Gilbert Law Summaries on Trusts
Authors:
Halbach Jr., Edward C. / Spivack, Carla / Sneddon, Karen J.
Edition:
14th
Copyright Date:
2023
19 chapters
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- References are made throughout this Summary to the Uniform Trust Code (“UTC”), which was promulgated in 2000 by the National Conference of Commissioners on Uniform State Laws. The 1959 Restatement (Second) of the Law of Trusts, referred to in this Summary as the “Second Restatement” or “Rest. 2d,” is being replaced by a new Restatement (“Third Restatement” or “Rest. 3d”). A preliminary volume on the “Prudent Investor Rule” was published in 1992 by the American Law Institute and has been codified directly or by adoption of the 1994 Uniform Prudent Investor Act (“UPIA”) in nearly all states; another three volumes (§§ 1–92) have now been published. The third of these volumes ends with Chapter 17 (§§ 90–92), which incorporates, in proper sequence, the Prudent Investor Rule (originally §§ 227–229 in the Second Restatement and 1992 preliminary volume). The fourth and final volume is now under way.
- As a first step, consider whether the relationship that has been created is in fact a trust. Except where the law implies a trust, there must be some effective expression of by the owner of property to create the particular status that the law regards as a trust. The parties’ own expressions of intent are, of course, significant, but also consider:
- Consider whether creditors can reach the trust estate (i) on the theory that the settlor has over the trust, or (ii) on the theory that the trust transfer was a
- on contracts executed by the trustee on behalf of the trust, the effect of any from the trust, and whether the contract creditors can reach this right.
- Consider not only the expressed trust purposes, but also whether the terms of the trust would violate any rule of property law,
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- Where unnamed beneficiaries of a testamentary trust are to be ascertained by a “formula” or description, that identification must be based on “acts of independent significance.” Under this doctrine, a will may dispose of property by reference to acts or events that have significance apart from their effect on dispositions made by the will. (S Wills Summary.)
- A valid private trust requires beneficiaries capable of enforcing the trust, and those beneficiaries must be ascertained or ascertainable when the trust is created or assuredly become ascertainable, if at all, within the period of the Rule Against Perpetuities ( Future Interests Summary). The purpose of this requirement of identifiable beneficiaries is, ostensibly at least, to assure that the trust is or will be enforceable, which in turn ostensibly requires or will require persons who are identifiable as beneficiaries or as members of a “reasonably definite and ascertainable class” of beneficiaries. [Rest. 3d §§ 44–46]
- minority, mental incompetency) may render the settlor’s act of creating the trust void or voidable, with the same consequences as any other void or voidable conveyance under appropriate local law. [Rest. 3d § 11 cmt. e] Under some circumstances, conservators or holders of durable powers of attorney may create (or amend) trusts on behalf of settlors under disability. [Rest. 3d § 11 cmt. f]
- Even where no rights have been expressly reserved by the settlor, if the trust or some interest in it is invalid, the res is excessive for the trust purpose, or the equitable interests have not been completely disposed of, a
- No particular words—even the word “trust” itself—are necessary. Nor is it essential that the settlor (or any of the other parties involved) know or understand that the intended relationship is legally defined as a “trust.” If the court finds that the parties intended to form a relationship with respect to the property involved that the law defines as a trust, then the parties’ intention to enter into that relationship provides the requisite trust intent.
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- Constructive trusts and resulting trusts are not based on any real expression of trust intent, but rather upon operation of law ( implied by law or imposed by courts).
- A resulting trust is an based on the of a property owner. It arises by operation of law where an express trust fails in whole or in part or where its beneficial provisions are incomplete.
