Trust Creation - Flashcard Notes PDF

1\) Trust Creation  - Intent -- S must intend to split legal and equitable title and to impose fiduciary duties on T  - If there is no intent, there is no trust. The court will not create one for you.  - Must be a present intent, but no specific words are required....

1\) Trust Creation  - Intent -- S must intend to split legal and equitable title and to impose fiduciary duties on T  - If there is no intent, there is no trust. The court will not create one for you.  - Must be a present intent, but no specific words are required. Just because you call it a trust doesn't make it one, you need those 2 things. - The fiduciary duties have to be legally enforceable, not precatory - Statute of Uses -- In the 1500\'s England eliminated the legal interest held by T. It developed the \"Active Trust\" where T\'s holding of property was for B\'s benefit. In Texas we have this and it says if T has no duties then there's no trust and title merges in B. - Sole T cannot be sole B.  - Method of Creation  - S is Alive  - Self-Declaration -- S declares themselves T of the property, they retain the legal title and are subject to the self-imposed fiduciary duties.  - Transfer in Trust -- S transfers legal title to T and imposes fiduciary duties on T.  - S is Dead  - Testamentary Trust -- requires a valid will.  - Consideration  - You do not need consideration for a trust, but a trust may be a promise in a contract situation.  - If S transfers only promises to a trust, they need to be enforceable to give them value, otherwise the trust fails.  - Honorary or Purpose Trusts  - The B is non-human and not a charitable purpose.  - Charitable Trust -- Must have a sizable class of B\'s as to have general public interest for which the purpose is attached. The description can be PEHRM (poverty, education, Health, Religion, Municipal)  - Monitored by AG - Notice requirement - by certified or registered mail within 30 days of filing and at least 25 before hearing - Can be saved by Cy Pres - RAP doesn't apply - Can be split interest - private and charitable - Capacity -- S must either have capacity to make inter vivos gift or will - depends  - Statute of Frauds -- Once a trust is in writing, all future dealings must also be in writing.  - Just need who T and B are, the property and how it is to be used.  - Oral trusts must be established by clear and convincing evidence. T can't be S or B, has to be personal property - Part Performance -- if a T does things as T, they cannot deny the existence of the trust  - Violations just make the trust voidable  - Who has standing? Alleged T or T in bankruptcy - Purpose -- Cannot be illegal or against public policy.  - Evaluating Trust Purpose  - Intent -- trust is illegal if the existence of the trust could induce another person to commit a crime even if T doesn\'t have to perform an illegal act. Looks at intent and effect.  - Use -- focuses on how the property is used, not motives.  - Creditors -- cannot do something to defraud creditors.  UFTA - Spendthrift -- in a self-settled spendthrift -- S = sole B = defrauding creditors - You can't send property to a trust if you're insolvent - Remedies for Illegal Trusts  - Set aside the amount of the creditor's claims - If other: - Void the trust - Resulting trust - S gets property back - Permit T to retain property free of trust - Remove the improper restriction and let the trust operate - Property -- S must put property into the trust and the trust must continue to hold some property  - Property can come from pretty much anywhere, but no matter what the conveyance has to come along with deed/title/possession etc.  - The only property that can't come into a trust is what the trust itself says can't and what a T says can't (because they don't have to expand their duties) - Has to be things you can transfer yourself - No future interest or something that isn't yours - Trustee -- Holds legal title and is obligated to deal with the property to benefit B.  - Prudent Investor Standard  - You cannot force someone to be T.  - Acceptance can be established 3 ways:  - How it is explicitly stated in the trust  - A written acceptance  - Performance of T duties  - Excludes if you're just helping to preserve the trust property and you give notice to S or B (if S is dead) or if potential T is just inspecting - Corporate T - Financial institutions don't need a separate charter but trust companies do. For foreign corporations it's about reciprocity. - If there's a merger then we have Substitute Fiduciary Act  - Bond is assumed in Texas, but corporate T is already bonded. S can waive bond but court can reinstate it. - T not liable for mistake of facts unless they have actual/written notice - Multiple Trustees are fine, but they have to hold each other accountable.   - If there's a T left we look for a successor or method, no court involvement needed - Successor trustees must check over and bring everything up to the standards and sue if needed.  - Trust Protectors -- Directs the T and has substantial powers.   - Discretionary Trusts -- T has discretion that could be very broad or narrow, but there is no total discretion because of the fiduciary duty.  - Violation can result in T removal, court orders on distributions, court scolds T and reminds them to get in line.  - Likely results ins separate property for B - Support Trust -- HEMS  - Life Insurance Trust -  starts when there's property in the trust and T has duties - Beneficiary -- Holds equitable title  - Has to be clearly ascertainable.  - Incidental B -- not named as B but still benefits.  - Disclaimer -- in writing, delivered, describes what is being disclaimed, can be partial, B cannot have any control or no way to disclaim. Cannot disclaim if you owe child support.  - Creditors cannot reach their interest before title has merged.   - Reduced Capacity - Minor - Person who T believes is incapacitated - Official determination not needed - Can be applied without S's express intent - Can give to guardian for HEMS or can reimburse person caring for B - RAP -- In TX -- 9/1/21 - Can be 300 years; cannot prevent T from selling real property after 100 years  - Applies to a future interest that is partially or totally contingent and is held by a non-charitable T - No one is too young/old to have kids and no one's death is iminent. - This is really an issue with perpetual trusts. - We look at the day the trust becomes irrevocable - In Texas, the court will reform to meet S's intent 2\) Trust Administration - T must: - Accept - T doesn't have to - Good samaritan with notice doesn't count and neither does checking out the property - Post bond - Texas oresumes it is required - Process and Safeguard Trust Property - Earmarking - labeling the property as belonging to the trust, T is responsible for a loss due to failure to earmark - Avoiding Commingling - Strict liability for losses due to commingling.  - Identify and Locate Beneficiaries - Figure out who they are and where they are - Follow S instructions - Act as Fiduciary - T can be held personally liable for failure to comply, breach of duty may result in civil and criminal penalties. - T owes duty of fair dealing even if not a trust transaction, need a full disclosure of facts and law - Support and Defend Trust - Duty to defend against attacks on trust validity - Appeal unfavorable verdicts unless there's no reasonable ground - Selection of Investments - Prudent Investor Standard - the portfolio approach; looks at different factors like economic conditions, taxes, expected outcome, B's other resources, and more. We look at when the investment was made. If S doesn't want this they need to be very explicit. - Non-economic Standard - Diversity in Investments where you can - Exculpatory Clause - will only protect them from negligence - Reviewing Investments must be done periodically; T must dump bad investments of previous T and determine if they were imprudent when made. If so seek redress from former T - Source of T's Powers - Instrument - Express from S - Statute - Gives a laundry list - Implied - these are analogous to necessary and proper powers given to Congress  - Court - with proper jurisdiction they can give T powers beyond what S or statute says. - Delegation of Powers - Standard - does T say "another prudent investor with the same skills would hire someone else"? Then it's okay to delegate - Methods to Delegate - make sure its okay with the trust, maybe the court can get involved - Improper Delegation - If they seek to limit S.o.L, if they require arbitration, or agent is affiliate, then T can still delegate, but they have liability - Agent has to take reasonable care to comply; T has to take reasonable care, skill, and caution in selecting and establishing scope - Distributions - Standard of Care - make distributions to the right person.  - Competent Adult - distribute directly to the B unless S says you can pay in another manner (pay debts directly) - Minor or Incapacitated B - should be made to guardian/custodian.  - Principal Distributions - Separate Property - Spendthrift - Creditors can't reach when not in B's hand essentially - Nothing beats the Feds - Duty of Loyalty - Selling Trust Property - T cannot buy/sell for their personal use.  - Borrowing Trust Property - S can expressly authorize in certain circumstances, but otherwise its a no. - Purchase of Common Investments - Corporate T cannot buy their own investments/their affiliates; personal T cannot have a common investment unless its in the trust and it makes sense to keep it - Transfers between Trusts - T can't sell property to another trust where they also serve as T.  - Dealing with B - you have got to be fair to the B.  - Self-Employment - NO. - Self-Dealing - Constructive Fraud. A T can never ever purchase from the trust. There's no arguing it. - Permitted Self-Dealing - S can include a provision - Conflict of Interests  - Corp T can't purchase their own or an affiliate's securities - Individual T can't purchase if T is director/owner/shareholder etc.  - T may retain said stock if it is reasonable - Breach of Loyalty Duties - S may waive self dealing of conflicts on interest, but they are strictly read against T - T can make no profit other than compensation ever - Liability of T to 3rd Parties - K Liability - T is personally liable unless they take certain steps. To recoup damages paid to a K claimant, T has to prove that they entered into the K for the benefit of the trust and seek reimbursement. - Don't sue a trust, due T in their representative capacity - In TX T can K if the K was within their capacity and a plaintiff can recover directly from trust - Limiting - a 3rd party is not bound by terms of a trust, put the clause in the K - Notice Duty - Plaintiff has to tell B by registered mail within 30 days of filing and at least 31 before judgment. If they submit a written request T has to provide B info within 10 days - Tort Liability - Protection - if T was personally at fault, they are personally liable. T should get insurance. - T is liable for their own torts and of their employees/agents - T cant recover from trust/get exoneration for common incident torts, strict liability, conversion - Liability as Property Owner - Not a thing anymore - Allocation of Receipts and Expenses - General Allocation Rules - the conflict is between income and remainder Bs - T 1st looks at S's instructions, then the code if neither allocate to the principal - T's discretion has to be fair and reasonable (which the code is) - Principal - Capital gains (sell property for more than you paid all of it is principal), eminent domain award, insurance proceeds, stock divided, stock split, stock because of merger, timber that exceeds growth, non-income earning property (we don't use delayed income anymore) - Income - Interest earned, rent, cash dividends, timber cut that doesn't exceed regrowth - Special Rule for Liquidating/Wasting Asset - Something that goes down in value as it's used (usually IP) - Income - 10 Principal - 90 - Oil and Gas - 1/1/04 "oil and gas law divided the same no more." - Before it was like above, now it's equitably, look at when the trust owned it - Power of T to adjust - UPIA says T can look at factors to potentially change allocation depending on the nature/purpose of the trust, S's intent, and about the B - Not allowed if S prohibits, T = B, T would benefit indirect/direct, adverse tax stuff - T doesn't require notice to B, but court can reverse if T abuse - Disbursements - When a T pays money, which pocket does it come from? - Income - Ordinary Repairs, Insurance premiums, property taxes - Principal - Capital improvements/extraordinary repairs - T compensation (presume 50/50), accounting expenses 50/50 - Debt Payment - interest come from income, principal comes from principal - Income taxes - pay from whichever receipt you're looking at - Depreciation - T discretion - Rights of Income B - arises on a date specified in trust or the date the asset becomes subject to the trust if there's no date. - Inter Vivos Trust - date of trust/ when it comes in - Testamentary Trust - death date - Unitrust - A way for I and P B's to come together. Current B is entitles to a fixed percentage of the value of the trust yearly, everyone wants the value to go up. - Converting a P&I trust - not in TX - Duty to Inform B - Upon B request or - When T is going to take a material and unusual action - S can limit when trust is revocable, B under 25, or B is remote and not eligible for current distribution/ distribution if trust ended now - Accountings - Keep good records because either S can set intervals or B can request every 12 months. Has to include trust property and its value, all receipts and disbursements, all liabilities, and the source/amount of T's compensation. - B has to write a written demand and T has to get it to them in 90 days, B can sue if not and recover from trust or T - Interest Person can ask, but they have to show they have a sufficient interest - S cannot waive - TX doesn't require regular accountancy - Limits allowed if same as duty to inform - T Compensation - Must be reasonable. B can bring it to the court and they'll look at T's totalling, the time/complexity/experience/risk and other factors. - S can waive it - Trust Modifications - By Court - Deviation - Can happen if: - Trust purposes fulfilled - Purposes are illegal now - Prevent waste - Purposes are impossible, or - Circumstances have changed in a way S wouldn't have known and a change would still follow S's intent. - Tax objectives and not contrary to S's intent - Continuing the trust isn't necessary - To achieve material