Trusts on the California Bar Exam


TRUSTS

  1. Private Express Trust: A fiduciary relationship with respect to property whereby one person, the trustee, hold legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

    1. Trust property: any presently existing interest in property that can be transferred can be the corpus of a trust. E.g. fee simple, future interest, life insurance. But not illusory interests.

    2. The beneficiary: any ascertainable person or group of people can be the beneficiary (“B”), including a corporation, or unincorporated ass’n (modern law only). But, watch out for the RAP.

    3. Trustee: A trust must have a trustee, but the court will not allow the trust to fail solely b/c there is no trustee. When necessary, the court will appoint a trustee.

    4. Intent: Settlor (“S”) must manifest an intention to create a trust.

      1. Must use mandatory words, rather than words of mere hope or desire (precatory words + parol evid. may = a trust). But, if precatory words + parol evid. are insufficient, transferee owns property in fee simple.

      2. Oral trust okay for personal property, but writing required if res is land (SoF).

      3. Creation

        1. Trust to take effect at S’s death – must comply w/ local probate code

        2. Trust to take effect during S’s lifetime – two methods

          1. Transfer in Trust (3rd party as trustee): For a trust of real property, the S must execute and deliver a deed transferring title to the trustee. For a trust of personal property S must deliver trust property to the trustee.

          2. Declaration in Trust (S as trustee): For a trust of real property, there must be a writing satisfying the SoF which indicates the S is also the trustee. For personal property, look for present manifestation of intent.

    5. Purpose: Trust must have a valid purpose not contrary to public policy or illegal.

      1. If illegality at creation, try to excise the illicit condition. If you can, the trust will stand, if not, the court will either (1) invalidate the trust at its inception or (2) All the trustee t keep the property for himself.

      2. If illegality after creation: a resulting trust is decreed (trustee must transfer the property back to the S if alive, if not to the S’s estate).

  2. Charitable Trust: trust created for public benefit (i.e. relief of poverty, advancement of religion, ed., etc)

    1. Charitable purpose required – look to the effect of the gift to determine charitable purpose, not the motive of the S. (if dual purpose, it’s not a charitable trust unless provides for split)

    2. Beneficiary: there is no ascertainable person or group. Society is the B. Note: if trust benefits a small group of people (e.g. trust to alleviate poverty among poor relatives) – split in authority re whether it is a private or charitable trust – argue both ways.

    3. RAP: does not apply to charitable trusts. Thus, a charitable trust can endure forever.

    4. Cy pres: If S manifests a general charitable intent, but the mechanism for effecting that intent is not possible or practicable, the court, acting in equity, may modify the mechanism cy pres, as nearly as possible, to effectuate S’s general charitable intent.

      1. Court will admit both intrinsic evidence (the trust instrument) and extrinsic evidence to ascertain the S’s intent. But, if specific charitable intent, no cy pres → resulting trust.

      2. Only the court invokes cy pres, not the trustee. But trustee may petition the court.

  3. Miscellaneous Trusts

    1. Honorary Trusts: a trust which has no ascertainable B and confers no substantial benefit on society. E.g., a trust to further fox hunting or a trust to take care of S’s pet.

      1. The trustee is not required to carry out S’s goal, but has the power to carry it out. The trustee is on his honor.

      2. If trustee refuses to carry out S’s intent, the trust fails (ct. will NOT appoint a new T)

      3. RAP applies – so these trusts often fail b/c there is no measuring life. Some courts strike the trust at its inception → resulting trust. Other courts allow the honorary trust to endure for 21 years and then → resulting trust.

    2. Totten Trust: a tentative bank account, whereby the named B takes whatever is left in the bank account at the death of the owner of the account.

      1. The depositor/trustee owns the account during his lifetime, and owes the named B no fiduciary duties whatsoever.

      2. May be elevated to a private express trust if S manifests an intent to create a trust.

  4. Restraints on Alienation

    1. Spendthrift Trust: a trust which, by its terms, prevents the B from transferring his right to future payments of income or principal, and creditors cannot attach the B’s right to future payments.

      1. Voluntary Alienation: generally, the B cannot ever voluntarily transfer his rights to future payments, as that would defeat the terms of the trust.

        1. But, sometimes a court will recognize the assignment on the grounds that the B merely has given the trustee a direction or order to pay the B’s agent or representative, i.e. the assignee.

