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

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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 (susceptible of identification when their interests come into enjoy-
ment); e.g., “friends” is insufficient

3. Notice not required but beneficiary must accept; acceptance is presumed

E. Valid Trust Purpose

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.);
or

d. Intended to defraud settlor’s creditors 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
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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 charitable
or from a charitable use to a private use

4. Enforceable by attorney general, not settlor or beneficiaries

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. UTC—settlor’s general charitable intent is presumed and application of cy pres

is mandatory

B. Honorary Trusts
1. Not for charitable purpose, but no private beneficiaries who can enforce trust (e.g.,
trusts for pets, graves)

2. Not enforceable, but trustee may choose to carry it out

a. Under UTC, enforceable for 21 years

3. If trustee does not carry it out, a resulting trust imposed for settlor’s estate
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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. Dependents, government, those supplying necessities may be able to reach the

protected interest

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

Principal
1. Before trustee makes discretionary payment, interest cannot be reached by creditors

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. Must reserve right to revoke or modify

a. UTC: Trusts presumed revocable

2. Power to revoke includes power to modify

B. By Beneficiaries
1. May terminate or modify if:
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a. All beneficiaries consent (watch for remote unborn beneficiaries), and

b. It will not interfere with a material purpose (Claflin)

1) Examples of purposes precluding termination—distribution at specific age,

preserving property for remainderman, protecting beneficiary from own
poor judgment

2. Joinder of settlor waives material purpose

3. Spendthrift trust cannot be terminated without settlor’s consent

C. By Court
1. May terminate if trust purposes accomplished or become illegal or impossible

2. May modify if changed circumstances make compliance incompatible with trust

purpose

VI. TRUST ADMINISTRATION

A. Powers of Trustee
1. Power to sell and lease unless limited by trust instrument

2. Power to incur expenses—necessary and ordinary management expenses allowed;

power to improve property usually not inferred

3. Power to borrow money must be granted in trust instrument

B. Duties of Trustee
1. Care—standard is that of reasonably prudent person managing own property

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

c. Cannot personally gain through position

d. Corporate trustee cannot buy (but may retain) own stock

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e. If duty breached, beneficiary may:

1) Set aside transaction,

2) Recover profit; or

3) Ratify the transaction

f. Settlor can waive self-dealing restrictions

3. 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

4. Duty to perform personally—cannot delegate administration of trust

5. 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. Liable to beneficiaries for breach of trust (surcharge action)

2. Losses from one breach may not be offset against gains from another

3. Defenses—laches or express or implied consent to the breach by beneficiaries

4. Exculpatory clauses relieving trustee of all liability or liability for bad faith, intentional
breach, or recklessness are void

5. Trustee liable to third parties for contracts and torts, but usually entitled to indemnifi-
cation
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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 the settlor’s lifetime

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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

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