- The Third Restatement and the Uniform Prudent Investor Act advanced a quite different and modernized rule for trust investment law. The so-called “prudent investor” principles now prevail, in one form or another, in the trust law of all states. The “prudent investor” rule judges an investment not in isolation but as a part of the
- The modern trend is to approve trusts for the dissemination of particular , but a trust for the promotion of a . Trusts for
- Trusts will terminate by their own provisions if the period specified for the duration of the trust . Trusts will terminate by
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- Various other fiduciary relationships may at times appear similar to trusts, guardianships, receiverships, the positions of executors or administrators of estates, even corporate directorships, partnerships, or limited liability companies. [Rest. 3d § 5 cmts. e, d, g] Each of these differs from a trust in some or all of the following respects: the nature and character of title held by the fiduciary; the duties and powers of the fiduciary; and the remedies available for enforcement. Other bodies of law also deal with special uses of the trust device, such as real estate investment trusts (“REITs”), voting trusts, Massachusetts business trusts, and employee benefit trusts, none of which are dealt with specifically in this Summary.
- An express trust is created by the by a person or persons having the power to do so, to create that fiduciary relationship with respect to property that the law recognizes as a trust. In other words, an express trust arises when a settlor either transfers property to someone else to hold and manage for a beneficiary or declares himself a trustee over his own property for the benefit of the beneficiary. This person need not use “Trust” phrasing and terminology, or even know it. The required “manifestation” of intent appears in the settlor’s oral or written words, conduct, or a combination of these, viewed in an overall context. Most matters discussed in this Summary primarily involve express trusts of the active variety, private or charitable, testamentary or inter vivos, revocable or irrevocable.
- Generally, courts are reluctant to give words of condition literal effect where forfeitures on failure of the condition would result. ( Property Summary.) Hence, unless the language makes clear that a condition was intended, a grant will usually be construed as creating a
- A resulting trust arises by operation of law when an express trust fails in whole or in part or where the beneficial provisions of an express trust are incomplete ( the settlor has failed to make full disposition of the equitable interests). For example, a trust is to pay for A’s college tuition. A graduates from college with money left in the trust, and the settlor failed to provide for any further use for the assets. In this situation, the law decrees that the trustee holds the assets upon a” “resulting trust” for the settlor or the settlor’s successors in interest. That is, the assets are no longer trust assets and will return to the settlor or the settlor’s heirs in fee simple. The term “trust” is really a misnomer: here it is really a way to solve the problem of excess assets in the trust after the trust’s purpose has been served.
- This chapter introduces the basic concept of the trust and its various forms, but more elaborate definitions and descriptions appear elsewhere in this Summary.)
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- Clearly a trust for the of the law ( “to support the work of the State X Law Revision Commission”) is charitable, but trusts to bring about a in the law may or may not be.
- The law gives charitable trusts special privileges that are not given to private trusts. Charitable trusts are generally construed in a manner that serves to uphold and preserve them ( to limit the purposes to those that qualify as charitable), and they are exempted from some of the restrictions applicable to private trusts.
- Cy pres is a doctrine that applies only to charitable trusts. Charitable trusts receive favorable treatment under the law. Cy pres provides the ability to “fix” charitable trusts that have outlived or outgrown their original charitable purposes. Cy pres does not apply to private trusts.
- A charitable trust is a type of express trust. When an exam question set forth a trust with an apparently charitable purpose, do not immediately assume that you have a charitable trust. It is important for you to make a determination of whether the trust is in fact legally defined as charitable. This determination may be important because the correct answer to your question may turn on the special privileges accorded only to charitable trusts. Alternatively, the trust’s validity may depend upon its purpose being classified as charitable. Take each step of the analysis in turn to fully respond to the question.
- Like private trusts, the purposes of charitable trusts must not be unlawful or contrary to public policy. A trust, for example, to promote a cause that is illegal, immoral, or irrational will not be upheld as a charitable trust (but the question of what is “irrational” is obviously highly subjective). The Third Restatement also states that a purpose involving which it attempts briefly to describe, is noncharitable and against the policy of trust law, even without a finding of state action. [Rest. 3d § 28 cmt. f]
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- Grantor conveys two tracts of land to Grantee, while intending to convey only one. Grantee holds the second tract on constructive trust for Grantor, whether Grantee knew of the mistake or not. ( Remedies Summary.)
