TRUSTS

HISTORY

I. In England, impossible to devise land or create a will.

A. Law of Primogenitor - Oldest male gets father's property.

II. The Use - predecessor to trusts - means of transferring land

A. To A and his heirs for use by B and his heirs.

1. A had legal title, but B (heirs) got to use prop

2. If A sells property, B has no rights.

III. Statute of Uses - 1536

A. Transformed B's interest into a legal one.

B. A's rights were terminated.

C. 3 Exceptions

1. Statute only applied to real, not personal property

2. Did not apply to Active Trusts

a. Trusts in which T has certain duties that require T to retain legal title.

b. As opposed to Passive Trust - T just holds property, no legal title needed.

3. Only operated to terminate the first use.

a. Second use could bypass the statute.

Trust

I. A trust is a fiduciary relationship in which one person (T) holds title in property, subject to an equitable obligation to use property for the benefit of another (bene).

A. Not a contract; not a business entity.

II. Trust can be either intervivos or testamentary.

A. Intervivos - Property transferring instrument executed during settlor's lifetime.

B. Testamentary - If created through language in grantor's will then a testamentary trust - doesn't exist until death of grantor.

III. Reasons for Trusts

A. Avoid probate

1. Since legal title is held by T, possible to avoid probate of property held by grantor.

B. Provide professional management for assets.

C. Preserve assets for successive beneficiaries.

D. Save taxes.

1. Income tax (deed irrevocably to T, paying benefits to children, lower tax bracket payers.

2. Estate and gift tax (spouse transfers property)

IV. Types of Trusts

A. Express Trust - usually in writing; created by some manifestation of intent by the settlor.

B. Resulting Trust - Court willing to recognize a trust based upon an inferred or presumed intent of settlor, although settlor has not expressly stated the request.

C. Constructive Trust - Not really a trust. Imposed on property to carry out justice, without regard to intent of parties.

ELEMENTS OF A TRUST - I.P.P.P

* Trust Intent

* Trust Property

* Parties

* Valid trust Purpose

I. TRUST INTENT

A. General Rule - Settlor must manifest some definite, final, specific, intent to create a present property interest in another, with a beneficial interest in a third party.

1. Vague, donative intent is not enough

2. Form - manifestation can be Words or Conduct

B. Failure to communicate action to third party or bene is evidence, but not conclusive that there is no definite intention.

1. A trust will not fail for failing to communicate intent to beneficiaries.

C. Wording

1. Words "trustee, trust" not necessary. Key is intent

a. Nor does the presence of these words guarantee that a court will find a trust intent.

b. e.g. envelope in safety box = intent of settlor to create trust.

2. Precatory Words (I wish, hope, request, etc.)

a. Courts reluctant to infer intent from precatory words.

b. T can't have unfettered freedom to do whatever he wants.

c. T must have a duty enforceable by bene

D. If an interest passes to the bene during the life of settlor, but settlor reserves a life estate or the right to revoke, in whole or in part, it does not invalidate the trust, or make it testamentary. [DeLEUIL v. DeLEUIL p. 2]

1. However, if the bene never has any enforceable interest in the property, then no trust. [Ponzelino v. Ponzelino p. 6]

a. Corollary - You have to find an intention in the grantor to create a property interest in the bene, which the bene can enforce. If the language of the trust shows no property interest in the bene(s), then no trust.

E. Time

1. Intent to transfer must exist and be manifest when T transfers property.

2. T can't give gift and later claim the gift was in trust.

a. Court of equity cannot render that gift perfect which the donor has left imperfect, and cannot convert an imperfect gift into a declaration of a trust. [Young v. Young]

F. Totten Trust

1. Person deposits money into savings account in his name as T for another person.

2. No notice, no delivery, no accountability, etc.

3. Upon death of grantor, trust automatically arises for benefit of bene.

4. Property (funds) transferred outside of probate.

5. Bene has no claim during settlor's lifetime

6. Settlor has ability to withdraw any amount of funds from the account without having to account.

7. If bene dies before depositor, property passes to depositor or his estate as if no trust.

8. Accepted in almost every jurisdiction.

G. Similar Relationships

1. Bailment

a. Chattels only

b. No title passes - remains in bailor

c. Must have consent of bailee

2. Equitable Charge

a. Lien or encumbrance

b. Security is intended

c. No fiduciary relationship

3. Guardians, Custodians, Committees for Incompetents

a. Fiduciaries, possession, management--no title.

II. TRUST PROPERTY (subject matter or res)

A. Trust res is essential to existence of a trust.

1. Courts may supply T or benes, but not trust res.

B. Every kind of valuable property capable of being transferred can be the subject matter of a trust.

1. Real or personal

2. Legal or equitable

3. Tangible or intangible.

C. 3 big requirements of Trust Property

1. Existing Property Interest

a. No trust if no existing interest in existing res.

b. If person purports to create trust out of an interest not in existence, no trust arises. However, if that person again manifests the same intent when the res or the interest in that res comes into existence, it may be sufficient to create a trust then.

(1) In [Brainard], the trust did not come into existence until subsequent manifestation, so profits attached to him immediately, and were taxable to him.

c. A promise to create a trust in future, or to transfer property into trust is enforceable only if supported by consideration.

(1) May make subsequent confirmation of intent unnecessary because the K is proof of intent.

d. Mere expectancy is not enough

(1) Example "Profits I'll get in Dad's Will," or "Profits I'll get from stock."

(2) See Note #5, P. 30-31

(3) Exceptions

(a) Expectancy under a will may be conveyed in a trust.

(b) State Statutes permit creation of trust with property that will enter trust by will upon death of testator.

2. Capable of Transfer

a. Res must be capable of transfer.

(1) i.e. promissory note - valid

(2) tort claims - invalid

3. Sufficiently Identified

a. Fractional Interest = OK (e.g. 1/3 interest in Blackacre)

b. Fungible goods = Doubtful b/c not identifiable

c. Debts as Trust Property

(1) Choses in action are commonly held as trust property.

(2) Debtor can't be T of own debt.

(a) Can declare himself T of some of his own property for the purpose of paying the debt.

i) Has to identify particular cash or a particular bank account.

d. Bank Deposits - not a trust res because banks don't segregate $, thus not identifiable.

(1) 3 types

(a) General Deposit - no trust relationship, debtor/creditor

(b) Specific Deposit - no trust relationship,Bailor/bailee

(c) Deposit for Specific Purpose - Yes, trust relationship exists.

i) Burden upon the depositor to show a special deposit

(2) Some legislation now allows banks to deposit funds if they set up a security fund, or bond pledged to protect them.

e. If funds not in a separate account, generally not trust res. Cannot be commingled with other normal funds. McKee v. Paradise, In Re Penn Central Transpo. Co.

4. Pierowich v. Metropolitan Life Ins Co.

a. insured named two sons as benes on life insurance policy - not to receive money until they reached 21.

b. agreement was a K to pay a debt, not a trust. Court has no power to release funds.

c. Reasons are

(1) There was no intent to have created a trust

(2) Effect of agreement signed by grantor was no segregation of funds. Ins Co. to pay interest, looks like a debt, not a trust.

III. Parties to Trust - Trustee [T]

Note: Grantor can sit in all slots, but must be at least one other person in one of the other slots.

A. T Qualification - any legal person or entity capable of taking legal title can receive conveyance as T.

1. exception: minors, incompetents, etc.

2. Some state and federal statutes disqualify persons who have been convicted of crimes involving moral turpitude.

B. Two ways T may accept (free to accept or reject)

1. Expressly--if statutory requirements, must comply

2. Impliedly - Taking possession of trust property or by some other act that interferes with it.

C. Effect of failure to name T:

1. Rule: A VALID TRUST WON'T FAIL FOR LACK OF T

a. Includes naming as T someone who cannot legally take title.

b. Exception: If clear that only acceptable T--"personal T"--then might fail.

D. Nature of T's interest = Bare legal title

1. Trust not liable for T's debts.

E. Disclaimer/Resignation of T

1. Designated T can refuse for any reason

a. T can't accept in part and disclaim in part

(1) But today many statutes allow partial disclaimer

2. Resignation--Once T accepts, he can't resign unless

a. No undue damage to trust will result, AND

b. T has complied with statutory requirements prior to resignation

OR

c. All Beneficiaries consent, OR

d. In accordance with terms of the trust

F. Removal of T: Only by court (unless trust's terms provide for it)

1. Grounds for removal: Only if T is harming or will harm trust.

a. Has to be more than T and bene not getting along.

G. Merger: Where T (holding legal title) and bene (holding equitable title) = the same person. Trust collapses & title merges into fee simple.

1. But if multiple Ts, multiple benes or both, then merger does not apply. Two reasons:

a. Multiple Ts hold the legal interest as joint tenants, and benes hold equitable interest as tenants in common--interests not identical.

b. Not a lack of obligation, since each of multiple Ts owes an obligation to other beneficiaries.

c. When one T dies, or bene dies, then vesting occurs into the other beneficiaries.

