TRUSTS OUTLINE 1. 1 Copyright 2009 Daniel Wilson. Revised This material is drawn from numerous commercial

Transcription

1 TRUSTS OUTLINE 1 1) A Trust is a fiduciary relationship in which a trustee holds legal title to property under a fiduciary duty to safeguard trust assets and income for beneficiaries. Beneficiary has equitable title. A) Express trust--expressed intent of settlor to create a trust i) Express trust can be private or charitable B) Resulting trust--arise from presumed intent of settlor. C) Constructive trust--not a trust, but rather a remedy. (Remember, constructive means not.) 2) EXPRESS PRIVATE TRUSTS A) Terminology i) Trustee holds legal title ii) res is the trust property iii) beneficiary has equitable title iv) trust must have valid trust purpose v) testator or grantor is the settlor vi) no consideration is required B) Intention to create a trust i) Intention can be manifested by words, conduct or writing. Unless trust falls within the SOF an oral trust is valid. ii) Delivery of a deed to real property, along with some expression of intent to create a trust such as communication to the trustee, is sufficient to show intent. iii) Intent to create a trust must be manifested when settlor owns property. That means grantor cannot create a trust after conveyance. iv) Settlor must intend trust to take effect immediately. Expression of intent to create a trust in the future does not create a trust. (a) Trust may consist of a future interest. (b) A promise to create a trust supported by consideration creates a trust when the property is acquired without further manifestation of intent. v) Precatory expressions do not create a trust. (a) Trusts often express a purpose for the trust. When the settlor merely expresses a desire that the property be used for a specific purpose no trust was intended. (a) Example: "to Fred with the hope that Fred will use the property for the support of Wilma" does not create a trust. (b) The inference of no trust can be overcome by (i) definite directions (ii) directions addressed to a fiduciary (iii) failure to impose trust would result in unnatural disposition 1 Copyright 2009 Daniel Wilson. Revised This material is drawn from numerous commercial outlines and analysis of Trusts essay questions released by the Colorado bar examiners and the National Conference of Bar Examiners. Permission is freely given to use this material to prepare for the Colorado bar exam. 1

2 (iv) extrinsic evidence vi) Trust can be testamentary or inter vivos. C) Trustee i) Trustee is essential. In event of trustee's death, incapacity, resignation or removal, an alternate trustee will be appointed. ii) Trustee must have duties. If the trustee has no duties, the trust will fail and the beneficiaries will take immediate title. This requirement seems to be very broadly interpreted, so a court will find existence of a trust if there is a res, intention to create trust and an identified bene. iii) Qualifications of trustee (a) Anyone who has capacity to acquire or hold title has capacity to be a trustee. Minors or insane people cannot be trustees. iv) Removal or denial of confirmation of trustee. (a) breach of trust (b) incapacity (c) unfitness--drunkenness, crime of dishonesty, absence from state, extreme old age (d) refusal to post bond or account (e) conflict of interest (f) trustee's insolvency (g) extreme friction or hostility between trustee and bene, if it impairs proper administration (h) Absent one of these grounds, bene cannot compel removal. v) Disclaimer. Trustee can refuse to serve. vi) Resignation. Trustee cannot resign without permission of court, unless so provided by the terms of the trust or all the benes agree. vii) Merger. When one person is the trustee and the bene, interests merge, trust is defeated and terminated, trustee/bene holds legal title. D) TRUST PROPERTY i) Trust must have res. ii) Res may be property of any type--personal, tangible or intangible, legal or equitable, present or future, vested or contingent. iii) Must be a present interest--(but a future interest in possession of real property is a present ownership interest.) iv) Settlor must have present power to convey. v) Res must be identifiable. E) BENEFICIARIES i) A beneficiary must be identified because there has to be someone to enforce the trust. A wrinkle here is something called an honorary trust, such as a trust to support pets. But current law recognizes such a trust through the fiction that the trust is for the benefit of the trustee in order to support the pets. Another wrinkle is a charitable trust, but they can be enforced by the AG of the state. ii) If a trust fails because lack of beneficiary a resulting trust results in the settlor. 2

3 iii) Any person, real or artificial can be bene. Unincorporated association cannot be a bene. iv) Notice to bene is not essential, although that may be evidence that intent to create a trust was lacking. v) Trust must be accepted by bene. Acceptance is presumed. Bene may renounce. vi) Benes must be ascertainable at time their interests are to come into enjoyment... Thus, an unborn bene is acceptable so long as they are identifiable when the trust benefits come into enjoyment. (a) Class benes are OK if sufficiently definite. vii) Charitable trusts do not have to have definite benes. F) TRUST PURPOSES. Trust is invalid if: i) illegal purpose (a) involves criminal or tortious act ii) contrary to public policy (a) Contrary to public policy if purpose of trust is to: (a) induce others to engage in criminal or tortious acts (b) encourage immorality (c) induce a person to neglect parental, family, or civic duties. iii) invalid condition (a) alternative provision by settlor (b) condition is invalidated (c) intent of settlor will control G) CREATION OF EXPRESS TRUSTS i) Inter vivos trusts (a) Inter vivos trust can be created by settlor declaring he is holding property in trust (b) No delivery required. (c) Inter vivos trust (living trust) created by transfer during settlor's life (d) Delivery required. An act that places the res out of the settlor's control. (e) Statute of Frauds. Does not apply to trust of personal property, does apply to interest in land. ii) testamentary trusts (a) Applicable statute of wills (ex: Uniform Probate Code) must be satisfied. Essential terms of trust must be ascertained from (a) terms of will (b) a writing incorporated by reference. Writing must be in existence at time of execution of will. (c) facts with an independent significance (ex: an already existing trust) (d) exercise of power of appointment iii) secret trust (a) Problem arises when a will makes a gift absolute on its face, with a promise by the beneficiary of the gift to hold it in trust for a third party. If bene refuses to treat gift as trust a court will impose 3

