Trusts Outline PDF

TRUSTS INTRODUCTION Basic Idea – First, the owner must divide the title to the property into legal and equitable interests. Second, the owner must impose fiduciary duties on the holder of the legal title for the benefit of the holder of the equitable title. The trustee has legal interests in the p...

TRUSTS INTRODUCTION Basic Idea – First, the owner must divide the title to the property into legal and equitable interests. Second, the owner must impose fiduciary duties on the holder of the legal title for the benefit of the holder of the equitable title. The trustee has legal interests in the property and the beneficiary has equitable interest. The settlor creates the trust (also known as the trustor or grantor). A trust scenario usually arises when a property owner wants to bestow benefits on a worthy individual or charity but does not want to make an unrestricted outright gift. Trust = principal, corpus, estate, or res The settlor transfers legal title to a trust that is honest and reliable and equitable title to a beneficiary that is deserving of a windfall. The trustee manages the property according to legal duties and settlor’s instructions Trustee distributes to beneficiaries according to settlor’s instructions. The trust ends when the duties or complete or the property is exhausted Texas Trust Legislation Before 1943 – case law and sparse statutes April 19, 1943 to December 31, 1983 Texas Trust Act January 1, 1984 to present – Texas Trust Code (retained a lot of the Texas Trust Act with enhancements from the Restatement) and part of the Property Code (also found in the uniform trust code, Property Code, Probate Code, and Family Code) – applies to all trusts created after the effective date and as well as transactions occurring after the effective date relating to prior trusts. Warning - Trusts are not always worth the costs, expense, and hassle. You have to weigh the benefits and burdens. Sometimes a durable power of attorney for property management can be economically prepared and is all that the client needs. Texas attorneys are prohibited from making a lot of statements about inter vivos trusts. Purposes and Uses of Trusts 1. To provide and protect beneficiary a. Minors, incompetents, people without management skills (celebrities), spendthrifts (they know better but don’t want to be responsible). For minor and incompetents, you would need a guardian if you did not have a trust and that is expensive and time consuming. 2. Flexibility of asset distribution a. Spread benefits over time, give the trustee discretion whom to pay and how much to pay, set standards and impose conditions (just can’t be illegal or against public policy). 3. Protection against settlor’s incompetence – the stand by trust a. Once a person is declared incompetent due to illness, injury, or other cause, the person cannot manage property. A trust can be used to avoid the need for a guardian. The settlor will serve as the trustee but he will have a successor trustee to take over when he is incompetent. 4. Professional management of property a. If a person doesn’t have the skills to manage the assets, they put the property in the trust and have someone else take care of it. Additionally, if they screw it up, you can sue them. Includes banks and trust companies that have more expertise and experience with various types of investments than most individuals. Professional trustees also have greater investment opportunities. 5. Probate avoidances a. Property in a trust created during the settlor’s lifetime is not part of the probate estate upon the settlor’s death. The property in the trust will be distributed according to the terms of the trust and does not pass under the will or by intestacy. It allows the beneficiaries to receive the property faster and avoids probate publicity. (As opposed to a trust created in a will). 6. Tax benefits a. The beneficiary may be in a lower tax bracket than the settlor so income taxes may be saved. If the trust is properly constructed, the trust property will not be included in the settlor’s taxable estate. Elements for a Valid Trust Trust intent Settlor with Capacity Statute of frauds compliance Legal Purpose Transfer of Property Trustee holding legal title  Beneficiary holding equitable title RAP compliance TRUST CREATION TRUST INTENT – trust intent is the threshold factor in determining whether or not a conveyance of the property is sufficient to create an express trust. If the transferor does not manifest trust intent, no trust is created and the court will not intervene to create a trust. No particular words or conduct is necessary to establish trust intent and the mere use of trust terminology alone is insufficient to show trust intent. “A trust is created only if the settlor manifests an intention to create a trust.” TC 112.002 Elements 1. Split of legal and equitable title 2. Imposition of enforceable (fiduciary) duties on the holder of legal title for the benefit of the equitable titleholder. Basic Principles Exact use of trust language not needed. o Perfect Union case,pg. 12 Weak language showing intent may be sufficient – courts are very willing to have a creation of a trust. There exists no particular forms or words required to create a trust, if there exists reasonable certainty as to a putative trust’s property, object, and beneficiaries. o Tomlinson v. Tomlinson, pg. 18 Intent must be present intent – cant say “tomorrow morning I am going to give you money” – intent to create a trust in the future is insufficient. Settlor and trustee are not required to tell beneficiary that he is to receive property at some time. Beneficiary does not have to be aware of the trust. Settlor need not know or understand technical trust words. Use of trust language is not conclusive – just because you call it a trust, doesn’t mean that a trust exists Duties must be legally enforceable, not moral or ethical – precatory language is insufficient Statute of Uses – the common law precursor to a trust was called a use. TEXAS – applies to real property but it would have the same result with personal property. The trust continues if the trustee has the power or duty relating to trust administration and if the trustee does not, legal title will vest in the beneficiary. Before 15th Century – honorary only, not enforceable – so beneficiary had no rights. During 15th Century – enforced in equity, even though not at law Uses were used to avoid duties of property ownership under feudal land ownership system because they didn’t want to do all of the work for the King. The statute of Uses was enacted in 1535 – it converted the beneficiary’s equitable interest into legal interest as well, thereby eliminating legal interest formerly held by the trustee. This was called executing the use – it got rid of the use. Now the beneficiary was responsible for all the responsibilities of ownership Exception – developed at common law. The active use is where the trustee had actual duties to perform (not just a mere title holder). The trustee needed legal title to perform a power or a duty relating to the property for the beneficiary’s benefit. Texas 112.032 Applies to real property (but same result with personal property likely) Trust continues if trustee has a power or duty relating to trust administration IF trustee does not, legal title will vest in beneficiary Combination of Parties – any combination is possible as long as the sole trustee is not the sole beneficiary. You can be the trustee of the trust you create You can be the beneficiary of the trust you created Settlor Trustee Beneficiary TRUST? A B C Yes A A C Yes A B A Yes A B B No – no split (sole beneficiary is the sole trustee) A B, C B Yes – do we have a split of title. Yes, some title is split and there are duties  A B B, C Yes A B, C B, C Yes – each trustee owes duties to each beneficiary and there is a split of title. Trustees hold as joint tenants and Beneficiaries held as tenants in common As long as legal and equitable title are split, even if only a tiny bit – the settlor can keep legal and most equitable title. Sole trustee can never be the sole beneficiary! Merger - If all legal and equitable title is in one person, merger occurs and no trust exists (beneficiary transfers equitable title to trustee or vice versa) o Split of Title and Merger - Trust Code § 112.034 - Any separation of legal and equitable title coupled with fiduciary duties on the legal titleholder is sufficient to create a trust. o Normally, merger occurs when the trust terminates and the trustee distributes the property to the remainder beneficiaries. It can also occur earlier because of circumstances the settlor did not anticipate or because the trustee and beneficiary are working together to terminate the trust (if this occurs, the settlor cannot sue because he no longer has sticks left of the property, unless he held a right to revoke. However, the trustee normally wont do this because no one would hire him again). o Spendthrift – a trust containing a spendthrift provision will not end via merger unless the settlor is also the beneficiary. Instead the court will appoint a trustee to keep title split. This prevents the trustee and beneficiary from circumventing the settlor’s intent by triggering a merger. o A trustee is unlikely to convey legal title to the beneficiary prior to the time the settlor specified because such conduct would give the trustee a bad reputation and jeopardize future trust business. The trustee may also be liable to other remainder or contingent beneficiaries who are deprived of their interests because of premature transfer. Distinguishing Trusts from other legal relationships – other legal relationships may appear trust like because they involve a split of legal and equitable title or because a person is subject to fiduciary duties. The law governing trusts is considerably different from the law controlling other relationships (statute of limitations may be different, for example). Sarah – chimpanzee case – the question was whether they had standing – is it a trust or is it a contract? If it was a trust they had standing but if it was a contract they didn’t have standing. The court found there were only duties under a contract but not fiduciary duties. There was also no intention to create a trust. Agency relationship – Paul gives Arthur written authority to sell some of Paul’s property located in another state and to remit the proceeds back to Paul. There were fiduciary duties, but Arthur was not given any title and there was no split of title. Bailment – property transfers (borrowing a ladder, watching a dog, lending a computer) are just bailments for the benefit of the bailee. There was only transfer of possession, no split of title. Condition subsequent – “To George and his heirs, but if tobacco products are sold on the premises, then I or my heirs may reenter and terminate the estate” – fee simple subject to condition subsequent. There was no split of title and no fiduciary duties. Custodianship – Aunt transferred money to her sister as custodian for niece – conveyance to a custodian does not give rise to a trust. The sister