H. Use of Trust Advisor:

1. May be named by settlor

2. Cts may sub advisor unless appointment is "personal" by trust's terms.

a. Advisors have fiduciary duties - quasi-Ts

b. Greater advisor's role, greater chance he could be held personally liable (as are Ts)

I. Uniform Gifts/Transfers to Minors Act

1. Both acts allow for transfers to minors, with adult acting as custodian.

2. Legal title held by minor, not custodian.

3. Adopted in most states

J. Uniform Custodial Act - provides for incapacitated adults

K. Power of Attorney - continues after incapacity

IV. BENEFICIARIES

A. Private trust - trustor must sufficiently identify one or more benes who can enforce his bene interest and duties owed by T.

1. A trust will fail w/o valid beneficiaries

2. T need not know who designated bene is as long as a bene is capable of being identified.

B. Charitable Trust - bene may be indefinite--A.G. will enforce trust.

1. In trust "to such objects of benevolence and liberality as" shall be approved - not trust because benes are too uncertain, not charitable trust because "liberality" too broad to be charitable.

C. Benes must be ascertained or ascertainable within period of rule against perpetuities.

1. Unborn child can be a beneficiary.

a. Rationale - instrument creates an immediate resulting (dormant) trust for settlor (which will cease upon the birth of child), and an express trust for child springing into exist if child born.

2. However, living settlor has no widow or heirs. Therefore no enforceable, beneficial interest passes, invalid.

D. If settlor confers power to designate bene onto third person:

1. Might be an absolute gift, T can keep it.

2. T might have general power of appointment, and confer ownership on himself, his estate, or anyone else.

3. If instrument excludes #2, then PoA or PiT.

a. If class of potential takers is definite, no need to decide, only if indefinite.

E. Power of Appointment v. Mandatory Power in Trust

1. If T has power to choose who the benes shall be, could be Power of Appointment or Power in Trust

2. Power of Appointment - VALID

a. G --> A(T) --> A for life to friends of G as A shall choose and in default of appointment to children of G.

b. T MAY exercise power, doesn't have to,

c. There are takers in default - usually. If not, a strong presumption that it is Power in Trust.

3. Mandatory Power in Trust - INVALID

a. T MUST exercise power.

b. No takers in default

(1) Invalid because no bene who can enforce the trust.

F. Class Gifts: Trust benes of a class: class must be described with sufficient certainty so its membership is definite and ascertainable.

1. What is a Reasonably Definite Class?

a. brothers/sisters

b. nieces/nephews/cousins

c. next of kin

d. heirs if settlor dead

e. issue descendants

2. Indefinite class

a. "persons as T may select"

b. "friends as T may determine"

G. Honorary Trust - not charitable, no identifiable bene

1. Example - trust for fox hunting [In Re Thompson]

2. In England--allowed

3. In USA--not allowed; except cemetery sites; saying of masses; care for specific animals

H. Trust can be created without notice to bene.

1. Presumption bene accepts if no action to reject.

a. Except where burden placed on bene, no presumption - proof of acceptance required.

2. Bene may repudiate trust - by statute in all states

a. Motive irrelevant.

b. Disclaimer dates back to date of instrument.

V. Nature of Bene's Interest

A. Bene has an equitable interest, instead of mere personal claim against T.

1. Minority -statutes suggest bene only has a right in personam to enforce trust against the T, no actual interest in the trust res.

B. Equitable Interest is either personalty or realty

1. If res is personal property, the interest of the bene is personalty - if real property, interest of bene is realty

2. Determines jurisdiction, taxes, conveyances, descent, dower, etc. Affects application of Statute of Frauds and PER.

C. Bene's equitable interest is wholly or partially transferable. [Blair v. Commissioner]

1. Rule: A bene owns an interest and may assign/transfer that interest

D. Form and Manner of Transfer of Bene's Interest

1. If trust real property, must be transferred by a writing. If personal property interest, generally no writing required.

a. Real property interests in trust are subject to Statute of Frauds [Coleman v. Coleman]

b. transfer requires a signed writing

c. oral transfers or agreements of transfers are void.

2. Delivery

a. If bene transfers property that is in T's possession, it is not in the power of the bene to make a manual delivery of the property. [Curriden v. Chandler]

(1) Manual delivery not required.

(2) Must make best transfer under the circumstances.

(a) If interest represented by a certificate, it should be delivered.

E. If Bene assigns same interest to 2 assignees?

1. Am Rule (majority)--1st assignee gets it. Date of assignment determines priority.

a. Rationale: nothing to assign because bene assigned it away.

2. Eng Rule--First assignee to notify T has priority

a. Followed in small # of Am jurs

b. Hansen likes this because all parties are better protected from fraud. Protects T as well.

F. Debtor's Interest

1. Creditor's Bill - This remedy subjects bene's interest to payment of his debts on the ground that the remedy at law is inadequate - assets of equitable nature should be applied.

2. If trust not spendthrift, bene's interest may be used to satisfy his debts.

3. Example - [Hillsborough v. Dickenson]

a. Clerk embezzled funds, invested in property in daughter's name.

b. "Purchase Money Resulting Trust" - Presumption that daughter is T and clerk is bene w/ beneficial interest.

c. After exhausting legal remedies, county has a claim against the property.

G. Illinois Land Trusts

1. Permits trust instruments to designate beneficial interest as personal property, with both legal and equitable rights vesting in T.

a. Benes entitled to profits, receipts only.

b. Promotes alienability - T holds both interests

c. Doctrine of Equitable Conversion

(1) If T receives real property with immediate duty to sell it and distribute proceeds to benes: benes have a personal property interest only.

(2) If T receives personal property and has duty to use for purchase of real property: benes have real property interest.

2. Statute of Uses

a. Conflict if trust is considered passive because statute of uses vests all interest in benes/destroys the trust.

(1) Jurs that validate these trusts claim they can be "active" by simple duty (sell property 20 years in future)

b. But Statute does not apply to personal property, so if benes interest considered personal property, then trust valid, and bene only has personal interest.

(1) Credit liens could not be placed on bene's legal interest in land because he doesn't have one.

FORMALITIES TO CREATE AN INTER VIVOS TRUST

I. Trust can be created by declaration or by conveyance.

A. If declaration, trustor/T simply makes declaration that he holds certain property as T for another.

1. Before he owns entire ownership interest in property

2. After he holds a bare legal interest, bene has equitable interest.

B. If by conveyance, another is appointed T, and property is conveyed to T.

1. T holds legal interest and bene has beneficial interest.

II. Requirements of Effective, Present Transfer of trust res

A. Consideration - Essential in two circumstances

1. Mere promise to hold or transfer property in trust without consideration not enforceable.

2. When the sole trust property itself is a promise.

a. If a trust is perfect, or properly declared, it need not be support by consideration, and although completely voluntary, is valid.

b. Settlor can declare himself T if he manifests intention to presently impose enforceable trust duties upon himself.

B. Delivery

1. Must be an adequate delivery of trust res to T.

2. Delivery is a word of art:

a. Present intention to divest self of property.

b. Delivery requires that grantor either relinquish physical control of the deed or have present intent to divest himself permanently of title to the property.

(1) Any acts or words which clearly manifest grantor's intention to consummate and complete his deed are sufficient delivery.

3. If property capable of physical delivery, delivery is evidence of intent. Not absolutely necessary.

4. Acceptance by T is not necessary.

a. Trust can be validly established w/o T

b. Physical handing over is only evidence of the intention.

5. Delivery requirement different under declaration than under conveyance.

a. If conveyance, then you have to follow the rules of conveyancing.

b. In [Whitehead], settlor never divested himself of ownership. No Trust.

6. Formalities necessary to pass title to realty and personalty to a T depend on the nature of the property being transferred.

7. Segregation of Trust Res: satisfies delivery requirement if settlor and T are same person.

8. Power of Attorney alone is insufficient to accomplish delivery. It dies with the donor.

a. Power of attorney is revocable, insufficient intention. Seen as creating property interest in the future

III. Statute of Frauds

A. All declarations, creations of trusts of real property must be in writing signed by grantor.

1. Most states agree through statute or common law.

a. Few states allow oral evidence-(clear and convincing)

2. Exception for constructive and resulting trusts.

B. Who must sign Writing to create trust in Realty?

1. Grantor: at or before conveyance: not after because violates statute of frauds

2. Grantee: Before, at, or after conveyance

3. Two writings may be used together to validate.

4. A writing signed by T can prove existence of an express trust, either simultaneous or subsequent.

a. Cannot be proved by writing from bene

C. Status of property as "real or "personalty" may be difficult to determine Look at Footnote 10 138

1. In these cases, original status of trust res controls

2. If trust property begins as personal and converted to real property, courts are unanimous that original character controls.

a. T given money to invest in land. Personalty

(1) Still valid even if oral.

D. Cts hate to apply Statute of Frauds when to do so would perpetuate fraud.

E. If partially valid, trust valid. Court may sever enforceable provisions from unenforceable ones. Sever personal property part from the real property part.

1. Typical of most jurs

F. Part Performance Doctrine

1. Acts of part performance by either party are sufficient to make an oral trust of real property enforceable.

2. Have to prove

a. existence of oral agreement

b. that the things they did they only would have done on dependance of the oral agreement.

