A trust is a device for managing property. Its an arrangement for making gifts and the management of assets by a trustee who holds legal title for the benefit of the beneficiary who holds equitable title. A trust has bifurcated title held in a fiduciary relationship that imposes legal obligations upon the trustee. Unlike in a contract consideration is not a requirement for a trust. At common law a testator used a will to distribute property. Modernly settlors choose to put their assets in a trust because unlike a will, a trust is not a public matter and there are no probate costs.
The key concept is creation of a fiduciary relationship that separates ownership into two parts. Legal title held by the trustee with management duties and equitable title in the beneficiary who can enforce those duties.
Reasons for creating a trust.
- Providing asset management for disabled persons or minors.
- Avoiding probate.
- Saving estate taxes.
Types of title
Bifurcated. Divided title held by the trustee and the beneficiary.
Equitable. Held by the beneficiary.
Parties to trust
1) Settlor/Trustor is the person who creates the trust and delivers the res, corpus or property of the trust to the trustee. They must have the intent to create a trust and it must be for a lawful purpose.
2) Trustee the person that holds a bifurcated title shared with the beneficiary, having the duty to administer decisions affecting the trust for benefit of the beneficiary.
- No self-dealing.
- No conflict of interest.
- No commingling.
- Duty of loyalty and care.
- Duty not to delegate to 3rd party.
- Duty to diversify.
3) Beneficiary is the party holding equitable title to a trust and benefits by receiving payments or some other type of property from it.
- A. Creation of an express private trust.
1) Intent. Did the settlor intend to create a trust? The settlor must have intent to create the trust in the present. If a trust is created in the will, the intent is at death. There are two ways intent to create a trust can be shown.
- Intervivos. Settlor transfers title to property during their lifetime. Often referred to as a living trust.
An intervivos trust is created outside of a will, standing on its own. It must be created with present intent to form a trust.
Example: I, Albert Halsey create a trust for the benefit of my grandchild, 100,000 for piano lessons as long as they need it to become a proficient pianist. Here, during his lifetime, AH has the intent to transfer property for the benefit of his grandchild.
Declaration. A trust can be created by declaration where the settlor and trustee are the same.
Example: AH declares100 shares of GM stock for B in trust.
If settlor and trustee are the same, delivery of the property is not required because one is not required to deliver property to them. Delivery is required when the trustee is a third-person.
- Testamentary trust. A trust created inside a will. The person who creates a testamentary trust is a testator.
Unlike an intervivos trust, delivery is not required. The intent to create a trust is created at the time of death. Therefore, the trust is created at the time of death.
Wills Doctrine applied in a testamentary trust setting
1) Independent significance Allows a testator to change the disposition of property in a will without changing their will.
Example: Joe leaves the contents of his bank account “to my employees”. If he then fires some of his old employees and hires new ones, the new employees will inherit the contents of the bank account under this provision.
2) Incorporation by reference To include language from another document that exists into a will.
Mandatory v. Precatory Language Poorly drafted documents may not make clear whether the settlor intended to impose duties on a particular beneficiary, or only expressed a desire that the beneficiary behave in a certain way. The result will depend upon whether a court finds the language regarding the children to be mandatory (a trust) or precatory (no obligation). Cases like these tend to be resolved very much on their own facts. See, e.g., In re Estate of Martin, 300 N.Y.2d (“request” was mandatory); Brannon v. Morgan, 106 S.W.2d 841 (“request” was precatory). The lesson is for the settlor to be specific in their intent. If a trust is intended, say so. If not, use language such as “I hope, but I impose no obligation.”
Precatory words. Words such as hope, wish, request or desire rather may be interpreted by the courts as a mere suggestion. A mere suggestion falls short of a showing of intent. If precatory words are on an exam, one must argue as to whether the settlor intended to create a trust or not. Determine that even though these words were used, a trust was created. Suggestive words however, are usually non-binding.