purpose of the trust and - All B consent (direct, virtual rep, guardian ad litem) - A change not inconsistent with the material purpose of the trust if all B consent - Reformation in Texas - To prevent waste - There's an impairment - To achieve purposes - Correct scrivener's error (even if unambiguous if there's C & C of S intent) - No jury for either - Cy Pres - By Parties - S - Can do all sorts of stuff; if trust is silent it is presumed revocable and they can do it or if it's irrevocable the trust can expressly save those powers for S - T - Generally no unless S gives power, there's a division, non-judicial cy pres, or decanting - B - "Claflin Rule" - allowed as long as no material trust purpose is unfulfilled; but TX says all purposes have to be satisfied and you need to get court approval and need all B - S & B - If S is alive and all B are in an irrevocable spendthrift consent there can be modification or termination - Family Settlement Doctrine - need genuine controversy - Trust Termination - Express Terms - Revocation by S - Termination by B - Termination by B and S - Merger - Lack of Property - Uneconomic - under 50k, notice to all current and remainder B, no adverse tax, cost doesn't justify continuing, NO if there's a conservation easement - Court Order - T Duties on Termination - T's powers continue for a reasonable time - depends on property 3\) Trust Enforcement - Procedural Matters - Standing - Interested Person - Necessary Parties - B who the suit is based on, all B named, anyone getting distributions, T, anyone else you want bound - Jurisdiction - Dist. Court; County court of law while estate is pending - Venue - Individual non-corp T - County of administration or office (for past 4 years) - Multiple individual non-corp T - County of administration of where the main office is, if no main office in TX their residence (for past 4 years) - One or more T is a corp - County of administration or office in TX (past 4 years) - Transfer can happen if everyone agrees or reasonable cause - Virtual Representation - If you bind the one who can revoke you bind everyone, bind guardian then you bind ward, unborn/unascertained bound if interests were adequately represented and the person there had a substantially identical interest - Remedies against T - Money Damages - Lost Value - no causation, T doesn't have to benefit - Profit Made by the T - causation required, trust doesn't have to have a loss - Lost Profits - Punitive Damages - the person was evil - Removal of T - Discretionary - T has materially violated fiduciary duty and trust suffered material financial loss - T becomes Incompetent - T becomes Insolvent - Other Cause - Remedies - Decree to Carry Out the Trust - Injunction - Appointment of Receiver - Increase Bond - Declaratory Judgement - Damages in the Absence of Breach - Remedies Involving Trust Property - Tracing - Opening balance is what they had before - Then add in the bad money - Assume T spends their money first - B have priority claim to that trust money - What happens if T spends more than their personal money? - They spend their money first and then the bad money - Whatever is left the B have priority on, but they can't get more than that - "Lowest Intermediate Balance Rule" - Subrogation - B gets position of the creditor T paid off - Marshalling - If a creditor has the right to pull from multiple sources, they have to pull 1st from one that no one else has claim to - BFP - Texas Protections - good faith is protected, you don't have to inquire and if T doesn't identify the trust stuff BFP isn't subject to B claims - Cause of Action Against 3rd Parties - T can sue others who are liable to the trust - Barring of Remedies - S's Approval in Trust Instrument - Can't waive: - Valid trust - SOL - Limits on exculpatory clauses - Duty of T/ acted in good faith/ inform B - Prior Approval or Ratification by B - Court Decree - S.O.L. - 4 years from discovery - Latches - Unreasonable delay in asserting rights to disadvantage Defendant 4\) Resulting Trusts - Not a real trust - we do what S would have done had S thought about writing down what was going on - Failure to Create Express Trust - S still has property - Failure of Express trust to Dispose of All Trust Property - Something happens like B dies and trust doesn't say where property should go after - Purchase Money Resulting Trust - Something like a loan situation 5\) Constructive Trust - Equitable remedy to prevent unjust enrichment - Trust Code DOES NOT APPLY to constructive trust § 111.003(2) - Grounds to impose constructive trust - Fraud - Abuse of confidential relationship - Promises made in contemplation of death - Any other evil conduct which the court finds merit the remedy 6\) Trust Bank Account - Not a trust - T/depositor has all the rights - No split of title - No imposition of duties - B only have rights after T dies and B survived them