is a fiduciary but she has no title to the property. The niece has the full legal and equitable title to the property that was gifted to her. Debt – David gave money to Cindy in exchange for her promise to repay the money with interest. There was no split of title to the money. Cindy has full legal and equitable title and may do whatever she wants with the money. She also has no duties except to pay back the money. Equitable charge – will left “all my property to Juanita provided she pays money to Sean” creates an equitable charge – when a donor makes a transfer to a donee subject to the donee paying a certain amount of money to a third person. There is a split of title because Sean has an equitable right to obtain the money but Juanita is not a fiduciary. Guardianship - there is a fiduciary relationship but the guardian does not have title to the property, only the right to possess and manage the property. Personal representative/ estate administration – there is a fiduciary relationship but the representative has no title to the property. Both legal and equitable title vests immediately in the heirs and beneficiaries in probate. Power of appointment – power to appoint property to grandson – no fiduciary relationship and no title to property in son. Security arrangements – loan from a bank to purchase a house. The bank demanded collateral for the loan so she took out a mortgage. Security arrangements such as mortgages, deeds of trust, and security interests do not create trust relationships. They are contractual liens on property and do not involve a split of title. METHODS OF TRUST CREATION – a person can create a trust when they are alive or delay the time of creation until the settlor’s death by including trust gifts in the settlor’s will. During Settlor’s Lifetime – a trust created while the settlor is still alive is an inter vivos trust or a living trust. The type of inter vivos trust depends on the person who holds legal title to the property Self Declaration of Trust 112.001(1) – where the settlor declares himself to be the trustee. The settlor retains legal title and is subject to self-imposed fiduciary duties and he transfers some or all of the property’s equitable title to beneficiaries. o Settlor = Trustee Transfer in trust 112.001(2) – in a transfer or conveyance in trust, the settlor transfers legal title to another person and imposes fiduciary duties. The settlor retains all or some equitable title or transfers all equitable title to beneficiaries. o Settlor is NOT Trustee Upon Settlor’s Death – a settlor can create a trust to take effect upon his death by including a gift in trust in the settlor’s will (testamentary trust). The split of title and imposition of duties does not occur until death. The will must be valid, and if it fails the trust will also be ineffective. The testamentary trust must also be valid on its own; validity of a will does not mean the trust is automatically valid. CONSIDERATION – 112.003 consideration is not required for a valid trust. A trust is a gratuitous property transfer (conveyance), not a contractual arrangement, so the beneficiary does not have to give consideration to the settlor. Once you make an irrevocable trust, you cannot revoke on the basis of lack of consideration. Promise to Create trust in the future – 112.003 consideration is needed to enforce a promise to create a trust in the future, just like any other promise to make a gift. It is not enforceable unless the promise qualifies as a contract under local law. (Example: if settlor agreed to put property in a trust if the son promised to care for the settlor in his old age, the son would have a good chance of convincing a court to enforce the promise.) Promise as trust property – if the settlor transfers only promises to a trust, those promises need to be enforceable contracts to give them value as trust property; it needs to be supported by consideration. Otherwise, the trust fails for lack of property. A certificate of deposit in a trust is a binding obligation of a financial institution to repay money that it borrowed from settlor – it may serve as trust property. A friends promise to pay money does not meet the requirements of a contract and is not adequate to create a trust. o Promise must be enforceable not just a gratuitous promise. If trust property is a promise, it needs to be supported by consideration to have value. Question: Settlor transfers my promise to give the settlor $1k on April 1 to the trustee of a trust. Is this trust property? o No. Not an enforceable promise. STATUTE OF FRAUDS – under certain circumstances, a trust must be evidenced by a writing before the beneficiary can enforce a trust. The general (common law) rule in the US is that a trust must be evidenced by a written instrument. POLICY – to protect a transferee who received an outright conveyance from having those rights infringed on by someone claiming that the transfer was actually one in trust. So the alleged trustee will use the lack of a writing to raise the SOF as a defense against a person trying to deprive the transferee of their rights (protects people that are not really involved in trusts). Violating SOF makes the trust unenforceable (voidable) not void. The alleged trustee really wants to be the donee! “Its not a trust, I’m a donee and have legal AND equitable title!” The whole purpose in a trust contest is to protect an outright donee from false allegations that they are only a mere trustee. Texas Basic Requirements – 112.004 (1) Written evidence of the terms of the trust (identity of the beneficiaries, the property, and how that property is to be used) and (2) the signature of the settlor or the settlor’s authorized agent. a. “Signature” defined in Code Construction Act 311.005 of the Government Code All changes and any revocation of a trust that is in writing must also be in writing, even if the trust could have been oral originally. Notarization – is not required but it is prudent practice so the trust may be recorded. An acknowledgment is a notarized statement that the settlor willingly executed the trust as an act of the settlor’s free will. With an acknowledgment it can be filed in public records and trust instruments that involve real property must often be filed in the deed records to establish the chain of title to the property. EXCEPTIONS: Personal Property – the normal requirements are relaxed in some situations for trusts containing personal property. Oral trust – allowed if it is personal property, the trustee is not the settlor, the trustee is not the beneficiary, and the settlor expresses trust intent prior to or simultaneously with transfer. Writing that does not meet requirements - Self-declaration – allowed if it is personal property and the settlor states in writing that the settlor holds property in trust, even though the writing does not comply with normal requirements (normally signature is missing or it doesn’t include all the terms.) Part Performance – courts can enforce an oral trust if the trustee partially performs. If the alleged trustee acts as if a trust exists, the trustee may be estopped from denying the existence of a trust. (The trustee permits the beneficiary to possess the land or make improvements to that land, the trustee may be prohibited from asserting that a trust did not exist.) Special rule if trust in writing All changes and any revocation must also be in writing, even if trust could have been oral originally. Standing to raise SOF Alleged trustee – thus they can carry out a trust even if the SOF defense exists (oral trust of land) although no one can force the trustee to do so. (Voidable not void) Trustee in bankruptcy – a person appointed to represent the bankrupt person’s unsecured creditors has the benefit of using the SOF defense. That way people who file for bankruptcy cannot claim that they hold their real property subject to oral trusts for the benefit of others to keep the property out of the hands of the creditors. RECAP: 1. Trust Intent a. Split of Title (legal and equitable) b. Imposition of Enforceable Duties 2. Consideration a. NOT Required 3. Writing a. Writing and Signing required b. A Few exceptions exist i. personal property; part-performance RULE AGAINST PERPETUITIES – Article 1 of the Texas Constitution adopts the common law version of RAP that a future interest not destructible by the owner of a prior interest cannot be valid unless it becomes vested at a date not more remote than twenty-one years after lives in being at the creation of such interest plus a period of gestation. (Prevents remote vesting of contingent interests that can unduly restrain transfer of property.) Does RAP Apply? – RAP applies to trusts other than charitable trusts. All of the following must be true: Future interest – not present Contingent (not totally vested) and Held by a transferee Trust Code 112.036 “The rule against perpetuities applies to trusts other than charitable trusts.” “An interest is not good unless it must vest, if at all, not later than 21 years after some life in being at the time of the creation of the interest, plus a period of gestation.” The interests affected by RAP: if you classify an interest as one of the following, you must check for a RAP violation (trusts are almost always one of these three). For every trust you have to do a RAP analysis. Contingent remainders Vested remainders subject to open, and Executory interests including trusts Armageddon RAP Test: Ascertain lives in being o Who was alive at the date of the creation of the trust Give each life in being a child who is born after the date of trust creation (not lives in being) Everyone dies except the new children Determine if beneficial interest in the trust must vest/not vest within 21 years EX. – “When the time comes that there is no direct blood issue living… the property goes to the Salvation Army” – violates RAP because it could occur within a life or lives in being at the time of the testator’s death and twenty-one years later. Parts of trust needed to comply with RAP: Time of trust creation – a trust to begin upon a contingent event must start within the period specified by RAP. If an event is not certain to occur within the expiration of the perpetuities period, the interests must fail. Ex. the trust begins when the first  person walks on mars. We cannot determine with certainty whether someone will or will not walk on the surface of mars within the perpetuities period. Beneficial interests while trust is ongoing – the interests of the beneficiaries cannot last longer than 21 years. If the settlor gives interest to a beneficiary for 25 years and then living descendants after 25 years, we do not know who the living descendants are until 25 years. This is past the 21 years if B dies in 4 years. B is the life in being, if it said for her life then the interest will vest immediately in the settlor’s descendants when B dies. (B could die tomorrow, and then, it would take 25 years (4 years too long) before my descendants could be identified and receive the money from the property.) Beneficial interests when trust ends – all remainder interests in a trust