Example: A believes they are going to die. A has a 90-year-old Aunt they want to take care of. A writes a will that says, “I leave 100,000 to my daughter Betty to use as much money that she thinks best for Aunt so long as she lives. I hope you will take care of Aunt as long as she lives.”
Was a trust created for the benefit of Aunt where A used the word hope? Aunt will argue that A was in the hospital, believed they were going to die and had the present intent to create a trust for her benefit. Daughter will argue that hope is a mere suggestion and therefore her father lacked the requisite intent to create a trust and as a result, no trust was created and Aunt gets nothing.
Modernly a presumption exists against intent if certain words like hope, desire and request are used. A rebuttable presumption is that no trust was created. An argument such as prior relationship, definite language addressed to an executor or some facts showing the settlor intended to create a trust even though they used the wrong words. End this issue with; “If the court finds an intent to create a trust for the benefit of Aunt” proceed to element number two, which is proper purpose.
2) Proper purpose. If the condition violates public policy, or is for an illegal purpose such as fraud, argue to sever the trust provision and save the trust if possible.
Example: Settlor doesn’t hold legal title.
Example: A trust to create a fraud on creditors.
If there is a condition precedent attached to the trust that violates public policy. Argue for severance to allow the trust to stand.
Example: A trust that encourages a divorce. “I leave 100k for Phil if he divorces his wife before the age of 40.
Example: I leave 100k for Phil provided that by the age of 50 he’s still married to his wife.
This condition promotes the sanctity of marriage and would therefore be valid.
3) Res/corpus. Requires a trustee to have property to manage, there must be an existing property rather than a mere expectancy. A gratuitous promise is insufficient to create a res. The res must be identifiable and delivered if the trustee is a third person. If there is lack of delivery a trust has not been created.
- Actual delivery. Giving the chattel itself.
- Symbolic delivery. A bankbook symbol of money held in a bank.
- Constructive delivery. Delivery to an agent of the trustee. “A leaves 100k in stock to daughter in trust for Tom to hold.” However, Tom is out of the country and cannot take delivery. Tom’s agent may take delivery and hold the stock until Tom returns.
4) Trustee. The party having legal title to trust property, to hold for the benefit of the beneficiary. A trust will not fail if settlor fails to name a trustee, the court may name a trustee. Trustee must manage and invest the property. Trustee may not resign, unless they resign before they accept their duties as the trustee. A financial institution may be a trustee.
A trustee can also be a beneficiary.
Example: “A gives 100k to B for B’s own benefit.” If a sole trustee is the sole beneficiary, the interest merges and takes the property outright. Merger cannot take place where there is more than one trustee.
Can a trustee resign? They may resign before accepting the duty as a trustee. However, they would be held liable for all losses as a result of their resignation, after accepting duties as trustee. After accepting the duties as a trustee resignation would be void.
A trustee that injures the trust violates their fiduciary duty to the beneficiary who may have the court issue an injunction to remove the trustee from the trust. The courts must protect the trust to effectuate the settlor’s intent and will remove the trustee to do so.
Power of Appointment A right given in a written instrument such as a will or trust, allowing the trustee to decide who and how to distribute testator’s property.
Example: If a donor grants their attorney a general power of appointment over furniture, the attorney will then be able to distribute the property to anyone, including the donor and the donor’s creditors. If the recipient of the power refuses to distribute any property, then the designated property will pass to the donor’s residuary estate or if none has been established, by intestacy. The donor may avoid this by including a default provision directing the property to someone else if the recipient of the power refuses to exercise it.
5) Beneficiary. A beneficiary must be ascertainable or become ascertainable when their interest matures. Includes minors/incompetents.
If there is no beneficiary the trust fails and reverts back to settlor, or if the settlor is dead to their heirs.
Example: Income beneficiary to B for life and remainder to C. C dies prior to B. When B dies the income reverts back to settlor’s heirs.
Exception. Charitable trusts.
Acceptance is generally implied unless the beneficiary expressly rejects.
Example: Trust land burden with heavy mortgage and taxes.
