Notes--Trusts--1 day

By Travis Ortiz,2014-01-15 22:53
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Notes--Trusts--1 day

    ? Copyright 2006. All rights reserved.



    A. Requirements

    i. All trusts (except charitable trusts) 1. Creator ... (only need capacity to


    2. Delivers legal title...

    3. As to Res...

    a. Must be certain and identifiable

    b. Expectancies

    1. Rulecannot create trust out of

    something expected in future (ie, will

    devise but T still alive)

    a. Exceptionwritten promise

    supported by consideration to

    create trust upon T’s deathK

    law say trust automatically arises

    at T’s death

    4. To a Trustee...

    a. Eligibility to serve

    i. Testamentary trustees:

    1. Ineligible to serve->infant, incompetent,

    convicted felon, incapable due to

    drunkenness, dishonesty, want of

    understanding, improvidence

    2. Non-resident aliensmay serve IF BOTH:

    a. Related to decedent


    b. NY resident is co-fiduciary

    it. Lifetime trustees->these rules N/A b/c they’re

    “non-court” trusts

    b. Failure of trustee never a reason for the trust

    failingcourt will appoint one

    5. For benefit of beneficiaries...

    a. Required:

    i. Definite and ascertainable

    1. Extrinsic evidence N/A to identify them

    a. “Resulting (trust)”- if “to trustee to

    pay income to `friends’, then to

    A”A gets it now b/c `friends’


    2. Gifts “to family”-treated as class gift

    and look to intestacy order

    ii. RAPinterests must vest, if at all, w/in lives in

    being + 21 years

    b. Contrast with charitable- opposite (can’t be identifiable

    and RAP N/A)

6. With intent to create a trust...

    a. “Precatory” words = non-binding suggestion +not

    enforceable (eg, “hope; request; would like”)

    i. Caveat- look at context! if apparent that T

    intended result it should be given effect anyway

    (eg, income to A for life, and at A’s death,

    “would like” to go to B)

    7. For a lawful purpose...

    a. Includes conditions against public policy

    i. Marriage

    1. Total restraints invalid b/c disrupts

    “family unity” (eg, income to W until W

    divorces, then gets res)

    a. RemedyW gets the property

    now free of everything

    2. Partial restraintsOK (eg, to S if marries

    Jew w/in 7 years, o/w to Israel)

    ii. Lifetime trusts

    1. Standard #’s 1-7 above

    a. “Delivery”must be a formal, complete transfer of legal

    title (ie, if shares no re-registered and creator diesno



    2. Evidenced by a

    a. Writing, signed by settlor and trustee


    b. Either

    i. Acknowledged by notary OR

    ii. Witnessed by 2 W’s


    A. “Pourover” gift by will to lifetime trust

    i. Defined = bequeath of property in will to be added to an existing trust

    ii. Requirements-of receptacle trust

    1. In existence before or concurrent with will

    2. At least one other beneficiary (besides settlor)

    3. Not required-Other formalities for will, even though settlor retains

    any of the following

    a. Income for life

    b. Power to: revoke/alter/amend; control trustee; cause life

    ins proceeds or emp benefits paid to trust

    c. Settlor names self as trustee (if has capacity to)

    4. Revocability and/or amendment-gift still valid

    a. Exception- if trust created by another persons and later

    amended -famendments are ignored

    B. Life Insurance Proceeds and Trust Settlement

    These are also available for savings/thrift accounts, and death benefits under emp


    retirement plans

    i. Options to insured: (to create unfounded trust for s/o’s benefit at death)

    l. Statute: unfunded revocable insurance trustname trustee as policy beneficiary (expensive to create)

    2. Testamentary trust for beneficiary’s benefit4name the “trustee in will

    as beneficiary

    C. Bank Account Arrangements


    i. Totten trust bank accounts

    l. Defined = signature card says “A (accountholder), trustee f/ B”