must vest within the RAP period – “trustee shall pay the income of this trust for 25 years, if B dies before then to B’s closest family member. At the end of 25 years, the trust terminates and the trustee shall pay all property to descendants.” Violates RAP because they all could die tomorrow and it would still take 25 years to figure out who the descendants are. Examples: Inter vivos trust which provides: o “in trust to Clark for life, then to Clark’s children equally when the youngest reaches age 25.” o Note that the RAP result is the same regardless of whether Clark already has a 25 y.o. child. o Clear violation of RAP. o Have inter vivos trust. “Armageddon analysis” After the date of the grant, Clark has a child, Clark dies. That child, we will not know in 21 years that that child will reach 25. RAP violation. What happens if RAP is violated? Common law – entire trust is void, not just the portion that violated RAP (even using wild hypotheticals) Wait and see – based on reality, not hypotheticals – see how things really play out Expand the period Cy pres (TEXAS Property Code 5.043) – the court must reform or construe interests that violate rap (not discretionary – mandated by legislation). Follow settlor’s ascertainable general intent, court must liberally construe statute, and court may use cy pres when it reforms/construes (equally equivalent). Courts look at the grant as of the day the trust was created and determine what the settlor would have done. o Warning: only applies to conveyances on or after 9/1/1969 Uniform Statutory Rule Against Perpetuities Act – 90 year time period from the grant, rather than times in being, with a wait and see approach. Then reform if interest is still not vested. (Thus it is never really used because the Act is too recent to have allowed the 90 year time period to run) RAP repeal – a number of states repealed RAP so people will bring their money and trusts to those states so they can create dyNASTY trusts. Savings Clause – if a court of proper jurisdiction finds that this trust violates the RAP, the remaining trust property shall be distributed to [Beneficiary]. TRUST PURPOSES – a trust may be created for any purpose that is not illegal. But the terms of the trust may not require the trustee to commit an act that is criminal, tortious, or contrary to public policy (focus on public policy). Capacity 112.007 Inter vivos trust = inter vivos gift Testamentary trust = testamentary capacity Prohibited Trustee Conduct 112.031 Commit a crime Commit a tortious act Commit an act contrary to public policy Standard to Determine Public Policy Intent and effect (majority and TEXAS) – look at the ramifications of the trust creation – it can’t make someone more likely to commit a crime or induce criminal or tortious behavior in a third person. Hunt – it is against public policy to instigate divorce or keep people from remarrying. But it is good public policy to take care of people in case they become single. (Can go either way and depends on intent of settlor and factors such as life expectancy.) o Stewart – if x named guardian, trust ends and property goes to others. Against public policy because forfeits the rights of children because of what the court does. Use of property (minority) – doesn’t look at the motives of the settlor. Discrimination – Traditional – a private person may discriminate as he or she wished but a court cannot lend its power and authority to enforce the discrimination provisions. If the restriction is illegal the court can either eliminate the restriction or declare the entire trust invalid. Courts look at what the settlor would have wanted. However some courts hold the provisions as valid because they benefit the public and provide benefits to classes that has previously been subject to discrimination. Defrauding Creditors – Uniform Fraudulent Transfer Act – a creditor may set aside a transfer the settlor makes to a trust if the transfer meets the requirements set forth in the UFTA. This comes into play when a donor makes an outright gift or creates a trust that would restrict the ability of an existing or future creditor to get paid from the transferred property. This does not apply to disclaimers, which are not considered fraudulent, even if the intent is to avoid creditors. Remedies: If defrauding creditors, set aside conveyance to trust up to amount of the claim (not the whole conveyance, just as much as the creditor needs) If otherwise improper purpose: o Resulting trust (settlor regains the property) (allows settlor to try to create another trust not against public policy) (if the settlor is deceased, his heirs or beneficiaries can claim the property) or o Permit trustee to retain property free of trust (when the settlor has moral culpability and it would be against public policy to allow the settlor to regain the property because they would do it again) SETTLOR – creates a trust by manifesting trust intent (split of title and imposition of duties). The settlor is also called a trustor, a grantor (tax), and a donor. Corporations, partnerships, etc. can also be settlors. Capacity 112.007 – the settlor must have the capacity to convey property to create a trust. To create an inter vivos trust, the settlor must be able to convey an inter vivos gift. To create a testamentary trust, the settlor must have testamentary capacity. Retention of powers by settlor – a settlor may make a declaration of trust so the settlor is also the trustee and retain most of the beneficial title. As long as the settlor splits the title to the property, it is a valid trust. If the settlor gives children an interest as the successor beneficiaries subject to complete defeasance if settlor revokes, it is still a trust. Westerfeld v. Huckaby, pg 61. Trust Code 112.033 The settlor may retain: Legal title (serve as trustee) Life interest (considerable beneficial title) Power to amend, modify, and revoke Power to change beneficiary Control over trust administration Ability to add property to trust Dacey Trust – a revocable trust under which the settlor, trustee, and lifetime beneficiary are the same person. Allows the person to retain total control over the property while alive and then have the property pass to the designated remainder beneficiary upon the persons death. TRUST PROPERTY 112.005 – a trust must have property, when there is no longer property the trust does not exist. A trust is a method of holding property, a conveyancing relationship. Any type of property may be held in trust as long as the settlor can transfer title to that property. Trust property can consist of present or future interests in real property and both tangible and intangible personal property (also legal, equitable, chose in action, claim, contract right). Property settlor cannot immediately transfer 111.004(12): o Non-assignable contract right o Spouse’s share of community property o Property to be acquired in the future o Expectancy to inherit from someone still alive § But you can make a contract to convey property when you receive it – “it is neither unreasonable or unusual for children to agree to share equally in their parent’s estate… granting, selling, and conveying to trustees whatever he may acquire form his parent through a will or descent and providing that such interest shall become a part of an existing trust is a conveyance to the trustees effectual to equalize the expectancies.” New Property 112.006 – new property may be added to an existing trust from any source in any manner unless the addition is prohibited by the trust or the property is unacceptable to the trustee (too many duties for trustee or doesn’t have time). Delivery (trust funding) – legal title to the trust property must reach the hands of the trustee. It is not enough for the settlor to sign a trust instrument; the settlor must actually transfer or deliver the property to the trustee. Delivery requires that the property be placed within the control of the donee with the intention that a transfer of title becomes operative  Real property = deed (even if declaration of trust – deed to yourself (quitclaim deed) – grantor would be settlor in settlor’s individual capacity and the grantee would be settlor in the settlor’s capacity as trustee.) o This is where a lot of trusts fail – the lack of transfer. WATCH FOR THIS ON EXAM Personal property – possession, deed of gift, title registration. o Shares of a stock in a corporation may be transferred by an assignment in writing, a delivery of the certificate to the transferee, or a surrender of the certificate and obtaining another in its place with the transferee named as owner. Marshall – the trust of stock failed because it was never endorsed, surrendered, or transferred to trustee’s TRUSTEE – holds legal title and must act in accordance with fiduciary standards. Trustee includes the original, additional, or successor trustee, whether or not the person is appointed or confirmed by a court Trustee’s Rights in Trust Property 111.004(18) Trustee’s creditors cannot touch trust property because the trustee has no beneficial interest in the property When trustee dies, the trust property does not pass through inheritance or a will Capacity - § 112.008 - Trustee must be able to: (1) take title, (2) hold title, and (3) transfer title of trust property (most difficult because can’t be minor or incompetent.) Individual - must be of legal age (18) (or have disabilities of minority removed) and be competent. Corporate - trustee must have the power to act as trustee in Texas (power is in their charter o Financial institutions – no separate charter needed o Trust companies – separate charter needed – set up as trust company and need separate charter giving them trust powers. o Foreign (anything not Texas) corporations if comply with the Probate Code – reciprocity – if they allow Texas citizens to be trustees there as corporations, we will allow it here. Acceptance 112.009 – a settlor cannot force legal title and the accompanying fiduciary duties on an unwilling person. The person must take some affirmative step to accept the position. There is no liability until acceptance – Blieden – before you accept, you have zero fiduciary duties so point of acceptance is very critical. 