A settlor can also be a beneficiary as long as they part with some interest in the property in favor of other beneficiaries. An issue that arises here is with creditors. A self-settled trust does not protect the creator from creditors.
Power of appointment to be valid the class must be sufficiently definite.
Example: A tells bank to distribute 100k to my friends or other persons as the bank selects. This class is too indefinite therefore the trust may fail for lack of beneficiaries. The assets would revert back to the settlor’s estate.
Example: I give 100k to my brother and sister. This would be more definite and that power of appointment would be given to the trustee and effectuate the settlor’s intent and therefore be valid.
Class Gifts are valid as long as they are definite. “To my family.” Children, issue, heirs, next of kin. Friends or cousins may be too vague, and class gift will fail.
Rule of convenience involving class gifts. The more definite the class is the more likely a court would find the class gift valid.
Example: “To my family” would be a definite class, including children, issues, next of kin provided they are describe with reasonable certainty and definite. Cousins, relatives and friends would be too vague and the class gift would fail. Modernly the courts might interpret relatives as next of kin.
Trustee discretion. If the trustee has the power to name anybody he desires, that would fail and end up a gift or interpreted as a power of appointment to the trustee.
Rule of convenience. For a class gift to be valid the class must close, meaning there must be time for distribution.
Example: To my children who have reached the age of 21. Settlor has three children 4, 6, 21. The class closes. The gift is valid.
Intent. Precatory words.
Rule against perpetuities.
Power of appointment.
Rule of convenience involving class gifts.
- B. Type of trusts. Once a trust is created it must be in a particular category.
1) Pour over trust An intervivos trust exists. Subsequently the settlor writes a will that pours over other assets into the pre-existing trust.
UTAT statutes validate a pour over trust as valid as long as the trust is significantly described in the will.
2) Secret trust An agreement outside of a will to distribute property in a certain manner. Secret trusts arise where property is left to a person under a will on the understanding trustee will hold property for the benefit of beneficiaries who are not named in the will. Secret trusts are divided into two types:
- Secret trusts, where the will is totally silent as to the existence of a trust. The intended beneficiary can bring inextrinisc/parol evidence to show the secret trust exists.
Here, a constructive trust would be created to prevent the trustee form becoming unjustly enriched.
Example: Brother to share 10k with sister. Sister may say she relied on the secret trust, where the testator made an oral promise to the brother, even though she was not named in the will.
- Semi secret trusts where the will provides the trustee is to hold the property, but does not specify the beneficiary or the terms under the trust. Secret trusts are a historical anachronism/relic arising because wills are public documents after they have been admitted to probate, and where the testator wishes to leave property to a mistress or an illegitimate child without causing pain or embarrassment to his family.
The majority rule is where there is a semi secret trust a resulting trust is imposed in favor of the testator’s heirs. Here, there is no unjust enrichment problem.
Example: A’s stock to be distributed by B as we have agreed.
3) Spendthrift trusts benefit an individual who is financially irresponsible prohibiting transfer of assets directly to the beneficiary or beneficiary’s creditors. The settlor may establish limitations on use of money to pay debts, or provide for direct payment to creditors, completely bypassing the beneficiary. Creditors may not invade the trust when it is in the trust to satisfy debts of the beneficiary absent being a special creditor. Special creditors such as taxes, tort creditors, alimony, child support creditors can reach assets in a trust. Tort, alimony, child support may reach the trust in some jurisdiction. Public policy: Settlor cannot be the beneficiary in a spendthrift trust to defraud creditors.
4) Support trusts provide for the beneficiary’s support. The trustee provides for food, clothing, shelter etc. Creditors cannot reach the assets when it is in the hands of the trustee. Creditors may attach if the amount exceeds the amount of support necessary or if the debt is related to the support of the beneficiary.
Example: A has an elderly brother and doesn’t want to leave all his assets with him, in fear he will spend it all so A leaves brother 10k a month for support so long as he lives.
Inflation or winning the lottery one might argue the support needs to be raised or decreased.
