TRUSTS OVERVIEW 1.

TRUSTS OVERVIEW
I. IN BRIEF
A trust is a fiduciary relationship with respect to property in which one person (the
trustee) holds the legal title to the trust property (the res) subject to enforceable
equitable rights in another (the beneficiary). It is a device whereby one or more
persons manage the property for the benefit of others. The trust must have a valid
trust purpose. The trustee ordinarily has legal title to the property, and the beneficiaries
have equitable title. The testator or grantor who creates an express trust is the settlor,
who must have had the intent to create the trust. Consideration is not required for the
creation of a trust; in fact, trusts are usually created gratuitously.

II. REQUIREMENTS OF AN EXPRESS PRIVATE TRUST

A. Settlor with Capacity and Present Intent to Create a Trust
1. Must intend trust to take effect immediately
2. Must express intent by words or conduct while settlor owns the property
3. Precatory expressions (hope, wish, suggestion) result in inference that no trust was
intended, but inference may be overcome by other evidence

B. Trustee
1. Failure to name trustee (or failure of trustee to accept or qualify) does not defeat a
testamentary trust; court will appoint trustee
2. Inter vivos trust will fail without trustee because there can be no valid delivery and
transfer of trust property (see below)
3. Trustee must have duties
4. Settlor may declare himself trustee

C. Trust Property (Res)

1. Property may be of any type, including future interests
2. Must be property that settlor has the power to convey
3. Must be described with certainty

D. Beneficiaries
1. Must be capable of taking and holding title to property
2. Must be definite (ascertainable within the period when all interests must vest
under the Rule Against Perpetuities); e.g., “friends” is insufficient
3. Notice not required but beneficiary must accept; acceptance is presumed

E. Valid Trust Purpose

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1. Trust or provision must not be:

a. Illegal;
b. Impossible to achieve;
c. Contrary to public policy (e.g., induce crimes, torts, divorce, child neglect,
etc.);
d. Intended to defraud settlor’s creditors; or
e. Based on illegal consideration
2. Effect of invalid condition subsequent—condition stricken, but trust is valid
3. Effect of invalid condition precedent—condition stricken, but court decides
whether interest is valid or fails

F. Formalities
1. Inter vivos trust—created during settlor’s life
a. Declaration of trust by property owner that he holds in trust, or
b. Transfer of property by the settlor to the trustee
c. No writing required unless trust of land
2. Testamentary trust—created by settlor’s will
a. Essential terms must be ascertained from will, incorporated document, facts
of independent significance, or exercise of power of appointment
b. Secret trust (absolute gift but trust intended)—constructive trust imposed
c. Semi-secret trust (gift in trust without beneficiary)—resulting trust for testator’s
heirs

III. CHARITABLE AND HONORARY TRUSTS

A. Charitable Trusts
1. Purpose must benefit the public (e.g., poverty relief, education, health)
2. Must have indefinite beneficiaries
3. May be perpetual—Rule Against Perpetuities (“RAP”) does not apply
a. RAP does not apply to limitations that shift beneficial interest from one charity
to another (charity-to-charity exception)
b. RAP does apply to a limitation shifting the interest from private use to chari-
table or from a charitable use to a private use
4. Enforceable by settlor, a qualified beneficiary, or attorney general
5. Cy pres—if settlor’s intended purpose is impracticable, unlawful, or wasteful, court
substitutes new charitable purpose
a. Must find settlor had general charitable intent, not just interested in the
named charity
b. Court will select another purpose as near as possible
c. Uniform Trust Code (“UTC”)—settlor’s general charitable intent is presumed
and application of cy pres is mandatory

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B. Honorary Trusts
1. Not for charitable purpose, but no private beneficiaries who can enforce trust (e.g.,
trusts for pets, graves)
2. Enforceable by someone named in the trust or appointed by court
a. Under UTC, enforceable for 21 years or for life of the animal
3. If property is more than is needed, excess is distributed to settlor or his succes-
sors unless trust provides otherwise

IV. TRANSFER OF BENEFICIARY’S INTEREST AND

CREDITOR’S RIGHTS
A. Beneficiary’s Equitable Interest Is Alienable
Beneficiary may voluntarily transfer interest in trust, and his creditors may levy on his
interest

B. Spendthrift Trusts
1. Spendthrift trust provides that beneficiary may not voluntarily or involuntarily
transfer his interest (i.e., cannot sell or give away interest, and creditors cannot
reach it)
2. Not valid if settlor is also a beneficiary
3. Unenforceable against claim brought by government or by child, spouse, or former
spouse with support order

C. Discretionary Trusts—Trustee Has Discretion to Pay or Withhold Income or

Principal
1. Before trustee makes discretionary payment, interest cannot be reached by credi-
tors
2. After trustee elects to make payments, must pay creditors directly if he has
notice—unless there is a spendthrift restriction

D. Support Trust Cannot Be Assigned or Reached Even Without Spendthrift

Clause

V. MODIFICATION AND TERMINATION OF TRUST

A. By Settlor
1. UTC: trusts presumed revocable and amendable unless terms expressly state
otherwise
a. Traditional rule: must reserve right to revoke or modify
2. Power to revoke includes power to modify

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B. By Beneficiaries
1. May terminate or modify if:
a. Settlor and all beneficiaries consent, even if it conflicts with a material
purpose; or
b. All beneficiaries consent, and no material purpose would be frustrated
1) Examples of purposes precluding termination—distribution at specific
age, preserving property for remainderman, protecting beneficiary from
own poor judgment
2. Watch for remote unborn beneficiaries—representative can be appointed to repre-
sent interests of minor, unborn, or unascertained beneficiaries
3. In most states spendthrift trust cannot be terminated without settlor’s consent

