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Trusts

Table of Contents
I. REQUIREMENTS FOR A TRUST......................................................................1 (1) EXPRESS TRUSTS (THE TRUE TRUST) 8 REQUIREMENTS FOR A VALID TRUST 1 1

II. TYPE OF TRUSTS........................................................................................1 A. REVOCABLE LIFETIME/INTER VIVOS TRUST (2) POUR-OVER GIFTS (3) TOTTEN TRUST (BANK ACCOUNT TRUST) (4) JOINT BANK ACCOUNTS (5) CHARITABLE TRUST (6) NON-TRUSTS I. HONORARY TRUSTS II. CONSTRUCTIVE TRUSTS III. RESULTING TRUST (7) STATUTORY SPENDTHRIFT RULE AND PROTECTION 1 2 2 3 3 4 4 4 4 4

FROM

CREDITORS

III. MODIFICATION AND TERMINATION OF TRUSTS............................................5 A. TRUST MODIFICATION BY TRUSTEE (2) TWO-LEVEL MODIFICATION TEST (3) TRUST TERMINATION BY SETTLOR
AND/OR

BENEFICIARIES

5 5 5

IV. TRUST ADMINISTRATION............................................................................5 A. TRUSTEES POWERS (2) SELF-DEALING 1. FIVE PROHIBITIONS ON SELF-DEALING II. TWO AFFIRMATIVE DUTIES ON SELF-DEALING III. REMEDIES FOR BREACH OF FIDUCIARY RESPONSIBILITIES IV. ACTIONS AGAINST A THIRD PARTY WHEN TRUSTEE ENGAGES V. INDIRECT SELF-DEALING (3) EXCULPATORY CLAUSES 5 6 6 6 6 6 6 6

IN

SELF-DEALING

V. LIABILITY OF TRUSTEE IN CONTRACT AND TORT...........................................7 A. PERSONAL LIABILITY OF TRUSTEE IN CONTRACT (2) PERSONAL LIABILITY OF TRUSTEE IN TORT (3) TRUSTEES INVESTMENT POWER 7 7 7

VI. RULE AGAINST PERPETUITIES AND SUSPENSION RULE.................................7 A. REVIEW OF RAP (2) NY RULE AGAINST SUSPENSION
OF THE

POWER

OF

ALIENATION

7 8

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I. Requirements for a Trust


Express trust is the only real trust. Other two are just equitable remedies.

(1) Express Trusts (the True Trust)


A legal device that allows an owner of property to make transfers of property and it managed on behalf of
someone else, rather than the beneficiary.

Two Kinds of Express Trusts:


o (a) Lifetime (inter vivos) trustset up during the lifetime of the settlor. o (b) Testamentary trustset up in the settlors will. 8 Requirements for a Valid Trust 1. Settlor who makes a a. Anyone 18 with the capacity 2. Delivery of legal title to a. Delivery = for titled assets, must be formally transferred to trustee. 3. Property (res, corpus or principal) to a a. Property = property that the settlor ownshas a present interest, not just a mere expectancy of ownership in the future. b. It must be identified now property, not subject to future determination. 4. Trustee who holds legal title for the benefit of a a. Trustee for Lifetime trustalmost anyone b. Trustee for Testamentary trustalmost anyone except: i. Under 18 / Judicially incompetents / Convicted felons ii. drunkenness, dishonesty, lack understanding, or unethical. c. A non-resident alien ONLY IF: related to decedent AND a NY resident is a co-fiduciary. d. Failure to name a trustee is not fatal. Court can appoint one. 5. Beneficiary with a. Beneficiaries must be definite and ascertainable; b. If ambiguous, trustee holds for the residuary beneficiary of a will (or intestate heirs) c. family or next of kin IS considered definite and ascertainable and the trust does NOT fail. 6. Intent to create a trust a. Settlor must intend to recreate an enforceable obligation; precatory language is not enough. I request, I would like, fail b. Trustee must be given some duties. Otherwise, passive trust, which is not a trust at all. 7. A lawful purpose a. No call for commission of a crime, destruction property, or a condition against public policy b. restricting marriage or promoting divorce violates public policy. HOWEVER, marriage restrictions to members of a certain religious or ethnic groups are valid as permissible partial restraints on marriage. 8. In a validly executed document. a. Must be in writing; b. Signed by both settlor AND EITHER: i. Acknowledged by a notary public; OR ii. Signed by two witnesses. Consideration is NOT required.