5) Discretionary trust The settlor gives the trustee discretion to apply or withhold payments to the beneficiary and arise as express trusts only. The settlor cannot be the beneficiary as in a spendthrift trust.
6) Charitable trust. A trust that is intended to benefit the community. Exempt from taxes. Beneficiaries must be indefinite. The charitable purpose must be specific. Example: Advance education, the arts, eliminate poverty, promote health, scholarships, etc. If a charitable trust cannot be found, due to impossibility to perform, the settlor’s heirs will argue the purpose of the trust fails and all the assets in the trust should revert back to the settlor or their heirs. The charity will argue the Cy Pres Doctrine, and ask the court to modify the terms of the trust to as near as possible to effectuate the settlor’s intent. The more generic the trust is the more the courts will allow a charitable modification. But, if the purpose is specific then it would be hard to apply Cy Pres and defeat the settlor’s intent.
Example: A leaves money to build a public library. A dies before delivery, and there was not enough funds to build the library. The purpose of the trust cannot be effectuated. Therefore the trust fails and the money reverts back to the settlor’s estate. The charity will ask the court to effectuate the settlor’s intent, such as use the money to build a park.
7) Honorary trust. A trust set up for a specific noncharitable purpose where there is no definite ascertainable beneficiary. Trusts for the erection of monuments, care of graves, or specific animals, such as a cat, dog or horse. Honorary trusts are for the benefit of specific animals differing from charitable trusts that are set up for the care of animals in general. The trustee is on their honor to carry out the terms of the trust. If the trustee does not carry out the terms of the trust the property reverts back to the heirs.
8) Operation of law. A trust that does not arise by the parties, where the courts step in to prevent fraud, unjust enrichment or where the trustee acts inconsistent with the beneficiary’s interest.
- Resulting trust. A failure of an express private trust where one of the elements of creation is lacking, a court will determine the intent of the settlor to create a trust to prevent unjust enrichment or fraud.
- Purchase money resulting trust. One person provides consideration for the purpose of purchasing property but title is taken in the name of another person.
Example: A purchases land but title goes to B. A and B are not related. A brings a suit for a resulting trust contending that they did not intend to give a gift to B and wants the property to revert back. B may rebut by using parol evidence that A intended the property as a gift to B, or that A owed a debt to B. Oral trusts involving real property raises a statute of frauds issue.
- Constructive trust. A trust created by a court, regardless of the intent of the parties to benefit a party that has been wrongfully deprived of its rights. Where a trustee has been unjustly enriched or acted inconsistent with the beneficiary’s interest a court may form a constructive trust.
- C. Trust supervision. The focus here is to scrutinize the conduct of the trustee, the individual who has the authority to manage the trust as to whether they acted properly in handling the trust. Trustees have certain obligations regarding managing the trust supervision. If they make mistakes, or cause losses to the trust they may be liable because it affects the rights of the beneficiaries. There may be third-party liability where a trustee turns property over to a third-party as well.
1) Authority of the trustee to act.
- Express authority. Did the trust expressly give authority to the trustee?
- Implied authority are the powers necessary to effectuate the purpose of the trust.
Example: Invest or pay expenses.
- Joint trustees require unanimous agreement in a private trust.
- Charitable trusts required majority agreement.
- Due care. The prudent investor rule obligates the trustee to act with a degree of care, skill and prudence of a reasonably prudent person in managing an enterprise of like character to accomplish the express purpose of the trust. If the trustee acted with express authority they can argue they acted with a standard of care. If they acted with no authority there is a breach regardless of the prudence involved.
Not every investment is a good investment. Stocks go up and down. Real estate goes up and down. The question is would a prudent person have made that same investment had it been there own money. A new stock is a speculative investment and a prudent person probably would not make that particular investment.
- Duty of loyalty. No conflict of interests or self-dealing. The number one duty is to act for the benefit of the beneficiary. Any time a trustee acts they must act for the benefit of the trust. A trustee cannot use beneficiary assets for their own benefit. Strict liability exists for all losses to the trust. A beneficiary may set aside a transaction that harms a trust. They can recover profits to prevent unjust enrichment. If the trustee is a lawyer, they may perform legal services for the trust and be paid in the capacity of a lawyer without violating their duty to not self-deal.