4 constructive trust to prevent unjust enrichment. Extrinsic evidence must prove by clear and convincing standard. (b) Promise may be made at time of execution of will or after, but not by post death instruction. iv) semi-secret trust. No named bene--no trust. Trustee holds as a resulting trust for testator's heirs. 3) CHARITABLE TRUSTS A) Charitable trusts must have a charitable purpose, one which benefits the public. i) Examples: (a) Trust for disseminating a particular political viewpoint is OK, trust benefiting particular party not OK. (b) Trust that benefits community is OK even if it benefits persons who do not need the help. Ex: trust to benefit widows of police officers OK even if some widows are wealthy. (c) Trust that requires matching funds OK. ii) Very general terms such as "charitable" or "humanitarian: is OK. iii) Effect controls, not motive. iv) If trust is mixed, i.e., both charitable and noncharitable, not a charitable trust. May be divided into two trusts. B) Beneficiaries must be indefinite. C) Enforcement i) Settlor and potential benes have no standing to enforce. ii) AG has standing to enforce. D) RAP i) RAP does not apply ii) Charity to charity exception--rap does not apply when transfer is charity to charity even if transfer happens on occurrence of a distant event. iii) Exception does not apply to transfer from charity to private use or private use to charity. Offending gift is stricken. E) Cy Pres i) If specific charitable purpose is accomplished or becomes impractical doctrine allows reformation of trust to a similar charitable purpose. ii) Court must determine if settlor would have preferred transfer or conversion of trust to private use. 4) HONORAY TRUSTS A) For maintenance of cemetery plot or support of pets. If trustee is willing to perform the trust will be honored. Otherwise resulting trust will be imposed for benefit of settlor. B) Potential RAP problems avoided by holding trust is personal to trustee or that trust res will be exhausted within 21 years. 5) BENEFICIARIES A) Alienability of bene's interests (a) Bene can transfer his interest. ii) Creditors of bene can reach distributions but not res. 4

5 iii) Spendthrift trust. By terms of the trust instrument bene is unable to voluntarily or voluntary transfer his interest in the trust. (a) Creditors can reach the distribution. (b) A restraint on involuntary transfer but not voluntary transfer is void as against public policy. (c) If bene voluntarily assigns his interest in distribution, that acts as an authorization to the trustee to pay distribution to third party but bene can cancel at any time and third party cannot compel trustee to pay income to third party. (d) Settlor cannot create a spendthrift trust in himself. If a person furnishes consideration for the trust he is the settlor even if the other party establishes the trust. (e) Bene's interests are subject to claims of dependants, the government, and persons supplying necessaries. E.g., taxes, divorce. Minority rule: Tort creditors. (f) Discretionary trust. Trustee is given discretion whether to distribute income or principal to bene. (g) Before trustee exercises his discretion bene's interest is not assignable and cannot be reached by creditors. (h) If trustee does exercise his discretion and he has notice of an assignment or an attachment trustee must pay to assignee or creditor. (i) If bene is settlor creditors and assignees can probably reach the interest. (j) Bene cannot interfere with trustee's discretion unless trustee abuses his power. If the trust is a support trust bene can force trustee to distribute to the extent reasonably necessary for support. Even if not a support trust trustee must act in good faith and with honesty. iv) Support Trust. A trustee is required to pay or apply only so much of the income or principal as is necessary for support of bene. (a) A trust to "pay all income to bene for support" is not a support trust. (b) Bene's interest in support trust is not assignable or attachable. (c) Whether bene is entitled to distribution even if he has other support resources is dependant on intent of settlor. B) MODIFICATION AND TERMINATION i) Power of settlor to revoke or modify. Unless trust instrument expressly reserves power to revoke or modify settlor may not do so. ii) Modification or termination by benes only if: (a) All benes agree and will not interfere with a material purpose of the trust. (a) Material purpose examples: (i) Trust gives income to bene until age 30, then distributes remainder. Material purpose is to keep principal out of hands of bene. (ii) Preserve property for remainderman. 5