3. Rationale: Show that parties believed a trust existed; why else would one party have performed?

4. [McKinley v. Hessen]

a. Grantor conveyed real estate to sister, oral agreement for her to hold in trust for him.

b. Evidence that it was a trust is his part performance, pay taxes, repairs, etc.

5. Oral trusts of real property are not void; merely unenforceable against T if he chooses to raise stat of frauds defense.

a. Thus if parties begin to enforce it & carry it out, the oral trust becomes operative.

b. If parties choose to enforce it they may do so.

G. Effects of Parol Evidence Rule

1. Declaration of trust or deed signed by the grantor cannot be varied, contradicted, or supplemented by oral testimony or other extrinsic evidence.

2. Will not bar parol evidence if fraud, duress, mistake, etc.

CREATION OF TESTAMENTARY TRUST

I. A trust purportedly created intervivos but not to take effect until the settlor's death is testamentary.

A. Will be invalidated by the Wills Act unless it conforms to requirements.

B. Trusts usually not executed with testamentary formalities

II. UPC illustrates minimum requirements for execution of a will

A. In writing; Signed by testator; 2 Witnesses

III. Rule that testamentary trust is invalid unless it conforms to wills act brings validity into question where:

A. Trust interest is valueless or highly destructible until death of settlor (Totten Trust, Insurance Trusts)

B. Settlor has retained extensive control or management over the trust corpus.

C. Trust is set out in a valid will but is designed to be affected by facts or written instruments not in the will itself.

D. Pour Over Trust

1. Settlor devises assets to an already created inter vivos trust.

a. Trust which exists and referred to in the will.

2. Possible Theories to Sustain "Pour Overs":

a. Doctrine of Incorporation by Reference: Will can incorporate the pre-existing trust by reference in the will to the trust.

(a) Writing in existence when will made

(b) Will must refer to it

(c) Intent to Incorporate must appear

(d) Trust must conform to will's description

(1) Doctrine of Facts of Independent Significance: Trustor refers to a non-testamentary extrinsic act or event to identify the trust beneficiaries.

IV. General Rules

A. Monell v. College of Physicians

1. Issue is whether there was a valid trust or a testamentary disposition.

2. If testamentary disposition, invalid because the instrument was not executed with testamentary formalities. It was oral.

3. Not a valid intervivos trust either.

a. Although inter vivos trust does not have to comply with Wills Act, to be valid it must presently create an interest in the bene which is not dependent upon the grantor's death.

b. Here it was personal property, so could have been valid without a writing, but not without transfer of present interest.

B. Farkas

1. Farkas declares himself T stocks for benefit for Williams - retained right to revoke, modify, life interest.

2. Issue - Did a present interest in the subject matter of the intended trust pass to the bene?

a. If no interest passed to Williams before death, trust is testamentary and invalid for failure to comply with the statute of wills.

3. Trust valid--transferred valid, present, equitable interest to Williams that he could protect.

a. Fact that it may disappear not important

4. Rule - T may create trust of personal property, be the T, reserve a life interest, and power of revocation and not render trust invalid.

Point of these two cases is to focus on whether an interest has passed to a bene.

C. Gurnett v. Mutual Life Ins Co.

1. The testamentary character of the trust corpus does not invalidate a trust.

2. Life insurance policies. Insured named T the bene of life insurance policy

a. Argument is that the property itself is testamentary in nature.

3. Here, what was transferred during the insured's lifetime was the continuing right of the T to collect the proceeds.

4. Life insurance policies, all of which spring into existence upon the death of the settlor, are a proper subject for a trust.

a. Note that here T had no duties until death of insured, also power of revocation, since by contract the insured can change the bene at any time.

5. A policy of life insurance is not deemed an asset of the estate of the insured unless it is made payable to him, executors or administrators.

6. Statute of uses destroys a passive trust, but not this type because it only destroys passive trusts of real property.

D. Montgomery v. Blankenship

1. Courts sustain valid testamentary dispositions which incorporate by reference the terms of an amendable or revocable inter vivos trust agreement when:

a. trust agreement was in existence at the time of execution of testamentary instrument; and

b. Powers to revoke or amend have not been exercised.

2. Doctrine of incorp by reference - will reaches out and grabs the named document, and document is valid as a trust, even though not signed, delivered, etc.

3. UPC - Any writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit its identification.

4. Amendments or revocations to trust instrument can be made after original trust document, but before execution of the will. If amended after execution of will, must be done with sufficient formality to qualify as a codicil. But see UTATA

a. If not, property passes according to original trust document.

E. Uniform Testamentary Additions to Trusts Act

1. Adopted widely. Legislative validity to pour-over trusts.

2. Doesn't use incorp by ref or acts of ind significance.

3. Validates whether or not funded during life of testator, so long as written doc in existence prior to, or concurrently with execution of will.

4. Permits amendments to trust after execution of will.

5. Read Text - P. 169

SPENDTHRIFT AND RELATED TRUSTS

I. Alienability

A. Generally, bene's interests are freely transferable

1. Bene can transfer only rights he has, not the res itself.

2. Remember rules for assigning rights to more than one person

II. Restraints on Alienability: Cts don't like , but some valid.

A. SpendThrift Trust

1. Accepted in every jurs except Ohio.

2. Trust whose terms prevent voluntary and involuntary transfer of bene's interest

a. No specific words needed - Trustor's intent must be clear

3. If bene tries to assign anyway-->revocable

4. Creditors Rights--Can't get at trust res

a. Once bene gets $, creditors can strike.

b. Bene buys Porsche with trust $, creditors get it.

5. An owner of prop cannot create a spend-thrift trust for himself.

a. Reciprocal Trust - H and W create trusts for the other with spendthrift clauses. Not binding. Each bene treated as settlor of that trust.

6. Policy for/against spendthrift

a. Against: Repugnancy on transferability

(1) Policy--allow for snot-nosed, irresponsible benes

b. For: Settlor did not have to give bene the prop, so creditors should not get it either.

B. Miscellaneous P. 183-188

1. Settlor may limit restraint to either voluntary or involuntary.

a. Express mention of one usually incorporates the other.

2. A few jurs do not protect principal same as income.

3. Some states impose $ limitations

4. May be limited to support of family members, or may subject income in excess of that required to provide for family to creditors.

5. Statutory or common law access to spendthrift income or principal:

a. Alimony or child support

b. Payment for necessary services/supplies for bene

c. Payments for offenses

d. Tax liabilities

C. If bene orders T to make payments to assignee, T not liable in doing so. Bene can revoke assignment at any time and if after doing so T continued to pay assignee, then T in breach.

OTHER TYPES OF TRUSTS

I. Discretionary Trusts

A. T given discretion to apply or withhold payments to benes

B. Creditors: (has to exercise that discretion)

1. Before payment, creditors can't get property

2. After payment, creditors may reach property

C. If discretion only to time or method of payments, not discretionary.

II. Protective Trust--pays out income regularly, but if transfer attempted, reverts to discretionary trust.

III. Support Trust--trust for benes education and maintenance only

A. Not assignable nor reachable.

B. Exception: when trust res is greatly in excess of what is needed, benes creditor's may be able to get at it.

IV. Blended Trust--trust for benefit of a group, no ind interests

A. Each interest is nonseparable

B. Non-assignable, nonreachable.

CHARITABLE TRUSTS

I. Recognized in nearly all states-invention of the judiciary, enforced in equity.

II. Enforced by Attorney general

III. Creation --by will or inter-vivos

IV. Charitable trusts have favorable status

A. can be perpetual in duration (not subject to RAP)

B. No need for identified bene

C. Tax advantage (income & estate & gift).

V. General Rules

A. Public Benefit

1. Must benefit a substantial segment of the public,

a. gift must be for benefit of "an indefinite number of persons"

b. but public need not be direct bene of trust income or principal

2. Examples

a. G - T - "to educate some child in music or art"

(1) Invalid because it has a single bene, really only benefits him.

b. G - T - "to pay for med school for student from Panguich if he returns to Panguich and practices for 25 years.

(1) Valid because the entire town with receive benefit "public benefit."

B. Charitable Purpose--does it fit within general accepted categories?

1. Classic examples are trusts for the relief of the poor, for education, and for support of city, state, or other government purposes

2. Motives are irrelevant (to get name on bldg., etc.)

3. Meaning of "charitable' Term of Art. American cts have been very expansive with their definitions. See fn. 37 p. 224

4. Trust for objects of "benevolence and liberality" not charitable

VI. Public Benefit

A. Trust for education and medical costs of "blood relatives" is invalid. Too limited.

1. Is valid if trust has express preference for relatives, but not limited to relatives. [Hardage]

B. Gift trust to support institution beneficial to community is charitable even though members pay fees to be a part of or maintain institution so long as trust income is used to maintain or other charitable purpose. [In Re Henderson's Estate]

1. Non-profit hospital, home for elderly, university.

a. Public has a duty to care for old people, sick, etc. Places that do so benefit the public.