- Preserve trust assets. A trustee must act with good faith. Diversify. If stocks starts to steadily decline the trustee must sell it. A prudent person would not fail to diversify the portfolio of a trust.
- Prohibit comingling of trust funds. A trustee must separate trust assets from personal assets.
- Personal performance. A trustee may only delegate administerial duties but not discretionary acts or powers. The trustee must exercise general supervision of the person’s performance. If the trustee negligently hires an account or somebody that harms the trustee, the trustee is held accountable and remains the guarantor for all losses to the trust.
- Legally defend the trust arises where the trust suffers a loss.
3) Liability for harming the beneficiary’s interest.
- Third party liability. Where a trustee transfers assets to a third person. Can the beneficiary sue the third person? Depends on whether the third party had notice.
Example: A trustee owes a third party creditor money and reaches into the trust and pays off their personal debts. Can the beneficiary bring action against the third party creditor?
Depends on whether the third party is a bonafide purchaser without notice, a guilty participant who has knowledge, or an innocent donee who will be required to return the property back to the trust to prevent unjust enrichment but will not be culpable.
Third party liability. If the trustee brings action but has unclean hands, or unethical conduct in relation to their action with the third party, the beneficiary can step in the shoes of the trustee and bring suit.
- Contracts. Liable unless a clause states otherwise.
- Breach of contract.
Example: Trustee allows an apartment building to fall in disrepair and someone enters the property and is injured. The trustee would argue the tort occurred during the supervision of the trust therefore the trust is liable. Is there personal liability to the trustee for torts committed within the scope of the trust supervision, including acts of the agents of the trustee. Yes. But, indemnity is permitted (shifting liability to the trust) where the trustee is not personally at fault or the tort occurs within the normal risk inherent in the activity.
If the trustee is entitled to reimbursement then tort creditors can reach trust assets to satisfy their claim. However, the beneficiary will argue that the trustee is liable.
- Remedies when the trustee violates their obligations.
- If a trustee resigns they are liable for all future losses.
- Remedies of beneficiary against the trustee.
- Sue for damages to loss of the trust.
- Injunction to remove the trustee for misconduct.
- If the trustee is unjustly enriched they can get a constructive trust over the assets and required the trustee to return them back to the trust.
- Defenses of trustee. Ratification of trustee acts by beneficiary therefore they are not liable.
Discuss each transaction separately and analyze the facts.
Example: Sale of stocks discuss obligations.
Example: Sale of land discuss obligations.
Determine whether the trustee had the authority to act.
Determine if they met their obligations and discuss liability if there is loss.
Offset Rule. Trustee enters into one transaction and makes money, and enters in another transaction and loses money. Can they offset the gains and losses to lesson liability? No.
Offsets are allowed if the two transactions arises out of the same transaction or occurrence.
Allocations. Beneficiary receives principle and interest during the life of the trust. The remainderman receives principle and interest at the termination of the trust.
- Principle and income from a trust belongs to the beneficiary accruing from the date the trust is created.
If the income beneficiary is the same person as the trustee they may not allocate income belonging to the remainderman. Here the trustee would have a conflict of interest and violate their duty of loyalty. Raise the misallocation issue and the issue of duty of loyalty to the future interest holder.
- Ordinary cash dividends are allocated to the income beneficiary.
- Stock dividends go to the principal remainderman.
- Wasting assets are items that lose value over time. The depreciation is charged against income.
- Unproductive assets. Swampland, timberland, etc. is land that yields less than 1% of its appraised value. Failure to dump unproductive assets may violate the due care. There is an implied duty to sell unless the terms of the trust say the property cannot be sold.
Example: A is given 100k in a life trust and upon A’s death to B.