- Transferor bequeaths “to Transferee in trust to pay the income to Beneficiary for life, and on Beneficiary’s death to transfer the principal to Beneficiary’s then living issue.” Beneficiary dies without having had issue. Because no provision has been made and no interest has been created for the circumstances that have materialized, the property reverts; Transferee holds upon resulting trust for Transferor, Transferor’s residuary beneficiaries, or, if none (or if the trust was itself a residuary trust), Transferor’s heirs at law.
- Consider the following two examples. Transferor creates a will that gives the residuary estate “to Transferee, as trustee” but specifies no beneficiaries or other trust terms in the will. Alternatively, Transferor creates a will that gives the residuary estate “to Transferee in trust upon such terms as I have or may communicate to Transferee during my lifetime” and no other trust terms are included in the will. Assuming no special circumstances exist (such as actual fraud) requiring a constructive trust for Transferor’s estate or others, it is clear on the face of the instruments that Transferee takes in trust but (under the general rule today) the terms of the trust cannot be proved and cannot be carried out. In each example, Transferee holds on resulting trust for Transferor’s estate for the benefit of Transferor’s residuary beneficiaries or, if none, Transferor’s heirs at law (
- Constructive trusts and resulting trusts may arise out of situations in which an actual intention to create a trust intention is present but the trust fails. Thus, these trusts are inferred
- A constructive trust is not really a “trust” at all. [Rest. 3d § 1] Like a resulting trust, a constructive trust arises by operation of law. But, quite differently from the resulting trust, a constructive trust serves as an to redress wrongful conduct or prevent unjust enrichment. A constructive trust is imposed whenever a court of equity is convinced that the person who acquired title to the property is under an equitable because the property acquisition was by fraud, duress, mistake, etc., or because (in certain appropriate circumstances) the holder of title would be unjustly enriched if the holder were permitted to retain the property. In essence, a constructive trust is not designed to effectuate an expressed trust intention but rather is to serve as
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- Oral trusts of personal property are valid at common law, but in a few states statutes have changed this ). On the other hand, trusts of land must be evidenced by some writing signed by a party empowered at the time to impress the trust upon the property. [English Statute of Frauds § 7]
- Grantor intends to transfer title to Grantee in trust for N. Grantor fails to make adequate delivery of the deed (no effective transfer), but N takes possession with the knowledge and consent of all parties. The transfer of possession may render the trust effective. ( Remedies Summary.)
- Such a deposit is not really clear on its face and does not by itself prove that the depositor intended presently to create an inter vivos trust. The depositor may have intended: (i) to create a trust upon her death, (ii) presently to create a trust that is revocable by her at any time prior to death, (iii) presently to create an irrevocable trust, or (iv) not to create no trust at all (the form of the deposit being merely to avoid certain restrictions or limitations on insurance protection or to set apart funds in case the depositor decides to create a trust in the future). The last of these has no trust intention at all. Although there is trust intention in the first, it is an intention to create a trust in the future and thus of no legal effect. The second and third intentions mentioned are permissible forms of trust , but the question is which of the possible intentions was at work? And, based on that, answer, is there a valid trust?
- Can a property owner transfer property into a revocable trust and thereby circumvent policies of the law of decedents’ estates (or other policies) restricting testation or imposing obligations on a decedent’s estate? This section addresses the use of a revocable trust to avoid the statutory
- A valid inter vivos trust may be based on a promise enforceable under the law of contracts to create a trust ( for valuable consideration, A promises B that A will hold certain property in trust for B’s children). It is not conceptually clear whether the promise creates a trust immediately or (with the promise serving as the trust property) or whether the later actual property transfer creates it. Be careful to distinguish this situation from a present assignment of another’s enforceable promise, which immediately create a trust (of a chose in action, the obligation, as property). For example, a settlor could create an insurance trust this way by transferring the
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- no trust
- The specific rules of trust accounting often differ from general accounting principles because trust law is influenced by special factors. (Individuals will accounting expertise may be, for example, surprised at the trust law’s strange lack of respect for normal financial concepts of “net” income.) In trust law, there is a tendency for some types of issues to favor income beneficiaries (reflecting the settlor’s probable intent because income beneficiaries typically have the closest relationship to the settlor); there will be a tendency in other situations to avoid a forced income distribution of properties or funds likely to be important to maintaining a properly functioning trust estate.