2. Some argument that class is not indefinite. Court said indefinite enough, people always coming and going, etc.

C. Trust to purchase a tomb or monument is not a charitable purpose, but the care of a grave site is a charitable purpose. [In Re Byrne's Estate]

1. The care of the grave site is benefitting more than just the one person.

2. Trust to establish or maintain public cemeteries have been held valid.

3. Trust for monuments for citizens of high achievement are charitable.

VII. Political Purposes [Cook]

A. Trusts is still charitable even if a purpose is to effectuate change in existing law.

1. Can seek to better government if to be accomplished peacefully.

B. Trust to eliminate discriminations and to provide relief for the person discriminated against are generally upheld as charitable.

VIII. Religious Trusts

A. Judge determines whether the purpose is charitable, for public benefit, not the testator.

1. Courts will invalidate gifts for whimsical purposes (Band to play dirges in cemetery)

B. [Beatty] Trust to train spiritual mediums, especially healing mediums not charitable. Here no evidence of public benefit.

C. [Thornton v. Howe]

1. Support of religion is recognized as charitable.

2. Court generally do not distinguish between types of religion, as long as not immoral or contrary to public policy.

IX. Mortmain Statutes

A. Statutes say that all charitable, religious bequests within 30 days of death will be invalid.

1. Purpose is to protect against "deathbed" gifts

B. Problem is that they are unconstitutional

1. Equal protection - when you draw a line to treat different classes differently, there must be some relationship between the line used and the protection sought.

C. Very few states that have them.

X. Legally accepted Charitable Purposes

A. Relief and Poverty

1. Food, clothing, shelter.

a. Rich (nonpoor) can also benefit.

B. Advancement of Education: colleges, libraries, museums, teachers, professorships, research activities, publication, distribution of books.

C. Not for specific political parties.

1. Change in law - valid

D. Advancement of Religion: maintain bldgs, relig. workers, education of young, saying masses.

1. Key Question: What constitutes "Religion"

a. London Spiritual Healing Case - no

(1) American = very willing to find it's religious trust

b. Atheism - not valid because religion = belief in Supreme Being. But could be valid under educational trust.

c. Illegality/Immorality: Not valid (i.e. polygamy)

E. Promotion of health

1. Cure and Disease/Elderly Care

2. Gift for own welfare is not charitable

3. Gift for others welfare is charitable

4. Not for profit hospitals

F. Government or Municipal Purposes

1. Public parks, debt reduction, buildings

2. But, if govt involved in profit-making activity, not charitable

G. Other Purpose Beneficial to Community

1. Care of Graves--valid because beauty of cemetery is enhanced

2. Monument to non-famous person - invalid

a. Must be notable, famous person (JFK Monument)

3. Mixed Motives - not allowed. E.g. to my son or daughter or university they attend.

XI. Partial Invalidity

A. Types:

1. One provision charitable, one not.

2. Gifts to partially charitable entities

a. Requires difficult tracing of monies to see if used for correct purposes, or invalidity.

B. Resolution

1. If not severable, wholly invalid.

2. If severable, court may save entire trust by using its power of cy pres or deviation to excise the non-charitable term.

3. May validate if non-charitable disposition is minor, temporary, discretion of T, etc.

C. St. Joseph's Hospital v. Bennett

1. Question was whether the clearly expressed direction of the testator must obeyed.

2. If gift, trust received on the condition that it be used for a purpose, then the entity is bound to that purpose.

3. But doctrine of cy pres allows the court to use the gift for other purposes if the original purpose is too restrictive.

XII. Enforcement of Charitable Trusts

A. AG has a lousy record for enforcing the terms of charitable trusts.

B. Some legislation has authorized fed agencies to enforce certain types of trusts, i.e. pension trusts.

C. Three situations where private party can enforce

1. Co-T v. Co-T

2. Sub-trusts v. T

3. Sometimes person with special interest in enforcement (i.e. member of congregation)

XIII. Modification of Charitable Trusts (cy pres)

A. Tool cts use to prevent a trust from reverting into a resulting trust because the charitable purpose for which the trust was originally established is gone.

1. Hansen's Analysis -- Two Pronged

a. The Specific Purpose of the charitable trust must be illegal, impossible, impracticable. (more than alternate use is preferable.)

b. A general, more broad purpose must exist for the trust other than the one mentioned in the original instrument.

(1) What is general? means that settlor wanted to benefit a general group, not restrict his gift to a certain object under certain conditions

(a) Cy Pres - obviously does not apply where settlor provides for a "gift over" provision in his instrument.

2. Nearest Purpose: When courts use cy pres they should try to modify in such a way to approximate settlor's intent.

Trusts Arising by Operation of Law

RESULTING TRUST

I. Imposed by the court when settlor demonstrates an absence of intention to pass beneficial title or interest.

A. Resulting trust is based on presumed intention

II. Resulting Trust may result in 3 situations

(The first two involve express trusts)

A. Express Trust Res is Excessive

1. If settlor did not expressly or impliedly dispose of surplus, it is returned to the settlor (or successors) in the form of a resulting trust.

2. Unless T gave consideration, it is presumed settlor did not intend for T to keep excess.

3. i.e. - transfers money in trust for income and maintenance of B. B dies before money is used.

B. Express Trust Fails or its objects are accomplished without exhausting the trust res.

1. Either settlor fails to dispose of entire beneficial interest, or trust is void for some reason other than illegality.

a. Fails to name bene.

2. i.e. - A provides express trust for the friends of A. Non specific group, trust fails, res returned to settlor (or heirs, devisees) in form of resulting trust.

C. Purchase Money Resulting Trust

1. One person pays consideration, either in whole or in part, for property, but vests title in another.

2. A resulting trust arises when a person becomes invested with the title to real property under circumstances which obligate him to hold the title and to exercise his ownership for the benefit of another.

3. At common law, if one person pays consideration for property, and title vested in another, resulting trust in favor of the person providing the consideration.

4. Resulting trust arises on a basis of presumed intention. This is a rebuttable presumption.

5. The burden of proof is on the one supplying the consideration.

III. If settlor is living, he is the bene. If he has died, heir receives real property in intestacy, and a next of kin receives personal property in intestacy.

IV. Cases of Purchase Money Resulting Trust

A. Mims v. Mims

1. Husband purchases property, put title in his and his wife's name. Contends it was his property the whole time; he provided money.

2. With husband and wife - where a spouse furnishing the consideration causes property to be conveyed to the other spouse, a presumption of gift arises, which is rebuttable by clear, cogent and convincing evidence.

3. If spouse can prove by clear, cogent, and convincing evidence that he did not intend a gift of an entirety interest in the property to defendant, then he will have rebutted the presumption of gift.

a. When this is done, the parties then stand as if they were not man and wife, that is, they stand as if the general rule prevails.

(1) Effect is automatically to create a resulting trust in favor of the party furnishing the purchase price.

4. H and W are not the only situation. Other situations where gift presumption arises.

a. Father to child, presumed to be a gift

b. Mother to child usually, not always, presumed to be a gift.

B. Fox v. Shanley

1. She died with property in her name. He paid for most of the property. 1900 of the 3000 down, and 2000 on the 2500 note. She was the one liable on the note.

2. Interest of the parties is established at the time the property is transferred.

a. Problem is that the payments he made on the promissory note came after the transaction was put together.

(1) Rule is that the purchase money must be paid at the time of the purchase, and that a subsequent payment cannot raise a trust.

b. The way around this is to find that the parties had an understanding of a liability to pay which dates back to the time of legal transfer of title. See footnote at 251.

(1) "Have to settle all of the finer points at the time of the transaction, and be able to prove that any later payments date back to that previous agreement."

C. Armstrong v. Blalack

1. No resulting trust when the intent is to make a loan.

2. Resulting trust comes into existence based on an absence of intention.

a. If intent shown, express trust, if no intention, then resulting trust, if intent of a loan can be shown, then no resulting trust, not correct remedy. It was a loan.

3. A gives money to B who pays C who deeds land to B No resulting trust. A is an unsecured creditor.

4. A to C for deed to B classic purchase money resulting trust.

D. Larisey v. Larisey

1. There was evidence of intention.

2. Statute of Frauds - creating an interest in real property based on something other than a written instrument. But Statute of Frauds does not apply here.

V. Common law purchase money resulting trust has been abolished in 5 states. Courts in those states give substantially the same remedy by declaring constructive trusts.

CONSTRUCTIVE TRUSTS

I. "A constructive trust arises when a person who holds title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it."

II. When property has been acquired in such circs that the holder of the legal title may not in good conscience retain the bene interest, equity converts him to a trustee.

III. "Does not depend on an intention to create a trust, it is a tool fashioned by a court of equity to remedy unjust enrichment."

IV. Complainant must prove identity of trust res.

A. Complainant must be willing to do equity to the defendant.

V. Some cts hold trust arises immediately when property is acquired, others hold no existence until issuance of a decree.

VI. Whereas grantor's intent is important for resulting trusts, it is the grantee's intent, or state of mind that is important for constructive trusts.

VII. Fraud-rectifying, not intent enforcing

A. Conflict with the Statute of Frauds and Wills Acts

1. A makes a conveyance or devise on the strength of the grantee's or devisee's oral promise to hold the property in trust for another. Grantee or devisee then refuses to carry out the trust claiming lack of compliance with the Statute of Frauds or Wills Acts.

