Trusts Final Exam Quiz

Introduction to Trusts

• A trust is created when a property owner divides ownership into legal and equitable interests.
• The settlor (trustor/grantor) creates the trust, transferring legal title to a trustee for the benefit of a beneficiary.
• This is often used when a gift is being made to a worthy recipient, but the owner wants to control the distribution.
• Trusts help manage assets for minors, incompetents, spendthrifts, or to avoid probate.

Texas Trust Legislation

• Texas Trust Code governs trusts created after January 1, 1984, and transactions relating to older trusts.
• Prior to 1943, trust law relied on case law.

Purposes and Uses of Trusts

• Protect beneficiaries (minors, incompetents, spendthrifts).
• Flexible asset distribution.
• Protection against incapacity of settlor.
• Professional management of assets.
• Avoidance of probate.
• Tax benefits (lower tax brackets for beneficiaries).

Elements of a Valid Trust

• Trust intent (settlor's desire to create a trust).
• Settlor with capacity (must be legally able to create a trust).
• Compliance with the statute of frauds requirement (some trusts need to be in writing to be enforceable).
• Legal purpose (cannot violate public policy).
• Transfer of property (transfer of title).
• Trustee holding legal title.
• Beneficiary holding equitable title.
• Compliance with RAP (Rule Against Perpetuities).

Trust Creation

• Trust intent is the crucial element in trust creation. Courts will not create a trust if no intent is shown.
• Specific trust language is not required to establish trust intent, but general language may be sufficient.
• Trust must be for a specific purpose or intent.
• A trust is created only if the settlor manifests intention to create a trust.

Combination of Parties

• Settlor, Trustee, and Beneficiary can combine in many ways.
• Sole trustee cannot be the sole beneficiary.
• Split of legal and equitable title is a key characteristic of trust.

Trust Creation (continued)

• The trust does not have to specify the current or future beneficiary.
• The trustee does not have to inform the beneficiary that they are a beneficiary of the trust.
• The settlor and trustee do not have to explain the purpose of the trust to the beneficiary.
• The trustee is required to act prudently in the reasonable care, skill, and caution.
• Trusts are not enforceable if trustee does not accept the fiduciary duties.

Trust Creation During Settlor's Lifetime

• Inter vivos trusts are created while the settlor is alive.
• Self-declaration of trust (settlor is the trustee and transfers equitable title to beneficiary).
• Transfer-in-trust (settlor transfers legal title to a trustee).

Trust Creation Upon Settlor's Death

• Testamentary trusts are created in a will
• The beneficiary does not have to be aware of the trust and be able to recognize valid conditions/directions

Statute of Frauds

• Trusts of real property must usually be evidenced by a written instrument.
• Trusts of personal property may not require a writing.
• Oral trusts of real property are unenforceable in Texas.

Rule Against Perpetuities

• Future interests must vest within 21 years after the death of a person alive when the interest was created.
• This rule applies generally to trusts other than charitable trusts.

During Settlor's Lifetime (continued)

• Inter vivos trusts are generally used for estate planning purposes.
• Beneficiaries during the life of the settlor can be identified or unidentified.
• The trust property can be transferred

Trusts During Settlor's Lifetime (continued)

• Inter vivos trust property is not part of the probate process upon the settlor's death.
• Some inter vivos trusts allow the settlor the right to revoke or amend during his lifetime until the settlor's death
• Can be created for many purposes, but some are not allowed (tax evasion)
• There are tax benefits for certain conditions of inter vivos trust

Trust Administration - Overview

• Trustees are legally required to accept the office and undertake the duties associated with it.
• Trust administration relies on the trust document and the Trust Code of Texas.
• Statutory trustee powers can be modified.

Trust Administration - Additional Points

• Trustees should have a basic degree of skill and prudence.
• Trustee's duty is to serve the beneficiaries
• Trustees must act in a prudent fashion when handling a trust or risk personal liability.

Trustee's Responsibilities and Duties

• Duties of Loyalty, Prudence, and Confidentiality
• Duties to Inform Beneficiaries
• Accountings (reporting)
• Handling Tort issues
• Handling Contract issues

Trustee Compensation

• Trustees may receive reasonable fees.
• Many factors go into what a reasonable fee is.

Court Alterations

• Deviation from trust provisions is possible if the settlor had an “equitable argument” that would have considered the same circumstances.

Party Alterations by Settlor

• Settlor can revoke, modify, or amend a trust, unless trust is specifically written as irrevocable
• Revocation is often a valid action.
• Settlors and beneficiaries can work together to change terms of irrevocable trusts

Party Alterations by Trustee

• Trustee can modify or amend a trust with court approval of beneficiaries
• If no court approval, then a trustee is not permitted
• Trustee's powers are delegated.

Trust Termination

• Trust will end when trust document terminates it
• Trust will end when all applicable terms are completed
• Trust will terminate via explicit written directions
• Trust will end if settlors and all parties agree in writing
• Trust can be terminated by the court if there's a worthy reason

Trust Enforcement

• How to ensure the trust is run correctly and by who.
• How to approach the courts
• How those courts will evaluate evidence and actions for breach of trust.

Remedies

• Trustee has legal responsibility.
• Personal recovery for beneficiaries
• Trust property recovery.
• Parties are personally liable

Other Trust Issues

• Trusts of real property, personal property, life insurance, and bank accounts.
• Resulting Trusts - when trust fails
• Constructive Trusts - when improper conduct leads to trust creation.