for losses incurred by the business unless has court approval to continue

3) Engage in Self-Dealing
Specific Acts
• Trustee can NOT buy or sell trust assets to himself
• Trustee can NOT borrow from trust funds
• Trustee can NOT lend money to the trust
o Any interest earned must be returned
o Security given for the loan is invalid
• Trustee can NOT profit from serving as trustee
o Commission fees are OK, just cannot take advantage of confidential info (insider)
• Corporate Trustee can NOT buy its own stock as a trust investment

Indirect Self-Dealing
• Also applies to loans or sales to the relatives of the trustee, or business that trustee is officer/director/controlling SH

No Further Inquiry Rule
• Breach of fiduciary duty by engaging in self-dealing is an automatic wrong, NO further inquiry may be made
o Trustee loses and that's the end
o Good faith is NOT a defense
o Reasonableness is NOT a defense
New York Fiduciary Powers Act (FPA)
o Sets out powers that can be exercised by a trustee without
Court order OR
An express authorization in the trust
o Applies to trustees AND an executor/administrator of decedent's estate
Beneficiary has right to demand an accounting
• Trustees/administrator/executor owe him a fiduciary duty
• In reviewing, beneficiary can ratify OR challenge if a violation is found
o Generally trustee can do anything, barring some exceptions
Trustee's Duties
• Take possession of and preserve trust property

• NOT delegate fiduciary responsibilities
o Trustee MAY delegate investment and management functions using prudent person standard

• Make periodic accountings

• Exercise reasonable care and skill

• Segregate trust assets from personal assets
o If commingled funds are used to buy an asset and the asset goes up in value, it is assumed that trust funds were used
o If the asset goes down in value, presumption that personal funds were used
o Must earmark trust assets by titling them in name (John Doe Trustee, NOT "John Doe")

• Prevent breach by a co-trustee

• Make trust property productive
Trustee's Investment Power
MUST manage the property of the trust on behalf of the beneficiary
o Includes the investment of the corpus of the trust

New York adopted Uniform Prudent Investor Act (UPIA)
o Gives a broad latitude to trustees to choose investments (scrutiny of decisions not based on hindsight)
Trustee may delegate investment/management functions
• Prudent investor standard applied to the delegation and selection of the agent
• Must periodically review the agent's performance
o The key to the UPIA is flexibility to shape the investment strategy for maximum total return and to adjust income to beneficiaries to be fair to each of them
o Trustees can pursue the Modern Portfolio Theory of Investment where the trustee creates a custom-tailored investment strategy for the trust

Eight Factors (only need to know two)
• 1) trustee must consider the role each investment plays within the overall trust portfolio
• 2) Trustee must consider expected total return from income and capital gain

o Old law had each investment scrutinized for prudence; diversification difficult
Trustee's Prudence Assessment
o Trustee's prudence in investing/managing is NOT measured by hindsight
Court looks at the decision when it was made

o Trustee can exercise adjustment power and allocate capital gains to income
Does not have to roll over into principal
End goal is fairness to all beneficiaries
Remedies for Beneficiary Against Trustee
Specific Remedies available against a Trustee's Breach of Trust
o 1) Beneficiary can sue to remove the trustee
o 2) Beneficiary can ratify the transaction and waive the breech
o 3) Beneficiary can sue for any losses
An action to recover losses to the trust is called Surcharge
Violation of any duty or improper exercise of power creates automatic liability
• Negligence does NOT need to be shown
• Innocence/good faith are NOT defenses
• Settlor has NO actions

No Further Inquiry Rule
o Breach of fiduciary duty by engaging in self-dealing is an automatic wrong, NO further inquiry made
Trustee loses and that's the end
Good faith is NOT a defense
Reasonableness is NOT a defense

Exculpatory Clauses
o Shields trustees from some liability
o Can NOT be used to shield for breach of fiduciary duty for testamentary trust
It CAN be used in lifetime/inter vivos trust

Actions against Third Party
o If trustee engages in a prohibited transaction and sells trust property to a third party, beneficiary can NOT sue the purchaser if they were a BFP for value, without notice
Notice includes:
• I) the fact that she was dealing with a trustee AND
• II) that trustee was engaged in self-dealing
Surcharge (Trusts)
An action by a beneficiary to recover losses resulting from Trustee's actions
No Further Inquiry Rule (Trusts)
o Breach of fiduciary duty by engaging in self-dealing is an automatic wrong, NO further inquiry made
Trustee loses and that's the end
Good faith is NOT a defense
Reasonableness is NOT a defense
Trustee Personal Liability in Contracts
Everything turns on how the trustee signed the contract
o If trustee signed on behalf of the trust - NOT personally liable
o If trustee signed personally (no mention of trust) - personally LIABLE
If signed "John Doe, Trustee of the Trust" there IS liability
• Merely stating a title, not that they're signing that way

Reimbursement
o Trustee will be reimbursed for personal liability by the trust IF:
I) contract was within the powers of the trustee; AND
II) trustee was acting in the course of proper administration of the trust
Trustee Personal Liability in Torts
Personally liable for ALL torts by the trustee OR his employees
o Should buy liability insurance and charge cost to trust - admin expense

Reimbursement
o Trustee will be reimbursed for personal liability by the trust IF:
I) he was acting within the powers of the trustee; AND
II) trustee was NOT at fault
Rule Against Perpetuities (Trusts)
Interest is vested when there is no condition that has to be satisfied and the exact identity of the taker is known

Any interest is void if it suspends the power of alienation for period longer than life in being + 21
o When there are no persons who could, together, transfer fee simple title

Suspension of alienation is a concern when either
o 1) spendthrift income interests are in the trust prohibiting transfer OR
o 2) a life estate is created in an unborn person or an open class that might include one

NY defaults to spendthrift
Look for contingent remainder for life
Unborn people cannot agree to alienate their property

NY LAW: reduces all age contingencies to 21 if over
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