2. Distinguish between wills and deed cases. Results are different.

VIII. Not executed by the Statute of Uses

A. Sole obligation of the T is to convey to bene.

B. Court will order Con T to convey title to bene.

IX. Used to either correct fraud, mistake, unjust enrichment, etc.

X. In the following cases, a key difference between the remedies, constructive or resulting trust, is the conscience of the grantee. If the grantee's conscience is "seised" with the identity of a specific person for whom the property is held, then a constructive trust is imposed. If not "seised," then resulting trust instead.

A. Rule - For constructive trust to arise, Devisee's conscience must be seized upon an identified person at the time the will was executed

XI. WILLS CASES

A. Church v. Ruland

1. Father devised realty to daughter on her oral promise to give it to A upon her death.

a. This is a Secret Trust

(1) Decedent conveys property to grantee upon grantee's oral promise to hold it in trust for another. Because will says nothing about oral trust-- "secret trust"

(2) Parol Evidence allowed to try to establish intent.

(3) Secret Trusts are invalid

(4) Remedy = Con Trust if fraud involved

b. Semi-Secret Trust

(1) D's will says "to B in trust for purposes agreed to in my life"

(2) Parol Evidence Not Allowed

(3) Remedy = resulting trust for D and heirs

B. In re Boyes

1. Identity of intended beneficiaries not known when will was executed.

2. Mind of devisee is important for constructive trust, (resulting trust look at intention of grantor)

a. Rule - For constructive trust to arise, Devisee's conscience must be seized upon an identified person at the time the will was executed

(1) Here devisee did not know who the bene was.

3. Result - Resulting trust for next of kin.

C. Oliffe v. Wells

1. Not an outright gift, but a trust. Gift is conditioned. He knew the wishes of the grantor.

2. No bene like the first case, but here there is a different result.

3. Result - Resulting trust for next of kin

D. Analysis

1. First two cases are Secret Trusts, there is no indication of a trust, looks like a gift.

2. Third is a Semi Secret Trust. Document identifies the devisee as T, but doesn't identify what he is supposed to do with the property.

3. Court allows enough evidence to avoid unjust enrichment.

a. With first, x evidence needed

b. With second, x evidence needed.

c. With third, no evidence is needed to prevent unjust enrichment.

(1) Clear that the devisee is not entitled to have it. Statute of wills claims then that it was an invalid gift, so back to next of kin.

XII. DEED CASES

A. Horsley v. Hrenchir

1. Is there a remedy for mother breaking promise and giving all of the land, including the daughter's share to the other daughter?

2. No. None of the following situations existed.

3. Rule - Transaction is removed from the Statute of Frauds when:

a. transfer procured by misrepresentation, fraud, duress, undue influence, or mistake, or

(1) Fraud must be evident at time of transfer. No intention to carry out promise.

b. transferee at time of transfer in a confidential relationship with transferor, or

c. transfer made as security for an indebtedness of transferor.

B. Lipp v. Lipp

1. Outright gift--known bene at the time of the transfer--fraud.

2. Son kicked mother out after promising to let her live there for lifetime.

3. Court found fraud because he had no intention to keep promise from the outset.

a. Broken promise alone not enough.

4. Result-Constructive Trust.

C. Sinclair v. Purdy

1. Outright gift--devisee does not even know, no promise by devisee.

2. Result-constructive trust based on a confidential relationship. Because he relied on confidential relationship, constructive trust.

3. Clerk gave land to sister, expected it back.

NOTE: Resulting Trust is always in favor of the grantor, and a Constructive Trust is almost always in favor of intended beneficiaries.

D. Orella v. Johnson

1. No fraud

a. No evidence Stepdaughter did not intend to keep promise at time of promise.

2. No confidential relationship

a. Even though close, no fiduciary, dependent, type of evidence.

3. Court found unjust enrichment

a. Specific restitution based on unjust enrichment--this is new. Remedy is not widely used, usually if you cannot find traditional grounds you have no trust.

PURPOSE - ILLEGAL TRUSTS

I. A trust is illegal if:

A. it's terms, objects, probable effects, etc. are illegal, or

B. it violates public policy.

C. Examples

1. Violates R.A.P., discourages marriage, promotes criminal activity, defrauds creditors, deprives spouse of her elective share, etc.

II. Appropriate Remedy

A. If fraudulent, creditor can set it aside to extent necessary to satisfy her claim.

B. Declare resulting trust for settlor or successors

1. Used if no conscious wrongdoing by settlor, illegality results from mere ignorance or mistake.

C. Permit T to retain property free from the terms of the trust.

III. In re Robbin's Estate

A. Benefit of taking care of children paramount to inducing people to commit crimes.

1. Clear example of illegal trust--T to use property and income for conducting seminars for the most modern techniques of bank robbery.

B. If purpose itself illegal or induces people to commit crimes, invalid.

C. Too attenuated to say this trust will induce people to commit crimes.

D. Note--p.284

IV. MacRae v. MacRae

A. H transferred property to W to avoid paying possible creditors.

1. Fraudulent intent

B. 2 tests to determine if Trust has illegal purpose

1. Is there actual fraud?

2. Was the intent or motive fraudulent, regardless of actual effect?

C. Here, court adopts second test, fraudulent intent.

1. Criminal motive is enough, even if mistaken in belief that he was fraudulently evading creditors.

D. Court holds that Betts did not have to transfer property back to either H or W because wife had fraudulent intent in her transfer.

1. Neither H nor W had clean hands.

2. If no one has clean hands, court will generally protect person with least dirt.

V. Montgomery v. Michaels

A. Can Totten trust be used to circumvent spousal share of intestate estate?

1. Determinative issue is whether grantor gave up sufficient control of property during lifetime.

a. Grantor's total divestment of property during lifetime circumvents spousal claim

(1) Therefore, must be evidence that grantor intended to sufficiently divest himself of the property, of control.

(2) Example is a irrevocable trust--sufficient transfer of property during lifetime.

(a) Spouse not able to reach trust res.

(3) However, if trust is revocable, or grantor is T, or grantor can use funds, etc., probably not a sufficient transfer of property

B. If grantor's purpose is to defeat spousal share, then invalid. Although no evidence of such intention here, still not a sufficient divestment of property right.

C. First major case to reject the notion that the true test is the intent of the grantor. Only cases where you let the spouse have property, is where the transfer was done to defeat spouses share.

D. Then Newman says the only real test is whether the transfer is real or illusory.

E. Uniform Probate Code agrees with Montgomery

1. No bank account in which decedent is owner during lifetime can block creditors after she dies.

VI. In Re Certain Scholarship Funds

A. Issue regarding charitable trust provisions favoring or excluding particular people--discriminatory. Permissible by private action, but not by state action. Debate as to what constitutes state action.

B. Here, trusts for boys, or protestant boys.

C. School board could not participate in administration-state action.

D. Could use Cy Pres or Administrating Deviation.

1. Cy Pres - remove the provision "boy" and replace it with "student".

2. Administering Deviation - Leave distributive provisions alone, and simply replace public T with private T.

E. Court here affirms using cy pres. Because appointing new T is in itself a state action, won't do that.

TRUST ADMINISTRATION

I. Summary of T's Responsibilities

A. Fiduciary Duties

1. Preservation

2. Productivity

B. Basics

1. Often must qualify

a. Filing oath, posting bond, etc.

2. Uniform Probate Code - also has to register the trust with state court of general jurisdiction

a. Puts public on notice that trust is in operation.

3. Locate and acquire trust property

a. Sometimes difficult (promissory note in default-has to sue)

b. Collect all notes, mtgs, etc.

4. If property is testamentary, it will first come under control of executor, who will then transfer it to the T.

a. Need to acquire it from executor promptly

b. Usually a court order accompanying transfer

5. Keep accounting of property while in his control, and give regular accounting to benes.

a. Gives benes opportunity to enforce the trust.

b. Also obtain complete accounting from predecessor T.

6. Keep property safe from others.

a. Protect against loss and damage

b. Record and register deeds

c. Maintain insurance

d. Earmark property

(1) Identify it as property of the trust rather than his property.

(a) Serious penalties for not earmarking.

i) In some jurs, any loss at all is sole liability of T, regardless of whether the loss is a consequence of failure to earmark.

ii) Other jurs now only hold him to losses sustained as a result of not earmarking.

7. Cannot commingle funds.

a. Cannot commingle with T's own personal property

b. Sometimes can with other trust funds

8. Support, defend trust against claims brought by benes, creditors, etc.

a. If obvious that it is invalid, or on advice of competent counsel, discharged from duty to defend.

b. Duty to appeal ruling unless fruitless.

STANDARD OF CARE AND INVESTMENTS

I. Standard -- Prudent Investor Rule

A. Prudent Investor Rule

1. When investing, must exercise skill and care that ordinary, prudent man would exercise with his own property

2. Some statutes, UPC, sets a higher standard - care that an ordinary, prudent person would exercise when investing the property of another person, not his own.

3. Exception - In re Estate of Killey

a. T with more skill than normal is held to higher standard.

b. One who procures his appointment as T by representing that he has greater skill than ordinary man will be held to have such skill as he represented.

4. Elements of Standard of Care

a. Care -Initiative, diligence, and effort

b. Caution

(1) Invest with view to both the safety of the capital and regularity of the income.

c. Skill

(1) T with greater skill has duty to use it.