II. Type of Trusts


A. Revocable Lifetime/Inter Vivos Trust
Main Requirement: at least one beneficiary who is not the settlor; settlor cannot be the beneficiary when also
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named the sole trustee.

Settlors Roles: Settlor can be:


o A trustee (unless settlor is sole beneficiary) o Income beneficiary for life; o One of the beneficiaries of the principal so long as there is at least one other beneficiary; o Retain power to terminate or amend the trust.

Reasons for doing this:


o Manage assets efficiently o Helps plan for possible incapacity by avoiding a guardianship proceeding. o Avoids probate.

Disadvantages:
o Does not avoid taxes. o Since keep income interest or keeps power to revoke, assets included in the settlors estate for taxes

(2) Pour-Over Gifts


Testamentary gifts (gifts made in will) to an existing revocable trusts. Trusts can be changed during the lifetime of settlor easier than changing will trust MUST be executed before or concurrently with the will for pour-over gift to be valid. Can be to any existing trust whoever created valid even if the trust was unfunded during settlors lifetime.
Life Insurance Proceeds

Two ways insured can make life insurance proceeds payable to a trust:
o (1) create an unfunded revocable insurance trust and name the trustee of the trust as policy beneficiary. o (2) make testamentary trust and have the life insurance policy contract name the trustee named in my will as the insurance policy beneficiary.

Can also do this with proceeds of savings accounts or pension plans.

(3) Totten Trust (Bank Account Trust)


bank account in the depositors name as trustee for a named beneficiary. Two key characteristics:
o (1) Depositor makes deposits and withdrawals o (2) Beneficiary has no interest during depositors lifetime, but gets whatever is in the account when the depositor dies.

No particular words are required to create a Totten Trust account.


Revoking a Totten Trust account

(1) Withdraw all funds in the account; (2) Express revocation during lifetime by: NEED EVERY ELEMENT
o (a) making a writing naming the beneficiary and the financial institution

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o (b) notarized o (c) and delivered to the bank.

(3) Revocation in a will must comply with the same requirements. (4) Death of beneficiarymoney goes free and clear to depositor. Beneficiarys heirs get nothing.
Changing Beneficiary

Change same way as a revocation.


Creditors

Depositors creditors can always reach Totten Trust before or after depositors death. It is a partial
revocation each time a withdrawal is made.

(4) Joint Bank Accounts


If clear and convincing evidence shows that a survivorship account was not intended, then survivorship
language set aside.

Each joint account holder owns one-half. No matter who deposited it excess is gift If joint account holder withdraws more than one-half, he may be forced to return what is in excess of his
lifetime gift. Uniform Transfers to Minors Act

Benefits:
o Avoids a guardianship proceeding o Avoids a trust, and thus court supervision of a trust. o Qualifies for the $13K per donee annual exclusion from federal and state gift tax.

(b) Gifts under UTMA must be made to a custodian and it must specify under UTMA (c) UTMA gifts can be made in a will if stated
Duties of a UTMA Custodian

Hold, manage, and invest the property under a prudent person standard. Pay over to minor or for the minors needs what part of the property that the custodian deems advisable; and Pay what is left of the property to the minor when the minor turns 21 (post-1996 gift) or 18 (pre-1997 gift).
NOTE UTMA does not create a trust; it is a special statutory rule where the custodian does not hold legal title. Minor does. UTMA Tax Consequences

(i) If donor names himself as custodian then the amount of the gift is taxible (ii) If donor names someone else as custodian, not taxable

(5) Charitable Trust


Key Characteristics

(1) Must have indefinite beneficiaries, and they must be a reasonably large group.
o no specific, named persons as beneficiaries. o Cant be so narrowly defined that just a few people benefit. o BUT a trust for Masses for relatives is okay.

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(2) must be for a charitable purpose. (3) may be perpetual. Not subject to RAP. (4) Cy pres can be used to change the trust.
o purpose of the trust can no longer be accomplished, or the charity goes out of existence, the court may use cy pres to reform the trust to make it as near as possible to what settlor wanted.

(5) Attorney genenral has duty of representing the beneficiaries of charitable trusts in the state.
o AG is an indispensable party to any suit on construction or enforcement of the trust. o AG and donor have standing to sue to enforce the trusts terms.

