Legal Three

Trusts Outline for the California Bar Exam

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TRUSTS

  1. Private Express Trusts

    1. Defined – a fiduciary relationship w/respect to prop whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create a trust for legal purposes

    2. Elements – a valid trust requires (1) a settlor, (2) delivery, (3) trustee, (4) intent, (5) trust res, (6) beneficiary, and (7) a valid trust purpose

    3. Property of the Trust – any presently existing interest in prop that can be transferred can be the corpus of the trust – no prop, no trust, fails

      1. Examples – fee simple absolute, future interests, life insurance policies, bonds, stocks

      2. Illusory Interests – cannot be the subject matter of trust (debts, future profits, mere expectations

    4. The Beneficiary – any ascertainable person or group of ppl can be the beneficiary of a private express trust

      1. Corporations – included

      2. Unincorporated Associations

        1. CL – could not be the beneficiary

        2. Modern Law – can be the beneficiary

      3. Class Gifts – are valid, but class cannot be so large that it cannot be administered – class must be reasonably definite

      4. A child conceived when the interest was created and later born is deemed an ascertainable person

      5. Notice not req., but must accept – express or implied

      6. RAP Issues

    5. Trustee – a trust must have a trustee, but the crt will not allow the trust to fail solely b/c there is no trustee or the trustee refuses to serve – crt will appt

      1. Must have duties, cannot be a passive trust

      2. Crt can remove for breach of duties, conflict, incapacity – trustee can resign only w/crt permission

      3. Merger if beneficiary and trustee become same person

    6. Manifestation of Trust Intent – there must be a present manifestation of trust intent made by the settlor

      1. No magic words are needed to create, but precatory words (words of wish/hope/desire), by themselves are not sufficient to create

      2. Precatory words + parol ev may be sufficient

      3. Trusts of personal prop do not have to be in writing, SOF applies only to real prop

    7. Creation

      1. Trust Created to Take Effect at Death – must comply w/Statute of Wills (Probate Code) – settlor is really a testator

      2. Trust Created to Take Effect During Settlor’s Lifetime – created by:

        1. Transfer in Trust – 3p is the trustee

          1. Real Prop – settlor must execute and deliver a deed transferring title to the trustee (writing req. per SOF)

          2. Personal Prop – must be delivery to the trustee of the trust prop at the time settlor manifests the intent to create the trust (can be actual, symbolic, or constructive)

            1. If there is no delivery, there is no trust

        2. Declaration in Trust – settlor declares herself as the trustee

          1. Real Prop – there must be some writing

          2. Personal Prop – b/c the settlor is the trustee there is no issue of delivery – just look at present manifestation of trust intent

    8. Legal Purpose – a trust is invalid if it is illegal, its performance req. a criminal or tortious act, or it is contrary to public policy

      1. Illegality at Creation – crt will strike illicit condition, or if not possible, will invalidate the trust at its inception and settlor will remain the owner of the prop

        1. Example – settlor creates trust for A on the condition that A divorces his wife – condition will be stricken as invalid b/c it violates public policy

        2. Compare – settlor creates trust to defraud creditors – crt will invalid entire trust

        3. Alternative – crt will allow the trustee to keep the prop for himself as punishment to the settlor who does not come w/clean hands

      2. Illegality After Creation – resulting trust

  2. Charitable Trusts

    1. Defined

      1. Statute of Elizabeth – trusts for edu, poverty, sickness, orphans

      2. Restatement – any trust which confers a substantial benefit upon society

    2. Creation – same way as express trusts:

      1. Manifestation of trust intent,

      2. At T’s death by will, or during settlor’s lifetime by declaration of trust or by transfer in trust,

      3. Of a presently existing interest in prop that can be transferred,

      4. For a legal charitable purpose

    3. Beneficiary of Charitable Trust

      1. Identification – there is no ascertainable person or group of ppl b/c society is the beneficiary – beneficiaries indefinite

      2. Note – individual may receive an incidental benefit

      3. Small Group of Poor People

        1. View 1 – private trust b/c only a few ppl are getting a benefit

        2. View 2 – it is a charitable trust b/c whenever poverty is eliminated, society benefits

    4. RAP – does not apply to charitable trusts – can endure forever

    5. Cy Pres – “as nearly as possible” – if there is not enough $ in the trust to cover subject of trust, crt will either impose a:

      1. Resulting Trust – corpus is returned to settlor or his estate or,

      2. Cy Pres – crt finds that settlor had a general charitable intent and only the mechanism for effectuating that intent is not possible or practicable, the crt can modify the mechanism as nearly as possible to effectuate settlor’s general intent