B. T has an obligation to make trust productive.

1. Invest with high income yield

a. Problem - greater risk - remainder benes want the trust res principal to be maintained while income receiving benes want high yield.

2. Originally Ts only allowed to invest in certain kinds of property (i.e. government obligations and first mtg)

a. Security of property was the priority.

b. Some state statutes listed appropriate investments, some were flexible, some not.

c. Then Prudent Investor Rule started (in Mass).

3. Now, nearly any type of investment may be appropriate.

II. Rules from Cases

A. In re Morgan Guaranty Trust Co.

1. Common trust fund

a. T over many trusts--variety of sizes.

b. T can commingle assets of all the trusts.

(1) Authorized by statute in almost all states, and by specific power granted in most trust instruments.

(2) Allows for greater investment diversity.

2. Court announces it will follow PIR.

3. To determine whether standard has been met, examine conduct of T, not the result of the investment.

4. Determine prudence at the time T made the investment.

a. Step 1: Each individual investment must be prudent.

b. Step 2: Look at each investment as part of whole.

5. Overall gain of a portfolio does not offset individual investment losses.

6. If complaint is about security that has already been approved in a prior hearing, benes are precluded from bringing an action.

B. Mutual Funds

1. T can invest trust assets in a mutual fund

2. Appropriate T and fund manager to take fee

3. T surrenders ability to make decisions, but this is not considered imprudent.

a. Look at whether or not it was prudent to invest in this mutual fund

b. T not required to track every investment the fund manager makes.

C. Common Stock, Trust Funds now seen as proper investments

D. In re Estate of Collins

1. T's had "absolute discretion"

a. No grant of discretion will release the T from fiduciary duties and duty to use prudence.

b. Exculpatory Clauses strictly construed. Prohibited/Allowed by some statutes.

2. Ts are under duty to distribute risk of loss by reasonable diversification.

a. Failure to do so is a breach of the standard of care.

b. Second mtgs are rarely if ever appropriate investments.

3. Duty to ascertain values, obtain proper securities, financial statements from guarantors, etc.

4. Endless list - Note #27 P. 344-45.

E. State Street Trust Co. v. De Kalb

1. Mortgage was initially prudent because property had value sufficient to cover the mortgage debt.

2. An investment permitted under the trust document at the time the investment made may become imprudent over time.

a. T has a duty to withdraw, becomes liable for unnecessary losses.

b. Successor T has a duty to:

(1) Ensure that at time of succession investments are prudent, AND

(2) Enforce bene rights against former T when necessary.

F. In Re Tship Under Agreement with Mayo

1. Trust instrument specifically precluded T from investing in corporate stock.

2. T's can deviate from settlor's express directions if in order to preserve the settlor's dominant intent/trust purpose.

a. A supporting, but not essential element to allow T deviation is lack of foreseeability on part of the settlor.

b. Still, great deference should be given to trust document.

3. Settlor's primary intention was to protect the trust principal and provide for family. Deviation required to further purpose.

4. Examples of deviations-Note #47 P. 359.

G. Non-Economic consideration in Trust Investment

1. Sole purpose of T is to invest with interest of bene in mind.

a. What about investing according to political or religious guidelines, like africa free investments?

2. Union Pension funds often struggle with same issue.

3. Not really any law here yet.

T POWERS AND DISTRIBUTIONS

I. Source of T's Powers: Current trend to enlarge T's powers

A. Trust Instrument

1. Express

2. Implied

B. Statutes

C. Rules of Equity

D. Court orders

E. Uniform T's Powers Act

1. Gives T "power to perform, without court authorization, every act which a prudent man would perform for the purpose of the trust," including but not limited to 26 special powers listed in the statute.

a. Adopted in 17 states.

F. UPC bestows similar powers.

G. Powers conferred upon T are fiduciary and reviewable.

H. Powers reserved by settlor are not, even if settlor is T

II. Powers of T

A. Power of Sale

1. General Rule - No power to sell unless granted by the trust document or statute.

2. Exception - T has inherent powers necessary to accomplish the purposes of the trust

a. Not if expressly forbidden by trust doc.

3. Courts more readily infer implied power to sell personal property than real property.

a. Could depend on # of factors

(1) whether single person or several are entitled to estate.

(2) whether they all agree to method of distribution

(3) whether trust estate includes personal or real property or both

(a) if personal, is it fungible

(4) whether division in kind is practical

(5) terminable in part or in whole

(6) whether distributee take beneficially or in trust.

4. Always look to nature of the trust and nature of property.

B. Imperative v. Discretionary Powers

1. Personal discretion - only the person named as T has right to exercise discretion.

2. T has duty to exercise discretion in honesty and in good faith. With absolute power of distribution:

a. Either do it or not.

b. Court will not interfere with that exercise of discretion without a showing of bad faith.

3. Right to terminate trust by distributing assets generally passes to a successor T.

C. Allard v. Pacific National Bank

1. T has duty to inform the beneficiaries of certain material transactions (before, not after)

2. If routine transaction, T can notify by normal, after the fact statements

a. Here, not a routine transaction, it was a sale of entire trust property, and

b. the benes had notified the bank they did not want to sell the property.

D. Ts Power as to Real Estate

1. In Re Trust Estate of Strauss - T entered into sale contract and then sought court order to vacate contract in favor of a higher bid.

a. Wanted to fulfil duty to obtain highest price

b. Courts follow three different rules on whether they will confirm a judicial sale when a higher bid was received after the original offer was accepted.

2. Majority Rule: In absence of mistake, fraud, etc. court cannot set aside a good faith contract notwithstanding a subsequent higher offer for the property.

a. Here the original contract expressly stated that it was subject to court approval. Should be o.k. Can't complain if court doesn't approve.

(1) But . . court is obligated to approve unless mistake, fraud, etc.

b. Policy in having stability of contracts. Hansen says it will discourage purchasers.

3. A few states automatically refuse confirmation and reopen bidding.

a. Policy that interests of benes are paramount. T has duty to secure the best price obtainable under circs.

4. A few states leave the matter to the court's discretion.

E. Power to Lease

1. Settlor may expressly grant power to lease.

2. If not express, power to lease real property can be implied if:

a. reasonably necessary to accomplish the purposes of the trust or the preservation of the trust property.

3. It is easily implied from instructions to pay over the income of the trust property.

4. Power to execute leases that may run beyond the term of the trust if:

a. reasonably necessary to accomplish the purposes of the trust or the preservation of the trust property.

b. substantial and immediate benefits to the beneficiaries and remaindermen will result.

5. Contention between immediate benefit of benes and long term benefit of remaindermen.

a. Courts often look to whether lease protects or can be structured so it will protect adequately both the life and remaindermen.

6. Good to get prior court approval.

F. Young v. Young

1. When an unusual exigency arises, (fire destroys property) unanticipated by the grantor, the court in equity has power to deviate from the trust document if necessary to accomplish purposes of trust

2. Power to mtg or encumber property

a. Courts reluctant to imply power to mtg, even if trust does not forbid it.

b. Not implied from a power to sell.

c. Some courts imply when necessary to enable T to conserve the assets. Some by statute.

G. Payments and Distributions to Beneficiaries

1. Ts generally held to absolute duty to pay correct beneficiaries, rather than merely good faith, etc. - personally liable if pays wrong bene.

a. If doubt about proper payee, T should seek court guidance.

b. Some trust instruments/statutes provide protection for Ts who use reasonable care.

2. Must make payment exactly as specified in the trust instrument.

a. i.e. If instrument specifies differently, cannot give lump sum.

3. If (1) unforseen contingency arises, and (2) grantor, if he knew, would choose to modify distribution scheme, court may deviate from trust instrument. [Bennet v. Nashville](early distribution)

a. Case dealt with invasion of income accumulation, not principal.

b. Rule would be the same for principal, only harder to find the necessary intent of grantor if he knew of new circs.

4. [In Re Van Deusen] Court will not provide for application of trust principal to support bene, if it will deprive another bene of property to which he is or may become entitled to.

a. If all beneficiaries, present and future, and guardian ad litems, consent, court MAY order change in distribution.

(1) Some courts hold that guardian ad litem can give away interest of unborn, and other courts say only born and minor, other says cant give away any of them.

DELEGATION TO AGENTS AND COTS--POWERS OF T

I. T can delegate ministerial duties, and may not delegate discretionary duties.

A. Ministerial Duties - Delegable

1. bookkeeping

2. collection of rents

3. farming trust property

4. disbursements

B. Discretionary - Nondelegable

1. conduct auction sale

2. decision to sue

3. investment discretion

4. acting on claims against trust estate

C. Settlor may permit delegation of any trust power by the terms of the trust.

D. T not excused for deferring to bene's wishes. Must make independent decision for appropriate action.

II. Negligent to delegate T discretion.

A. If T unlawfully surrenders trust powers, he becomes a guarantor

1. Liable for property transfer and any interest on the property from the date of transfer.

2. Liable for any loss, regardless of whether it resulted from the delegation of power.

3. Guarantor rule rarely expressed - usually because most losses are attributable to delegation.

B. If delegation is proper, bene bears loss if agent embezzles, is negligent, etc.

1. T liable for act of agent if done by T would constitute a breach if T

a. directs, permits, or conceals act of agent

b. delegates that which he cannot delegate

c. uses no reasonable care in agent selection

d. fails to supervise properly

e. neglects to compel agent to correct wrong.