6 (b) If all benes agree to terminate trust and distribute res trustee will have no liability. (c) Settlor of inter vivos trust cannot stop termination of trust iii) Trust will terminate under its own terms or when purposes of trust have been established. iv) Judicial termination (a) purposes are accomplished early or purposes become illegal or impossible (b) Changed circumstances. If compliance with terms would defeat purposes of trust due to changed circumstances not foreseen by settlor, administrative terms may be modified, but cannot change beneficial rights of benes. 6) TRUST ADMINISTRATION A) Powers of the trustee i) Trustee has powers conferred on him by the trust instrument and necessary or appropriate to carry out purposes of trust. ii) if there are two trustees, all powers must be exercised jointly. If there are more than two a majority may exercise powers. iii) Powers of trustee are usually not personal to a particular trustee but rather to the office. iv) Power is imperative if terms of instrument require performance of a particular act. v) Most trustee powers are discretionary. Exercise of such powers are subject to review of court to prevent abuse of power. If trustee is exercising power involving business judgment court will generally refuse to intervene. vi) Absolute discretion. But trustee still must not abuse discretion or act unreasonably. B) Implied powers i) If instrument neither confers nor withholds power of sale trustee has power. If instrument directs trustee not to sell he may not do so. ii) Trustee has power to incur reasonable expenses, necessary and proper. iii) Power to lease. iv) Power to make improvements on trust property probably OK. v) No implied power to borrow or mortgage trust property. C) Duties of trustee i) Trustee held to exercise the degree of care, skill and caution that would be exercised by a reasonably prudent person. ii) Trustee owes duty of undivided loyalty which means no self-dealing. (a) Cannot buy or sell trust assets (b) Cannot sell assets from one trust to another (c) Cannot borrow trust funds or make loans to trust. (d) Cannot use trust asset to secure personal loan. (e) Cannot personally gain through position as trustee. (f) Generally cannot employ self. 6

7 (g) Self-dealing rules apply to relatives or business associates. (h) Duty to account. (i) Good faith by trustee is irrelevant. (j) Bene can set aside a self-dealing transactions, recover any profits, or may ratify. (k) Restrictions on self-dealing can be waived by settlor. iii) Trustee has duty not to commingle funds. If commingled property is partially destroyed or lost it is assumed that the destroyed or lost portion belonged to trustee, not trust. If commingled property increases in value increase is attributed to trust funds. iv) Prohibition on delegation of trust duties. (a) Investment and management decisions may not be delegated. v) Duty to defend trust. vi) Duty to protect trust property and make it productive. Trustee must exercise reasonable care to: (a) collect all claims due trust (b) lease land or manage it so it is productive, or sell it. (c) record recordable documents and provide for insurance. (d) Invest trust funds within a reasonable time after receipt. D) Investments. Trustee is required to invest trust funds to achieve a reasonable return. Majority rule is the Uniform Prudent Investor Act. i) A trustee must invest and manage trust assets as a prudent investor would, taking into account the purposes, terms, distribution requirements and other circumstances of the trust. The trustee must exercise reasonable skill, care and caution. ii) Trustee with special skill held to higher standard. iii) Trustee must tailor an investment strategy that incorporates risk and return objectives suited to the particular trust. iv) Trustee's decisions are evaluated at the time of decision making, not in hindsight. v) Trustee may delegate investment and management functions that a prudent trustee of comparable skills could delegate under the circumstances. E) Liabilities of trustee i) Beneficiaries may seek to surcharge or dismiss trustee for violation of fiduciary duties. ii) Exculpatory clause that purport to relieve trustee of all liability is void as against public policy. Limited exculpatory clause OK unless they relieve trustee from liability for bad faith, intentional breach of trust or recklessness. iii) Trustee generally personally liable for breach of contract. F) Liability of third parties i) Purchaser in good faith is protected. Purchaser who is not bona fide purchaser not protected. ii) Innocent donee not liable for damages but must restore property to trust. 7

8 iii) Generally, trustee must pursue cause of action. Benes have cause of action against trustee. Benes have cause of action against third party if trustee participated in breach, trustee fails to sue, or trustee abandons his office. 7) WILL SUBSTITUTES A) Revocable inter vivos trusts i) Settlor establishes a trust during his lifetime (inter vivos) instead of leaving a gift in a will to the bene. Does not pass by probate because the bene receives a benefit during settlor's life. If the settlor transfers property to another with the usual trustee powers there is no problem as to its validity. This is so even if the settlor retains administrative and investment control over the trustee. Questions arise when the settlor settles the trust in his own name on the theory that no interest has passed to the bene. However, this sort of trust is upheld if the trustee notified third parties of the trust or took some action that makes clear his intention to create a trust. ii) Advantages of rivt. Avoidance of probate; secrecy; iii) But will not defeat surviving spouse elective share of augmented estate. iv) Pour-over trust. Settlor establishes trust inter vivos with will providing that testator's assets will pour over to trust on his death. (a) Trust must be in existence before execution of will or created at time of execution. (b) OK if trust is amendable or revocable. (c) Valid even if trust unfunded during settlor's lifetime. B) Life insurance trusts i) Insured assigns policy to trustee to hold in trust for bene. ii) Contingent bene trust. Insured designates wife as bene, but if wife does not survive insured to trustee for benefit of benes. C) Totten trusts i) Bank account in depositor's name in trust for benes. D) Uniform transfers to minors act i) Allows appointment of custodian for benefit of minor. Custodian is not a trustee. Legal title is in the minor. 8