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Wills and Trusts Review Session Three

November 22, 1999 - © 1999 John Thompson


Analytical Framework for Addressing a Trusts Question

1.. Identify type of alleged trust from two perspectives

a.. when created

i.. inter vivos trust (made while settlor alive) ; consideration is not needed (trust is a conveyance not a contract)

a)      declaration of trust - settlor and trustee the same person

b)      conveyance or transfer in trust - different people

ii.. testamentary trust - condition precedent is validity of a will

††††††††††† b.. type of beneficiary

††††††††††† ††††††††††† i.. private trust - for individuals

††††††††††† ††††††††††† ii.. honorary trust - for designated pet (no longer than life of animal),


non charitable purpose (limited to 21 years)

††††††††††† ††††††††††† iii.. charitable beneficiary

2.. determine validity of trust (8 steps)

††††††††††† a.. trust intent - two parts

i.. split of title into legal and equitable interests (any combination will work as long as sole beneficiary is not the sole trustee); settlor can contain all interests in trust as long as there is at least one remainder beneficiary

ii.. enforceable duties on trustee - have to be enforceable in court (mere moral duties (precatory language is insufficient)

b.. settlor must have capacity to create trust - no difference in regards to rules as to wills and trusts

c.. compliance with statute of frauds - if real property (realty) writing signed by settlor or trustee; there is potential for part performance exception

ii.. personalproperty - can be oral if there is clear and convincing evidence of terms of the trust beyond settlorís intent

d.. legal purpose - one that is not against the law or against public policy; if charitable trust, the COURT makes the determination whether or not the purpose is charitable (must have an unselfish motive); no bright line test as to whether or not a particular purpoe is charitable

i.. many courts use a generally accepted standard (as accepted by people in community

††††††††††† ††††††††††† ii.. if purpose is religious there is more toleration

e.. property - trust is a conveyance and thus must have property; any property will work as long as the settlor can transfer that property to the trust; the settlor must actually get the property transferred: deliver for personal property; registering stock or securitites

f.. trustee must be holding legal title - cannot force someone to be a trustee so this is not enforceable until acceptance (must be in writing or by exercising a power or performing a duty); if trustee does not accept then look to trust instrument for an alternate or a method for filling the vacancy; if none, then a trust company can take it if the adult beneficiaries consent; the court can always appoint a replacement trustee

††††††††††† ††††††††††† i.. bond not required, but the settlor or the court can require it

††††††††††† ††††††††††† ii.. CA rules are different where bond is presumed required for trustee,

representative, waived (CHECK THIS)

††††††††††† ††††††††††† iii.. common law rule that says all must agree -Ö.

g.. beneficiary holding equitable title - the beneficiary should be clearly ascertainable; in CA, unlike common law the beneficiary can be selected by a third party or trustee according to the trust (will not work in most states)l if the trust is revocable, and the settlor is competent, then the trustee owes the duties to the settlor rather than named beneficiaries

††††††††††† h.. no violation of rule against perpetuities

i.. CA - 90 years from creation or 21 years from death of lives in being whichever is longer; plus there is a wait and see and a mandatory repriveation provision as well

3.. Determine traits of the trust (key characteristics)

††††††††††† a.. see if it is revocable

i.. CA presumes the trust to be revocable; only irrevocable if stated in instrument; or settlor deceased

††††††††††† b.. transfer a beneficial interest?