        1. Intrinsic ev (trust doc) or extrinsic ev can be introduced to ascertain settlor’s intent

        2. If settlor has specific charitable intent to create specific gift, cy pres cannot be used and crt will impose resulting trust

  3. Pour-Over Wills

    1. Scenario – Settlor creates an intervivos trust, with a provision in her will devising part or all of the estate to the trustee of the trust (see wills outline)

  4. Miscellaneous Trusts

    1. Honorary Trusts – trust has no ascertainable beneficiary and confers no substantial benefit upon society

      1. Because there is no beneficiary, it cannot be a private express trust

      2. Because there is no substantial benefit to society, it cannot be a charitable trust

      3. Simply a goal of the settlor

      4. Trustee is not req. to carry out, but has the power to carry out – trustee is “on his honor” to carry out settlor’s intent

      5. Examples – trust to further foxhunting or to take care of settlor’s pet

      6. Trust will fail if trustee refuses to carry out – resulting trust

      7. RAP issues – no measuring life, will violate rule

        1. Some crts will strike at its inception resulting trust

        2. UTC – enforceable up to 21 yrs

    2. Totten Trusts – tentative bank account trust, depositor is trustee for a person who is to receive the $ at the time of the depositor’s death

      1. Example – account reads “Mary Smith as trustee for John Jones”

      2. Not a true trust – more of a will substitute

      3. Depositor retains full control of the $ in the account during his life

      4. Revocation – w/d of funds, any lifetime act manifesting an intent to revoke, beneficiary predeceases the depositor

      5. Note – if there is a manifestation of a trust intent, totten trust may become a private express trust

  5. Restraints on Alienation

    1. Rule – the beneficiary of a private express trust can voluntarily alienate his interest in prop (transfer his right to future payments), and creditors can involuntarily alienate a B’s interest in prop (attach or seize a beneficiary’s right to future payments)

    2. Spendthrift Trusts – the beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attach the beneficiary’s right to future payments of income or principal (trust must state definition)

      1. CL Exception – preferred creditors can attach the beneficiary’s right to future payments, notwithstanding the spendthrift provision

        1. Preferred Creditors – govt., those who provide necessities of life to the beneficiary, child support, spousal support, alimony, tort judgment creditor

        2. Any Creditor – has a right to attach “surplus” measured by the beneficiaries “station in life” – many jxds allow creditors to reach surplus that exceeds B’s cost of living

      2. Spendthrift Trust Provisions for Settlor

        1. Involuntary Alienation – trust itself is valid, but the spendthrift provisions are not recognized – one cannot insulate oneself from one’s own creditors, would violate public policy (but some jxds allow)

        2. Voluntary Alienation – split of authority

          1. Majority – ignore the provision and allow settlor to voluntarily alienate her interest

          2. Minority – uphold provision and will not allow settlor to transfer – policy driven, provision protects the beneficiary from himself

    3. Support Trusts – trustee is req. to use only so much of the income or prin as is necessary for the beneficiary’s health, support, maintenance, or edu

      1. General rule – no voluntary or involuntary alienation

    4. Discretionary Trusts – trustee is given sole and absolute discretion in determining how much to pay the beneficiary if anything and when to pay the beneficiary if ever

      1. Voluntary Alienation – 2 arguments – no VA b/c uncertain if party will be paid, if ever, or VA b/c assignee will step into the party’s shoes and if trustee decides to pay, the trustee must pay the assignee

      2. Involuntary Alienation – same 2 arguments

  6. Resulting Trusts

    1. Defined – an implied trust in equity and is based upon the presumed intent of the parties to prevent unjust enrichment – usually a reversionary interest – resulting trustee will transfer the prop to the settlor

    2. Methods of Creation

      1. Private express trust ends by its own terms and there is no provision for what happens to the corpus thereafter

      2. Private express trust fails because there is no beneficiary or party dies

      3. Charitable trust ends b/c of impossibility or impracticability and cy pres cannot be used

      4. Private express trust fails b/c after creation, the trust become illegal

      5. There is excess corpus in a private express trust (due to good invest, there is more than enough corpus avail to accomplish the trust purp)

      6. Purchase Money Resulting Trust – sale of prop where 1 party obtains legal title, but consideration is paid by another party –presumed whenever X (the beneficiary) furnishes consideration for the acq of prop, but title is taken in the name of Y (the trustee). Burden is on X, the party claiming to be the beneficiary, to prove by C&C ev that he supplied $ and a PMRT was intended. Y can argue payment was a gift, or loan to Y, or satisfaction of debt owing to Y