        2. Prior to payment, the B would have the right to revoke the order or direction.

      2. Involuntary Alienation: generally, creditors cannot attach B’s right to future payments.

        1. But, at common law, preferred creditors can attach the B’s right to future payments (e.g. gov. creditors like the IRS, those who provide the necessities of life, a child for child support, a spouse for spousal support, an ex spouse for alimony, or a tort judgment creditor).

        2. Plus, there is a rule in many jurisdiction that any creditor (even if not preferred) has the right to attach “surplus” as measured by the B’s “station in life.”

      3. If S creates a spendthrift trust for himself.

        1. As to involuntary alienation, in every jx. the trust itself is valid, but the spendthrift provisions are not recognized. Can’t create a spendthrift trust to insulate oneself from creditors.

        2. As to voluntary alienation, there is a split in authority: most jx. ignore the provision and allow the S to voluntarily alienate her interest. But, some jx. will not allow S to transfer her right to payment in the future.

    2. Support Trust: a trust, which by its terms, allows the trustee to pay only so much income or principal as necessary for the B’s health, support, maintenance or education.

      1. Voluntary Alienation: the B cannot voluntarily transfer his right to future payments.

      2. Involuntary Alienation: generally, creditors cannot attach the B’s right to future payments, but there are preferred creditors who can attach, see above)

      3. If S creates a support trust for himself, same result as above.

    3. Discretionary Trust: a trust, which by its terms, gives the trustee sole and absolute discretion in determining how much to pay the B if anything, and when to pay the B if ever.

      1. Voluntary alienation: on the one hand B cannot voluntarily transfer his right to future payments b/c the B may not get anything. On the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the B, and if the trustee decides to pay, he must pay the assignee or be held personally liable.

      2. Involuntary alienation: on the one hand creditors cannot attach the B’s right to future payments b/c there may be nothing to attach. On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the B, if he decides to pay, he must pay the creditors or be held personally liable.

      3. If words indicated both discretionary trust and support trust – argue both ways.

  5. Resulting Trusts: an implied in fact trust based upon the presumed intent of the parties.

    1. If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the S if alive, and if not, to the S’s estate, i.e. to the residuary devisees if any, and if none, to the intestate takers.

    2. Arises when: (1) private express trust ends by its own terms, and no provision for what happens to the corpus thereafter, (2) a PET fails b/c there is no B, (3) a charitable trust ends b/c of impossibly or impracticability, and cy pres won’t work, (4) a PET fails because illegality, (5) there is excess corpus in a PET, (6) purchase money resulting trust, (7) there is a semi-secret trust (makes a gift to someone to hold as trustee, but does not name a B).

  6. Constructive Trusts: An equitable remedy to prevent fraud or unjust enrichment.

    1. The wrongdoer will be deemed a constructive trustee and must transfer the property to the intended B.

    2. Arises when: (1) a trustee of a PET or charitable trust makes a profit b/c of self-dealing, (2) there is fraud in the inducement or undue influence re a will, (3) there is a secret trust (the will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B – parol evidence is admissible to show that B was the intended B), (4) oral real estate trusts.

  1. Trustee Powers and Duties

    1. Trustee’s Powers: Trustee has those powers expressly conferred by the trust instrument, state law, and court decree, and all powers implied as necessary to accomplish the trust purpose.

      1. Trustee may sell trust property, incur expenses, lease, and borrow money as necessary to carry out the trust purpose. Power subject to review for abuse of discretion

      2. Trustee may not borrow money, mortgage or otherwise encumber trust property

      3. Trustee may sue third parties who damage the trust property.

      4. Joint trustees must exercise their power by unanimous agreement.

    2. Trustee’s Duties:

      1. Duty of loyalty: The trustee must administer the trust for the benefit of the beneficiaries, having no other consideration in mind. No self-dealing. Must turn over ill-gotten profits to the intended B (constructive trust).

      2. Duty of due care: trustee must act as a reasonably prudent person dealing with his own affairs.

      3. Duty to invest – split of authority – three alternative rules – discuss all three, but under all three standards, the trustee has a duty to diversify so if there is a loss, the entire portfolio is not destroyed.

        1. State lists: In certain jurisdictions, in the absence of directions in the trust, the trustee must follow a list of good investments.

          1. Good investments include: (1) federal gov’t bonds, (2) federally insured certificates of deposit, (3) first deeds of trust in real estate, (4) sometimes stocks of publicly traded corps (depends on the jx.).

          2. Never invest in a new business or second deeds of trust,

        2. Common law prudent person test: The duty to invest requires the trustee to act as a reasonably prudent person investing his own property, trying to maximize income while preserving corpus. If the greater skill – higher stdrd.