    2. Governing rules

    a. Account-holder

    i. Has all rights over account

    ii. Withdrawalspartial revocation

    b. Beneficiary

    i. Gets DOD account balance, subject to spouse‟s

    Elective Share of as a testamentary substitute

    ii. Changing the beneficiary

    1. Requirements

    a. Written, signed, and acknowledged by


    b. Specifies the bank, and current& new


    c. Delivered to the bank

    iii. Beneficiary dies firstautomatic revocation

    c. Revocation in will OK

    i. Required

    1. Express reference made to:

    a. Account in the named bank AND

    b. Named beneficiary

    3. Contrast with joint and survivor bank account

    a. Gives beneficiary access during holder’s lifetime (“payable

    to either or survivor of them”)

    NY: Considered a gift of V2 to beneficiary upon opening


    b. Not revocable by will

    c. Challengeable in equity s/o may prove that the account not

    intended to be survivorship, rather opened

    as a convenience account”= to enable “beneficiary” to

    arrange for holder’s care (B/P on challenger)

    D. Uniform Transfers to Minors Act

    i. Defined = where donor funds account and names self as “custodian


for S(on), under UTMA”

    ii. Effect of UTMA

    1. Custodial gift is irrevocable

    2. Retains power to alter, amend, terminate (if distributed

    property to S)

    iii. Includable in donor’s “gross estateat deathif he dies in his capacity as custodian

    1. If funded by non-custodiannot includable (b/c he didn’t

    retain those powers)

    iv. Automatic termination when donna is 21

    1. Exception: if gift made in form “A, custodian for B until 18”

    v. “Minor” beneficiaries of estate or truststatute authorizes distribution to UTMA custodianship


    i. RAP N/A (maybe perpetual)

    ii. Requirements

    1. Charitable purpose (health, education, religion)

    2. In favor of reasonably large class of unidentifiable people from

    public at large

    iii.. Reformation by cy pres

    l. If stated purpose not possiblecan be reformed by judicial

    proceeding to related purpose as near as possible to stated


    a. Enforced by AG who is indispensable party to any

    action involving charitable trust

    2. Also applies to outright gifts (in will) iv.

    iv. Special trusts for

    1. Perpetual care for cemeteries and burial plots

    NY: By statute, these are treated as charitable trusts (valid)

    2. Pets


    NY: By statutevalid for 21 years

    Trustee may be s/o designated in will, or court-appointed

    if none

B. Honorary “Trusts”

    i. Defined = trust that has no individual beneficiaries to enforce it

    leaves trustee to enforce it “on his honor”

    1. (eg, “to trustee for weekly wax of A’s Bentley”) ii.


    NY: These are not valid and unenforceable b/c “trustee” owes no


fiduciary duties to anyone

    in. Effect on the “corpus”- falls to residuary as undisposed property

    C. Not “trusts”:

    i. Constructive trust (NOT a trust)

    1. Defined = flexible equitable remedy designed to disgorge

    unjust enrichment arising from wrongful conduct

    a. “Trustee’s” duty only duty is to convey property to

    the person who in equity should have it

    2. Automatically imposed

    a. Must have clear and convincing evidence of.:

    i. Fraud in the inducement = s/o orally promises to

    serve as trustee but has no intention of doing so

    ii. Grantee/trustee served in confidential relationship

    to grantor-creator (eg, father/son, business


    b. Failure to provequantum meruit still applies

    i. (cg, A provided services in exchange for oral trust,

    which A could not prove existed)

    3. ON EXAM:

    a. Apply Law no remedy b/c ... (requirements not met)

    b. Apply Equityif (i) unjust enrichment plus (ii)

    wrongful conduct constructive trust

    i. Only punish the direct wrongdoer, not his kids 1/2, 1. EX: S kills Aintestacy says S gets but equity says S gets 0Ss kids share

    S’s forfeited share

    ii. Resulting trust (NOT a trust)