††††††††††† c.. trusts contain spendthrift provisions - provision that prevents beneficiary from

transferring and prevents attachment by creditors (are recognized in CA although there are expceptions (if settlor is beneficiary, due but unpaid distributions, spouse and child support)

d.. discretionary provisions - are provisions for payment mandatory or discretionary

i.. trustee discretion is up to the trustee or what it says in the instrument (a standard)

ii.. no such thing as absolute discretion - the court can ALWAYS review trustee discretion (trustee cannot disregard trust purposes; trustee must still act reasonable; not in bad ways)

††††††††††† e.. support provision - payments could be limited to trusteeís support

††††††††††† ††††††††††† i.. mandatorily - have to provide for support

††††††††††† ††††††††††† ii.. discretionary -

f.. pour over provision - a provision in a will that leaves property to a trust; governed by terms of trust and future amendments

††††††††††† ††††††††††† i.. trust identified in a will

††††††††††† ††††††††††† ii.. written

††††††††††† ††††††††††† iii.. written down before or concurrently with will execution; although


need not to be funded except for property that pours over; trust can receive its initial funding from the will

††††††††††† g.. life insurance policy, life insurance, annuities - can be payable to a trust

4.. Changes to the trust (can the trust be changed)

††††††††††† a.. changes by the court

i.. by deviation - will allow changes if comply with terms of the trust; if there was an unanticipated change in circumstances, complying with the terms of the trust would be contrary to the settlorís intent

††††††††††††††††††††††† ††††††††††† a).. at common law deviation only allowed for __

††††††††††† ††††††††††† ii.. cy pres - for handling charitable trusts

††††††††††† b.. changes by the parties

††††††††††† ††††††††††† i.. settlor can do it (presumed revocable)

††††††††††† ††††††††††† ii.. beneficiaries can do it - but if a matieral purpose remains; cannot be

terminated if trust contains a spendthrift provisions (if settlor agrees can terminate or modify the trust)

c.. termination of a trust - methods for changing apply here and are about the same; terms of the instrument can change this stuff

5.. propriety of trusteeís actions during estate administration

††††††††††† a..powers of trustee - what and did he exceed those powers

††††††††††† ††††††††††† i.. trust instrument can give powers

††††††††††† ††††††††††† ii.. statute can give powers (CA very comprehensive and gives all powers

trustee would need; even codifies implied powers); couirt can also limit or expand powers

iii.. cannot delegate powers trustee can be reasonably be required to perform (how much to pay beneficiaries of a discretionary trust; under most states you cannot delegate investing duties - but with prudent investor approach trustee may delegate if it is prudent under the circumstances this maybe be delegated (CA))

††††††††††† b.. duties of the trustee

iÖ special skills - if he has or represent he has them, have to use those special skills

ii.. basic duties - to posses and safeguard the property; earmark the property as belonging to the trust; avoid commingling; properly allocate receipts and expenses between principle and income; look for exculpatory clause (a provision that relieves trustee of liability for negligent breaches - not evil such as bad faith)

iii.. investment and management duties - generally covered by prudent investor standard in CA - trustee must consider purposes, terms, distribution requirements of trusts; do not view investments individually any more - now view them as a portfolio - view as overall investment strategy; trustee can consider appreciation, income, safety, taxes, economic situations, needs of beneficiaries, trustee should diversify if possible (if trust has enough money to make it reasonable to do so); trustee must review investments; prudent investor standard is the default - settlor may change it in the instrument

††††††††††† ††††††††††† iv.. duties dealing with loyalty, good faith, and to aovid self dealing

a).. trustee cannot sell, borrow, or buy property from trust for his own use†††††††††††

††††††††††††††††††††††† ††††††††††† b).. no adverse interest to trust

††††††††††††††††††††††† ††††††††††† c).. presumption of breach if trustee enters into transactions with

beneficiary that benefit trustee

v.. accounting duties - trustee must account for what he did; beneficiaries reasonably informed of the trust and its administration (terms, full information about everything that is going on to beneficiaries when they ask); unless provided otherwise by instrument or beneficiaries accountings once a year required

vi.. compensation - first look to instrument; if silent; trustee entitled to reasonable compensation (unlike personal representative of a estate - where we follow a chart)

††††††††††† ††††††††††† vii.. liability to third parties -

††††††††††††††††††††††† ††††††††††† a).. contract liability - can avoid personal liability of contract

properly entered into for trust; does not provide for personal liability; trustee reveals that trustee is contracting in a representative capacity or identifies the trust