1. Signature of trustee – conclusive evidence – this may be on the trust instrument or a separate acceptance document. Once you have accepted, you can’t get out of it. (But hard to get trustee to come and sign. It is prudent practice to get the trustee to sign the trust immediately after the settlor signs. You cant do this with pr trusts because the trust is ineffective until the settlor dies – so should sign another acceptance document after death) 2. Exercise power or perform duty (estoppel) = presumption of acceptance unless o Preservation, if notice given (if you take action to preserve the property and tell beneficiary or settlor that’s what you are doing, then doesn’t count as acceptance – not required to be in writing) or o Inspection Reasons to Accept – if it provides for compensation (or if silent – it is a job so you can get paid), if you are also a beneficiary, family relationship and familiar with people and property. Reasons to not accept – subjecting yourself to liabilities and bad beneficiaries (must comply with a host of requirements and technical rules in carrying out this fiduciary position) If trustee does not accept Trust instrument names an alternate Trust instrument provides a method for selecting alternate (majority vote by beneficiaries to name a successor) Court appointment upon petition of interested person (a trust will not fail for lack of a trustee) Bond 113.058– presumption that bond is required. A trustee may need to post bond conditioned on the faithful performance of the trustee’s duties. The court sets the amount of the bond based on the value of the trust property. The trustee typically obtains the bond from a surety company. In exchange for the payment of premiums, the surety company agrees to pay the amount of the bond to the beneficiaries if the trustee breaches the applicable fiduciary duties. The surety will then seek reimbursement from trustee. If the instrument is silent, bond is required. Not required if: o Waived by settlor in trust (unless court nonetheless requires it) o Corporate trustees Why require bond? – Protects beneficiaries from an evil trustee – but if settlor thinks the trustee will act improperly, settlor should probably name a more trustworthy person to that position. Why waive bond? – The costs of the hearing and the annual bond premiums are proper trust expenses and thus reduce the amount the beneficiaries eventually receive. Bond premiums are expensive and cost increased with the value of the trust property. Multiple Trustees 113.085– a settlor may appoint more than one person to serve as co-trustees. Traditionally, the trustees all had to consent before taking any action. In Texas the majority may act to make decisions regarding the trust. Benefits – if one trustee is absent or ill, spread workload, checks and balances (hard for multiple trustees to go evil), different people have different expertise. o If the trustee is a corporation, settlor may want another trustee that has compassion and understands the situation. However trustees are jointly and severally liable for the acts of all trustees so a bank may not want to serve with family member for fear of their improper acts. Dangers – trustees might fight, more people to pay, and takes too long to make a decision, more transaction costs with phone calls, conferences, and paperwork. Resignation 113.081 – a trustee may resign. The settlor may have provided a resignation method in the trust (written notice to successor trustee). If the trust is silent, then the trustee will need to comply with the local law or petition court for permission to resign. The court may accept the trustee’s resignation and discharge the trustee from the trust on the terms and conditions to protect the rights of other interested persons. Removal 113.082– a trustee may be involuntarily removed in accordance with terms of the trust instrument or by the court. Successor Trustee 113.083 If no trustee remains o Successor named by settlor o Replacement method specified in trust – (majority vote or let lawyer appoint) o Court may appoint on its own motion – if first two fail o Court must appoint on petition of interested person If at least one trustee remains o Successor named by settlor o Replacement method specified in trust o Court will not fill vacancy (courts only get involved if necessary) § If it is a charitable trust, remaining trustees may fill vacancy by majority vote if it does not provide for filling vacancy. (Codified – but discretionary – that way they can pick someone with like mind) Why does statute allow this? o Trustees can pick people with similar philosophies o Want to keep the number of trustees at capacities so that trustees don’t get over-worked when the number of trustees dwindles Powers – PRESUMPTION is same as original. Except: o Trust instrument provides otherwise o Court order provides otherwise Substitute Fiduciary Act Finance Code ch. 274 – Allows subsidiary company to be substituted as a fiduciary for an affiliated bank (mergers, purchases, and buyouts). Permits a corporation that acquires a target to become the trustee of those trusts the target was a trustee of – without permission of the court. If a settlor chose a small bank because he likes that bank, you may want to provide a clause denying the ability of acquiring corporations to use this act to take trustee powers from the local bank. Use express language in the trust. BENEFICIARY 111.004(2), (10) – holds equitable title and enforces fiduciary duties against trustee (can sue the trustee for breaching duties). There can be multiple beneficiaries o either concurrent (each is presently eligible for distributions) or o successive (one beneficiary may be entitled to the income from the trust until death with any remaining trust passing to a remainder beneficiary) Capacity – ability to take and hold property – does not have to be able to transfer so no issue with being a minor or incompetent – just have to be a legal entity (corporation, partnership, association, or governmental unit) Description of Beneficiaries – must be clearly ascertainable from the trust instrument. The trust will fail if the settlor fails to describe the beneficiaries with sufficient certainty. Can’t say “to distribute to those individuals whom by trustee so desires” or “to those of my friends…” but can say to “those of my children whom my trustee so desires” because it’s a class designation – there are only so many children that you may have. Honorary (Purpose) Trust – a trust that lacks a human beneficiary or charitable purpose. It could be to care for pet, say masses, or erect monuments. Because equitable title is not held by a human or a charity, no one can enforce the arrangement and the trustee is on the trustee’s honor to carry out the settlor’s instructions. Failure results in the property reverting back to the settlor or going though intestacy or to beneficiaries.  Traditional Approach – invalid – it’s not private as there is no human beneficiary and not charitable because it is lacking charitable purpose. Modern Trend o Pets – 49 (Minnesota is the state that doesn’t have one. Legislative mix-up) states recognize statutory pet trusts (including TEXAS 112.037) (In Texas you can put a condition on a person to receive money if they do something. Therefore equitable title is in a person) § People usually just created a traditional trust which indirectly provided pet care by instructing the trustee to help the beneficiary who is providing care to the pet by paying for the pet’s expenses. § The statute does not require the pet owner to make as many decisions regarding the terms of the trust. It fills in the gaps… so if you say “I leave $1,000 in trust for the care of my dog” it will be effective. (Trust ends when the pet dies) o Other purposes – allowed under UPC and UTC – no equivalent in trust code. There is a growing trend to permit trustees to carry out these arrangements as long as the purpose is not unlawful or capricious and it doesn’t violate RAP. Incidental Beneficiary 111.004(7) – someone who benefits from the trust but does not have equitable title – so cannot enforce the trust. However, they may fit as interested person under “affected by” language of the statute. Depends on the court. (Example: neighbor in an upscale neighborhood could sue trustee if beneficiary’s house is not kept nice) Disclaimer – beneficiaries are not required to accept the proffered equitable title. The property may be undesirable or accompanied by an onerous burden, a beneficiary who is in debt may disclaim property to prevent the property form being taken by the person’s creditors except for the federal tax lien, and the beneficiary may disclaim to reduce the person’s transfer tax burden. Inter vivos trust – cannot exert dominion, control, or accept benefits. They may cherry pick (partial disclaimers are allowed) and it is irrevocable and unconditional. o Requirements § In writing § Acknowledged (notarized so it can be filed in deed records) § Delivered to trustee not later than 9 months after the later of: date of trust creation, beneficiary reaching age 21, or if future interests, date it indefeasibly vests. o Passage of property – under specific terms of the trust or under terms of trust as if beneficiary predeceased trust creation (beneficiary cannot direct where the disclaimed property goes) Testamentary Trust – (1) written and acknowledged document, (2) must be filed in the court handling the estate no later than 9 months after the deceased death and (3) give notice of the disclaimer to the executor of the estate by personal service or registered or certified mail. o Disclaimant is treated as predeceasing the deceased and it passes under the trust as if the beneficiary predeceased the settlor. Disclaimer (updated) Cannot exert dominion, control, or accept benefits. May “may cherry pick” (partial disclaimers allowed) Irrevocable and unconditional Governed by Property Code Ch. 240 o Texas Uniform Disclaimers of Property Interests Act Formalities o 240.009 § In writing § Declare the disclaimer § Describe what is being disclaimed § Signed by beneficiary § Properly delivered § Notarized (not required but prudent practice) Delivery Testamentary Trust 240.103 o Trustee § If none, personal representative of decedent’s estate § If neither, file in public records where decedent domiciled or owned real property Delivery Inter vivos trust 240.104 o Trustee § If none, court with Jx to enforce the trust § If neither, file in public records of situs of trust administration or where settlor domiciled o If trust is revocable, also to the settlor Passage of Property 240.051 o Under specific terms of trust (“If A disclaims, then the property passes to X.”)  o Under terms of trust as if beneficiary predeceased trust creations. Characterization of Distributions – whether an interest held by a married beneficiary is characterized as separate or community property. Assume trust is not created by one or both spouses. Principal distributions (gifts) – separate property – trust interest was acquired by gift, intestate succession, under a will, or prior to marriage. Undistributed trust income – not yet able to classify until beneficiary has right to demand distribution Discretionary income distributions – separate Mandatory income distributions – commentators disagree and case law not definitive Effect of Divorce – if the settlor and beneficiary of a revocable trust are divorced and the settlor fails to amend the trust to address this change in circumstance. Date of Divorce Controls Pre Sept 1, 2005 – property interest of spouse-beneficiaries not affected by a subsequent divorce. Date of Divorce Controls Post Sept. 1, 2005: statute applies if: o Trust is written o Trust is revocable (if its irrevocable, they have title invested in them and cannot get it back) o Settlor named spouse as beneficiary o Settlor later divorces spouse o Trust is silent as to impact of divorce. Provisions revoked: o Ex-spouse as beneficiary o Ex-spouse as trustee o Other ex-relatives as beneficiary o