    1. Defined = this is liable used by cts when a trust fails 2. Purchase-Money resulting trust

    a. Defined = A pays for land but takes title in B’s name

    (unrelated). A later sues b/c no gift intended and seeks re-


    b. Rule

    i. Majority (45)B has PMRT and A can compel

    re-conveyance at any time (presumed no gift intent)

    ii. Minority(5)PMRT not recognized

    NY: Follows minorityPMRT is not recognized

    because Parol evidence bars testimony contradicting

    the deedB gets it

    a. Possible constructive trust ifC&C evidence

    that Bexpress/implied promise tore-convey



    A. Spendthrift Trusts

    i. Purpose- protects from creditors (and fiscal irresponsibility)

    ii. Rule


    ; Statutory spendthrift

    o Ruleall income interests (in anyone but the

    settlor) are given spendthrift protection, even if trust

    instrument does not contain spendthrift clause

    ; Exceptions:

    ; Creditors who furnish necessaries

    ; Claims for Child support, alimony

    ; Federal tax liens

    ; Excess disposable incomebeyond

    needed for support and education

    ; 10% levy under CPLR

    ?5205(e)available to judgment

    creditors in all cases (not per creditor,

    all creditors share that 10%)

    o Effect on settlor’s retained interest

    ; Irrevocable trust creditors may reach income

    interest only (but not principal) fraudulent conveyance ; Exception

    creditors can reach principal if

    transfer done with intent to DDD

    (defeat, defraud, or delay creditors)

    ; Revocable trust- creditors can reach

    everything (interest + principal)


    A. Judicial Modification

    i. Changed circumstances when continuing to adhere to specific direction would frustrate the primary purpose of the trust

    1. EX: trust gives house rent-free to W for life, and house should not be

    sold. Then house encircled with mfg plants and non longer suitable for

    residencecourt may allow trustee to sell to relocate to somewhere

    more suitable for W to live

    B. Termination

    i. Of trust by settlor

    ; General Ruleall trusts irrevocable and unamendable unless

    power to do so expressly reserved in trust

    o Exception- consent by ALL beneficiaries

    ; Representatives (eg, guardian) cannot give Consent

    ; Gestation not regarded as “person”


    ii. Giving a “remainder to settlor’s heirs”

    1. M/S answers

    a. Common lawworthier title deletes this if remainder

    created in settlor’s heirs grantor has a reversion

    i. Eg, O gives “to A for life, remainder to my

    heirs”O has reversion

    2. NY answers

a. Look to purpose

    i. Who takes on creator’s death?

    1. Worthier title abolished if remainder is limited to

    heirs/distributees of creator, they will get it

    ii. Can creator terminate trust w/ all beneficiary’s


    1. Trust termination statute for this purpose, settlor’s

    heirs do not have a beneficial interest (their consent not



    A. Trustees

    i. Powers

    1. Source

    a. NY Fiduciary Powers Act automatically applies to all

    trusts and estates trustee may exercise power w/o

    court order or express authorization

2. Types

    a. Major “Can do” powers (very broad)




    i. Auction sale of real/personal property (unless

    specifically devised in will)

    ii. Mortgage property

    iii. Lease

    1. Trustee- 10 years

    2. Executor/administrator 3 years

    iv. Make ordinary repairs

    v. Contest, compromise, settle claims

    vi. Distribute up to $10,000 to custodial parent if

    distributable to minor

    vii. Distribute to custodian of minor beneficiary

    under UTMA

    b. Major “Can’t do” powers (unless will/trust, or court


    i. Borrow money

    1. Continue a business

    2. Extraordinary repairs


    3. Abandon/demolish real


    4. Employ agents or delegate


    5. Keep funds uninvested

    6. Pay time-barred or discharged


    7. Lend personal funds to estate

    8. Advance funds to beneficiary

    9. Self-deal (see next)

    3. Trustee must have duties-if trustee has no duties there is no


    a. eg, mere title-holding is not a “duty”

    ii. Exculpatory clauses

    l. Ordinary negligence

    a. Lifetime trusts OK to have absolve liability (non-


    b. Testamentary-knot valid (by statute) 2. Gross negligence-can never be exculpated

    iii. Self-Dealing

    1. Trustee is not allowed to:

    a. Trust assetscannot buy/sell them to self

    b. Trust funds

    i. Borrowingnot allowed, unless settlor waives

    1. Indirect self-dealing N/A (friend

    borrows for him)

    ii. LendingN/A

    1. Interest earned (by trustee) must be


    2. Secured interest received- invalid

    c. Profit from position (other than compensation) ie,

    utilize confidential info learned in capacity as trustee

    d. Corp trusteecan’t buy own stock as investment (may

    retain if in estate, and it meets “prudent person” rule)