- On the other hand, where the settlor makes a , during life or by will, of a “wasting asset” to the trust ( “my oil well to T in trust for B for life, remainder to C”), the income beneficiary has typically been allowed to receive all receipts, on the rationale that this is what the settlor must have intended in making a gift of the “income” from an asset that is depletable.
- In trust accounting the general rule is that the income beneficiary is entitled to on the trust estate . What these “earnings” are, however, may follow the wills rule recited above, or—perhaps more often—any interest payable to the trust may commence at the date of the testator’s death.
- Earnings on the trust corpus during administration of the decedent’s estate are generally allocable to the income account from the testator-settlor’s date of death (even though not payable, of course, until the trustee receives distribution of the trust funds).
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- The key question is whether these are part of the material purpose of the trust or not. There is conflicting law on this question: courts have differed. In one case, a trust provided for a lifetime interest for parents with the children as remainder beneficiaries. The parents asked the court to terminate the trust and distribute the assets to them. The court refused, holding that having the assets professionally managed during their lifetimes was a material purpose of the trust. On the other hand, another court found that a lifetime beneficiary who transferred her interest to the remainder beneficiaries during her lifetime did not violate a material provision of a trust because the settlor’s only material purpose was to preserve the assets for the remainder beneficiaries. Although the authorities are divided and often unclear on the ...providing for successive enjoyment by the beneficiaries (so that all beneficiaries together are free to modify the trust or to terminate it and...
- charitable trusts
- By operation of law, the restraint upon the freedom of the beneficiaries ends, as does the law’s deference to the settlor’s purpose, once the applicable perpetuities period has expired—“lives in being plus 21 years” under the common law Rule Against Perpetuities. Although (as long as all interests are vested) a trust may beyond the period of the Rule, the trust can no longer be “indestructible.”
- Remember that the terms of the trust will tell you what procedures are available within the terms of the trust for modification and even termination. Exam questions concerning the modification and termination of a trust involve the possibility of termination of the trust before the trust would conclude according to the trust terms. The most critical exam material covered in this chapter has to do with the ability of courts and beneficiaries to modify or terminate trusts after the settlor has died.
- In creating (or, unless restricted, in amending) a trust, the settlor can grant to others, including a trustee or beneficiary: the power to modify the trust, the power to terminate it (and thereby, if a beneficiary, receive part of the trust estate), or the power to appoint interests under the trust.
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- Remember that, when in doubt, a trustee may petition for court instructions for rulings on law or interpretation of the trust, but not for decisions based on the trustee’s business judgment.
- Another important source of the trust terms and the trustee’s powers is trust law itself. Trust powers under the common law generally include those powers that are “ to carry out the purposes of the trust” and Rest. 2d § 186] Today, the law allows the trustee Rest. 3d § 85] The UTC gives the trustee “general” and “specific” powers in sections 815 and 816. These powers include: the power a competent unmarried adult has over her own property and the power to buy, sell, exchange, deposit, borrow as necessary to manage the trust. The trust instrument can limit or expand these powers.
- A most important and flexible source of a trustee’s powers is the trust instrument or other admissible evidence of settlor intentions. [ Rest. 3d § 4—defining “terms of the trust”] (Of course, all trusts need not be in writing, and not all extrinsic evidence is admissible.) The powers thus created are not only those that the trust instrument expressly states, but also those that are imposed
- Where a trustee has misappropriated trust assets or used trust funds to acquire other property, the beneficiaries can enforce a constructive trust (tracing the property and requiring it or its proceeds and the profits from the property to be used exclusively for the trust and its beneficiaries) or enforce an equitable lien on the property to secure a claim for damages.