C. By Court
1. May modify if trust could have been modified if all beneficiaries had consented
and interests of nonconsenting beneficiaries will be protected
2. May terminate or modify if circumstances unanticipated by settlor threaten trust
purpose
3. May modify if continuation of trust is impracticable or wasteful
4. May modify or terminate if value is insufficient to justify administration cost or
achieve tax objective
5. May reform to reflect settlor’s intent if clear and convincing evidence shows
settlor’s intent and trust were affected by a mistake

D. By Trustee
May terminate if trust property is less than $50,000 and is insufficient to justify admin-
istration cost

VI. TRUST ADMINISTRATION

A. Powers of Trustee
1. Powers expressly conferred by trust
2. Powers an individual has over own property unless limited by trust
3. Powers appropriate to achieve investment, management, and distribution of trust
property not forbidden by trust
4. Powers conferred by UTC unless limited by trust

B. Duties of Trustee
1. Duty to administer trust—must act in good faith and in prudent manner, in accor-
dance with trust’s terms and purposes and beneficiaries’ interests
2. Loyalty—no self-dealing
a. Cannot buy assets from or sell assets to the trust
b. Cannot borrow from trust or loan to trust

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c. Cannot personally gain through position

d. Corporate trustee cannot buy (but may retain) own stock
e. If duty breached, transaction is voidable by beneficiary unless:
1) Transaction authorized by trust or approved by court;
2) Beneficiary failed to bring suit within prescribed time period;
3) Beneficiary consented, ratified transaction, or released trustee; or
4) Transaction involves contract or claim from before trustee became
trustee
f. Settlor can waive self-dealing restrictions
3. Duty to report—keep beneficiaries reasonably informed
4. Duty to separate trust property—no commingling with own property or other
trusts’ property
a. Commingled property lost or destroyed presumed to be trustee’s
b. If portion of commingled assets increases in value, presumed to be trust
assets
c. If portion of commingled assets declines in value, presumed to be trustee’s
5. Duty to enforce claims and defend trust from attack
6. Duty to preserve property and make it productive
a. Investments must be prudent; trustee must use reasonable care, skill, and
caution
1) Trustees with special skills held to higher standard
2) Trustee must diversify investments
3) Investment decisions may be delegated if a prudent trustee would do so
b. Prudence evaluated in terms of overall strategy

C. Trustee’s Liability
1. If trustee commits breach of trust, court can:
a. Order specific performance of trustee’s duties;
b. Issue injunction against trustee;
c. Compel trustee to pay money or restore property; and
d. Suspend or remove trustee
2. Trustee liable to beneficiaries for greater of:
a. Amount necessary to restore trust property and distributions to what they
would have been absent breach, or
b. Trustee’s profit from breach
3. Defenses
a. Trustee acted in reasonable reliance on trust terms
b. Beneficiary consented, released trustee from liability, or ratified transaction
4. Exculpatory clauses are void if they relieve trustee of liability for breach committed
in bad faith or reckless indifference or appear in trust because of trustee’s abuse
of confidential relationship with settlor
5. Trustee not liable for acts of co-trustees if did not join in action and exercised
reasonable care in preventing breach or compelling co-trustee to redress breach

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D. Allocation of Receipts and Expenses—Uniform Principal and Income Act

(“UPAIA”)
1. Trustee must administer trust impartially; must be fair to all beneficiaries
2. Interest and dividend income to income beneficiary
a. If such distribution does not effectuate trust purpose and is unfair, trustee may
adjust between principal and income
3. Receipts
a. Income—rental income, interest on bond or CD, money received from entity,
liquidating assets and mineral rights—10% rule
b. Principal—proceeds of sale of asset, eminent domain awards, capital gains,
property other than money received from entity, insurance proceeds where
trust is beneficiary, liquidating assets and mineral rights—90%
4. Expenses
a. Income—one-half trustee and consultant compensation; one-half accounting
and legal expenses; ordinary expenses (interest payments on debt, ordinary
repairs, taxes, insurance premiums)
b. Principal—one-half trustee and consultant compensation; one-half accounting
and legal expenses; principal payments on debt; environmental costs

VII. WILL SUBSTITUTES

A. Revocable Trusts
1. Interest passes during life but becomes possessory at death
2. Pour-over from will to revocable trust
a. Trust may be established before, after, or concurrently with will
b. Trust may be amendable and revocable
c. Gift is valid even if trust unfunded during settlor’s lifetime

B. Life Insurance Trusts

1. Contingent beneficiary trust allowed (e.g., “proceeds to A, but if A does not
survive, to B in trust for my children”)
2. Assignment of policy trust allowed (assign policy to party to hold in trust)

C. Totten Trust Bank Accounts

1. Trustee-depositor has full rights during lifetime
2. Revoked by withdrawals, any other lifetime act indicating intent to revoke, or by
will
3. Subject to depositor’s creditors’ claims
4. Automatically terminates if beneficiary predeceases depositor

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VIII. RESULTING AND CONSTRUCTIVE TRUSTS

A. Resulting Trusts
1. Purchase money resulting trusts—person taking title did not supply consideration;
sole duty is to convey title to one furnishing consideration
a. No resulting trust presumption if parties closely related
2. Failure of express trust—resulting trust arises with settlor as beneficiary
3. Excess corpus—if trust property remains after purpose fulfilled, resulting trust for
settlor arises

B. Constructive Trusts—Equitable Remedy to Prevent Unjust Enrichment

1. Theft or conversion
2. Fraud, duress, undue influence, mistake, or interference with contract relations
3. Breach of fiduciary duty (e.g., attorney/client, director/corporation, trustee/benefi-
ciary)
4. Breach of fraudulent promise, promise by one in confidential relationship, promise
concerning will or inheritance, promise to forgo foreclosure bid

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