        1. Exception – no PMRT presumed if parties are close relatives

      7. Semi-Secret Trusts – when the will makes a gift to a person to hold as trustee, but does name the beneficiary – “I devisee 100k to A as trustee” – INVALID – will be argued by residuary

        1. The will on its face shows a trust intent, but the beneficiary cannot be ascertained

        2. To admit into ev to est. the terms violates the Statute of Wills, crts will decree a resulting trust

        3. Distinguish – Secret Trusts – where the crt allows in parol ev to est. the ID of the beneficiary – VALID (below)

  7. Constructive Trusts

    1. Defined – a remedy to prevent fraud or unjust enrichment wherein the wrongdoer has an obligation to transfer the prop to the intended beneficiary as determined by the crt; means to disgorge a wrongdoer of his ill-gotten gains (note not really a trust)

    2. Methods of Creation

      1. Self Dealing Trustee – when a trustee of a private express trust or charitable trust makes a profit b/c of self dealing

        1. Trustee will be ordered to turn profits over to the intended beneficiaries of the trust

      2. Fraud in the inducement or undue influence in the creation of a will

        1. Crt can deny the will probate and make the heir a CT to transfer prop to intended beneficiary

      3. Secret Trust – will makes a gift that is absolute on its face, but was in fact made in reliance on the beneficiary’s promise to hold the prop in trust for another

        1. Parol ev is admissible to show that the beneficiary was B

        2. A will become a CT for B if proved by clear and convincing ev

        3. BUT crts will not impose a CT for semi-secret trusts – rather they will impose a resulting trust

      4. Oral Real Estate Trusts – oral secret trust for transfer of real estate to beneficiary – A, party named in doc asserts SOF defense – crts will bar A from using a SOF defense if:

        1. Fiduciary Relationship b/n S and A – crt will make A CT

        2. Fraud in the Inducement – crt will make A CT

        3. Detrimental Reliance by B, the intended beneficiary – if B relied to his detriment on the existence of this oral real estate trust, then b will get the prop from A via a CT

      5. Homicide – killer cannot take prop of V by will or intestacy – will be CT in favor of whomever would have taken the prop if killer predeceased V

      6. Breach of Promise alone does not result in CT – unless fraudulent misrep

  8. Trustee Powers & Duties

    1. Trustee Powers

      1. Enumerated express powers

      2. Implied powers – helpful to carry out the trust purpose

        1. Sell trust prop, incur expenses, lease, borrow

      3. Uniform Prudent Investor Act (UPIA) – provides that trustee must invest as a prudent investor. Each individual investment is not scrutinized, but rather performance is measured in the context of the entire portfolio

    2. Fiduciary Duty – Reasonable Prudence Test– the trustee owes a general fiduciary duty to administer the trust solely in the interest of the beneficiaries. Trustee must exercise that degree of care, skill, and prudence that would be exercised by a reasonably prudent person in managing her own property.

    3. Trustee Duties Owed to Beneficiaries

      1. Duty of Loyalty – requires that the trustee admin the trust for the benefit of the beneficiaries, having no other consideration in mind; no self-dealing by trustee

        1. Consequences

          1. If there is a loss the trustee is “surcharged” meaning that the trustee has to make good on the loss

          2. If the trustee makes a personal profit, CT imposed for profits

      2. Duty of Loyalty to Residuary Beneficiaries – a trustee can breach a duty of loyalty by not acting in the best interest of the beneficiaries

      3. Duty to Invest – split of authority

        1. State Legal Lists – some states have lists which the trustee must follow in the absence of directions from the trust – good investments should be made in following order:

          1. Fed govt. bonds, Fed. insured certificates of deposit , 1st DOTs in real estate (cannot invest in 2nd DOT)

          2. Stocks of publicly traded corps (cannot invest in new biz)

        2. CL Prudent Person Test – duty to invest req. the trustee to act as a reasonably prudent person investing his own prop, trying to max income while preserving corpus

          1. If a trustee holds himself out as having a superior skill, he is held to that higher standard

          2. Each individual investment is scrutinized

          3. Good invest: Fed govt. bonds, 1st DOTs in real estate, Fed insured certificates of deposit, Blue chip stocks, Mut fnds

        3. Uniform Prudent Investor Act – adopted in most states, provides that trustee must invest as a “prudent investor”

          1. Each individual investment is not scrutinized, but rather performance is measured in the context of the entire portfolio; thus any investment is not per se invalid