(6) Non-Trusts
i. Honorary Trusts On where no human being is the beneficiary of a private trust. o Not a valid trust. Money falls into the residuary estate.

A private trust must have a human beneficiary EXCEPT:


o Pet trustscan last for the lifetime of the pet. Someone designated in the will or appointed by the court makes sure the trusts purposes are carried out. o Cemetary trustsTrusts for perpetual care and maintenance of cemetaries and burial plots are classified as charitable trusts. Therefore, no RAP problem. ii. Constructive Trusts =Equitable remedy designed to disgorge unjust enrichment that results from wrongful conduct. o Must convey the property to the person who, in equity, should have the property. iii. Resulting Trust = Not a trust, but is an equitable remedy Purchase Money Resulting Trust

NOT RECOGNIZED IN NY. PMRT only arises when a purchaser buys property and put title in someone elses name who is not a relative.
Later, purchaser claims no gift and asks title holder for title back. Title holder refuses.

creates a PMRT to allow purchaser to compel title holder to give back. NOT NEW YORK. NO BACKSIES.
o EXCEPTION: In NY, PMRT will apply if there is clear and convincing evidence that the grantee had expressly or impliedly promised to give back, then a constructive trust created & makes them give back

EXAM NOTE: Define PMRT and say it is the rule in most states, but does not apply in NY. Check if
exception applies.

(7) Statutory Spendthrift Rule and Protection from Creditors


Typical language: "No beneficiary of this trust shall have the power to assign his or her interest, nor shall Protects a beneficiarys interests from creditors
o Beneficiary and creditors cannot make the trust alienable. such interest be reachable by the beneficiary's creditors by attachment, garnishment, or other legal process."

DEFAULT PROTECTION: NY statute protects all income interests with spendthrift protection even if
clause omitted BUT only applies to trust income, not principal. o For spendthrift principal must be in trust

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Effect of Spendthrift Clause is to keep creditors at bay. EXCEPTIONS:


o (1) Creditors for necessities o (2) Child support and alimony; o (3) Federal tax liens; o (4) Excess income beyond that needed for support and education. FREQUENTLY TESTED Remedy of last resortcreditor has to show all other possible remedies have been exhausted. needed is based on the lifestyle of the beneficiary. o (5) The 10% uprotected levy by CLPR

Self-Settled Trust Rule


o Spendthrift protection does not apply to any interest retained by the settlor o They can protect other beneficiaries.

Revocable trusts are fair game for all creditors, even if the settlor has no immediate financial

III. Modification and Termination of Trusts


A. Trust Modification by Trustee and/or Beneficiaries
ok when the objectives of the trust would be impaired if the trust not be modified. The purpose of the trust comes first, overriding any specific methodology in the trust.

(2) Two-Level Modification Test


(1) Find out the primary purpose of the settlor. (2) Look at methodology in the trust to determine whether, because of change in circumstances, the specific
directions in the trust now frustrate the primary intent. settlors purpose of the trust.

(3) By statute, the court can authorize the invade the principal if the income is not enough to carry out the

(3) Trust Termination by Settlor


Default Rule: Trusts normally are irrevocable and unamendable. BUT Settlor can expressly reserve the
power to revoke and amend.

EXCEPTION: Settlor can terminate an irrevocable trust if ALL beneficiaries alive consent. Impossible
because no one can give consent for minor or incompetent benificiaries o a child in gestation is not recognized as a person. o If trust gives property to heirs or next of kin, still no consent needs to be obtained from them. (no heirs while alive)

IV. Trust Administration


A. Trustees Powers
New York Fiduciary Powers Act controls. EXAM NOTE: Probably dont need to know the detailed
provisions for the exam. o powers that can be exercised by a trustee without a court order and without express authorization in the trust. o FPA controls not only what a trustee can do, but what an executor or administrator of a decedents estate.

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General Approach to Trustees Powers in NY

Trustee can do almost (sell, mortgage, lease, repair, settle claims) anything except
o (1) self-dealing. [Most important prohibition] o (2) Borrow money on behalf of the trust. o (3) Operate business in trust (unless court ok). Otherwise, trustee would be liable for losses.

Beneficiary has a right to demand accounting. Beneficiary can either ratify or challenge any wrongdoing
evident in the books.

(2) Self-Dealing
1. Five Prohibitions on Self-Dealing (1) cannot buy or sell trust assets to himself.