III. Co-Ts

A. Must act in concert. Viewed as one T.

B. Each has a duty to participate with due care in administration of trust

1. Must act reasonably for the circumstances.

C. Co-T personally liable if:

1. Improper delegation to other co-T

2. Lack of reasonable care in overseeing trust affairs

D. One co-T may shoulder heavier burden than the other

E. [Coxe] - Co-T was not liable.

1. Did not negligently delegate discretionary duties

2. Had no way to know about Caveny's wrongful actions.

F. [Herr] - 3 Corp officers now Co-Ts responsible to liquidate and distribute funds to former members.

1. Delegation to secretary co-T of ministerial duties not negligent - not liable.

a. If it had been negligent, personally liable

2. Delegation of appropriate acts does not relieve a co-T from supervising co-T in performing those acts.

a. Court here permitted Co-Ts to allow banking audits to act as supervision.

3. Exam Question

a. What is the reasonable standard for the coT who delegates?

(1) Even though they are permitted to delegate, still responsible to behave as a reasonable prudent person would in that situation.

(a) Hansen thinks they should not be able to rely on third parties (bank audit to supervise other agents or coTs. Notion of annual audit or report would suggest good action.

G. If many Ts, settlor may empower a majority of Ts to act for trust.

1. Some case law and some statutes agree.

H. Where prudent, necessary, T may hire expert assistance, and pay for assistance out of trust assets. [In Re Will of Axe] Majority rule.

IV. Current Trend - In light of current trust investment practices, attitude that a T must not delegate is giving way to the notion that a T must personally perform the trust duties except as a prudent person might delegate them.

DUTY OF LOYALTY - SELF DEALING

I. Policy

A. Trust laws are designed to deter Ts from acting improperly; not designed only to help benes

1. Punitive remedies requires T to have as his sole objective the welfare of the benes of the trust.

2. Uncompromising rigidity by the courts.

II. Self-Dealing

A. Self dealing occurs where a T or co-Ts is (are) associated with both sides of a transaction.

1. i.e. A T acts as seller and buyer.

2. Impossible conflict of interest.

B. T can make no profit out of the trust.

C. If self-dealing found, "no further inquiry."

1. Means P does not have to demonstrate harm.

2. Benes are entitled to T's profits from trust assets.

D. It is possible for the trust instrument, or a court, if asked properly, to authorize self dealing.

III. Conflict of Interest

A. Usually a less obvious relationship - divided loyalty

B. If only conflict of interest, and not self dealing, "no further inquiry" is not applicable.

C. Must prove damages.

D. Measure of Damages

1. If breach consists solely of failing to obtain the best possible price, damages are the difference between the fair market value and the actual price as of the day the sale contract was entered into.

2. If T had duty to retain the property in trust, but breached by sale, then liable for property value as of day of the decree.

E. [Matter of Rothko's Estate]

1. Case stands for proposition that in cases of conflict of interest, look to see if harm done, and measure damages based on decree, not contract date.

2. When is it date of trial--when T's have an obligation to not transfer ownership of property.

F. T may not receive even incidental benefit.

G. Examples Footnote #9 pg 419.

H. Even if T himself does not directly benefit, he has an obligation to insure that others involved are not profiting also (i.e. T's employees).

1. If negligent, benes get all profits made by T's employees, and T is personally liable for the amount. [Mosser v. Darrow]

a. Liable for both sets of profits - those resulting from sales to Ts, and those to third parties.

I. Exceptions to Self Dealing and Conflicts of Interest

1. Because banks are subject to federal regulations and engage in the business of finance, they are given greater flexibility regarding self-dealing. [Basham]

a. Different departments of same bank can act on different sides of a transaction.

2. Some jurs allow corporate T to advance its own funds for trust investments before the money is available in the trust estate and to make reasonable charges for money advanced.

3. Most courts hold that a T of two trusts may enter into a transaction between the two, acting as T for both, so long as it is fair to each trust.

a. However, corporate T cannot use trust funds to purchase its own stock.

4. Examples Footnote #15 pg 431.

5. Lawyer Ts

a. Ts have duty to defend trust from attack

b. Not self dealing for lawyer T to be paid for professional service as an atty from trust if in good faith and compensation reasonable, or approved by court. [Norris]

c. Cts are split on this issue

(1) Atty could not exercise the same objective discretion than if he hired another

(2) T cannot claim ignorance as T, and then give advice as atty.

J. Loyalty to Bene [Prueter v. Bork]

1. Highest standard imposed when T is dealing with bene.

a. Bene can rely on T

2. Rebuttable presumption of unfairness where T has benefitted from a transaction with bene on the subject matter of the trust.

a. Rebut by clear and convincing evidence

3. Factors to consider whether a particular transaction is fair are:

a. Full disclosure of info

b. Adequate consideration

c. Bene had competent, independent prior advice

CONTRACT AND TORT LIABILITY

I. Contract Liability

A. Power to make a K is within T's power when reasonably necessary to execute trust purposes.

Common Law

B. T is personally liable for such contracts, is personally bound and judgment must be collected out of his property.

1. Reason: trust is not a legal entity, and a T is not an agent of benes.

2. T then has a right to reimbursement from the trust property.

3. Creditors cannot collect directly from trust assets.

a. Derivative Right Theory

(1) If T is insolvent the creditor may be entitled access trust property.

(2) Creditor stands in shoes of T

(3) Must show inadequacy of remedy against T

C. T can expressly exclude his personal liability in the contract, or can incorporate the trust instrument by reference if it precludes personal liability.

D. UPC, adopted in most jurs (36), presumes a T is not personally liable for contracts entered into in his representative capacity unless he fails to reveal that capacity.

1. Most statutes attempt to impose liability directly on trust property, instead of T.

II. Tort Liability

A. Almost the same as rules for contract liability.

B. T is liable for his torts committed in the administration of the trust.

C. T is entitled to reimbursement from trust res if:

1. Not personally at fault

a. Personal liability limited to amount of res. [Smith v. Rizzuto]

2. Personally at fault, but tort occurred as a normal incident to management (damage from coal mine)

3. Tort increases value of trust property.

D. If personally at fault, T is personally liable even where value of trust res is insufficient to reimburse him

E. Respondeat Superior - liable for employees, agents.

1. Liable even if trust res insufficient to reimburse

F. Derivative theory applies.

ALLOCATION OF BURDENS AND BENEFITS TO PRINCIPAL AND INCOME

G--->(T)--------->Benes------------->Remaindermen

income principal

I. T must produce income from the trust property for the income bene and preserve the trust principal for the remainder bene.

A. T is strictly liable to make correct dispersements.

B. If it dictates, instrument controls the distribution.

C. Uniform Principal and Income Act or the Revised Principal and Income Act govern most allocations.

II. Principal or Income? Illustrations

A. Corpus of trust is Stock

1. Cash dividends are income, unless paid upon termination of company.

2. Stock dividends are usually principal, if paid in the same stock as that held.

a. Reason is that stock dividend does not change the underlying ownership distribution.

(1) Illustration - stock split.

3. If stock dividends are in a different stock then it is income.

B. Bonds

1. If market rate return, return to income bene

2. If above market rate return, and extra (principal) was used buy it, then:

a. the market rate return goes to income

b. and above market difference goes to principal.

(1) Reason is to re-imburse principal.

C. Rents on property = Income

1. Net rents = gross rents minus ordinary costs, expenses and repairs.

D. Wasting Assets (Trademarks, Oil Wells)

1. Are the receipts from this kind of asset income or principal?

a. Problem is that if you pay income until the asset expires, nothing is left for the principal beneficiaries.

2. Open Mine Doctrine

a. If the settlor had been receiving income from property during lifetime, when he dies, and the life estate recipient is likewise entitled to enjoy the proceeds thereof, even to exhaustion.

(1) Therefore if instrument says income to spouse, and remainder to children, his intent was spouse to continue to receive during her lifetime, to exhaustion if necessary.

b. Court in Kimbark extended doctrine--settlor entering into lease during lifetime is analogous to the mine being in production.