          1. Key: each investment is scrutinized.

          2. Good investments include: (1) federal gov’t bonds, (2) first deed of trust on real estate, (3) federally insured certificates of deposit, (4) blue chip stocks, (5) mutual funds may be ok (depending on jx.).

          3. Never invest in a new business or second deeds of trust.

        3. Uniform Prudent Investor Act: Adopted by most states, provides that the trustee must invest as a prudent investor.

          1. Key: Unlike the rules above, each individual investment is not scrutinized, but, rather, performance is measured in the context of the entire trust portfolio.

          2. Thus, any investment is not per se invalid.

        4. If breach of duty, trustee must make good on the loss. If there is a profit, the B will affirm the transaction. But no netting.

      4. Duty to earmark: requires the trustee to label trust property as trust property. If breach of duty, and there is a loss:

        1. At common law the trustee is held personally liable regardless of whether there is a causal relationship between the failure to earmark and the loss.

        2. Under the modern approach, the trustee is held personally liable only if the loss was caused by the failure to earmark.

      5. Duty to segregate: the trustee cannot commingle his own personal funds with trust funds. If breach, the trustee can be removed and be held personally liable for any loss.

      6. Duty not to delegate: The trustee can rely on professional advisors in reaching a decision, but the trustee cannot delegate decision-making authority to these advisors.

        1. But, modernly, the trustee can delegate the duty to invest in a professional money manager.

      7. Duty to account: requires the trustee to give the B a statement of trust income and expenses on a regular basis.

      8. Remedies for breach of duty: (1) damages, (2) constructive trust, (3) tracing and equitable lien on property, (4) ratify the transaction if good to the B, (5) remove trustee.

    1. Liability of Trustee to Third Persons

      1. Liability in Contract

        1. Common law: trustee is sued in her personal capacity, so her personal assets are at stake. But trustee can get indemnification from trust assets if acting w/in her powers and was not personally at fault.

        2. Modern law: If the other person to the K knows that the trustee is entering into the K in her representative capacity, the trustee must be sued in her representative capacity, and her personal assets are not at stake.

      2. Liability in Tort

        1. Common law: the trustee is sued in her personal capacity. If w/out fault, may seek indemnification.

        2. Modern law: trustee is sued in his individual capacity and is personally liable for torts only if the trustee is personally at fault. Otherwise sued in rep. capacity.

  1. Modification and Termination of Trusts

    1. Modification by the Settlor: S can modify the trust if the S expressly reserves the power to modify the trust. S also has power to modify if the S has power to revoke.

    2. Modification by the Court:

      1. There can be modification by the court regarding charitable trusts and the cy pres powers: changing the mechanism to further settlor’s general charitable intent.

      2. Court may also modify pursuant to its deviation power to change the administrative or management provisions of the trust. Requires:

        1. Unforeseen circumstances on the part of the settlor

        2. Necessity (deviation needed to preserve the trust).

    3. Termination of Revocable Trusts:

      1. Majority Rule: To retain the power to revoke the S must expressly reserve the power in the trust instrument.

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

    4. Termination of Irrevocable Trusts: 3 methods of premature revocation

      1. Settlor and all the beneficiaries (including remaindermen) agree to terminate

      2. All the beneficiaries agree to terminate and all the material purposes have been accomplished (the court will make certain that sufficient assets are set aside to accomplish any minor purposes).

      3. By operation of law: passive trusts and the statue of uses

        1. Where there is a private express trust of real property, and the trustee has only passive duties (just holds bard legal title to the res), the trust terminates under the Statute of Uses, and the B gets legal title by operation of law.

        2. Not recognized in all jurisdictions

        3. Generally only applies to a trust of real property. But, should apply by analogy to the trusts of persona property because equity should not see a useless act done.

  2. Income v. Principal Problems

    1. Life tenant:

      1. Gets: (1) cash dividends, (2) interest income, (3) net business income

      2. Pays: (1) interest on loan indebtedness, (2) taxes, (3) minor repairs

    2. Remaindermen:

      1. Gets: (1) stock dividends, (2) stock splits, (3) net proceeds on the sale of trust assets

      2. Pays: (1) principal part on loan indebtedness, (2) major repairs or improvements

    3. Adjustment power of trustee: trustee can disregard above stated rules regarding allocation of income to life tenant and remainderman if different allocation is necessary to administer the trust fairly.

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