††††††††††††††††††††††† ††††††††††† b).. tort liability - CA - trustee only responsible if trustee

personally at fault

c).. liability as a property owners - for taxes, slips and falls; trustee liable only if personally at fault†††††††††††

††††††††††† c.. remedies against trustee

††††††††††† ††††††††††† i.. loss or depreciation in value of trust property

††††††††††† ††††††††††† ii.. profits made

††††††††††† ††††††††††† iii.. profits that were lost

††††††††††† ††††††††††† iv.. can remove trustee from office

††††††††††† d.. trust property

††††††††††† ††††††††††† i.. can trace property as long as it has not reached hands of a BFP

††††††††††† e.. if trust is revocable, then settlorís creditors can reach the trust (both while

settlor alive, and after he is dead)

f.. remedies against other beneficiaries

g.. remedies against third parties if they endanger trust or property - if third party acts in an evil way then there is possibility of double damages

h.. look for an exculpatory clause (only negligence)

i.. statute of limitations - 3 years from discovery or when it should have been discovered; 3 years from when it is revealed in an accounting

j.. resulting trust - things that are not express trusts - instead where the court implies a trust like relationship under the circumstance; under the conduct looks like the parties wanted a trust but they never expressed trust intent

i.. income to X until X dies - what to do with the left over money?The money goes back to the settlor because the settlor must have intended that to happen

k.. constructive trust - not express or implied - is an equitable remedy to prevent unjust enrichment when an evil person has acquired property through unconscionable means; pretend like they are trustee and then allow person that should have got trust property


Review of sample questions


Question One


-         note the call of the question - focus on ways in which duties were or were not breached


Things Sam did and whether they violate his duties:

1.. held 30% of trust for corporation for five years - was this reasonable?

a.. examine with prudent investor standard - is 30% too much? Should it have been kept for that long?Must look at the entire portfolio; not inherently suspicious; just note this issue and the elements

2.. allocated cash dividend to income

††††††††††† a.. cash dividends are income so this was okay

3.. allocated a stock dividend to income

††††††††††† a.. this should have gone to principle - was a breach

††††††††††† b.. stock dividend should not be allocated to income because they go to principle

4.. sale of Hercules stock to his wife

††††††††††† a.. self dealing and conflict of interest

††††††††††† b.. even though it was for fair market value this is not enough to get around

breach of duty; might be enough to beg the court

††††††††††† c.. Sam is responsible for profits the stock gets

††††††††††† d... could trace the property - (wife is most likely not a BFP)

5.. allocating profit of Hercules stock to income

††††††††††† a.. sale of stock goes to principle

6.. purchasing Fabulon stock

††††††††††† a.. much more to talk about in regard to prudent investor standard

i.. new company, test production, company was going to distribute income as cash dividends (very suspicious because nothing for the start up to reinvest)

††††††††††† b.. very suspicious - these factors need to be discussed


Question 2


Clause by clause would be the easiest way to go through this.On exam there will be space limitation.


Clause A

-         precatory language - lacking enforceable duties, and therefore no trust intent


Clause B

-         decedent cannot be a trust beneficiary

-         lapsed gift - does the anti lapse statute apply? Does not apply in this case because it is to a friend and not a relative.Gift fails.