RECORDS, ACCOUNTING AND FEES

I. Trustee Duties

A. Voluntarily advise benes of trust existence

B. Maintain accurate records (purchases, etc)

C. Keep benes reasonably informed of trust and its administration; enough to protect bene from T malfeasance

D. High Standard of Disclosure=full and adequate accounting candor and fairness.

II. Periodic Accounting

A. Generally by state statute

1. Annually; specified intervals, when bene requests

B. UPC

1. Not annual - upon bene request

C. Failure to properly account creates presumption against T - T has burden of proof to show accounting.

D. Duty to account regardless of language to contrary. May not have to initiate accounting, but if asked, has duty.

III. Benes may be held to a duty to investigate and discover

IV. T compensation

A. T has right to compensation even if not in trust doc.

1. If silent, then fees still allowed

2. If express language denying fees, then no fees.

B. Amount set by doc, contract, statute, court action

C. Statutes fall into 3 categories

1. T requests court approval of specific amount

2. UPC - reasonable comp, w/o court, subject to review

3. Comp schedule, based on trust income or corpus FMV

D. If stipulated in trust instrument, T held to contract.

1. Now T's include clauses for "reasonable comp"

E. Court can always deny comp to T for negligence, bad faith, etc., that results in trust losses.

F. Factors courts use to determine reasonable comp

1. gross income of trust estate

2. success/failure of administration of T

3. unusual skill T brings

4. loyalty/infidelity T displays

5. time to administer trust

6. kind of work done

7. T's own estimate of value for services

ALTERATION BY THE COURT

ADMINISTRATIVE DEVIATION AND CY PRESS

I. Administrative Deviation: (Charitable & Private Trusts)

A. Court may alter the PROCESS by which the purposes of the trust are accomplished when:

1. Either charitable or private trust.

2. Compliance with the process is impossible, or illegal, or

3. Due to circs not anticipated by the settlor compliance would defeat the purpose of the trust

B. The term sought to be deviated from must be administrative.

C. Courts prefer admin deviation to cy press; not as drastic, allows particular purpose to be effectuated.

D. Example

1. New T

2. Process of selecting beneficiaries

II. Cy Pres - Charitable Trusts

A. Cy Pres is the courts power to carry out donor's intention as near as possible

1. applies only to charitable trusts.

2. no such deviation from private trusts

3. Purpose of Cy Pres doctrine is to prevent the failure of valid charitable trust gifts.

B. If property is given in trust to be applied to a particular charitable purpose and it is or becomes impossible or impracticable or illegal to carry out the particular purpose, and if the settlor manifested a more general intention to devote the property to charitable purposes, the trust will not fail but the court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the settlor.

C. Court may alter the PURPOSE of the trust when:

1. Trust is charitable

2. court finds a general charitable intent

a. primary purpose of aiding charity in general or some standard type of charity

b. does not mean benefitting charity generally, but a charitable purpose that is sufficiently broader than the particular purpose to further grantor's purpose.

3. particular charitable purpose is impossible, illegal or impracticable

a. Impracticability and impossibility must be permanent.

D. If there is a gift over, this will usually negate a finding of general charitable intent

E. Court needs to determine whether the settlor would have preferred to have funds devoted to a like charitable purpose or withdrawn completely. Look to:

1. trust itself, and

2. extrinsic evidence

F. Court may not use cy pres:

1. merely to correct inefficiency or ineffectiveness, or

2. to vary terms of trust just because T feels he can better spend the income, etc., or

3. to suit the convenience of the T

4. when a gift is outright to a charitable entity, and not for any charitable purpose, and the entity ceases to exist.

G. T may not invoke cy pres when his own deliberate act has prevented the fulfillment of the trustor's purpose.

ALTERATION, REVOCATION OR TERMINATION

BY THE PARTIES

I. If settlor retains power to amend or revoke, may do so.

A. Power to amend includes power to change beneficiaries.

1. If power to amend, and stipulation saying that cannot remove bene without approval of trustee, can do it without approval.

a. Reason is that if he wanted to, settlor can amend the trust to make it revocable, anyway, so this is just a smaller step.

B. Power to revoke revests property in the settlor.

C. Settlor can amend, make himself sole bene and acquire fee interest under merger.

1. A power to revoke includes a power to amend

2. A power to amend might be used to revoke.

a. Amend it to include power to revoke, then revoke.

D. Whether revocation is procured through undue influence is not a factor to consider.

1. Policy is that the corpus is returned to settlor, and then any subsequent disposition of it will be subject to an undue influence analysis.

II. If trust is silent--irrevocable--no agreement or conveyance between settlor and T can destroy the trust.

A. Exceptions

1. Totten Trust - impliedly revocable unless otherwise indicated.

2. Voluntary Trust - by statute in some states, they are revocable unless expressly made irrevocable.

III. Termination of trust by beneficiaries is possible if:

A. All beneficiaries consent

B. no bene is under an incapacity, and

C. the continuance of the trust is not necessary to carry out a material purpose of the trust.

D. Claflin Doctrine - Know Footnote 12 P 585.

IV. Termination by settlor and beneficiaries is possible:

A. if the settlor is living, then the consent of the settlor and all beneficiaries is sufficient, regardless of any unfulfilled material purpose.

1. If heirs, no real interest, not benes, so they do not have to consent. (Doctrine of Worthier Title)

a. Footnote 18,19 P. 592, 593

B. If settlor is dead, then benes can terminate only upon a showing of the three elements in III.

V. Revocation by Settlor alone

A. Where settlor is the sole bene, he can revoke or terminate the trust, even if it is a spendthrift trust.

B. Where settlor creates trust, with himself as T, and sole bene for life, and then to his heirs, he has a fee simple interest. Absent any language to the contrary, the heirs have no remainder interest, and settlor can revoke.

G ---> G(T) ----> G for life, then to G's heirs.

VI. Family Settlements

A. Court will defer to certain family settlements (trust property dispersed) if:

1. trust existence and/or purpose is threatened by a genuine controversy, and

2. special protection is afforded benes under an incapacity (infants).

VII. Natural Termination

A. Upon termination of trust, T has a reasonable time to make distribution.

B. If "T de son tort" - wrongfully continued in possession and management of property after the trust has terminated - then liable for losses regardless of cause.

ENFORCEMENT OF TRUSTS

I. Remedies against the Trustee

A. Court ordering trustee to carry out trust provisions

B. Injunction against or decree setting aside wrongful acts of the trustee

C. Judgment against trustee for damages.

D. Removal of trustee

II. Damages are assessed against trustee.

III. Vertical Investments (Corpus divided and invested)

A. Bene entitled to gains from proper investments

B. Bene entitled to gains from improper investments

C. Bene suffers loss from proper investments

D. Trustee suffers loss from improper investments

Rule: Even though overall a trust shows gain, T is under duty to use such diligence and prudence as a reasonable person in his own affairs.

a. May not offset indiv losses by overall gain

IV. Horizontal Investments (Total corpus invested in a series)

A. If one or more of investments is considered a breach, bene has a choice between:

1. value of the original trust res plus interest, or

2. the end result, current net property

3. ask hansen is this rule applicable if all of the investments, including the breaches, are considered a single breach? or does that constitute a different result?

V. REMOVAL OF TRUSTEE

A. More than dissatisfaction or friction required.

B. Have to find level of disharmony such that it interferes with the accomplishment of grantor's intention/purpose.

C. Courts are cautious to do this.

VI. COURT ADVICE AND INSTRUCTION

A. May be sought by bene or T.

B. Limited right--not substitute for legal advice

C. Procedure need not be adversarial.

REMEDIES INVOLVING TRUST PROPERTY

I. Allocation of Losses among benes

As between T and bene, T always loses. As between different benes, have to have some set type of loss distribution.

A. First In, First Out

1. A claimant whose money was last deposited should be permitted to withdraw from the fund first, and so on, in inverse order of deposit.

B. Pro Rata

1. Funds are distributed according to contribution proportions.

C. Fraction Formula

1. Loss falls on the benes in proportion to their ownership interest at the time of each breach.

2. Example

a. A-->10,000 in trust; T spends in breach 3,000

b. B--> 7,000 in trust; T spends in breach 4,000

c. C-->10,000 in trust; T spends in breach 4,000

d. Total 27,000 in trust, 11,00 in loss

3. Apply Rule

a. A takes first loss; amount in trust = 7,000

b. B puts 7,000 in; A and B divide 2nd loss equally

c. 10,000 remains in trust (A-5,000; B-5,000). C puts in 10,000. A and B each pay 1,000 and C pays 2,000.

d. Everyone here ends up with 4,000.

II. CommingleD FUNDS (T places funds in his personal account) Breach!

A. Commingled Non-Trust Account

1. Payment of funds from commingled personal account are presumed to be from T's personal funds.

a. Presumes T is honest, favors bene.

(1) Creates a lien on the presumed remaining trust funds.

2. Deposits into commingled personal accounts are not deemed to be replacing benes money

a. Favors creditors of trustee.

B. Commingled Trust Account.

1. Same. Payment of funds from commingled personal trust account presumed to be from T's personal funds.

2. Deposits made into it are deemed to be replacing bene's funds.

BARRING OF REMEDIES

I. Trustee can be relieved of liability by release, acquiescence, ratification, estoppel, statutes of limitations and laches.

II. In [White v. Sherman] the benes told T to use his own judgment

A. Not an acquiescence

1. Basically told him to fulfill his duty.

2. Their non-response to accounting of funds was not acquiescence either because accounting was deficient.

Questions To Do

1. What is the difference between intervivos and testamentary trust if the trustee is incapable of taking trust res? Page 49 footnote 12.

2. Figure out Bene Section

B. Special Types of Revocable Trusts:

1. Irrevocable Life Insurance Trust -- valid intervivos trust even though life insurance policy not effective until insured's death.

2. Revocable Life Insurance Trust -- valid intervivios trust

3. Uniform Testamentary Additive to Trusts Act: A gift in a will that is given to a pre-existing trust is valid if:

a. Pre-existing Trust in writing

b. Pre-existing Trust is sufficiently described i