    2. Duty to

    a. Segregate assets (trust/personal)

    b. Earmark assets (title them in trustee’s name)

    c. Not commingle funds (trust/personal)

    i. If used to buy an assetconclusive presumption:

    1. Decreasesmoney came from trustee

    2. Increasesmoney came from trust

    iv. Liability

    1. Rule trustee personally liable (if signs his name), unless K

    clause relieves him of personal liability

    a. Method of signing significant

    i. Personally liable “T, trustee for A”

    ii. Not personally liable:

    1. “T, as trustee and not individually”

    (creditor looks to trust)


    2. “Trust, by T, trustee” (K is w/ the trust)

    2. Reimbursement allowed if

    a. K within his powers


    b. Acted in proper administration (if torttrustee was not

    personally at fault)

    v. Investment powers

    1. Prudent Investor rule”by prudent man of discretion and intelligence... seeking reasonable income and preservation of


    NY: NY has adopted the

    ; Uniform Prudent Investor Act (1995)

    o Based on modern portfolio theory

    conduct is measured at the time the

    investment decision made (not hindsight)

    ; Returns measured on total (not

    individual) returns

    ; Required of trusteecustom-tailored

    investment strategy, considering:

    o General economic conditions

    o Inflation/deflation

    o Tax effects

    o The role that each investment

    plays within the overall


    o Expected total return from

    income and CG

    o Liquidity needs

    o Asset’s special relationship or

    value to the purposes of trust

    or beneficiary

    o Different interests (income

    beneficiary vs. remaindermen

    2. Uniform Principal and Income Act (2002)

    a. Ruletrustee may adjust and allocate CG to income

    where appropriate (broad discretion)

    i. Factors:

    i. Purpose and duration of trust

    ii. Net amount of ordinary income and CG


    iii. Circumstances of beneficiaries

    iv. Needs for liquidity, regular income,

    preservation/appreciation of capital

    v. Changes in value of trust assets

    vi. Whether he has power to distribute


    vii. Effects of economic donations, inflation


    viii. Tax consequences


    A. NY Suspension Rule

    i. “Every future interest is void if it suspends the absolute power of

    alienation for period longer than lives in being + 21 years”

    1. All it requires is persons in being who could join in conveying fee simple

    within LIB + 21 years (must account for “all the pieces” within LIB +21)

    a. EX: T devises “to Church, but if land ever ceases to be used for church purposes, then to my then-living descendants

    i. RAPviolated

    ii. Suspension rule-)violated b/c those who could

    join in conveying fee simple might not be

    determined within LIB + 21



    b. EX: T gives “to S for life, then to such of S’s kids to

    reach 30.” S has S1, S2, S3.

    i. RAPviolated

    1. NY reform statutecuts down age to 21

    and makes it OK

    ii. Suspension ruleOK, b/c the kids and S could

    join hypothetical conveyance of fee simple c. EX: Interplay with NY‟s Statutory Spendthrift Trust Act

    (treats all income interests as spendthrift- can’t transfer

    all (no conveyance)

    i. EX: T creates trust with “income to D for life,

    and on D’s death, income to D’s kids for their

    lives.” T dies at 30, and D and D 1 alive. OK b/c the life estate in D’s kids will vest, if 1. RAP

    at all, upon D’s death

    2. Suspension ruleviolated b/c this is trust

    income to open class After T died, D could’ve

    had D2, who could not be a LIB b/c born post-T.

    Then D & D1 could die, who are the only

    measuring lives here. If D2 outlives them by > 21 ndyears, in 22 year he has spendthrift trust that he

    cannot convey under statute

    a. BUT NY’s age reform may save

    if D’s age qualifiespresumed

    that woman <12 and >55 can’t

    have kids if D over 55, class is

    (presumed) closed and then D

    and D1 could hypothetically convey

    fee simple


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