Other ex-relatives as trustee Effect – Generally o Property passes as if ex-spouse or ex-relative disclaimed o Fiduciary designations interpreted as if ex spouse or ex-relative died before marriage terminated Does not apply if: o Trust was executed after the divorce o A court order o Express language in trust o Express language of a contract relating to the division of the marital estate entered into before, during, or after the marriage. Bona Fide Purchasers – a BFP from ex-spouse does not have to return property or payment and is not liable for that property or payment Unjust enrichment – ex-spouse who receives property or payments they aren’t entitled to, is personally liable for and must repay that property or payment. Power to Transfer or Assign – PRESUMPTION that you are able to transfer. Inter vivos by gift or sale or at death by intestacy or will. In reality there are Restrictions: life interest (beneficiary only received a life interest) or a spendthrift provision (beneficiary is prohibited from transferring aka no stick to transfer property). Priority of conflicting assignments of the same beneficial interest in trust: o English view – gives priority to the first assignee who notifies the trustee of the assignment; notice to trustee is required to complete a beneficiary’s assignment. (Similar to the race deed in property class “first to the courthourse”) o American view (TEXAS) – gives priority to the first assignee unless the trust instrument provides otherwise – this occurs because the beneficiary did not own any interest in the trust after making the first assignment – so second assignment never occurred (no transfer) (however estoppel can apply if the second person can show B misled him – court can estop first person from asserting priority) Duties of Beneficiaries to each other – A beneficiary is liable for loss to the trust if the beneficiary has: Misappropriated or otherwise wrongfully dealt with the trust property; Expressly consented to, participated in, or agreed with the trustee to be liable for a breach of trust committed by trustee; Failed to repay an advance or loan of trust funds; Failed to repay a distribution or disbursement from the trust in excess of that to which the beneficiary is entitled; or Breached a contract to pay money or deliver property to the trustee to be held by the trustee as part of the trust. Unless trust says otherwise, trustee is authorized to offset a liability of the beneficiary to the trust estate against the beneficiary’s interest in the trust estate, regardless of a spendthrift provision in the trust Spendthrift Provisions 112.035 - Availability of Beneficiary’s Interest to Creditors – a provision which typically prohibits the beneficiary from transferring right to future payments of income or principal and prohibits beneficiary’s creditors from subjecting the beneficiary’s interest to the payment of their claims. (Don’t have to prove that the person is a spendthrift – knows how to use money but doesn’t want too). Generally, the equitable interest of the beneficiary may be subject to attack from the beneficiary’s creditors.  Purpose – To protect the beneficiary (asset protection) and to allow the settlor to have trust property used as settlor intended. There is no requirement that the beneficiary actually needs protection. (Policies – settlor has the right to dispose of the property as the settlor wishes, granting the protection prevents Bs from becoming public burdens should the trust property become exhausted due to creditors, and creditors have the responsibility to investigate the debtor and know that they should not use the trust as a basis for granting credit) Time of protection - The protection only applies while the property is in the trust; once it is given to the beneficiary it is fair game since there is no longer a split of title. Then the beneficiary may transfer and creditors may reach. Beneficiary can cash the money and spend it or hide it from creditors. But if the money is deposited in an account, it may be subject to garnishment and creditors can reach it. Creation of Spendthrift Trust – no particular language is needed as long as settlor’s intent is clear. No Magic Words – just say, “this is a spendthrift trust” or “the beneficiary’s interest shall be held subject to a spendthrift trust” Exceptions to enforceability – under several circumstances, courts will not enforce spendthrift provisions for public policy reasons: o Self-settled trusts (settlor is the beneficiary) - But, states like Alaska will enforce such self-settled trusts. (A settlor cannot protect his or her own property from his or her creditors). Many offshore and some states allow self-settled spendthrift trusts (not in TEXAS). Booth – “Under such circumstances the man creating such a trust is protecting himself, not against his own folly, but against what other men may do while he is in a position where duress may very easily cause him to part with his property under circumstances where he might be afraid to claim duress.” § Texas is not a Domestic Asset Protection Trust state! DAPT o IRS – Trust property not protected from Uncle Sam as a creditor – property in a spendthrift trust will not be protected form the beneficiary’s federal tax obligations. o Necessities – creditors with claims for necessaries such as food, clothing, shelter, and medical care, stand a good chance of reaching trust income – not codified but some pre-code cases may support this exception. o Child Support – HUGE - FAMILY CODE § 154.005 allows the court to look through the spendthrift provision and order disbursements for child support payments up to the amount that the trustee is authorized to distribute (court has discretion to break spendthrift protection for child support) (the needs of the ex-spouse and children are deemed to outweigh the rights of the settlor to control the use of the trust property). § If a trust payment is mandatory, then the court can use up to the mandatory amount. § If the trust is discretionary, the court can order ALL trust income to be used for the child support payments § Could also put in a forfeiture provision that states that the beneficiary would not receive their payments until they are up to date on child support. § IMPACT: Because most trusts have more than one beneficiary, they often have a provision stating that the beneficiary owing child support forfeits their interest if they are ever delinquent in child support. This way, the beneficiary who is delinquent won’t screw the other beneficiaries because of the look-through provision To benefit from the look through provision, the person claiming delinquency must first get a judgment against the delinquent parent, and then, you can go after the trust § To prevent from taking money away from other beneficiaries, just created two trust – one for each kid – but this also costs more money – better to put the forfeiture provision. o Compliance with agreement settling trust issues (agreement that required one of the beneficiaries to transfer part of the beneficiary’s interest) despite the spendthrift provision a beneficiary can make this transfer because settlement agreements help relieve court congestion and permit parties to resolve differences in a more amicable manner than litigation. o Tort claimants – (not in TEXAS) – different than regular creditors because the tort claimant did not have any opportunity to investigate the beneficiary as do traditional creditors. Merger Prevented - Anti-Merger Statute 112.034(c) – a trust containing a spendthrift provision will not end via merger unless the settlor is also the beneficiary. Instead, the court will appoint a trustee to keep title split. This prevents the trustee and beneficiary from circumventing the settlor’s intent by triggering merger Discretionary Trusts – the settlor wants the trustee to make trust distribution in accordance with the beneficiary’s needs just as the settlor would if the settlor were still in control of the property – when beneficiaries are children and their future needs cannot be predicted with accuracy. The settlor gives their trustee the discretion to determine which beneficiaries to pay and how much to pay each. The trustee may or may not be subject to a stated standard. Also called spray or sprinkle trusts. Trusts distributions are either discretionary or mandatory (trustee is to pay $1,000 a month to beneficiary; Trustee is to pay for beneficiary’s medical expenses; Trustee is to pay X dollars if beneficiary does Y thing). Not as common as discretionary trusts Interest of beneficiary – no interest in income or principal until the trustee exercises discretion (so can’t demand anything). In effect, the beneficiary hopes to receive property under a power of appointment the settlor placed into the trust. o The settlor has put a power of appointment into the trust giving the trustee the authority to decide what to do. The beneficiary cannot compel payment from the trustee. If the trustee embezzles or doesn’t invest, the beneficiary can sue and win—but the winnings go back into trust, not the beneficiary’s pocket. Availability of interest to creditors – not reachable until it’s paid to the beneficiary. EXCEPT – settlor and beneficiary are the same person or its for child support Family Code §154.005  Discretion – there is not such thing as absolute discretion – that would mean there are no fiduciary duties for the beneficiaries to enforce. 113.029(a) Tax Problems – if a non-settlor beneficiary is also the trustee of a trust and is given the power to make self-distributions that are not limited by an ascertainable standard relating to health, education, support or maintenance. (Occurs when settlor gives the trustee/beneficiary unrestricted discretion). The trustee’s power to distribute will be cut back to an ascertainable standard and his power to distribute is restricted distributions cannot be made to another person that the trustee personally owes. o If there are other trustees besides the beneficiary, a majority of the trustees can exercise the power to make discretionary distributions to the limited trustee/beneficiary o If they are all trustee/beneficiaries, the court can appoint a special fiduciary with authority to exercise the power. o The cut-back wont apply if the trust was created before September 1, 2009 and became irrevocable (after September 1, 2009 and did not become irrevocable – the cut-back will apply) o The settlor is the beneficiary/trustee o The settlor expressly indicated that the provisions of this section do not apply o The trustee/beneficiary is the settlor’s spouse and a marital deduction was previously allowed for the trust o The settlor may amend or revoke the trust o Contributions to the trust qualify for the gift tax annual exclusion Support Trusts – trusts that restrict the use of trust income, principal, or both, to the beneficiary’s basic needs such as food, clothing, medical care, and educational expenses. The use of trust funds are limited to the beneficiary’s support (HEMS standard – health, education, maintenance, and support). Distributions may be mandatory or discretionary (or