        4. Under all standards, trustee has a duty to diversify so that if there is a loss the loss will not destroy the entire portfolio

        5. No speculating allowed under state lists or prudent person test

        6. Breach – trustee must make good on the loss

      4. Duty to Earmark – requires trustee to label trust prop as trust prop

        1. Consequences of Breach

          1. CL Approach – if trustee breaches duty to earmark and there is a loss, the trustee is held personally liable

          2. Modern Approach – if there is a failure to earmark and there is a loss, the trustee is held personally liable only if the loss was caused by the failure to earmark

      5. Duty to Segregate – trustee cannot commingle any personal funds or funds from another trust with the trust funds

        1. If breach, trustee can be removed and held liable for any loss

      6. Duty Not to Delegate – the trustee can rely on professional advisors in reaching a decision, but the trustee cannot delegate decision-making authority to these advisors

        1. At CL, trustee could not delegate duty to invest to money manager, MT – allows

        2. At CL, trustees could only act unanimously, MT allows majority decision

      7. Duty to Account – requires trustee on a regular basis to give the beneficiaries a statement of income/expenses of the trust

        1. If trustee fails, beneficiaries may file an action for accounting

      8. Duty of Due Care – trustee must act as a reasonably prudent person in dealing w/his own affairs

      9. Duty to Defend Trust from Attack – must defend in legal suit

      10. Remedies for Breach of Duties – Damages, CT, Tracing, Equitable Lien, Ratify the transaction if good for beneficiary, Remove trustee

    4. Liability of Trustee to Third Persons

      1. Liability in Contract

        1. CL Rule – trustee is sued in his personal capacity, but trustee can get indemnification from trust assets if the trustee acted w/in his powers and was not personally at fault

        2. Modern Rule – if the other party to the k knows that the trustee is entering into the k in his rep capacity, trustee is not personally liable and may only be sued in his rep capacity

      2. Liability in Tort

        1. CL Rule – the trustee is sued in his personal capacity, but can seek indemnification if he was not personally at fault

        2. Modern Rule – trustee is sued in his ind capacity and is personally liable for torts only if the trustee is personally at fault (i.e. acted neg)

  9. Modification & Termination of Trusts

    1. Modification by Settlor – settlor can modify the trust if the settlor expressly reserves the power to modify, settlor also has power to modify if settlor has power to revoke

    2. Modification by the Court – there can be modification by the crt re charitable trusts and the cy pres power by changing the mechanism to further the settlor’s general charitable intent

      1. Deviation (Doctrine of Changed Circumstances) – when the crt changes the admin or mgmt provisions (not interests) of the trust based on:

        1. Unforeseen circumstances on the part of the settlor, and

        2. Necessity (deviation needed to preserve the trust)

      2. Crt may terminate is purpose becomes impossible, illegal, complete

      3. Claflin Doctrine – trust cannot be modified or terminated, even if all beneficiaries agree, if to do so would be contrary to a material purp of S

    3. Termination of Revocable Trusts

      1. Majority Rule – to retain the power to revoke the settlor must expressly reserve the power in the trust instrument

      2. Minority Rule – settlor has the power to revoke, unless the trust is expressly made irrevocable

    4. Termination of Irrevocable Trusts – 3 ways irrevocable trust can terminate prematurely:

      1. Settlor and all the beneficiaries agree (incl contingent remaindermen – guardian ad litem must be appt to rep them) – trustee not liable

      2. All the beneficiaries agree to terminate and all the material purposes have been accomplished – equity will not see a trust continue to carry out a minor or insignificant purpose

      3. By operation of law – passive trusts and the Statute of Uses (trustee has no active duties and is just holding bare legal title)

        1. Does not apply to stock or other personal prop – but by analogy principles of Statute of Uses should apply b/c equity

  10. Income & Principal (Uniform Principal & Income Act)

    1. Income & Expenses Allocated to the Trust Income – Life Tenant

      1. LT gets income from cash dividends, interest, net business income, rent

      2. LT’s must pay for interest on loan indebtedness, taxes, minor repairs

    2. Income & Expenses Allocated to the Trust Principal – Remaindermen

      1. Principal/RM gets income from stock dividends/profits (capital gains), stock splits, net proceeds on the sale of a trust asset

      2. RM must pay for prin part of loan indebted and major repairs or improve

    3. Adjustment Power of Trustee – can disregard the above rules if a diff allocation is necessary to admin the trust fairly to the beneficiaries

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