- Expenses. Courts will look toward the settlor’s intent. Debts to the trust such as taxes, capitol gains on investments, stock broker fees, mortgage interests, repairs and expenses to maintain property related to daily activities belong to the current beneficiary. If one receives the benefit, they are also responsible for the expenses. If the asset benefits the beneficiary then they are responsible for the expenses. If the benefit is more long-term then the expenses belong to the future interest holder. Sometimes they may be apportioned between the life and future interest holder.
- D. Beneficiary rights. The beneficiary generally has the right to freely transfer, or revoke their interest (alienability) in a trust. However, the courts will consider if the settlor’s intent has been satisfied.
A beneficiary interest may be subject to creditor claims.
Exceptions. Trust that cannot be transferred or attached.
- Spendthrift trusts.
- Support trusts. A creditor may attach a support trust if the supports debts are greater than the support payment for things like food, shelter and clothing.
- Discretionary trusts.
- E. Modification. A trust may be modified or amended by the settlor for many reasons. However, the terms must be expressly stated in the trust document. A trust can be modified if all parties to the trust agree.
Example: A guardian ad litem for a beneficiary not yet born may agree to modify the trust for the unborn child.
Example: Settlor wrote a trust years ago and their life style has changed. A change in a trust is no different than making a change in a will.
Most courts will not allow an amendment unless the power to amend is expressly written in the trust document.
Doctrine of change circumstances. Court authorized to change terms in a trust where the settlor did not know or anticipate the circumstances. The rule is designed to carry out the settlor’s intent not the beneficiary. A deviation cannot change a beneficiary’s interest because that would be applying Cy Pres, which only applies to charitable trusts.
Example: A devises their stock in trust to his family and directs the trustee not to sell. The stock value declines over many years and the prospects of recovery are slim. The courts should approve a trustee’s application to sell the stock under the doctrine of change circumstances.
Revocation. The majority rule is the settlor may not revoke unless the right to reserve is in the trust document.
Termination. All beneficiaries must assent to termination. However, it will not be allowed if it defeats the settlor’s intent, or settlor does not agree.
1) Terms of the trust have been accomplished.
Example: A creates a support trust to B, 10k a month for as long as B lives, remainder to C. B dies. The support trust is terminated and the remaining assets are turned over to C. The trustee must wind up the trust and distribute in a reasonable amount of time.
2) Unanimous consent. Beneficiaries may terminate a trust early if there is a unanimous consent between all beneficiaries including all unborn beneficiaries. This rule makes it impossible in the majority of jurisdictions to get unanimous consent. Some jurisdictions will allow a guardian litem that is appointed for consent purposes. Termination will not be allowed if it hinders the settlor’s intent.
Example: In a spendthrift trust A leaves 10k a month to B until he reaches the age of 55. B is 24 and wants to terminate the trust to do that would defeat the settlor’s intent. Here, the trust will not be terminated even with the trust of all beneficiary’s so long as the trust purpose remains unfulfilled. If the purpose of the trust was to curb spending habits the beneficiary’s cannot agree to terminate the trust, as this would defeat the settlor’s intent.
3) Operation of law. If the purpose of the trust becomes frustrated, impossible to complete or through merger where the trustee is the beneficiary.
Ademption Describes what happens when property bequested under a will is no longer in the testator’s estate upon testator death. For devises of specific items of property, the property is adeemed, and the gift fails.
Example: The will bequeathed the testator’s car to a specific person, but the testator owned no car at the time of his death, the gift would be adeemed.
General Devises Gifts of cash are never adeemed. If there is not enough cash in the testator’s estate to satisfy the gift, then other assets in the residuary estate are sold to raise the necessary cash.
Transfer of real property must be in writing to satisfy SOF. However, property given in a will does not require SOF.
A constructive trust may be oral.
Exculpatory Clause That states a trustee is not liable for breaches of trust except for their willful or gross negligence are not looked upon favorably by court where the trustee is the drafter because the provision is designed to get the trustee off the hook for their negligence.
Guardian Ad Litem A court appointed person to look after the best interest of a child.