(2) cannot borrow trust funds (3) cannot lend money to the trust
o Interest from loan must be returned to the trust, and any security given for the loan is invalid.

(4) Trustee cannot profit from serving as trustee, except for appropriate trustee fees.
o Trustee cannot take advantage of confidential information received while trustee.

(5) Corporate trustee cannot buy it sown stock as a trust investment.


ii. Two Affirmative Duties on Self-Dealing (1) No commingling. o If commingled funds are used to buy an asset and the asset goes down in value, conclusive presumption that personal funds were used. o If value goes up, conclusive presumption that trust funds were used.

(2) Duty to earmark trust assets by titling them in trustees name.


iii. Remedies for Breach of Fiduciary Responsibilities

(1) Beneficiary can sue to remove the trustee. (2) Beneficiary can ratify the transaction and waive the breach. (3) Beneficiary can file a surcharge actionaction to recover losses to the trust. (4) No Further Inquiry RuleBreach of a fiduciary duty by engaging in self-dealing is an automatic wrong
and no further inquiry need be made. o Good faith or reasonableness NOT a defense. iv. Actions Against a Third Party When Trustee Engages in Self-Dealing (1) If sells trust property to a third party, , the beneficiary cannot sue the purchaser of property if BFP for value without notice.

(2) Purchaser must know that she was dealing with a trustee, and that the trustee was engaged in self-dealing.
v. Indirect Self-Dealing

also apply to loans or sales to a trustees relative, business of which trustee has an interest (e.g. SH)

(3) Exculpatory Clauses


Cannot be used to shield trustee(s) from liability for breach of a fiduciary duty in a testamentary trust. But
exculpatory clauses can be used in an inter vivos trust.

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V. Liability of Trustee in Contract and Tort


A. Personal Liability Of Trustee In Contract
(1) How trustee signed contract is key to determining liability:
o (a) If trustee signed only on behalf of the trust, then no personal liability. o (b) If trustee signed personally, and merely mentioned trust, then trustee has personal liability.

(2) Even if there is personal liability, the trustee will be reimbursed by the trust if:
o (a) Contract was within powers of the trustee; AND o (b) Trustee was acting in the course of proper administration of the trust.

(2) Personal Liability of Trustee in Tort


personally liable for all torts by trustee or trustees employees. should buy liability insurance and charge the cost to the trust. can get reimbursement from the trust for any tort claims if:
o (a) must have been acting within trustee's powers; AND o (b) not personally at fault.

(3) Trustees Investment Power


(1) Trustee manages the property of the trust on behalf of the beneficiary, and thus investments the corpus (2) Uniform Prudent Investor Act (UPIA); this gives a broad latitude to trustees to choose investments. (3) Trustee can pursue what UPIA calls the modern portfolio theory of investment, where the trustee creates a custom-tailored investment strategy for this particular trust. (4) Two (2) key factors to remember:
o (a) must consider the role each investment plays within the overall trust portfolio. o (b) must consider the expected total return from income and capital gain.

(5) Trustee does not have to justify the prudence of each investment only in aggregate (6) Specific things to remember:
o (a) Prudence is hindsight only; look at the decision to invest when made, not later. o (b) Trustee can exercise adjustment and allocate capital gains to income. (i) Trustee can switch capital gains into the income category if necessary to protect the income beneficiary, and vice versa. (ii) End goal is fairness to all beneficiaries.

(7) The key to the UPIA is flexibility for maximum total return and distribution between the income and
remainder beneficiaries to be fair to each of them.

VI. Rule Against Perpetuities and Suspension Rule


A. Review of RAP
RULE: No interest is valid if it could vest later than any life in being (LIB) at the time of the creation of the
interest, plus 21 years. o (a) An interest is vested when there is no condition that has to be satisfied, and the exact identity of the taker

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is known. o (b) If there is any possibility, no matter how remote, that an interest could vest more than lives in being plus 21 years, it is void.

NY perpetuities reform statute automatically reduces any age contingencies to 21 years, saving the gift.

(2) NY Rule Against Suspension of the Power of Alienation


= Any interest is void if it suspends the power of alienation for a period longer than lives in being plus 21
years, that is, when there are no persons who could, together, transfer fee simple title.

Arises when either:


o Spendthrift income interests are in the trust (almost every trust); OR o A life estate is created in an unborn person, or in an open class that may possibility include unborn persons.

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