- Today, legislation in most states explicitly eliminates the personal liability of the trustee as “principal.” Where the common law has been modified by statute, only the trust estate— the trustee in his fiduciary capacity—is liable on contracts properly executed by the trustee if his status as trustee was known to the other party.
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- Does Glynne’s one-third elective share of the augmented estate stand on a different footing? This prompt requires you to connect concepts about trusts to concepts related to estates. In the absence of a statute, such as the UPC’s augmented estate statute, which would bring it into the estate for purposes of the elective share. courts have held that it does not. In those situations, courts hold that a revocable trust be used to circumvent a surviving spouse’s elective share. Note that increasing case law (and an increasing number of statutes) give special protection to the surviving spouse’s elective share. Many of these cases require a finding that the trust was intended to “defraud” the spouse, but most courts have rejected this highly subjective approach. There is very little other authority (absent legislation) recognizing a special status for a spouse’s elective share with respect to such trust properties. It is fair to say, however, that on the more general question (mentioned...
- Sam received a terminal diagnosis three years ago. At that time, Sam established a revocable trust and transferred almost all of the assets titled in Sam’s name into the trust. The trust terms provide for the net income to be paid to Sam annually and provide that on Sam’s death the principal is to be distributed to State University for scholarships for academically gifted students. Sam and County Bank & Trust Co. serve as co-trustees.
- The question states that the jurisdiction has not adopted any trust forms in recent years. Nevertheless, Bob may create a trust with a situs (i.e., legal location) that is in a jurisdiction that does recognize self-settled asset protection trusts. The requirements of that jurisdiction would need to be reviewed but will typically include a requirement that a trustee (or at least a co-trustee) be domiciled in that jurisdiction. That likely means that Bob would need to hire a professional trustee, which can increase the cost of maintaining the trust. In addition, some jurisdictions have exceptions to which creditors may access the trust property. Research as to the particular requirements and exceptions would need to be undertaken. There may also be conflicts of laws and possible bankruptcy issues arising in the future if a creditor did try to reach Bob’s assets.
- Determining that a trust was created would create internal inconsistencies in the dispositive plan. A trust result would be inconsistent with the normally inferred intention to treat children equally. If John is found to take his one-half share of the estate in trust, subject to significant obligations to his grandfather, Mary’s provision for John would not be comparable to the provision for her daughter, Martie. Martie’s gift has no such language. Just how disparate the treatment of her children would be if a trust were found would depend on the terms and meaning attached to that intention. Furthermore, this uncertainty itself reinforces John’s argument against finding a trust. Although the question does not ask for a discussion of the precise terms of the trust, the very fact that the language in the will is vague is likely to detract from any allegation that there was an intent to impose binding duties in the form of a trust.
- Beyond this, there is always the possibility of seeking a constructive trust as a remedy for simple . Most authority is against this, but there is at least a growing number of decisions allowing restitution via constructive trust where the grantor conveys to the grantee upon oral trust for . Even this authority, however, poses difficulties in the present case for two reasons: (i) it is less likely to be applicable even by analogy to the grantor’s transfer to the grantee orally in trust for a ; and (ii) even if a remedy is granted, it is likely that the constructive trust will be for the purpose of making restitution to the grantor (and here to the grantor’s estate) rather than by “going forward” with the intended trust for the benefit of the third party. Such a result would likely be much less helpful to Caleb (depending, on the terms of Bryan’s will, if any).
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- the trust estate, the trustee is obliged to obtain insurance on the trust property—including insurance on its own liability (because this serves to protect the trust res as well as the trustee).
- Although use of the word “trust” may be helpful to establish intent, no magic words are needed to create a trust. The intent must be to create a relationship that the law would deem a trust that is essential.