both – pay for support and give extra if needed). Mandatory Support Trust - Trustee must make distributions to support the beneficiary. Discretionary Support Trust- Trustee may, but is not required, to pay for the beneficiary’s support and may not, under any circumstances, make distributions for other reasons Define Support - How much “support” should a support trust give the beneficiaries – make sure they have a nice penthouse, or just keep them off the streets? Default = Keep the status quo – level of support to which beneficiary was accustomed before becoming a beneficiary. If the settlor wants to support a higher or lower standard of living, the settlor may so describe. Incidental Beneficiaries - If H is the beneficiary of a support trust, we normally include the others who the beneficiary is legally obligated to support. H would normally be obligated to support W and kids. So, if there is a support trust for H, the support can be for W and kids too. (Include support of beneficiary’s dependents – even if the trust is silent) But, the settlor could say otherwise Considerations – are beneficiary’s other resources to be considered? – consider whether they can have extra money or they have to use up other resources before they can get the money for support. Keisling – you have to figure out what the settlor wanted (so create a trust instrument with sufficient information) If the trust is a mandatory support trust, and the court says the trust pays the last dollars, this could provide an incentive for the beneficiary to not work so that the last dollars become the first. But, this is why support trusts are frequently discretionary to permit the trustee to not pay if the beneficiary is a bum. This minimizes the moral hazard problem. Courts will read in a spend thrift provision - If beneficiary had the right to transfer their interest, it would subvert the settlor’s intent of supporting the beneficiary CHARITABLE TRUSTS – also called a public trust, is a trust established for the benefit of the community as a whole or for a relatively large segment of the community. For the most part, the law governing charitable trusts is substantially the same as the law for private trusts. Basic Categories of Charitable Purposes – courts retain considerable power to decide whether a particular purpose is or is not beneficial to the community. Just “giving money” to people is not a charitable purpose and is not some “other purpose beneficial to the community.” To be some “other purpose,” the purpose must promote the social interest of the community as a whole (not just financially enrich people). Marsh Relief of poverty Advancement of education Advancement of religion Promotion of health Government or municipal purposes Size of Charitable Class – A sufficiently large or indefinite class of beneficiaries so the community is interested in enforcement of the trust. If the trust fails as a charitable trust, it may still be valid as a private trust (but beneficial to be charitable because eligible for tax breaks and not constrained by RAP) A trust to pay for the educational expenses of some deserving student who wishes to pursue an acting career. – Person receiving money is conduit to charitable purpose so could be charitable. A trust to provide a $1,000 scholarship to each student who receives an A in any law school course that spends at least six weeks on trust law. – Yes – trusts that award people for accomplishments are ok.  A trust to pay for the medical care and expenses of victims of Hurricane Katrina – Charitable – to benefit society in general. Mortmain Provisions – statute that limits gifts to charity under specified circumstances – often held to be unconstitutional under the 14th amendment’s equal protection clause. Texas does not have one. Description of Charitable Class - Settlor can be broad in his designation (for medical research). However, broad designations are not necessarily charitable – a trust for such objects of liberality that the trustee selects – would not be charitable because the recipients are not limited to those of a charitable nature. Determination of Charitable Purpose – Must have an altruistic motive. Settlor’s opinion of charitable purpose is irrelevant. The question of whether a trust is charitable is a question of law—it goes to the court. The court uses the “generally accepted” standard – if the judge believes that the consensus of the community would be that the settlor’s purpose is charitable, then the court will treat that purpose as being charitable. This standard can be harsh because its application could prevent trusts from achieving charitable status if they are created for purposes not widely deemed charitable or if they involve new or controversial matters. Weird Purposes If the trust is to carry out the whims of the settlor and the settlor seems to be out of touch and no other people seem to be on board with the issue, probably not charitable o Not charitable to hire a guard to point people to settlor’s grave o Not charitable to have people play songs on your birthday in cemetery Religion – Most lenient. Courts are far less likely to call religious things as “uncharitable” - The normal rule is whether or not it is generally accepted o With a religious purpose, courts will uphold the charitable trust so long as the trust is not illegal or against public policy. So, it’s okay to sacrifice chickens but not okay to sacrifice humans (murder) Other Charitable Trust Issues Tax benefits – if a trust meets the detailed requirements of the Internal Revenue Code it can qualify for significant income, gift, and estate tax benefits. Successor trustees 113.083(b) – the remaining trustees of a charitable trust may select a successor trust – if they want. Enforcement – Attorney General is charged with the duty of enforcing charitable trusts for the benefit of the community. Some states require the party initiating an action involving a charitable trust to give notice to the AG’s office. The AG may then decide whether to intervene in the action to protect the charity’s interests. If the AG does not receive notice, some states permit the AG to set aside any judgment or settlement. Cy Pres – prevents lapse of charitable trusts RAP – not subject to Rap so they may continue indefinitely Split interest trusts – can be both charitable and private – or be private and become charitable (vice versa) (charitable remainder trust – where family gets benefits of a trust until a specified time after which the remainder passes to charity) (charitable lead trust – the charity obtains the benefits from the trust property for a set period of time after which they return to the settlor or the settlor’s family) POUR OVER WILLS – A clause of a will that leaves property to an inter vivos trust Reasons: To put property into a trust that is already created To keep the disposition of property private since in a will it will be public record So they can monitor the trust while they are still alive Making changes to a trust have very few formalities compared to a will. Historical Development Not allowed Incorporation by reference – still had a lot of problems because you had to make sure trust was in existence at the time the will was executed and you couldn’t make any changes unless you redid the will. Frozen at execution of will, can’t make any changes such as who beneficiary is. Fact of independent significance – required trust to have been created – changes can be made because only has be in existence when the testator dies. Uniform Testamentary Additions to Trusts Act (1993) – TEXAS – expressly authorizes a pour over technique. o Trust created by the testator, even if after will execution o Trust created by another person, even if after will execution o Trust not yet in existence due to the lack of funding as long as trust is:  § In writing and § Identified in the will (pour over can be initial trust funding) o Cannot pour over into revoked or terminated trust Governance: current terms of the trust, even if amendments made after the testator’s death. Therefore you should not pour over into a trust of someone else unless it is irrevocable because otherwise they could change the terms of the trust and give the money to completely different people. LIFE INSURANCE TRUSTS – funding a trust with a non-probate asset. The owner of a life insurance policy may name a trust as the beneficiary of the policy or the owner may transfer the policy itself to the trust. The trust property then will consist of the contract right to receive proceeds upon the insured’s death or the life insurance contract itself. (Beneficiary of a life insurance policy is a trust, rather than the individual the insured ultimately wants to benefit upon his or her death). The trust can include just the life insurance policy or other assets as well. Purpose – obtain all the benefits of a trust for life insurance proceeds, often the deceased’s most valuable asset It is virtually essential if client has a minor or disabled child. (Ultimate beneficiary may not have the legal capacity to handle the proceeds or unable or unwilling to manage property in a prudent fashion) The insured may want to exercise control over how the proceeds are used after his death. Can help an individual create a unified plan for the insured’s estate. Recognition in Texas - very favorable Contract right to receive proceeds is sufficient to be trust property (names trust as beneficiary) 111.004(12) Life insurance may be made payable to trustee of inter vivos trust Ins. Code 1104.021 Life insurance may be made payable to trustee of testamentary trust. 1104.022 Inter vivos or testamentary? Inter vivos trust – effective immediately (but you have to may a lawyer to make the inter vivos trust and you need to find a trustee and pay them) – o So look at the competency and health of the client – if they need management, then inter vivos would be better since it is effective sooner o Wealth – cost of testamentary trust is nothing – no expenses now, inter vivos is expensive o Certainty – inter vivos because operational while alive o Single parent – inter vivos – likelihood of needing trust for money Testamentary – bad because if the will is invalid, the trust is invalid and it takes time to probate the will. Characteristics Can you transfer other property to the trust? – The insured does not need to add more property. o Funded – the trustee will have property available to pay the premiums to make sure the policy stays in force. However the trustee will then have the additional duties of managing the property used to fund the trust. o Unfunded – Simplest arrangement –insured does not have to part with additional property and the trustee is under no obligation to manage other assets. If you don’t have any money to part with (however the trustee has nothing to do so premiums don’t get paid and the policy becomes worthless) Allow settlor to undo plan? o Revocable – might want to retain the ability to change the beneficiaries o Irrevocable – (ILIT – irrevocable life insurance trust) – life insurance is part of taxable estate so if you transfer ILIT the proceeds will not be in the estate when you die and wont be subject to taxes. However you have to live three years after you move it to ILIT – or have someone else buy it so you aren’t transferring it to kids – only works if starting a new policy. This could also be done for a divorce settlement (funded, irrevocable life insurance trust, to help provide for the former spouse and/or children). TRUST ADMINISTRATION OVERVIEW 1. Trustee Accepts 112.009– The settlor cannot force legal title and the accompanying fiduciary dues on an unwilling person, therefore a person must make a conscious decision to accept the office of trustee – no duties are imposed and no liability attaches until a trustee accepts the position. (Person may not want responsibility or potential liability, may lack expertise, be incompetent, or fees are insufficient)  Signature – conclusive evidence (trust instrument or separate acceptance document) Exercise power or duty – presumption of acceptance No liability until accept 2. Post Bond 113.058 – unless the trustee is exempted from the bond requirement, the trustee must post bond (settlor waives or trustee is a corporation) – Bond is rarely required in Texas. 