-         Gift then goes to remainder (clause f) since it fails


Clause C

-         named trustee lacks capacity but is not a problem in the long term because the court will appoint a new trustee

-         Henry lacks capacity because he is in a home for criminal insance

-         Is the trust too small?Is it economical to maintain a trust of $1,000?So maybe the new trustee would terminate the trust and give it outright to the beneficiaries


Clause D

-         no property in trust and therefore the beneficiaries are out of luck

-         note was only an indication of future intent

-         a trust needs property and the note therefore was not enough


Clause E

-         CA recognizes honorary trusts even though there is no beneficiary

-         Most states do not allow this

-         This can last for 21 years (CA allows honorary trust to last for 21 years)

-         This might be too small to keep it in trust


Clause F

-         pour over provision

-         must meet elements (written trust, executed prior to will, appropriately identified)

-         who benefits from the pour over property? New beneficiaries or original?Pour over is governed by amendments so it is the new beneficiary



Question Three


A.. common trust fund; okay to commingle the trust fund in this case

B.. seems speculative and a violation of the prudent investor standard; should investigate this

C.. presumption that this type of transaction is in violation of trusteeís fiduciary duties but it is rebutable

D.. breach of duty in this case can be waived; fair market value so the trustee is not making a profit; want to be careful though


Question Four


Hardest question as there is very little guidance as handling the issues


1.. Presumption of revocability

-         if fact is missing, then it is amendable and revocable

-         change was valid because no consent of beneficiaries was needed


2.. If it was Irrevocable trust

-         agreement of beneficiaries

-         so then the amendments would be valid


3.. So, whichever way we look at it, the amendment is good, so now ask: CAN beneficiary terminate?

-         yes, if no material purpose remains

-         is there a material purpose left? Yes, settlor worried about spending it on riotous living


4.. Can the court change the purpose?

-         no deviation unless a change in circumstances

-         no change in circumstances here - he just want the money early


Question Five


1.. did Popís 1990 will effectively revoke the 1985 will? Discuss

-         the 1990 will did have an expressly revocation provision (revocation by subsequent writing)

-         but it looks like the 1990 will can be contested because of fraud in the inducement (deception as to extrinsic fact, and then made a change based on that extrinsic fact)

-         therefore the 1990 will never properly revoked the 1985 will so the 1985 will is still good

-         might also be able to discuss independent relevant revocation


2.. After Popís death, who owned the house? Discuss

-         Donna owns it because it was a valid gift to her - not in the probate estate

-         Donna already has it

-         Satisfaction issue - need a written document to show satisfaction- this is the only hope that Sam would have


3.. was Popís attempt to establish atrust for his employees effective?

-         need to go through the elements of a valid trust

-         inent - no issue; capacity - wrote a will; valid - as far as we know; legal - is legal; condition - legal; property ascertainable - yes; fact that no trustee named - not fatal, court will appoint one; beneficiaries can be named as a class - not a problem; Rule against perpetuities - get 90 years from date of creation so not a problem


4.. Of the property which will be distributed to Popís relativeís which relative will get what fraction of the property?

-         already decided that the new will not good, so now under old will.Will Samís kids get anything?Anti lapse statute applies so Samís gift for his children is saved

-         What if Donna could not invalidate 1990 will, is she out of luck?NO - she is an omitted child and will take, because testator though she was dead.She would get half - this is what she would take under intestacy.



Question 6


1.. has Tom breached his duties as trustee and, if so, what are his liabilities to the beneficiaries?Discuss.


Propriety of investments under prudent investor rule.

-         stocks and bonds - what are they earning? They are earning 8%

-         we donít know about safety

-         appreciation is divided in value, some went up, some stayed the same

-         we donít know the whole portfolio


Rate of return on apartment house?

-         house is earning 5.5%

-         in a neighborhood that is becoming industrial; hard to tell if this is good; we do know that we should not build something else though because home values are probably going down


Vacant lot.

-         speculative

-         maybe they held on to it too long?

-         No income, questionable value

-         Just make sure you discuss


Self dealing

-         lending at low market rate

-         lending to a company he is connected to (conflict of interest)

-         cushion between value of loan and value of property is too small


2.. has Abe received all the income to which he is entitled?Discuss.

-         rent is income so the rent was missapropriated

-         no income from lot because it was not earning anything - might be a breach

-         below market rate loan - breach

-         no capital gain on stock - that is okay