- If F did not actually modify the trust, the “pour-over” is clearly valid. If the trust , the trend is to hold that the “pour-over” is valid and applicable to the trust as amended. Some courts would hold the “pour-over” invalid altogether or would uphold it only on the trust terms at the time the will was executed. Note that if the will was after the amendment, the “pour-over” is effective on the amended terms in all jurisdictions.
- Mere use of precatory words (“hope”) will not create a trust under modern law. Use of the word “expectation” does create some complication as “expectation” is not one of typical precatory words, such as hope, wish, or desire. Added to that is the additional language of “to provide support” and “T’s absolute discretion.” An argument can be made that A intended to create a trust.
- Evidence tending to rebut a trust arising by operation of law ( a resulting trust) is
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- Under traditional trust law, a settlor could not create a spendthrift trust for herself—that is, one that would prevent the settlor’s creditors from reaching the settlor’s assets. The quest for such a form of asset protection led, however, several countries to start offering asset protection trusts in so-called “offshore” jurisdictions like the Cook Islands, the Caymans, and other Caribbean Islands. These trusts offered settlors a way to benefit from their assets while keeping them out of the reach of creditors.
- A beneficiary may alienate that person’s interest in a trust , unless the trust contains a valid provision to the contrary, such as a spendthrift clause. Thus, a beneficiary can assign, pledge, or encumber the beneficiary’s interest, or even transfer it in trust for another. Also, if the interest is not conditioned on the beneficiary’s survival, it will pass by will or by intestate succession. [Rest. 3d § 51]
- A standard spendthrift clause looks like this: The interest of any Beneficiary of this Trust in the income and principal shall not be subject to claims of his or her creditors, or others, or be liable to attachment, execution, or other process or law and no Beneficiary shall have the right to encumber, hypothecate, or alienate his or her interest in any of the trust in any manner except as provided herein. Nor may a creditor compel a trustee to make a discretionary transfer to a beneficiary. Where the trustee is also a beneficiary, restraint on transfer is invalid against transferees or creditors of the Trustor. In no case shall a disclaimer by a beneficiary be considered a transfer to that Beneficiary.
- Irrevocable Trusts:
- Conflict of law rules state that a state need not apply another state’s law if that law conflicts with the state’s public policy. So, if a Massachusetts resident sets up an Alaska DAPT, and is sued by a creditor in Massachusetts, a Massachusetts court might refuse to apply the Alaska law if it determined that Alaska DAPTs violated Massachusetts public policy. One case has tested this issue in the context of bankruptcy: [ assets into an Alaska DAPT. Almost all of the assets transferred were in Washington, and the settlor resided there as well. When the settlor declared bankruptcy, the court held that Washington, not Alaska law, applied, because Washington had a strong public policy against asset protection trusts. A federal bankruptcy judge issued a similar ruling in 2011, applying the federal statute of limitations, rather than the shorter Alaska, when applying fraudulent transfer law to assets transferred to an Alaska DAPT. Finally, in 2007, the Alaska Supreme Court ruled that...
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- Pour-Over Wills, secret trusts, 70–71. Secret Trusts, semi-secret trusts, 72–73. Semi-Secret Trusts
- tentative trusts. Totten Trusts Testamentary Trusts, 69–75. Creation of Express Trusts; Pour-Over Wills
- trusts created by operation of law, 5
- revocable inter vivos trusts, 73–75. Revocable Inter Vivos Trusts Testamentary Trusts, 69–75
- on creditors, unenforceable oral trusts, 63–64
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- Publication Date: August 25th, 2023
- ISBN: 9781685611415
- Subject: Trusts and Estates
- Series: Gilbert Law Summaries
- Type: Outlines
- Description: This outline covers the trust law you will encounter in your Wills, Trusts and Estates class. Topics include the following: elements of a trust, trust creation, transfer of beneficiary's interest (including spendthrift trusts), charitable trusts (including the Cy Pres Doctrine), and a trustee's responsibilities, power, duties, and liabilities. Other topics include duties and liabilities of beneficiaries, powers to modify or revoke, termination of trusts by operation of law, resulting trusts, and constructive trusts.