3. Obtain possession and/or control of trust property – as holder of legal title, the trustee has the right to possess trust property. As soon as they accept, the trustee needs to locate the trust property, assume control over it, and protect it. (Record deeds, buy insurance, keep the property repaired, place valuable personal property in a safe deposit box, and register corporate securities.) Earmark property – label the property belonging to the trust so its not confused with the trustee’s own property. (Liable for losses only if resulting from failure to earmark.) Common law rule is strict. Modern rule – liable only if failure to earmark causes loss. o Holding as nominee 113.017 – a trustee may hold corporate stock or other securities in the name of a nominee. (Nominee example: Merryl Lynch, E*Trade, etc.) (This makes it easier for the trustee to buy and sell) Avoid commingling – the trustee must also keep trust property separate form the trustee’s own assets and the property of others. Trustee may be liable for loss even if they aren’t due to commingling. Most states permit corporate trustees to commingle the property from several trusts into a common trust fund (113.171 & 113.172) so they can diversify and lower transaction costs. o A trustee will be strictly liable 4. Ascertain identity and location of beneficiaries – their names and addresses are needed so the trustee knows who receives the trust benefits and where to send them. (Sometimes the trustee may need to hire a professional search service).b 5. Follow the settlor’s instructions in the trust – the trust instrument controls over the trust code, so everything can be changed by the settlor (unless prohibited by state law or public policy). The settlor provides instructions regarding investments, management, and distribution. 6. Follow the requirements of the Trust Code – you can’t say that you didn’t know something. 7. Exercise appropriate standard of care – this is where problems arise regarding investments, management and distribution. For example, the trustee must exercise a high standard of care when investing trust property and otherwise managing the trust. If a trustee fails to comply with the requirements and duties of trust administration, the trustee can be personally liable. 8. Act with high degree of fiduciary loyalty – avoid self dealing and avoid conflicts of interest. 9. Personal liability for failure to comply – civil and criminal penalties (if you do anything with state of mind worse than negligence it can be criminal penalties). Trustee is not an insurer or guarantor of trust value. The trustee is not liable for losses, only liable for breach of the standard of care. Safeguarding and preserving trust property 117.004 – exercise reasonable care, skill, and caution (place valuables in safety deposit box, insure property, and record property deeds) Duty to support the trust – the trustee is responsible for defending attacks on the validity of the trust and its administration unless the advice of a competent attorney indicates that there is no reasonable defense. Attorney fees and court costs of reasonable defense paid by trust, even if the trustee loses. The trustee has a duty to appeal unless there is no reasonable ground. STANDARD OF CARE AND INVESTMENTS The trustee is responsible for investing trust property to make it productive while simultaneously protecting that property from undue risk. A trustee is not an insurer of trust success. Trustee is only liable if their conduct breaches the standard. Just because the value of the trust goes down, it does not mean that the trustee is liable (especially if due to the economy). Possible Standards of Care Prudent person with respect to own property – common law rule, former Texas approach (Pre 2004) o Under the prudent person standard, the person had to consider (1) safety of the investment (2) investment’s potential to appreciate in value and (3) the income which the investment was expected to generate Prudent person with respect to another’s property – heightened by some states – this requires more care because you will be more careful with someone else’s property than your own. Prudent investor – majority rule in US, Uniform Prudent Investor Act, adopted by Texas – effective 1/1/2004. o Total asset management – appropriateness of investments is based on the performance of the ENTIRE trust portfolio Historical Development 1. Very safe conservative investments only. – Only government liabilities and first mortgages on real property (because stock market crash and depression) 2. Legal lists – statutes contained a list of investment types that were deemed permissible to invest in. Usually composed of relatively safe investments such as obligations backed by the US government (treasury bills, savings bonds, or insured certificates of deposit) and first mortgages on real property. (Now they include corporate securities, mutual funds, and similar investments) 3. Prudent person rule – formerly, majority US and Texas rule (not any more) – each investment was viewed as a prudent person would make permanent disposition of property (not speculation) considering probable: income, appreciation, and safety 4. Prudent investor rule – modern rule used in the majority of the states & TX o Settlor can limit or expand the prudent investor rule 117.003(b) – but prudent investor rule is triggered by language in a trust that sounds like prudent person rule 117.012 – so even if you try and change it to prudent person, it will really mean prudent investor. Lowering the Standard of care Settlors express instructions in the trust – JUSTIFICATION – don’t want to burden a family member with a high standard that is well beyond the ability of most people. (Otherwise they have to delegate to someone that has the skills) Exculpatory Clause – excuse a breach (rather than lower the standard) (can excuse breach or permit transactions that would otherwise be self-dealing or create a conflict of interest.) An exculpatory clause is unenforceable if: o A breach of trust is committed in § Bad faith § Intentionally, or § With reckless indifference to the interest of a beneficiary, or § Any profit is derived by the trustee from the breach of trust (the settlor may not permit the trustee to retain any profit derived from a breach of trust.) § If clause inserted because of abuse of: Fiduciary duty to settlor, or Confidential relationship with settlor Basically you can only exculpate negligence (not bad faith or intentional bad acts) Because the clause is strictly construed against the trustee – so you’re better off if you just lower the standard Can an attorney-trustee take advantage of exculpatory clause? (Exculpate himself for negligence) – MRPR states that lawyers cannot exculpate malpractice with client. (Can’t write a trust lowering your standard of care – someone else would have to write the trust – but even then it might not work) Trust Protectors 114.0031 – a settlor may name a trust protector who has the ability to watch over and direct the trustee to take (or not take) certain actions. This evolved from offshore trusts which require foreign trustees. The trustee must (required) follow the trust protector’s instructions unless to do so would be manifestly contrary to the terms of the trust or a breach of the protector’s duties. The trust protector is presumed to be a fiduciary and must act in good faith with regard to trust purposes and beneficiaries. Liability will attach if the trust protector breaches a fiduciary duty. Trust Protectors – Key Features Settlor may grant powers such as: o Remove and appoint trustees o Modify or amend trust for tax purposes o Modify or amend trust to facilitate efficient trust administration o Modify, expand, or restrict terms of power of appointment the settlor granted to a beneficiary The Trust Protector is presumed to be a fiduciary (unless settlor provides otherwise) For following the Protector’s directions, trustee is normally liable only for willful misconduct, and gross negligence Trustee has no duty to: o Actively monitor the Protector’s conduct, or o Tell the beneficiaries that the trustee would have acted differently but for the Protector’s directions. Trust Protectors – Other Issues Protectors in charitable trust context are governed by 114.003 which is more restrictive. Uniform Directed Trustee Act is under construction Trustee with special skills 117.004(f) – a trustee who has or represents as having more skill than a prudent investor has a duty to exercise those additional skills. Thus a professional trustee or attorney may be held to a higher standard. A trustee who claims to have higher or special skills is bound by those claims. If a trustee has lower skills, they still must follow the Prudent Investor Standard. Trustee’s conduct evaluated – a trustee’s compliance with the prudent investor rule is measured by the facts and circumstances at the time the trustee made the decision. (Not future circumstances, the trustee is not required to be psychic.) Factors trustee must consider 117.004(a) – The trust code explains how the prudent investor rule operates and enumerates the factors a trustee must consider when making investment and management decisions. Basic factors to consider: o Trust purpose o Trust terms o Distribution requirements o Circumstances generally Portfolio approach – a trustee’s investment and management decisions respecting individual assets must be evaluated in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust (balance assets) = trustee must take reasonable risk o View investments collectively – not individually as under the prudent person rule where every investment had to be safe and go up in value. Comprehensive factors 117.004(c) – circumstances that a trustee shall consider in investing and managing trust assets: o General economic conditions, possible effect of inflation or deflation, tax consequence, role of each investment within the portfolio, income expected, appreciation expected, beneficiary’s other resources, need for liquidity, need for regular income, importance of preserving trust property, importance of appreciation, or special relationship or value of an asset to the purposes of the trust or beneficiary Diversification 117.005 – a trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying. The trustee has the duty to spread the risk so that if one investment goes bad, the entire trust does not suffer. General rule is that it is required. If settlor desires otherwise, have them put express directions in the trust (family business, family farm, etc). Duty to review investments 117.006 – the trustee must review trust assets within a reasonable time after accepting the trust or receiving trust property. The trustee must then bring the trust property into compliance with the prudent investor rule (i.e. diversify, etc.) The trustee must also periodically review investments to determine if they are still appropriate for the trust. (Prior law – trustee didn’t have to diversify when got the trust) The type of investment determines how often the trustee should conduct the review – some property investments only need occasional reevaluation while active stock portfolios may need daily attention. The timing of review may be statutorily determined – national banks must conduct a review of all assets of each fiduciary account at least once every calendar year. ADVICE – review all trust investments and with regard to improper investments – change ASAP and sue the former trust (breach of duty if you don’t sue the former trustee). Loyalty 117.007 - Trustee’s loyalty is to the beneficiaries. The trustee must invest and manage solely in the interests of the beneficiaries. Accordingly, social investing is prohibited. Social investment = considering factors other than monetary safety (looking at company’s handling of environmental matters, etc.) (Investing in green companies or companies without child labor.) EXCEPT If there is permission in the trust There is proof that non-social investing would not have produced better results - (If 2 investments are prudent and identical, and one is made by blind 5 years old in China, and the other by the hard work of Americans, trustee can go American, etc. But, if the Chinese one were a better investment, you need to go with that one) Impartiality 117.008- Trustee must act impartially and not favor one beneficiary over another. (Unless there is authority in the trust to treat them differently) This is especially important in the context of income and principal allocations under Chapter 116. TRUSTEE POWERS The trustee needs a wide array of powers in order to carry out the trustee’s duties relating to the management of trust property, such as to buy, sell, rent, lease, lend, borrow, mortgage, settle claims, and mange corporate securities. Sources of Powers: (1) Trust instrument – the first place the trustee looks for authority to act is the trust instrument. The trust code provides that the terms of a trust instrument granting additional powers or limiting powers will trump the statutorily provided powers. In the past, settlors included comprehensive lists of trustee powers, but this is no longer necessary due to statutory powers. (2) Trust Code 113.001-113.029 – provisions enumerate an extensive list of powers that the trustee automatically receives. Permits the settlor to draft a relatively short trust because they don’t need to enumerate all of the trustee’s powers o.001 – Powers don’t apply if settlor or court says other wise (these are default powers) o.008 – Business Entities - Invest in, participate in, and continue operation of businesses.  o.009 – Power to manage real property – allows you to do all sorts of stuff such as exchange, develop, improve, partition, vacate, adjust boundaries, adjust valuation, dedicate to public use, raze walls, erect walls, make repairs, and other alterations. o.010 – Selling trust property – can sell for cash, credit (secured or unsecured). Can contract to sell, sell and convey, or grant an option to sell real or personal property o.011 – Lease – you can have a lease that extends beyond the terms of the trust – long-term lease – long term leases are advantageous b/c you get fixed rent which is a good investment. People pay more for long-term lease (but the downside is that you can’t enter the land and the remainder beneficiary can’t enjoy the property) § Trust ends 1 week from now. Trustee can, today, lease it out for 30 years and screw beneficiary. They have this power, but may be in breach of duty o 012 – Mineral powers – includes negotiating and making leasing, contracting numerous operations, purchasing leases (mineral transactions may extend beyond the term of the trust) o 013 – Insurance - Trustee may purchase insurance not only to protect the trust, but also to protect the trustee. o 014 – Pay taxes – a trustee may pay taxes and assessments levied or assessed against the trust estate or trustee. o 015 – Borrow money – from any source, including a trustee (mortgage property, pledge property, buy on credit) [pledge = physical possession of collateral to creditor] o 016 – Manage securities o 018 – Hire agents including lawyers so long as reasonably necessary (attorneys, accountants, agents, investment agents, and brokers) (If a reasonably prudent owner of that type of property holding that property for similar reasons would employ outside assistance.) o 019 – Handle claims – trustee may compromise, contest, arbitrate, or settle claims of or against the trust estate or trustee. o 020 – Abandon worthless or burdensome property - Pour over will that left the trust everything o 022 – Provide beneficiary with a residence § PRE and POST death - Meaning you can pay living and burial expenses of beneficiary o 023 – Ancillary trustees. Not needed often – but if you have property in another state (especially real property) the trustee may name an individual or corporation qualified to act in the foreign jurisdiction (has same duties as Texas trustee) o 025 – Allows trustee to investigate environmental concerns pre acceptance (3) Granted by equity – implied powers – 113.002 – necessary or appropriate to carry out the purpose of the trust. 113.024 – implied powers that are not inconsistent. (4) Court order – a court with proper jurisdiction may render a judgment affecting the trustee’s powers. The court may grant additional powers beyond those the settlor or statute provides, or may limit powers which were granted by the settlor or state statute. 113.001 & 115.001 Delegation of Powers – a settlor expects the trustee to administer the trust as the settlor selected the trustee because they had confidence in that person’s judgment and ability to carry out the instructions. But it is burdensome to force a trustee to personally perform all acts necessary. Common Law – that trustee may delegate mere ministerial duties but may not delegate discretionary acts. (Investment was deemed discretionary) Modern Rule: may delegate if reasonably necessary in the administration of the trust. 1. TRADITIONAL RULE regarding delegation of powers is that the trustee may delegate mere ministerial duties but may not delegate discretionary acts. Investment of trust property was deemed a discretionary act and thus was not subject to delegation o Vague rule because there is always a question as to when something is “discretionary” – is the janitor’s decision to mop one side of the store first discretionary? 2. 1999 RULE – Investment Agent o Allowed the trustee to delegate investment decisions to an investment agent so long as the trustee sent written notice to the beneficiaries at least 30 days before entering into an agreement to delegate investment decisions o The trustee would remain liable for the investment agent’s decisions unless they jumped through all of the statutory hoops 3. 2004 RULE – Delegation Permissible 117.011 o New Standard: Trustee may delegate any investment or management decision if a prudent trustee of comparable skills would delegate under the same circumstances. § Recognizes that a person can know that they aren’t a prudent investor and allows non prudent investors to act prudently in seeking assistance o Disclosure - No notice to beneficiaries is needed o Duty of trustee - The trustee must exercise reasonable care, skill, and caution in selecting the agent, establishing scope and terms of delegation, and periodically reviewing agent’s actions. o Duty of Agent – reasonable care to comply with the terms of delegation. o Liability – General Rule: the trustee is not liable to the beneficiaries or the trust if the trustee used reasonable care, skill, and caution to select, establish scope, and review. UNLESS: (EXAM) § The agent is an affiliate (relative, partner, employee)  § Trustee or beneficiary is required to arbitrate under the terms of the delegation (this makes it too easy to breach because the agent doesn’t fear arbitration as much as court – we want the agent to be scared) § Shortening of statute of limitations against agent (period for bringing an action by the trustee or a beneficiary – shorter than the law applicable to trustees) 1. Review – we want the agent afraid. They cannot be your buddy. Fear is what keeps them acting properly with regard to the investments. 2. If you follow the above requirements and make sure that the agent you select is not an affiliate and the terms of the relationship between the trust and this agent doesn’t cut short SOL or require arbitration, then the trustee is not liable for the actions of this investment agent o Delegation to a co-trustee is allowed unless the trust requires joint exercise – the trustee can also revoke the delegation as long as it is irrevocable. o Ask: may the trustee delegate powers and duties to others? if yes – may escape personal liability – if not – trustee personally liable. Multiple Trustees – the settlor can appoint two or more persons to serve as co-trustees. The traditional rule required all trustees to consent before taking any action with respect to the trust unless the settlor expressly provided otherwise in the trust. TEXAS – majority may act (not all like common law rule) to make decisions regarding the trust. Vacancies – unless the instrument provides to fill in a vacancy, the remaining trustees may act for the trust. (The court only steps in when there are no remaining trustees) Duty of co-trustee to participate – a co-trustee shall participate in the performance of a trustee’s function unless: o The co-trustee is unavailable to perform the function because of absence, illness, suspension under this code or other law, disqualification, or other temporary incapacity. o Co-trustee has properly delegated the performance and communicated the delegation to all the other co-trustees and has filed the delegation in the records of the trust. Remaining trustees may act to administer trust efficiently or avoid injury to the beneficiary – they are jointly and severally liable to the beneficiaries. Duty to exercise reasonable care to: o Prevent breaches of trust by another co-trustee and if a breach is discovered, the trustees should